Scandal Raises Questions about Satyam's Ability to Retain U.S. Customers

Offshore outsourcing vendor in 'very dire situation' after accounting fraud revelation.

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Fri, January 09, 2009

Computerworld — The revelation this week that the management of offshore outsourcing vendor Satyam Computer Services Ltd. had falsified accounting and overstated earnings brought to light a scandal with potentially deep implications for many U.S. companies.

Much of Satyam's growth into the fourth-largest provider of IT services in India is due to business from companies in the U.S., helped along by its heavy use of the federal government's H-1B visa program. Satyam, which claims that its customer base includes 185 members of the Fortune 500, may get more than half of its $2 billion in annual revenue from the U.S., according to analysts.

In a resignation letter sent to Satyam's board on Wednesday, B. Ramalinga Raju, the company's founder and chairman, admitted to inflating its cash balances and the credit amounts it was owed while understating its liabilities. His brother, B. Rama Raju, also resigned as Satyam's managing director.

As a result of Raju's disclosure, Satyam already faces two class-action lawsuits in the U.S. and an investigation by the Securities and Exchange Board of India, that country's securities regulator.

What it needs most of all now is to keep customers such as Nissan North America Inc. from defecting to other vendors. Nashville-based Nissan signed a five-year application services deal with Satyam in 2006, as part of a move to diversify its IT services providers via a multisourcing strategy. The automaker previously had relied on IBM for nearly all its IT functions.

Nissan spokeswoman Katherine Zachary said Thursday that the company is keeping an eye on the situation at Satyam. "We're taking appropriate steps to ensure the continuity of our systems and applications that are Satyam-supported, and we're going to continue to monitor the situation," Zachary said.

Caterpillar Inc. is another major Satyam customer. Last April, the Peoria, Ill.-based construction equipment maker sold its market research and customer analytics operations to Satyam for about $60 million, a deal that deepened the business process outsourcing ties between the two companies and gave Satyam the means to provide higher-level analytic services to other customers. "This acquisition further demonstrates the trust both organizations have in each other," Raju said in a statement at the time.

A Caterpillar spokesman declined to comment on Thursday about the current situation at Satyam.

When General Motors Corp. announced $7 billion worth of IT outsourcing contracts in early 2006, it was widely reported in India-based news outlets that Satyam had received about $150 million in work as a subcontractor — for example, from Capgemini, which had won a contract to handle application development and maintenance for three of GM's business units.

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