Feb 3, 2009

Tech - Satyam clients find that breaking up is hard to do

SAN FRANCISCO - Outsourcing partnerships are built on trust, so when Satyam Computer Services Ltd. copped to inflating its books by $1 billion, its customers — some of the world's biggest companies — were burned.
Satyam — Sanskrit for "truth" — counts a third of the Fortune 500 as its clients, some of which have handed Satyam their most critical technology chores. No longer just cheap call centers or help-desk technicians, outsourcers do it all now, from maintaining clients' databases to handling their payroll.
That means severing an outsourcing relationship is like hacking off a limb. Companies are loath to unplug even from a shaky outsourcing deal.
Yet that's the dilemma facing Satyam's customers as they see the company in tatters.
Three former top Satyam executives — founder and ex-Chairman B. Ramalinga Raju; his brother B. Rama Raju, Satyam's former chief executive; and Srinivas Vadlamani, former chief financial officer — have been arrested and face conspiracy, forgery and other charges in India. The future of the company is unclear — facing a cash crunch, Satyam recently had to press some customers to make early payments.
Still, Satyam says its biggest clients have promised to remain.
"Well over 90 percent of our clients have committed to staying with us, either formally or informally," spokesman Jim Swords said. "We're not experiencing any volume of attrition at this point."
The fact that few Satyam clients have defected — so far — shows how deeply connected outsourcers have become to their customers.
With information-technology services now a $748 billion business worldwide, according to Gartner Inc., outsourcers such as Satyam, IBM Corp., Accenture Ltd., Infosys Technologies Ltd., Tata Consultancy Services Ltd. and Wipro Ltd. are often as important to a company as its own internal divisions.
Even companies that want to defect — an option being explored by most, if not all, of Satyam's 650-plus clients — may have to wait weeks or months before they can pull the trigger. One big challenge is simply figuring out which Satyam workers handle which particular technological tasks for a customer.
"This isn't speed dating," said John McCarthy, a vice president with market-research firm Forrester Research. "You're not changing partners every three minutes. And that's because of the complexity."
Since Satyam's fraud surfaced Jan. 7, only one big company is known to have jumped ship.
Bloomington, Ill.-based State Farm Insurance Cos. ended its contract with Satyam fewer than 10 days after the accounting shenanigans emerged. State Farm won't say how much business it did with Satyam; Satyam said State Farm's decision was "immaterial."
The companies had worked together for nearly a decade, with about 400 Satyam employees at State Farm offices in the U.S.
State Farm pulled the plug because "somebody came to the opinion (Satyam's) future was a little too uncertain for us," spokesman Jeff McCollum said.
State Farm apparently could quickly sever the ties because it had been outsourcing relatively basic jobs to Satyam, including claims processing. State Farm wouldn't elaborate.
Other Satyam customers have expressed their support — but are hedging their bets.
General Electric Co. said it has not left Satyam, but is monitoring the situation. Cisco Systems Inc. said its "primary aim is to see the continued delivery of services from the Satyam team," but added that it is considering "appropriate risk mitigation strategies." Coca-Cola Co. said it is reviewing its options.
Nestle SA said Satyam has guaranteed that services won't be disrupted. But Nestle added that it is considering "alternative solutions" and that it has the in-house capacity to perform the tasks Satyam is now handling.
One main Satyam rival, Tata Consultancy Services, says it has been approached by several large Satyam customers, each worth potentially tens of millions of dollars in new contracts. But Tata says it hasn't reached out to companies that didn't already have outsourcing contracts with Tata.
"Our business will grow, but at the same time this is not a hard-selling situation," said N. Chandrasekaran, Tata's chief operating officer. "It could turn people off, and it's just not appropriate."
Most of Satyam's other competitors wouldn't talk about how Satyam's problems could benefit them. However, Kevin Campbell, group chief executive of Accenture's outsourcing division, said switching providers has gotten easier as outsourcing has become more common.
"Switching isn't something that you're going to do every day," he said. But "if you've already outsourced, once you've already done the hard work, switching from one provider to another is much easier than trying to take something back in house."
Satyam has been scrambling to reassure clients that the company will not collapse. Its executives have visited customers, and a few clients have gone to Hyderabad, India, to see that the company remains in order.
Even so, it wasn't clear until the last minute whether Satyam would be able to pay its workers for January. Satyam did meet payroll, and spokeswoman Archana Uttapa said Monday the company is making vendor payments on time and closing new deals.
Robert Kennedy, a professor at the University of Michigan's Ross School of Business and author of "The Services Shift," a book about outsourcing, believes it will be important to see whether more Satyam clients follow State Farm out the door. If that happens, he said, "it could become a stampede for the exits."
Kennedy expects Satyam will survive, but as part of another company. He says a Satyam competitor could snap up Satyam's assets at fire-sale prices "to pick up a whole bunch of capacity and customer contacts really cheap." That, he said, could "calm customers down."
AP Business Writer Erika Kinetz contributed to this report from Mumbai, India.

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