January 14, 2009

Implications of the Satyam fiasco

Satyam fiasco was a shocker for me. I have been closely monitoring it for quite some time as a scam of this magnitude can have a ripple effect in the Indian IT industry. There has been thousands of reactions from all over the world. I logged in to twitter to see how the story unfolds, as it is supposed to be the real time micro-blogging media to tract instant reactions.

Not to mention the micro blogging platform was teeming with activity and tweets about satyam and the term #satyam was the highest referenced term on twitter.

There were few comments that caught my attention.

http://twitter.com/thomaspower/status/1113004894

http://twitter.com/thomaspower/status/1110612232

What was so special about these reactions? They were from one of the most renowned networking experts on the Internet – Thomas Power. Besides this, this was from someone whom I regard highly as a friend and a human being.

And this is why these comments were very shocking. I immediately thought of two possibilities (but I was not convinced) -

Possibility 1:It was a casual remark

It is understandable.

However with the influence that Thomas has on Internet, I feel such casual remarks (at least something which has negligible probability) should be avoided. It will not only result in a hype, but also spreads negative vibe about an industry in general which employs more than over a million professionals.

Possibility 2: Thomas meant it!

In this case, first of all, I am deeply hurt, because I never expected such comment from a global visionary who wrote the book "A friend in every city".

Second, let me emphatically say that this is not the end of an industry. Also generalizing an industry due to some events is not a mature way of looking at things. And, if a scam of this magnitude can 'finish' an industry, then we would not talk about:

Power business after the Enron scandal.
Banking / Investments business after Lehman Brothers fallout.
Bandwidth business after Worldcom went bust.

The culrpit is not an industry. Then why talk about the industry. The culprit is the greed which is driving few professionals with extraordinary power to misuse it. In my opinion this is just another scam driven by personal greed and peer pressure. We should not read much into it and move on.

Again, the losers have been shareholders, who are aware of that they are investing in a risk based equity model. At least this is better (comparatively) to the scams where companies went down with savings, debt instruments and required bail-out from taxpayers money. And yes, those industries are still there!

Software outsourcing industry is here to stay, since it has proven benefit model, which is resulting in solid growth for every stakeholder involved. It is balancing the work-compensation balance in the flattening world and resulting in an inclusive growth of the global economy.

So, I very much disagree with Thomas on this.

What may be the aftermath of the Satyam fiasco:

I think the Satyam scam will lead to major improvement and overhaul of regulatory framework which will plug the loopholes that has resulted in this scam.
People will look at their bottom line more often and work on improving the efficiency there. (Considering that Ramalinga Raju did not siphoned out the money and inflated the figure only to sustain the peer pressure)
There will be temporary 'loss of faith' of retail equity investors, which may elongate the bearish trend on Indian stock markets for a slightly longer period. However,these may change overnight!
It also reminds that new companies need to continuously emerge. The companies who are stalwarts today may not be like that forever. There is a life-cycle and to remain on the top, India need to throw up interesting growth oriented companies at regular intervals. They cannot remain dependent on the "fab four".

Of course there are more implications than what I can get together in few minutes. So feel free to add your views..

Filed under India, My Favorite Posts by Abhishek

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http://www.ebizindia.com Arun Agrawal – Ebizindia

Totally agree with you Abhishek. People with influencing power automatically get a responsibility – they cannot make off the cuff remarks and get away with it because every reader does not analyse all situations in depth and tends to get heavily influenced by people like Thomas.

"India outsourcing is finished because of Satyam". That's right Thomas. And all Americans are cheats because there was Enron and Anderson And all Muslims are terrorists because some belong to Al Qaeda

Generic comments like this never benefited anyone, none the less when they come from people like Thomas.
http://gautamghosh.net Gautam Ghosh

Hi Abhishek

Actually Thomas did not actually say that. His twitter account is linked to his Socialmedian account and when he 'clips' any story there it is reflected on twitter. If you follow his twitter stream you would realise that.

But yes, people who don't know that context can easily think that Thomas endorses that view

warm regards
Gautam
http://Istandbymypointofview Thomas Power

Corporate Governance at Indian companies is not up to London/NYC globals standards for this reason large Brands will abandon their contracts in India once they are complete some sooner.

Satyam has done much more damage to India than people in India realize.

The next imminent disaster is Tata with Jaguar Landrover once again Corporate Governance will be found wanting at Tata.
http://abhishekrungta.com Abhishek Rungta

@ Gautam – Thomas clearly says that he stands by his point of view!

@ Thomas –

Corporate governance is directed by the ethics of the individuals involved in a corporate body. It is not geography specific. It is not country specific.

Enron, Worldcom and most recently Lehman Brothers shows excellent example of so called corporate (non)governance and mass scale fraud in London/NYC. If you dig deep (just Google it), there are massive corporate frauds happening all over and many of them simply go undetected. (http://www.guardian.co.uk/business/2005/nov/20/corporatefraud.observerbusiness).

So, a corporate fraud in one country in a specific industry does not close it down or wipe out its growth prospect. It just remind people to be more careful in their dealings in future. The biggest example is the re-assignment of the World Bank contract to another Indian IT firm after World Bank banned couple of major IT firms due to so called 'conflict of interest'. It does not change the value proposition or the reason for the rise of the outsourcing industry in India. If tomorrow there is a large fraud of similar nature in China, you cannot say that "Manufacturing industry of China is history".

Indian IT industry is here to stay and grow. And yes, time will tell who is right.

We will be both around here to witness the future.
http://abhishekrungta.com Abhishek Rungta

Another important point to understand-

In this global economy, companies do not have a 'country' label

Vodafone may be a european company, but their major revenue comes from India. In the same way major US corporations (even software companies) have set up shop in India and China and employ more people in the growing (or developing) countries than their country of origin.

This just reinforce the fact that fraud happens when 'a group of people' dump ethics and has nothing to do with geography or country.

Of course, this statement is true, unless you mean to say that 'People from country X are unethical'
Bharat Berlia

It is a real pity when People start jumping to conclusions and start making generic statements on a sect of people.

In such a fiasco , where an eminent MNC is involved , there are many around the globe who are somehow protecting their exposure as a partner in all misdeeds.
When the World bank issued a notice mentioning that –

'Satyam have been providing "improper benefits" to bank staff and failed to "maintain documentation to support fees charged for its subcontractors.' ,

What was World bank doing for so many years (from 2003 to be precise) . The so called better governed company / organization could not locate this fraud (which must have involved the top of the brass ) for so many years.

So with a criminal there are many who are abetting the crime.

And anyways , I am more than convinced, Indians and Indian IT industry will always be growing. We have always been the backbone to every success and will continue to serve everybody without any prejudice.
http://gautamghosh.net Gautam Ghosh

I totally agree Abhishek,

Making generalisations is a sign of lack of critical thinking. I personally think that Thomas is mistaken, and this incident would in no major way impact Indian IT firms.

It's it's not just people like us but even large "brands" (that Thomas thinks would turn away) that are endorsing this view.

From http://www.mbtmag.com/articleXml/LN911569788.html

John G Rice, vice-chairman, GE, said that an isolated case like Satyam will not impact the company's India strategy. "Satyam is an isolated case and I do not think it will have any impact in the image of India Inc or the software industry," Rice told Hindustan Times in an exclusive interview.
http://www.ecademy.com Thomas Power

Good comments guys and of course I am not saying London and NYC do not have corruption of course they do as is being illustrated right now on a mass scale. The standards of the London Combined Code which I have studied in detail on courses various is I consider the highest in the world. London is not above the law and still has huge errors.

http://www.frc.org.uk/CORPORATE/COMBINEDCODE.CFM

Rest assured there are more Bernie Madoff's to appear in NYC and there are more Satyam's to appear in India and elsewhere in the world this will shake confidence further. This meltdown still has a long way to run arguably it hasn't really started yet. The stock markets are nowhere near their bottom.

The issue for me is that Satyam had a strong, powerful, experienced Board of Directors who clearly didn't know what was going on. These guys know Corporate Governance so what they missed it, didn't check the audit, had the wool pulled over their eyes or didn't care. This is not acceptable and should in time lead to prosecution. What other Boards do they sit on in India or elsewhere, should those companies be re-audited?

Their behaviour is common on Board's all over the world, I know because I sit on them and see inadequate directors everywhere that have to be politely replaced because they do not understand what Corporate Governance is.

However the issue is their behaviour has damaged outsourcing in India and in Indian companies and believe me this is the thin end of the wedge once the detailed audits begin you guys are going to discover a ton of Satyams just like an army of Madoff (with all the money) in NYC.

Lastly I am not one for generalisations or flippant comments and respect and welcome your right to criticise me and my point of view however we ain't seen nothing yet so be on the look out for a flood of these stories over the coming years as the global credit crunch cleanses Boards of inadequacy all over the world not just India and not just in outsourcing.
http://abhishekrungta.com Abhishek Rungta

Hi Thomas,

I appreciate your response.

I agree that there will be lot of shakeout all over the world. 2009 will be marked as a year of bloodbath as existing business principles will collapse and new business management concepts will evolve. No industry, geography or country can escape this. T

The simple reason for this is that greed has taken things out of control and now things need to normalize. We need to re-look and re-think about how we want to build and run enterprises in years to come. There are loopholes everywhere and they need to be plugged to win back public confidence in stock market.

Corporate governance all over the world needs to be re-evaluated. Everything that happens has a global implication since organizations, investors and employees are all spread across multiple countries for most organizations.

There might be more skeletons in the closet and they will tumble out soon. And this is true for all the economies. This is why we are seeing this meltdown with no bottom in sight. So let the cleaning take place. It will of course shake many industries and far many more companies out of business.

However companies and industries with strong fundamental base will stand the storm. I am personally quite confident that Indian IT industry has the maturity to do the same.

Over to the future!
http://www.brandmantra.net Amar Damani

Hi All, The discussion on satyam was a wonderful read, i will urge Abhishek to write more often. Keep up the good work! Amar Damani