What would you call Indian ivy league outsourcing club, popularly known as SWITCH (Satyam, Wipro, Infosys, TCS, Cognizant and HCL), without Satyam? If you said ?Witch?, you are in sync with the latest in the industry.
Analysts are suggesting that Satyam could lose close to 40% of its business this year, which will be redistributed among Indian and global rivals by the end of the year. And industry pundits seem to be on a witch hunt to identify predators, which can swallow the tottering firm?s business.
Vendors are soliciting Satyam clients, with emails explaining the merits of migrating their IT operations from the fraud-hit firm to them. Clients are also evaluating options and keeping backup strategies ready with help from advisory and research firms like Forrester and Everest on which vendor would fit their business best. These firms also confirm that employees are evaluating their options almost on a daily basis. Prominent brokerages have calculated gains of 5% in net profit for Indian IT majors, if the entire Satyam business is redistributed among them. Gains could be about 2%, if global companies like IBM and Accenture also share the pie.
Probably the largest scandal in corporate India, Satyam?s debacle could have long-term implications. It could prove to be a game-changer for the offshoring arena. The squeaky-clean image of India?s IT sector was dealt a blow after Satyam?s former chairman B Ramalinga Raju admitted that he had cooked up the company?s books for years. It has triggered fears that large global corporations could step up their due diligence process to check financial integrity of offshore service providers. ?This will surely have a business impact and clients could step up their due diligence,? agrees Infosys CEO, Kris Gopalakrishnan.
While Infosys has clarified that it is not interested in acquiring a ?tainted firm? or poaching Satyam employees, analysts expect Satyam clients to consider Infosys, thanks to its iconic corporate governance status in India. Ripples could spread to global stage. IT analysts at Gartner and Ovum have been telling clients about the dent Satyam?s debacle could cause in the wider international market, already weakened by slower spending growth. Recent developments at Satyam have left the global sourcing market in a disarray, forcing buyers and suppliers to make vital business decisions in a very short timeframe, while the situation is rapidly evolving and rumours are flying.
Satyam had 617 active clients, with more than 180 on the US and Global Fortune 500 lists at the end of fiscal 2008. Forrester estimates about 30-35% of its clients will review their deals with Satyam, especially those who have deals of about $1 million or lesser. And this is an opportune time for clients, since client budgets are arranged at the beginning of the calendar year, according to Edelweiss analysts, who expect $600 million of business to be redistributed.
Clients who do project-based work with Satyam are likely to the first ones to be shifted. Companies like GE, Citibank and GM, which work with several Indian offshore vendors, will also have lesser problems in migrating processes. Many have been advised to review exit clauses, assess portfolio of work and decide which pieces could be potentially moved.
CIOs are also conducting an inventory review of the potential business knowledge that is locked up in the heads or the work of Satyam staff. Many companies are considering jobs offers and incentives to Satyam staff as part of the knowledge transfer back in-house or to competitors. ?Transition gets tougher when you have a 24×7 maintenance work where you have to keep the lights running all the time,? says Everest CEO, Gaurav Gupta, who is advising a bunch of clients on how to manage their outsourcing relationship with Satyam. Even if Satyam bounces back, it could lose some clients if uncertainty continues for few more weeks. Clients are primarily asking for how long should they wait to see if Satyam will survive and should they transition their work to other vendors. And if they decide to move, CIOs want to know if they should make the operations captive to stay clear of such problems in future or shift work to blue chip US firms.
Competitors are obviously in a frenzy to feed on these. More than half a dozen providers have already called deal advisors like Forrester and Everest to discuss competitive strategies for taking over business in joint accounts. While Wipro is reported to have written emails to all salespersons asking for aggressive messaging to customers that Wipro is ready to take on operations running at Satyam, HCL Technologies has sent emails to over 3,000 customer contacts, highlighting its 23 quarter track record of dividends (more than $500 million paid), as well as its eZMigrate framework, where it has transitioned business from other vendors to itself in eight instances. Cognizant management is sending out mails, highlighting its US listed status and compliance with Sabanes Oxley laws.
While many companies have survived accounting scams earlier, Satyam?s struggles with liquidity crunch are adding to the pressure and raising the prospect of a predatory attack on the company?s business from its peer vendors and markets are agog with extrapolations of how this will happen.
Assuming that 60% of Satyam?s business is annuity, about two-thirds of the operations will raise immediate concerns on business continuity even though discretionary project may not drive the same worries and may be terminated forthwith, says a research note from CLSA. Its analysts Bhavtosh Vajpayee and Nimish Joshi have drawn up the industry scenario if Satyam cannot continue as a vendor. They expect an increment of 7% in revenue, if Indian offshore vendors alone eat up Satyam?s business and a gain of 1.4% if other offshore vendors like IBM, Accenture share the pie. Profits could increase by 5.2%, if Indian offshore vendors corner all the gains.
Ripples are not limited to rivals alone. Satyam?s debacle could have deep and long-term implications for some parts of the offshoring world like package implementation, engineering services and manufacturing. For instance, it is the strongest player among Indian IT vendors in the SAP space, which accounts for almost 45% of its stated revenues. In fact, the company had set itself the target of emerging as the world?s second-largest SAP implementer by the end of this year. Many in the industry expect Satyam?s loss to be HCL?s gain. HCL?s acquisition of incumbent SAP services leader, Axon will help it strengthen its IT services business through a stronger SAP capability. Axon specialises in rapidly growing enterprise applications (EAS) space and boasts of several big clients that Indian firms would be keen to have. Defensive sectors like public sector and utilities are seen to be a big plus in a tough economic environment.
As HCL builds strengths in the lucrative package implementation space, Satyam?s current problems weaken its position in an area that has traditionally been its biggest strength. Riding on Axon, which enjoys a 15% market share in the UK SAP implementation market, HCL has created an eZMigrate strategy?a solution to help ?our customers migrate applications, engineering and infrastructure operations to HCL.? Infosys, another strong player in the EAS domain, has been strengthening its consulting practice for long now.
High-margin EAS has been emerging as a sweet spot as global services biggies are dulling Indian companies? low-cost advantage by creating global delivery models and economic uncertainties cloud global tech outlook. Similar sentiments have come from the quarterly results of global firms like Accenture.
Clearly, Satyam?s travails will benefit Indian big league outsourcing firms like TCS, Infosys, Wipro and HCL Technologies as well as global outsourcers like IBM and Accenture. But the implications could be much wider than a mere re-distribution of Satyam?s business. Satyam fiasco could leave deep footprints on the offshoring domain for long. Not only will due diligence go up, but the way contracts are structured could see big changes. In the business of outsourced technology services, companies often depend on clients to manage technology behind crucial tasks like billing, purchasing and customer relations. And as global corporate majors review and monitor their relationship with Satyam and other offshore vendors and Indian offshoring majors enter a mad scramble to corner Satyam?s business, they could end up rebooting the entire offshoring game.