• Technology
  • CFO.com | US

How to Limit Your Outsourcing Risk

Experts offer advice as companies around the world reel from the scandal at India-based Satyam. High on the list for CFOs: paying careful attention before hiring a service provider.

U.S. and global companies had a serious wake-up call last week when Satyam Computer Services’ founder confessed to accounting abuses that included making at least one false $1-billion cash entry on his company’s books.

Among the concerned corporations were customers directly affected by the scandal — which also brought the resignation and arrest of Satyam ex-CEO B. Ramalinga Raju and CFO Srinivas Vadlamani, and led to the naming of two auditing firms, KPMG and Deloitte, to help with restatements. (Price Waterhouse India, a separately owned affiliate of PricewaterhouseCoopers, was said to be retained by Satyam as auditor.) Satyam claims to have 185 Fortune 500 clients, including Cisco Systems, Caterpillar, Ford Motor, and General Electric.

Those companies that didn’t retain Satyam, however, also have deep concerns about the use of outsourcers, and the outsourcing industry as a whole.

Satyam’s competitors and advisory consultancies have been fielding calls since the news broke last week about Raju’s four-page confession to his board. Their clients had been asking for reassurance about their vendors’ corporate governance, and were rethinking the assessments they made before moving technology and back-office work overseas. “It’s causing a lot of people to pause for a second, and say, Oh my God, there are more unknowns and risk than I thought,” says Robert E. Kennedy, executive director at the University of Michigan’s William Davidson Institute, and author of an upcoming book about offshoring called The Services Shift.

When customers sign up for a three-, five-, or even 10-year contract, they want to know that “their service provider will continue to provide such services over a long period of time,” says Rohit Kapoor, chief executive at EXL Service, a New York company that provides business process outsourcing in India and the Philippines.

To be sure, the Satyam scandal creates concerns that go beyond the potential low-wage outsourcing partners in India or other developing countries. It affects all types of service providers. “We don’t want to paint one brush on the industry … it was one incident, and a completely isolated case,” says Surjeet Singh, CFO of outsourcer Patni Computer Systems.

In response to the worried calls, outsourcing experts are reminding clients to conduct strong due diligence, and to balance cost savings against the serious risks presented by moving work beyond internal corporate walls. “You have to treat third parties as if they were part of your institution,” says Nick Benvenuto, a managing director at risk advisory firm Protiviti.

Indeed, companies should consider the possibility that a vendor will have a rogue employee — or even a renegade CEO — just as they would factor in that risk for internal workers. Other what-if questions should be contemplated as well. At the top of list: What if the vendor goes out of business? What if the service provider slacks? What if you decide to change your business strategy half-way through the contract? What if confidential information is stolen?

Business as Usual?

Satyam’s clients are considering whether to pull out of their existing contracts — some of which have a few years left — as the shaky future of India’s fourth largest software-services provider has put some of their current projects at risk.

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