IT outsourcing contracts merit review given scandal at Indian firm

Customers of Indian IT services firm Satyam should weigh their options as the offshore outsourcer weathers a financial scandal. In fact, here's advice for all CIOs who outsource.

Customers of any IT outsourcer that runs into trouble should consider renegotiating their IT outsourcing contract, and make sure they have the documentation and staffing needed to take their business elsewhere, experts said this week in the wake of the financial scandal at Indian IT services firm Satyam Computer Services Ltd.

Even if a crisis is limited to one provider, CIOs with any outsourcing contracts have work to do, experts said (see related story: Action steps for non-Satyam customers), to make sure their projects or levels of service are uninterrupted.

News broke last week that Satyam, a 22-year-old global IT services firm based in Hyderabad, India, had been listing assets far in excess of what it actually held, a scandal that has been referred to by some as "India's Enron." The "financial irregularities," disclosed by the firm's founder, were followed by other allegations, such as that Satyam executives inflated employee counts, siphoned off money and fled the country. The company denies these charges.

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U.S. customers of Satyam include Caterpillar Inc. and Nissan North America Inc. Caterpillar declined to comment and Nissan did not respond to an inquiry about its plans. Yet the uncertain environment raises the question of how clients of any stricken outsourcing vendor can protect their investments during difficult times.

David Rutchik, a partner at Pace Harmon, an outsourcing advisory firm serving Fortune 500 companies, said Satyam customers should assess both the immediate and long-term ramifications of the scandal.

"In the immediate term, CIOs need to be analyzing their contracts to understand what sort of rights they have as far as termination, any kind of damages they could be getting and non-solicitation [of employees] or lack thereof," he said.

Another first step is to determine exactly what resources your organization has invested in the outsourcer, said Frances Karamouzis, a vice president of research at Stamford, Conn.-based consultancy Gartner Inc.

"We've been advising clients that they need to put very specific things into place to stabilize their outsourcing deal with Satyam," Karamouzis said. "That means, if they don't do it already, they need to inventory everything they have with Satyam."

That might sound like overly simple advice, she said, "but some clients, once they outsource, are not keeping very tight track of everything." Organizations should obtain documentation and information that show where and with whom their data resides.

Next: People matters

CIOs should then get more specific: Determine, by name, which Satyam employees are working on their accounts and prioritize those individuals' importance to your work – whether they have a lot of information in their head, to what extent they are engaged and how indispensable they are.

"This being a cash crisis, there are still a lot of questions about what's going to happen to individual employees," Rutchik said. "To the extent that [employees] are insecure or unsure about their future, the chances of them leaving and going elsewhere are high right now."

"CIOs need to be analyzing their contracts to understand the rights they have as far as termination, any kind of damages they could be getting, and non-solicitation [of employees] or lack thereof."
David Rutchik
partnerPace Harmon

Once you have a staff inventory, "We're recommending that those companies with more than 50 FTEs [at Satyam] send one or more employees to India to have face-to-face meetings with the Indian employees," Karamouzis said. This will allow you to reassure the employees working on your account that you are planning to stick with the company and that you are continuing to pay.

Karamouzis also recommends taking this opportunity to assess whether the individuals might be looking for employment elsewhere. Then, "go through the further effort of creating some sort of a stipend or incentive plan to keep them there," she said. "That's a very good way to keep people motivated and enticed." Consult with counsel to ensure that you are doing so legally, she added.

Rutchik advises consulting legal counsel and examining the provisions of your contract with Satyam, which might have been breached by the financial scandal, making any non-solicitation or non-hiring agreements unenforceable. If not, and if a mission-critical employee does leave Satyam, it might be worthwhile for your firm to break non-solicitation or non-hire agreements with Satyam and hire them, Rutchick says, so as not to leave your company – and your project – hanging.

"You have to weigh the risk there – if they're managing mission-critical applications or business processes, it might be a bigger risk not to secure them, rather than worry about a breach of a non-solicitation or non-hiring agreement," Rutchik said.

Form an IT outsourcing contingency team

Concurrent to all of this, it is important to create a contingency team within your firm that can examine exit clauses, determine whether to terminate the IT outsourcing contract, how long that would take, and whether there are other vendors that could do similar work, Karamouzis said.

Exploring options for shifting business elsewhere could include looking at temporary providers, Rutchik said. "The nature of what Satyam is doing [for a company] is really going to determine how difficult or how feasible in the near term it is to transition," he said.

Your company may see an easier transition if internal employees have been working jointly with Satyam employees on particular projects. "But if it's a service end-to-end that they're providing or a managed service, that's going to be more difficult to transition because there's more reliance with the vendor overseeing it all," Rutchik said.

Karamouzis advocates seeking out only long-term partners. "Check out the due diligence of the new company," she said. "You don't want this to be a stepping stone or an interim vendor, but a new long-term vendor you can engage with."

Any contract, meanwhile, should include transition plans for moving data both to and from the vendor with whom you are contracting in the event of any problem and need for recovery or retention of information.

"In the unlikely event you have to react to a situation like this, you're in a position to do so," Rutchik said. "You can't prepare for this individual fraud, but if something were to happen, you've got specific steps to take."

Let us know what you think about the story; email: Rachel Lebeaux, Associate Editor

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