Could the Satyam scandal open up local integrator opportunities?

Could the Satyam scandal open up local integrator opportunities?

Analysts agree the broader service provider community will face tougher scrutiny but are divided on whether local players could pick up new customers

Analysts have expressed mixed opinions on whether the scandal surrounding Indian outsourcer, Satyam Computer Services, could open up short-term opportunities for Australian services companies against their multinational counterparts.

In one of the biggest scandals to rock the IT services industry, Satyam this week revealed it had been inflating profits and cash balances, understated liabilities and overstated credit amounts for several years. Ovum principal analyst for IT services, Jens Butler, predicted Satyam’s illegal accounting practices would subject the broader industry, and particularly outsourcers with offshore operations, to tougher regulations and customer scrutiny.

At the same time, the cost savings benefits associated with offshore companies would be tempered by customer demand for lower risk, he claimed.

“The question is how this got through the auditors,” Butler said. “There will be a huge focus on organisations with operations in India or offshore, as well as around systems integrators’ governance, compliance, accountability and cash flow. In Australia especially, we haven’t really been impacted by these problems before – Enron, for example, didn’t hit us here.

“Everyone will start looking at their books to make sure they can justify all expenditure.”

Satyam has a significant customer base in Australia including Qantas, CBA, Telstra and NAB. Many are now reviewing contracts and setting up contingency plans in the event Satyam falls. Butler said this could generate new customer opportunities for local, mid-tier players around short-term project and consulting work.

“The cost to kick Satyam out of an organisation on a five-year contract would be substantial, so I don’t expect big contracts to necessarily go to a UXC, SMS or ASG,” Butler said. “The opportunity will be around short-term projects – organisations will have to look where contracts are at and assess if it’s worthwhile changing suppliers.

“The risk component associated with offshoring to any Indian or other player will have risen – the whole industry will be tainted by this brush. All customers are going to look at their vendor selection process to see if the risk component for them has increased.”

However, Gartner vice-president and analyst, Partha Iyengar, disagreed the broader community would be swept up in the scandal.

“Comparisons to the Enron scandal in the US will be made. Clients are likely to ask [and the service providers should proactively offer to provide] certificates of financial compliance signed by their CEO, CFO an independent board member and the external auditor, just as a strong reaffirmation of the credibility of companies’ financial statements,” he said in a research paper.

Ovum’s Butler claimed recent concerns about the World Bank situation, dollar exchange rate and terror attacks will also have a big impact on how organisations procure services going forward. But while suggesting an outsourcing firm’s value-add would become more important, he admitted cost savings will still dominate in the current economic climate.

“Some clients will jump ship – 40 to 45 per cent of Satyam’s business is pure consulting, and smaller players should start looking at that piece,” Butler said. “There will be short-term contracts that could provide some joy for local players with application development practices for example.”

Gartner Australia vice-president and IT services analyst, Rolf Jester, didn’t see anymore opportunity for local services providers from the Satyam scandal than when other competitors hit the wall.

“If IBM had a problem, I don’t think customers would think all US providers were bad,” he said. “Australian buyers are going to take a closer look at the finances of companies they work with across the board. But when dealing with companies who have headquarters in other countries where they don’t understand the regulatory conditions, there could be more scrutiny.

“Customers are going to want to lock-in services agreements and make sure things are ok.”

In an attempt to reassure the market, Satyam’s board said it is working on various options to improve liquidity on its balance sheet. Several analysts claim its vulnerability leaves the company exposed to takeover bids from other Indian outsourcers, such as TCS or Infosys, as well as US-based organisations like IBM and HP.

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