Summary
In troubled times even large and healthy companies need to avoid major missteps, yet Satyam has just been guilty of one (possibly two) such missteps. At best this will dent their growth. At worst it could signal a company sale or dissolution. The focus now has to be on retaining existing clients, rather than finding new clients.
Analysis
A Gold Rush mentality always spawns excesses and missteps. The recent Wall Street meltdown has provided plenty of examples of both. For the last several years the Indian outsourcing business has been something of a Gold Rush, and many firms have grown rich. Notable among these firms are companies such as Infosys, Cognizant, Wipro, and Satyam. These companies have grown into multi-billion dollar, multi-national giants. Some have adopted a corporate governance structure familiar to US enterprises, but others are still managed by a powerful founding family.
The mere fact a large corporation is controlled by a founder, or a founder’s family, is not necessarily a problem. Some very successful large enterprises have thrived under such control. Similarly, some large enterprises have been guilty of highly questionable activities despite allegedly having corporate governance in place (Enron comes to mind). Nonetheless, consolidating power into one person or family must be considered a risk factor making corporate malfeasance more tempting. A founder who has controlling interest of a large corporation is tempted to view that corporation as his/her private property, to be managed as s/he sees fit.
While the recent allegations against Satyam do not necessarily imply any corporate malfeasance, they do raise concerns. Both the attempted purchase of family-controlled companies for amounts some consider excessive and the World Bank allegations paint a troubling picture about Satyam’s governance practices. Satyam is aggressively defending itself against the World Bank allegations and may be completely innocent. Similarly, although many feel the attempt to purchase family-owned companies was inappropriate and the price proposed was too high, others may consider that assessment simply a difference in judgment.
What is clear at this point, however, is that Satyam must fight an uphill battle to repair the damage. With the world economic problems even companies such as Satyam may see reduced growth or possibly even no growth. The collapse of many financial services firms worldwide will have a chilling effect on the large Indian outsourcers, since financial services firms were and are heavy users of Indian outsourcers. In this environment the struggle for revenue among IT outsourcing companies will be intensified.
The allegations by the World Bank will be particularly disturbing to those large clients of Satyam, whether governments or business. Large businesses and government agencies need to maintain a squeaky-clean image. Even if Satyam is completely innocent of all allegations, the mere accusations cast a pall around Satyam that will make them damaged goods for many of their clients. Adding in suggestions of potential Board and executive wrongdoing makes the picture uglier.
Regardless of Satyam’s guilt or innocence these accusations will inevitably damage them in the market. How much damage is done will depend largely on how much more bad press Satyam gets. This may also lead clients to take a hard look at the other big Indian outsourcing companies, based on nothing more than “guilt by association”.
