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Satyam clients likely to re-evaluate contracts

Bibhu Ranjan Mishra in Bangalore | December 18, 2008 10:23 IST

Around six to eight strategic clients of Hyderabad-headquartered IT services major Satyam Computer Services [Get Quote] are understood to be thinking of re-evaluating their contracts as they are 'no longer satisfied with the intent and focus of the company.'

IT outsourcing contracts of over $200 million (around Rs 960 crore) is up for renewal. Some of the major clients who have long-term strategic relationship with Satyam include Unilever, Nestle [Get Quote], DuPont, Cisco Systems, GE, Sony and Applied Materials. The current move by Satyam could trigger a possible review of their relationships with the company.

"It's not just the investors, but also Satyam's clients who have not reacted positively to its move to get into the infrastructure and real estate business. They are questioning the long-term intent of the company in terms of supporting clients' requirement in the IT and BPO sector. Even though the acquisitions of the two companies have been called off, some of them are of the opinion that the intent of the management is under question," highly-placed sources familiar with the development told Business Standard.

Besides, many clients are seriously considering a vendor consolidation, and Satyam is expected to lose out to its competitors in India, including Tata Consultancy Services [Get Quote], Infosys Technologies and Wipro [Get Quote]. The current economic environment has spurred majority of the clients of domestic IT services company to ask for a re-negotiation of contracts.

Driven by many external and internal factors in the wake of a global recession, most clients are going in for a major cost-cutting exercise, which is adversely affecting the Indian IT outsourcing industry.

While volatility on part of the clients was already present in the mind of the most of companies, the recent move by Satyam has only added to the rising discontentment and "has painted a very negative picture for the entire IT community", a leading analyst said on condition of anonymity.

"If the focus of the company is going to change, there will be a significant risk for the clients. While outsourcing the IT contracts to vendors, overseas clients take decisions based on the reliability of the vendors. The long-term sustainability of a service provider is a very critical factor for any client before they start engagement with them. This, of course, is the reason why a service provider is required to their clients take into confidence before making any strategic decision, which might deviate from their long-term goal," said Sabyasachi Satpathy, an expert in outsourcing advisory services, and co-founder of Mindplex Consulting.

It might be quite a while before Satyam's management can bring back the confidence not only into the market, but also its client base and in the process of which 'there might be a major churn in the key management', Satpathy added.

The practice of corporate governance by most Indian companies is also under question, despite the restriction of Sebi and other controlling bodies.

However, most of the IT services companies, including Infosys [Get Quote] and TCS, are known for their strong focus on corporate governance. According to an estimate, many Indian listed companies skip their annual general meeting, and don't take shareholders' approval before taking major decisions.

"The percentage of people who have invested in IOP or secondary market is very low in India. The large number of investors in India are retail, public and small investors who are highly unorganised, and are being taken for a ride in India. This is not sign of good corporate governance," said Diptarup Chakraborti, principal analyst, Gartner India.

 


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