Friday, February 06, 2009

Risks of Offshore Outsourcing

India-based outsourcing firms -- and the U.S.-based companies that use them -- suffered a traumatic shock in January when it was revealed that the chairman of one of that country's largest IT outsourcing firms admitted engaging in massive fraud to the tune of more than $1 billion.

Will the scandal end up harming India's growing HR outsourcing business?

Prior to his arrest for fraud, B. Ramalinga Raju, founder and chairman of Satyam Computer Services Ltd., admitted in a letter of resignation that, for years, he had falsified accounting records to make it appear the company had far more revenue and far less debt than it actually did.

The incident has severely tarnished India's reputation as a business powerhouse, Premchand Palety, director of the Delhi-based consulting firm C-Fore, told the Wall Street Journal. "This is a very bad thing for our country. It's shown the color of our entrepreneurs," he said.

The Satyam scandal is a reminder that India is still adjusting to Western ways of doing business. Traditionally in India, businessmen "had to work with politicians, pay bribes, so the culture of ethics is very new to our country," Palety told the Journal.

Stan Lepeak, managing director for global research at outsourcing-consulting firm EquaTerra in New York, says American clients of Indian outsourcing firms have reason to be concerned.

"Any time you're looking at doing business in emerging markets [such as India], you do need to do due diligence and have good risk-management policies in place and plan for the worst-case scenario," he says.

"The Satyam debacle is a wake-up call that India is a bit behind the United States in terms of governance and regulation," he says.

Although India is more commonly known as a powerhouse in the world of IT outsourcing, in recent years a number of Indian firms have entered the HR outsourcing market. Four large outsourcing firms in particular -- TCS, Wipro, Hexaware and Infosys -- have had some success in winning U.S. HRO clients and are positioning themselves as low-cost alternatives to U.S.-based HRO firms such as Hewitt, Convergys and ACS.

Lepeak says that, although the four Indian firms have good reputations, HR leaders should never assume there is no need to do due diligence when considering those firms.

"It would be a mistake to assume that, if you go with one particular firm, you'll be safe," he says, adding that this extends to American providers as well.

Proper due diligence and risk management should include having a back-up plan in place for shifting services to a different firm or moving them back in-house should a provider go out of business, ensuring that data is properly protected and ensuring the provider has adequate contingency plans in the event of a severe disruption.

Lepeak says the Satyam debacle may well end up benefiting U.S.-based outsourcing firms, despite the fact that fraud can happen anywhere.

"For the average buyer of these services, they may be more likely to go with a U.S.-based provider now because they have a greater degree of faith in the U.S. legal and regulatory system," he says.