A not so Happy New Year for Satyam; A Blackeye for Offshore Players or for all of IT?

Well, at this point, not to lay it on but Satyam is not looking so well in this very young 2009, which is clear. But what is more pressing is to begin to understand what this potential "IT Services Enron" will have on other offshore suppliers, as well as the IT services business in general.

To recap, today it was reported in the NY Times that the chairman of Satyam, Ramalinga Raju, resigned after admitting to a massive accounting fraud at the company, including past quarter revenues that were 20 percent lower than the 27 billion rupees reported, in addition to a massive overstatement of operating margins.

This follows a few scandals that closed out 2008, including in October the World Bank's cancellation of all work with the Indian offshore IT service supplier after it was accused of installing Spyware on some of the World Bank's computers, as well as inproperly charging on some sub-contracting work.

Then in December Satyam attempted to acquire two large Indian construction and real estate businesses (Maytas Properties and Maytas Infra), which in the end was abandoned when it became clear all of Satyam's cash would in essence be transferred to its Chairman B. Ramalinga Raju, who controlled the Maytas companies.

It is quite a shame since Satyam's SAP Consulting Services business itself in the U.S. was among the largest of the Indian offshore's, reaching #12 in 2007 (albeit with a 1% market share) on growth of high 40%! (I assure you, based on PAC estimates, not fuzzy accounting)

While some analysts have commented that many Satyam clients will now look to exit contracts and go to competitors, such as Infosys, TCS and other offshore players. I also believe that while many companies may wish to quickly exit it relationship with Satyam, in reality (contractually as well as physically), it is a much more gradual procedure to switch suppliers; especially when it is tied to a company's backbone processes!

Also, just as companies became smart in their use and the ROI of IT during the last economic downturn, I believe this scandal may make companies much more deliberate in their selection process (if it wasn't long enough already!), and perhaps in some cases rethink whether offshoring to countries with more lax auditing standards is too risky. One could point to the lack of accountability today in the U.S., but at the same time, standards are still far stricter in structure and in practice in the US than in India or other emerging / BRIC regions... to discount this is a joke! And as shocking as Satyam's quick fall has been, to me it would be more difficult to fathom this happening at the same extent to traditional/on-site, large IT services suppliers... not that it could never happen, but as the dot-com saying went, "You don't get fired for hiring IBM!"

Happy New Year Folks...