| | By Mick James
The scandals rapidly
overtaking Indian
outsourcing giant Satyam
have profound and
worrying implications. A
billion in overstated
revenues, possibly a
quarter of the workforce
fictitious, share values
collapsing – and these
are just the opening
salvoes. Experience shows
that these things rarely
get any better as the
story unfolds, although
in this case it’s hard to
see how things can get
worse. Already the case
is being dubbed “India’s
Enron”, and one has to
hope this is a misnomer,
because one thing that
the Enron affair
demonstrated was that
these scandals create an
enormous amount of
collateral damage: Arthur
Andersen, Enron’s
auditors, did succeed in
overturning their
conviction for
obstructing justice – but
that was long after the
firm had ceased to exist
other than as an
administrative rump.
Once again, a major
audit name is involved,
PwC (or rather one of its
many Indian “affiliates”,
thanks to a rather arcane
aspect of Indian
accountancy regulation
that imposes a limit of
20 partners on any audit
firm). It will be a while
before what went wrong
with the auditing
emerges, and I’d be very
surprised if PwC suffered
any lasting damage, at
least outside India. But
it won’t do people’s
faith in auditing and
corporate governance any
good generally,
particularly as Satyam
only last year received a
coveted “Golden Peacock”
award from the World
Council for Corporate
Governance.
How far will the
collateral damage spread
to firms like TCS, Wipro
and Infosys, who have
spent the last two
decades painstakingly
building India’s image as
a trusted world leader in | |
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| | IT services and
outsourcing? Already the
news that Wipro has been
blacklisted for four
years from World Bank
contracts for providing
“improper benefits” to
staff – a charge the firm
vigorously denies – has
wiped 12% off the
company’s shares. Would
the news have caused more
than a ripple had it not
followed hard on the
heels of the Satyam
announcement? I doubt it.
It’s hard to see how
this can be good for the
Indian outsourcing
industry or for
outsourcing as a whole.
Obviously, Satyam’s
customers will have to go
somewhere, which may mean
that its Indian rivals
will benefit, or that
clients may go for the
perceived comfort of more
familiar brands such as
IBM and Accenture. Some
clients who may have
previously considered
outsourcing to be a
“no-brainer” may decide
to re-evaluate their
position. Outsourcing is
an invaluable business
tool, but its value
rapidly declines when
trust begins to
disappear, and the cost
savings are eroded by the
need to invest more in
duplicate onshore
resources, increased
layers of governance and
security or greater
stockholding. Outsourcing
has done much to
deconstruct the very
concept of the firm as a
closed entity – a
“company” of individuals
with a common allegiance.
The firm seemed to be on
the way to being simply a
named entity or brand
which controlled the flow
of processes through any
number of physical or
corporate entities. Will
the pendulum swing back
the other way?
But there are serious
issues which go far
beyond the damage that
Satyam has done to
India’s corporate
reputation or the future
of outsourcing and IT. So
far in the current crisis | |
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| | the major scandals have
occurred in the world of
finance, the esoteric
realm of “funny money”.
People may have been
shocked by the extent to
which the crisis has
affected their personal
lives, but I suspect
rather less so by the
revelation that the City
boys were either up to no
good or out of their
depth.
Satyam is different –
this is a “real world”
player, an international
company with a Big Four
auditor and clients who
are themselves household
names all over the world,
and which was, until
recently, buying up
management consultancies
in many different
countries. If you can’t
trust a multinational
company which has been
subjected to that level
of due diligence, who can
you trust?
It’s worth remembering
that for all our recent
talk about globalisation,
the world economy has
only relatively recently
recovered from the damage
it inflicted on itself in
the 20th century. Before
the First World War
globalisation was moving
along happily – only to
be torn apart by
nationalism and
militarist aggression.
Now we seem to be on the
brink of another reverse,
this time caused by a
massive erosion of trust.
That’s sad because, on
the whole, I’m in favour
of globalisation. We,
supporters of globalism,
don’t get much chance to
express ourselves – it’s
difficult to know which
restaurant to loot, for a
start – but now is the
time when we really need
to stand up for the very
uncertain progress we’ve
made so far. America has
just inaugurated its next
president and ushered in
a new era. Will it be one
in which we continue to
push forward with
globalisation or retreat
into isolation and
protectionism? | |
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