Needed : An Indian SOX

With the Satyam accounting scandal that has not just rocked the Indian IT industry but overall the Indian business community, the need for stricter norms for publicly traded companies is loud and clear. It is surprising that no one is yet talking but just like Enron, Worldcom and other disasters led to the Sarbanes Oxley regulation in the US, this is the right time ( though late) bring about such a regulation to ensure such disasters are never repeated.

That the business of business is business is known, but when businesses go about creating or evaporating wealth by doing pure accounting, the impact is felt across the socio economic levels of not just the country but globally in case of such enterprises.

A lot of Indian IT companies are taking extra pain to demonstrate their transparency and voluntarily going ahead with key disclosures to substantiate their financial position. This is a great booster and helps enhance the credibility of the industry which many perceived to have taken a beating with the events of the past week. 

Satyam - The End of A Beginning or The Beginning of An End?

The events of this week with Satyam Computer Services, India's fourth largest IT services company, has left all shocked and stumped.

Industry associations and government are keen to ensure that this does not in any way dampen the "India story". In a basket of mangoes, there can be a few bad mangoes which does not make the basket bad. Enron did not mean that all American business enterprises indulge in fraud and similarly this is an aberration which needs to be highlighted and quickly addressed.

The customers, employees and shareholders are the most impacted with this. For others, it is more on an "environment news" - but for anyone who is one of these, the damage is closer and devastating for employees and shareholders.

It is good to see that the government has taken up some rare and unprecedented action ( at least to my knowledge) of instilling this confidence by constituting a new board. Once the true state of the finance position is known, the team will chalk out a program to stabilize, recover and then grow.

This is important for Satyam and for the offshoring and IT outsourcing industry from India in general. Something to closely watch and these events just reinforce that nothing can be taken for granted.

Satyam Computer Services : An Acquisition Candidate?

While a lot has been written recently on the developments at Satyam Computer Services in the recent week, clearly with the directors resigning including the high profile Vinod Dham, it has impacted their image. The recent World Bank issue which reportedly banned any business withthem for few years did not help any further either. There is more news tumbling on the nature of holdings by the promoter but this post is not about these developments really, but their possible impact in terms of a possible acquisition.s

So, is Satyam a good candidate for acquisition by either traditional onshore providers (like IBM) or even offshore players (like Infosys or TCS)? It may not be as easy, even when the time comes after the next quarterly announcements which is expected to clear their holding and cash reserve position. Here are some considerations:

1. It is too big with over 50,000 employees for a simpler acquisition assessment
2. It has been aggressive with its pricing, often taking on business with lower margins which may not fit every company's norms
3. It has a very negative image currently with possisble impact on future earning potential which does not strengthen a case for letting it exist as a separate entity after the acquisition
4. It would not bring any differentiator to at least the offshore based providers, except access to a resource pool of their employees and the existing customer base. No major technology or service differntiator would be involved.
5. For onsite based providers, most who wanted an India story have a big India presence already (IBM has over 70,000 employees) and so it may at least appeal to a major onshore based provider which was left behind in building an India story. This probably would be from a European provider as most US based onshore providers already have a big India presence.
6. While always counted among the top 5 of offshore based players, it was probably the one without a professional management team, when looked at by outsiders. There are others also in the Top 5 who are also led by the founder or his family but with all other factors inclcuded Satyam stood out in that count.
7. The current economic climate does not motivate many to look at Satyam for an acquisition in an all-cash kind of deal.
8. There has been a start of exodus and poaching of some of their brighter employees which will only worsen with time, if a promising suitor doesn't move quickly
9. Satyam has played in most segments but does not lead in many and by too much. The best areas known as its SAP practice and to some extent its engineering services practice.
10. The promoters have caused damage with the news trickling and their other interests (in real estate etc.) to make any new company do a thorough scrutiny of its books before deciding on it.

Surely a story to keep tab on in the coming weeks.

Chargebacks for IT Infrastructure Services

While the concept of chargeback has been around for many years now, in reality there are really few organizations which have implemented this really well. But it will also not be wrong to say that almost all organizations have initiated or have some form of chargeback mechanism in place but most of them do not cover all aspects of the services and assets. The easiest form is to charge departments for their spend on project work -- but the tricky part is with the operations and support side.

In its most mature form, it is a CIO's pushback to be taken seriously -- to shape the IT department as a profit center and not as a cost center. However there are several challenges that organizations face. However, this does not stop them from asking for such models from bidders when releasing an RFP.

The fact remains that in few organizations IT department really calls the shots. IT is still considered a support department and not really taken seriously. There are stories of CIOs who changed the way their companies did business - but for that the CIO needs to have a strong vision and leadership style along with a receptive boss who is ready to give him a chance.

Some other factors that have probably contributed to the lack of acceptance:

• Overall diminishing cost (seemingly, though TCO may not vary too much) of hardware resources
• Pushback from business which would not welcome this as it would make them more accountable and they would not be their careless self when asking for more!
• Lack of meaningful model which can be adapted and agreed by all. Given the complexity and variation of demand, it may actually be useful more in very large environments. In smaller ones, it may actually make sense to have some level of aggregation to manage costs
• Lack of acceptance and prevelance of service catalogs which are a pre-requisite for a good chargeback model. While ITIL has talked about service catalogs for some time, these are again not easy to implement and need to be really exhaustive and relevant

Am sure they may be more, but these come to mind as key ones.

It is difficult to say if it is good or bad and it rally depends on the size, scale and nature of business. Overall it is surely desirable to make business understand the cost of services they enjoy or demand but there has be a good tracking mechanism.

Maturing Remote Infrastructure Management Capabilities

RIM service providers are maturing, or so most say, when it comes to developing capabilities up the value chain. Following (in ascending order) are the service areas when it comes to assessing maturity on a single dimension of nature of service delivered. There are other dimensions -- in terms of pool of resources, number of customers, innovation, patents etc. but we will for the sake of simplicity, limit the discussion to the nature of work being outsourced to offshore RIM providers. So, here's the list in ascending order of maturity:

• Monitoring : L1 monitoring of events; resolving basic ticket and assigning tickets to L2/L3
• Management : L2/L3 support; resolving tickets assigned by L1 teams or system generated and queued
• L4 support : L4 or close to OEM technology support
• Architecture : Designing of IT Infrastructure
• Implementation of mid/high complex infrastructure : includes Storage, Backup, high-end computing platforms
• Transformation Consulting : Roadmap and recommendation for transformation
• Technology Development : Pioneering new frontiers of technology related to IT Infrastructure

Most IT Infrastructure providers or RIM service providers are today operating at the lowest two levels of L1/L2/L3 support. There may be one off engagements where they deliver higher levels of support at L4. For those higher up in the value chain (in italics above), it is still a space where they have not established themselves.

It is not easy to find resources who have practical experience in those areas at offshore. Competencies are being mostly build with experience being at L1 through L4 levels but that is not easy. Hiring professionals in other geos is an option which some have started to consider but then they cannot use that as a scalable model without upsetting the labor arbitrage.

HP & IBM

Among the various OEM majors two companies stand out for their coverage and above all "offering mix". Each of these two have a hardware business to reckon with, have a software aspiration (or also a software business to reckon with) and each of course is big in the services play.

Let's look at some of the major competitors in each of these categories:

• Hardware : Dell, Sun
• Software : (is a big space depending on where you are looking): Oracle, CA, BMC
• Services : EDS, CSC, Accenture, Offshore based players like TCS, Wipro, Infosys, CTS etc.

This is an interesting situation because their competitors in each of these three distinct categories are also possible alliance partners or sources of size-able revenue for one of the other category.

Both these companies realize that wooing the service providers who also compete with them is also important for their hardware and software business. Thus it is not uncommon to see HP/IBM presenting and sharing technical details of their hardware and software products with these service providers.

This is an interesting relationship! The two companies are competitors for large deals but also need each other though often the hardare vendors seek them more than the other way. In caseses where the service providers encounter mainframes, of course they would then seek IBM for specific inputs.

On their part, HP and IBM talk of how these distinct teams are different and insulated from each other. The sales rep will give some standard explanation of how his colleagues work on the same deal but they don't talk and the whole of IBM/HP till the top is unaware of IBM/HP teams working on the same deal.

Impact of Recession on Offshore Based IT Services Companies

I wrote some time back on "Wall Street Meltdown & Offshore IT Players". In the past months the meltdown has crossed over to the oft quoted Main Street and now is on Hosur Road, Whitefield and OMR in India.

The global recession which was being discussed in whispers and "what ifs" is now full blown in terms of acceptance. However the extent of its impact is yet to be known. With the domino effect it has been having this time across various industries ( I was reading last week that in the previous quarter Volvo reported new orders for just under 150 new trucks globally, against a number close to 15000 in the same quarter last year). Unlike the last one, this recession is not limited to or greater in impact to the technology companies alone. In this one it seems that the technology companies will feel the heat as opportunities from various industries they connect with, get impacted. So, the impact is more widespread, it has shaken the fundamentals of economy and business in many countries and has now crept to impact everyone with the government bailouts, mortgages and job losses.

So, what does it mean in terms of its impact to the offshore based IT companies in particular. Here is my take:

1. The worst is yet to come. What we are seeing now are steadier revenues from business signed few quarters back. Since a large part of the engagements are relatively longer in terms of contract, the real effect of the slowdown will show when the deals that were to be signed now and in future will result in loss of work in the coming few quarters. Some of the short term project work has of course taken a hit and the impact is clear with the layoffs being seein now even in the Tier 1 offshore based IT services companies.
2. The impact, once in its full by mid of next year, will be the worst that the industry has seen. The positive fall out is that it will make these companies re-think on their "hire more people for more revenue paradigm". All are now sitting on a big employee base with labor cost (salaries) being their largest part of their operating cost which is bound to reduced.Another development that will soon set in is that some new offshoring contracts will get signed in the next 2-3 quarters. These will be related to outsourcing/offshoring those work which the client operations teams could hold off due to fear of losing their own jobs, losing control to an offshore team, due to risks in security which could be now be re-assessed with a higher risk taking ability in the interest to keep the work going. Next quarter we should see traction from mid-sized companies which would want to decide very fast for IT services in general. It is also possible that in case the enterprises have an incumbent, they have already called them and asked for a flat 10%-15% discount due to the business climate. Increasingly this is not unusual and an RFI/RFP issue only adds to the thread in case some large onshore based vendors are not willing to budge.
3. By next year, almost all would have asked employees to take a pay cut. The focus would also be to create products, upgrade competency and even pursue mid-sized deals (either smaller contracts with large companies but more likely, larger end to end contracts with smaller companies).
4. Not restricting to offshore vendors, but in general too, this recession will really move up the bars for risk/reward system in contracts. Companies will find innovative ways to structure contracts with contained risks for service providers partially but a big thrust on sharing their fate with the payout with service providers. In absence of much action elsewhere, offshore based vendors are more likely to jump for such deals since their cost base are still relativevly smaller than the larger onshore based companies.
5. Offshore based providers, again not restricting to them, but they in a big way will start scaling up their sales efforts in non-US markets. Moving sales staff from US to South America, Europe, South Africa and APAC will be a big focus.
6. When it ends, it will bring the offshore providers back with the labor arbitrage that they were fast losing. It may not put in them in the position they were at the beginning of the century but the frenzy would give way to some more sensible selective pay hikes and not those blanket ones. The attrition (staff turnover) due to volunteered resignations has dramatically reduced though larger number of employees are leaving as they are being asked to.