Satyam's Great Fall

Satyam CEO's revelations on inflated cash have rocked the bottom of the already deflated stock indices in India. Some say that India's outsourcing industry itself will now be viewed with suspicion. While I do not think it will happen (what with the American financial institutions in trouble due to reckless lending and the double whammy from Mr. Madoff's Ponzi scheme still smarting, I do not thinkg the offshore outsourcing industry will be singled out as a miscreant), I do think that such events are serious blows to our credibility as a world-beating player in IT services. They come at a diificult time and any merger or acquisition that will see Satyam become part of another company will undermine the true value that Satyam has commendably built into itself- in terms of its delivery processes and strength in Enterprise Application Services.

On online forums, Indians are reacting with customary hyperbole, "Raju is worse than Kasab (the captured Pakistani terrorist from the Mumbai siege):, says one. Another asks, "Who is the idiot who is running their Finance department?"

Raju released a letter to the board of Satym and the SEBI chairman yesterday. A paragraph in the letter caught my attention:

The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly (annualized revenue run rate of Rs 11,276 crore in the September quarter, 2008 and official reserves of Rs 8.392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations – thereby significantly increasing the costs.

While ethical standards in companies like Wipro and Infosys are considered to be high by the general public (and their managements have been conservative and transparent to strengthen this impression), this is a scenario that could unfold in any organization. If there is a small differential in the cash flow as reflected by the books and appears in reality, will a CEO contradict his published, audited books and go public with this discrepancy? Will that not affect the impression of the company in the minds of its investors, customers, employees and other stakeholders. In Raju's case he just postponed the problem until it grew bigger and dominated the company itself. If he had gone public when this problem first started, will it have taken a beating? It may well have, and that is what a CEO needs to commit in his/her mind. Wipro's ethical guidelines state that "anything grey is black", meaning that whatever the price, the company will stay on the right side of the law and ethics. Will this be put to practice in a situation like Satyam's?

I'm firm in my view that the laws of the land must take their course in prosecuting Mr. Raju and any others involved. But the fact is, as Solzhenitsyn said, "the line between good and evil runs through the heart of every man."

Security Breaches in IT

Interesting new item here-

http://www.consumeraffairs.com/news04/2007/09/ct_accenture.html

The state of Connecticut is suing technology consulting company Accenture over the loss of a data tape containing personal information on 58 taxpayers and nearly 460 state bank accounts.

"Accenture deserves censure -- to be held accountable for allowing valuable secret data to be stolen and putting at risk state taxpayers, bank accounts and purchasing cards," Blumenthal said.

"Transferring this data to Ohio is inexplicable and inexcusable," Blumenthal said. "Confidential information can have the value of cash -- especially in the wrong hands -- but Accenture treated it like scrap paper. Its breach of contract and negligence exposed state taxpayers to identity theft and other harm."

A $98 million contract to develop this payroll, inventory and accounting system ought to have been better monitored for security. Even with security measures that are robust and mature in place such as at most Indian or global IT giants' offshore delivery centers,occasional slip-ups such as the breach at MPhasis are a major concern for clients. Incidents such as the Accenture-Connecticut case point to such breaches even when the information is kept onshore; and call into question giving away contracts upwards of $5 million without ensuring necessary conditions against breach, such as the inadmissibility of storage devices in associates' laptops, policies against accessing client resources except under monitoring or in a 'time and material' billing without attached SLAs and so on.

Deconstructing Wipro

We've heard it before- complaints about Indian companies not making big ticket US acquisitions, excelling in infrastructure services but not going the whole hog by providing hosting, being too risk averse and India-centric, not being global enough to establish high end services locally in the US, Europe and Japan.

One wonders what to make of Wipro. Wipro's acquisition of Infocrossing for $600 million out of cash reserves of $750 million changes the paradigm. With the acquisition Wipro gets complementary services (hosting) through 5 US datacenters, 900 US employees and reasonably well known senior management from the US (who are also not originally Indian). Will this pay off? I hope so. This was after all Vivek Paul's dream for Wipro- to make it a $ 4 billion company by 2002- half of it coming in through acquisitions.

This is another positive fall-out of the rising Rupee. Time to buy. When and if the Rupee falls again it will pay off much more. Wipro is also not interested in restructuring its acquisitions. Which is why its talks with other big US companies to acquire them have not taken off. The 900 Infocrossing employees will remain on board. The 12 percent net margin is much smaller compared to Wipro's (mid 20s), but Wipro is planning to move a lot of existing work into the datacenters which are now run mid-capacity, a move which should improve their net margins substantially. All in all a satisfying acquisition. I hope Wipro and Infocrossing have the apetites to digest it.

The Rise of the Rupee and What It Means to Us

The Indian Rupee has been going up against the US Dollar for a couple of months now and the Reserve Bank is following a laissez faire policy in administering this rise. This is in keeping with its goal of letting market forces dictate the fate of the Rupee and let India ease into the global economy naturally. Unlike in China where their fiscal policy is hidebound to keep the currency low vis-a-vis the dollar, we are following the IMF guideline to let it be.

How does this play out in terms of our economy? As an employee of a Big Three IT export organization in India I can say that this has very quickly percolated down to every level, especially the roles based in the US. Spending in dollars has been cut, several bureaucratic hoops now need to be jumped for travel to India for accompanying a client on a site visit, there is a drive to increase billing rates and shorten bills outstanding. Add to this the 2009 deadline for the tax holiday we have been enjoying thus far, and you see the IT industry preparing for lower margins and perhaps a slightly less competitive situation due to increasing billing rates.

Factoring in all of this as well as the perceived threat of competition (more on this in the next paragraph) the industry should still earn net margins above 20 percent of the revenue. Besides the market is already shifting significantly away from traditional outsourcing to selective outsourcing, meaning it is moving from the model of 'we do our core business best, you do the IT' to 'we retain the strategic applications and infrastructure, you do the selected other services'. Thus the big bang approach of infrastructure hosting, rebadging employees and outsourcing entire departments is now outdated and with many such previous engagements coming to an end, $100 billion worth of business locked up in those large deals is now being reconsidered as to what can be outsourced and what retained.

This is the reason why IBM is confident enough to commit $6billion to investment in India and 100,000 net employees in India in the next 3 years. They need to retain most of their large deals to remain competitive and they are eager to get in the game. This brings us to the next question: what is India's competition? Let's skip the perfunctory look at Russia, Eastern Europe, Northern Africa, the Phillipines and so on. The perceived threat to the head that wears the crown is China. It's too early to comment, but since 2000 I've seen doomsday predictions for India's IT industry because of Chinese advancements. In 2000 we were given until 2002. In 2002 we were given until 2006. Today we are given until 2010. I don't know if they will catch up that soon. Regardless of that, we need to be careful because some companies are ramping up services out of China- HP for instance published a report to the effect that it expects to gain from China what it may lose from India due to attrition, increased salaries and so on. This remains to be seen.

Our company has operations in China and we have until now seen it as a supporting location for India-based services and not as a credible competitive business unit. We have also found it tough to hire local professionals for our projects. The Chinese government is trying to remedy things on a grand scale at a rapid pace as they are wont to do. Training a staggering mass of people in the English language, flying out people to our Bangalore campuses, et al. It took us over 20 years to get our processes and quality assurance in order, to build infrastructure and develop a rich hinterland of people who are qualified enough. AMR reports on the other hand that China needs to be at least 20 percent cheaper than India to even be a competitor at all, despite all the flaws India has and any further infrastructure build-up China may make. As I said we need to wait and watch. It will be an interesting fight.

Aside from this, I'm bothered about our currency rise. This is because the IT industry, telecom and certain other sectors are doing well. But this is not a uniform development for all sectors of the economy. While the star performers drive up the currency the laggards find themselves unable to export competitively or compete against imports in the light of the stronger Rupee. The predictions by independent agencies peg the Rupee at Rs. 36 to a dollar by the end of the year. Wonder, if the RBI will still let it be.

India's Technology Numbers- Can Companies Help?

For a decade India has been meeting the need for outsourced information technology work. The numbers have been incredible. The top five companies have all grown at compounded annual rates of over 40 in the past six years. TCS, Infosys, Wipro, Cognizant, HCL and Satyam are billion plus companies. The recent quarter's earnings were well on track with the 40 percent growth rate continuing. All this amid reports that the talent may be in short supply. Is this true?

The alarm bells have been ringing for a year now, first from NASSCOM, then from the analysts and now the press. How does this measure up against the realities that I see when I go to India, so many bright young people who would still rather be employed at the good salaries that IT companies turn out? Infosys' Gopalakrishnan had mentioned in the press a month ago that it is not the dearth of people but the dearth of quality people that is a problem.

So many strategies have been put forward. The top companies have been building up development centers outside of India, in China, Eastern Europe and Latin America, thus strengthening numbers for multilingual development and support. They have also been developing centers in smaller towns in India such as Chandigarh, Cochin and Vizag. Wipro has been investing in the US, in lower cost regions such as Idaho and Virginia, establishing connects with local universities. True to their nature, the companies have been thinking and acting fast. This is commendable.

I do have a pet gripe, though. Though the IT companies have generally been socially conscious (especially their founders), I am disappointed at the low level of grassroots development they are fostering to improve the quality of educated young people in India. The Azim Premji foundation and the Infosys Foundation are initiatives aimed at basic education. This is noble indeed and arises from the philanthropic proclivities of their top managements. I strongly believe, though, that these companies would do well to invest in improving education at the university level from which they could tap into the resource pools. Nothing compels charity as direct returns, and I am more than a little disheartened to see very little of such nexus between the IT industry and the local education system.