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No Way Out?

The Satyam scandal has prompted companies to be more careful about outsourcing arrangements.

A stunning confession of fraud by the CEO of India’s Satyam Computer Services sent major corporate customers into damage-control mode half a world away. State Farm Insurance, for one, was able to react quickly. In two weeks it reprioritized key outsourcing projects, redistributed work among other vendors, and severed its ties to the fourth-largest Indian IT outsourcing firm.

The Satyam scandal not only led to the arrest of CEO B. Ramalinga Raju and CFO Srinivas Vadlamani (among others), but also tarnished an outsourcing industry that seemed poised to boom as companies look for more ways to cut costs. Many offshoring firms have been working diligently to expand their offerings beyond core IT services to more-sensitive (and higher margin) work, including finance and accounting. Now many companies may question just how much they put at risk when they ship work overseas.

“The industry is built on relationships that imply some level of trust and confidence and integrity,” says Peter Allen, a partner and managing director for outsourcing advisory firm TPI. Indeed, many agreements have ballooned over the years without an adequate review of risks. Modest projects that began with a handful of people routinely turn into broader arrangements that employ 1,000, with the growth propelled by little more than a handshake.

That seems likely to change. “I wouldn’t want to be a CFO who tells my board that Satyam was running our accounts receivable and now it’s running out of cash,” says David Rutchik, a partner at outsourcing advisory firm Pace Harmon.

Cause to Pause

Indeed, nearly 200 Fortune 500 companies that did business with Satyam, including Cigna, Cisco Systems, Caterpillar, Ford, and General Electric, deny any material fallout from the vendor’s troubles. But they do admit to spending more time monitoring the situation. “We have detailed contingency plans,” Cigna spokesman Joe Mondy insists. “Regardless of what happens with any of our vendors, the processes we have in place are designed to ensure that customers continue to receive consistent, reliable, cost-effective service.”

Experts predict that recent events will spur more-comprehensive scenario planning regarding potential offshoring vulnerabilities, including performance problems, power outages, terrorism, and fraud. “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 a book about offshoring called The Services Shift.

Action Plan

Even the most rigorous due diligence may fail to detect certain kinds of problems. “If you look at the WorldCom, Enron, and Madoff scandals, there is no way to completely protect oneself against individual fraud,” Rutchik admits. It can be even harder to get a look inside family-run foreign corporations (see “The Right to Remain Silent?“). But to mitigate business disruption, Rutchik cautions companies to scrutinize vendors to the best of their abilities and keep all documentation up to date. Below are some ways to balance the cost savings gained from outsourcing with the serious risks posed by moving work to distant shores.

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