Troubles of Satyam Could Benefit Rivals and 2 U.S. Companies

 The financial fraud at Satyam is rippling through the technology services industry, as customers scramble to line up other suppliers and rivals look to pick up business. 

Already, competitors are angling for a share of Satyam’s nearly $2 billion in annual revenue. The big winners from the fallout are likely to be two American companies, Accenture and I.B.M., Rod Bourgeois, a technology services specialist at Sanford C. Bernstein & Company, said Thursday.

Accenture and I.B.M., Mr. Bourgeois said, have three advantages over other competitors. Each company already supplies most of the blue-chip corporate clients of Satyam. I.B.M. and Accenture have built up their Indian operations in recent years, so they offer Satyam customers the same skills at competitive prices. And they are not Indian companies.

The $50 billion-a-year offshore outsourcing business was growing at a 29 percent annual rate until the credit crisis hit last fall, Mr. Bourgeois said. But he now forecasts growth in 2009 to be about 10 percent.

The impact on other Indian outsourcing companies is unclear, but analysts say that, long term, the fraud could have wide implications. The scandal at Satyam — a company listed on the New York Stock Exchange and audited by an American accounting firm, PricewaterhouseCoopers — raises doubts about other Indian companies.

“This is a crisis of trust,” said Frances Karamouzis, an analyst at Gartner. “It’s not really Satyam at stake; it’s the India Inc. brand.”

The big Indian outsourcers like Tata Consulting Services, Infosys and Wipro could pick up business as a result of Satyam’s travails. The same is true, analysts say, for Cognizant Technology Solutions, which has its headquarters in Teaneck, N.J., but most of its operations in India.

Yet in the business of outsourced technology services, where suppliers build and maintain a customer’s vital software, reputation matters a lot. Companies often depend on their outsourcing suppliers to manage the technology behind basic tasks like billing, purchasing and customer relations. In the corporate market, it is said, customers are not buying technology, which can change rapidly, but buying a relationship with a supplier.

For that reason, Ms. Karamouzis said, the odds are that the Indian government and the industry’s powerful trade group, Nasscom, will develop a rescue package for Satyam, if necessary.

For corporate customers, the crucial resource is the software developers at Satyam, far more than the corporate entity itself. Satyam’s strongest business is maintaining and customizing so-called enterprise resource planning software, typically from SAP and Oracle, which runs the basic operations at companies.

Ms. Karamouzis said Gartner’s advice to clients was to identify by name the most important Satyam developers working on a company’s outsourced software projects. Then, she said, companies must assess the risk at Satyam, which may include sending people to India for a first-hand look.

In a letter to the Satyam board on Wednesday, Ramalinga Raju, the chairman and co-founder, said that the company’s cash reserves were about $69 million, instead of the $1.1 billion reported last year.

“If they don’t make payroll, there will be a mass exodus of employees,” Ms. Karamouzis said.

If Satyam remains intact, she said, companies may well want to offer bonuses to keep the important engineers working on their projects, instead of defecting to outsourcing rivals.

The Satyam setback has occurred at a time when the once-torrid growth of the Indian technology outsourcing industry has been slowing significantly. The terrorist attacks in Mumbai last November and a stronger rupee, analysts say, have prompted some companies to look at lower-cost alternatives in China, Mexico and Brazil.

But the main reason is the sudden slowdown in the global economy, especially the crisis in the financial services sector, a large source of business for the Indian outsourcers.

Yet when the global economy comes out of its slump, many analysts expect the growth of the leading Indian outsourcers to pick up, if not to the previous levels.

“The golden age of very high growth and financial returns is over,” said John C. McCarthy, an analyst at Forrester Research. “But Satyam and the current economic troubles do not change the fundamental economics of offshore outsourcing.”

Forrester projects that the offshore outsourcing business will grow by 17 percent annually through 2012.