Fraud hobbles Indian outsourcing strategies

By Mark Everett Hall
January 15, 2009 9:00 AM EST
Both IT vendors and corporate users have flocked to Indian outsourcers to take advantage of the labor cost savings and the available expertise. That rush to save cash and find talent will undoubtedly slow down with the revelations last week that Satyam Computer Services Ltd. has been cooking its books for years.

Already scathing commentaries are being exchanged online. Some argue all outsourcing IT operations in India, such as those that write SaaS application code, manage data centers remotely or run cloud-based systems, are rife with fraud. Others with equal vehemence call such accusations racist. Neither position is correct.

Virtually all countries have crooked capitalists. With more capitalists among us, the U.S. undoubtedly has more than most. However, if Satyam were an isolated case of Indian fraud, those calling critics of Indian outsourcing racially biased would have more credibility. There is rich recent history of fraud on the sub-continent.

Back in 2002 KPMG published a special report on fraud in India, revealing that more than half of the companies surveyed had been victims of fraud emanating there. Indian call center workers have been reported to have charged goods from Americans' credit cards. And Google points to India as the center for massive AdSense click fraud.

As Rajesh K. Pillania of the Management Development Institute put it in an academic paper published last summer, "India is widely recognized as one of the most corrupted countr[ies] among the major global economies."

While pointing to the "impeccably run" Infosys Technologies Ltd. in Bangalore as an exception, the Economist magazine warns its readers that they "delude themselves if they think standards in most Indian technology firms...are close to those set by Infosys."

Granted, not every IT company in the U.S. is run as "impeccably" as, say, IBM or Microsoft. But if your organization is dependent upon a U.S. services business for SaaS or cloud operations and it stumbles, you have other local resources to get you through a rough patch. That's not as easily managed for a situation that may arise in India with different laws, culture and resources to mitigate the problem. And with the global economy sinking faster and faster, those rough patches abroad may become far more commonplace.

At the moment, Satyam remains a financial scandal. But if I were dependent upon the company for services to my customers, my fear would be that Satyam might end up like an Enron or an Arthur Anderson, a company wiped out by greed, hubris and incompetence. Then where would I be? Or worse, where would my customers be? With my competitors, I suspect.

Doing better due diligence and conducting new audits for all Indian partners has just became a priority for IT executives.