Satyam fraud has ramifications for outsourcers

The financial fraud perpetrated by Satyam Computer Services executives could trigger near-term disruptions across the outsourcing and IT industries. Ramalinga Raju, the company's founder and chairman, resigned last week. He has admitted to inflating Satyam's cash balances and the credit amounts it was owed while understating its liabilities. This scandal has many ramifications for Satyam's customers as well as those of other outsourcing companies.

1. The challenges of transitioning Satyam's services to new vendors

As of this writing, the viability of business-continuity efforts under way at Satyam (including a government takeover of the company's board and rumors of a bailout) remains highly uncertain. Following last week's announcement of the fraud, some Satyam customers have started shifting engagements to other outsourcing vendors. However, the inherent challenges of transferring processes between vendors -- a complex undertaking under ordinary circumstances -- will be compounded by the following potential conditions:

• Transition timelines that are inordinately compressed because of Satyam's questionable longevity
• Contractual disputes regarding the exercise of termination rights
• Inaccessibility to a legacy vendor preoccupied with its preservation

Accordingly, customers should prepare for exceptional disruptions to steady-state services during vendor transition, particularly if Satyam had been the single source for such services. These challenges may be compounded further if Indian vendors observe recent requests from the influential trade organization Nasscom to refrain from hiring Satyam employees.

2. The emergence of build-operate-transfer programs in response to challenges with captive entities

Satyam customers that currently operate captive entities in India may wish to have these entities hire the Satyam personnel engaged on their accounts. However, such efforts may run afoul of the customers' contractual nonsolicitation obligations to Satyam, and renegotiations of these provisions, if protracted, would not be feasible.

Furthermore, Satyam customers that do not currently operate captive entities in India are likely to find that there is insufficient time to create such operations. In response to these limitations, the industry may turn to "build-operate-transfer" agreements, under which new outsourcing vendors would hire the Satyam employees (in a manner that does not breach their customers' nonsolicitation obligations) to operate the outsourced services for a defined period, after which the outsourced operations may be transferred to captive entities of the respective customers.

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