From:	Baroni Limited [Baroni-Limited@tiscali.it]
Sent:	29 January 2009 09:57
Subject:	Baroni Limited - Offshoring Newsletter' - 02/2009

Call us to discuss how we can help your organisation, have an independent, impartial and competent assurance on your off-shoring / outsourcing relationship – Don’t rely on Balance Sheets, forecasts and company reports.

Outsourcing clients on the lookout for red flags
Choosing an outsourcing vendor was never easy. But after the fraud this month at India's Satyam Computer Services, it has got harder. The confession by the former Satyam chairman, B Ramalinga Raju that he fixed the accounts of India's fourth largest software group for several years, under the noses of auditors and international regulators, seems to have made one thing clear: companies looking to divest functions to a third party based offshore will have to outsource part of the process of finding this partner to a private investigation firm to check all is as it seems.
'Smart companies are already hiring investigative companies to poke around and ask difficult questions and we'll see more doing so,' says Ashutosh Gupta, vice-president of investment research at Evalueserve, a research firm.
The government prosecutor now alleges that Mr Raju overstated the number of employees at Satyam by more than 25 per cent, siphoning off the salaries of fictitious staff for his own purposes. The fraud at Satyam, estimated to amount to more than $1bn, has come as a shock in India and overseas because the country's outsourcing sector was regarded as a paragon of corporate governance in emerging markets.
Satyam's former chairman had ticked all of the boxes normally associated with good governance. He had stacked his board with luminaries including professors from Harvard Business School and the Indian School of Business. He chose as his auditor one of the 'Big Four' international accountancies, PwC.
Part of the reason Mr Raju slipped under the radar was that India's outsourcing industry had become a darling with investors, who loved its rapid growth, and with clients, who appreciated its quality and low-cost services.
The industry has also become expert at burnishing its image. Indian outsourcing companies manage highly sensitive client data, system hardware and business processes. Companies will not hand to a partner half a world away control of their trading systems, for instance, unless they trust them.
Kroll, the risk consulting company, says Indian outsourcing groups developed their own parameters to measure their performance. These included revenue earned from top clients, utilisation rates (a measure of whether staff are working at optimum capacity) and geographic breakdown by revenue.
Investors and clients accept these parameters, even though they are next to impossible to verify independently. Regulators only require outsourcing companies to reveal standard financial information.
Clients will now have to do more due diligence. Satyam's clients are already beginning the review process. Although most will not comment publicly, one big client, Nestlé, says it is considering 'alternative options' to Satyam and expects no disruption to its operations. Another, US-based State Farm Insurance, has terminated its contract with the outsourcing group.
As these and other companies seek new partners, industry insiders and analysts say there are a number of 'red flags' to watch out for. One is whether a company is 'owner-driven' or is truly run by professionals, according to S Ramadorai, chief executive officer of India's largest outsourcing group by revenue, Tata Consultancy Services.
The management of TCS and the industry number two Infosys Technologies is not dominated by a single family but by professionals. Satyam, on the other hand, was controlled by the Raju family, albeit with a small stake.  Others say it is wrong to dismiss outsourcing groups just because they have dominant family shareholders, who are known in India as 'promoters'. The 'promoter' phenomenon is so common in India that this would rule out most companies.
Surjeet Singh, chief financial officer of Patni Computer Systems, controlled by the Patni family, says more important is to look at internal management practices, in particular the structure of the board audit committee and other functions. Another comfort factor is the presence of a strong institutional investor, particularly on the board.
'People should put Satyam into perspective and not paint everyone with the same brush,' Mr Singh says. Another factor to watch for is whether a company and its controlling shareholders are focused on the business of outsourcing or whether they have other interests. Satyam's controlling family had invested heavily in their Matyas real estate and infrastructure businesses. The first sign that something was amiss was when the outsourcing group tried to buy these companies.
'IT outsourcers should remain focused on their sector,' says Sudin Apte of Forrester Research.
The main lesson from Satyam, however, is that when doing business in India, companies can no longer rely on spoon-fed figures derived from a Google search by an analyst and a few meetings with management.
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Call us to discuss how we can help your organisation, have an independent, impartial and competent assurance on your off-shoring / outsourcing relationship – Don’t rely on Balance Sheets, forecasts and company reports.
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Gartner's advice customers of other Indian service providers
* Become more familiar with the organisational structure and governance of your providers, but continue your engagements with them, as the factors contributing to Satyam's difficulties are likely to prove unique.
As a risk mitigation measure, consider asking for a certification of compliance to generally accepted accounting principles (GAAP) or their equivalent, certified by the CFO, CEO and the board of directors, and countersigned by the external auditors.
* If you are also a Satyam customer, as a contingency measure, consider assessing the ability of your other providers to take over projects currently run by Satyam, if necessary.	

 	
 Top Stories	
 	
Gartner Says Outsourcing Will Continue to Grow in 2009 Despite Economic Slowdown
The fifth annual 'Gartner on Outsourcing, 2008-2009' report shows that the global economic slump has meant that outsourcing clients are re-evaluating their contracts to improve efficiency and costs. This is affecting provider selection and retention, how services are or will be delivered, delivery location and contract pricing. Beyond the drivers of efficiency and cost, however, many organizations will also experience business change as a result of repercussions of the economic crisis, which will impact current outsourcing or plans for outsourcing.
Offshoring audit work
Top audit firms are increasingly outsourcing core audit functions to their overseas affiliates. The logic goes like this: Sarbanes-Oxley has resulted in 'fee fatigue' for a lot of clients. To give them a break, more auditors are lowering costs via their overseas affiliates.
BNP Paribas and IBM Sign 318 Million EUR, Six-Year IT Services Agreement in Italy Through Joint Venture
IBM and BNP Paribas, the largest French company and the fifth largest in the banking industry worldwide, today announced a 318 million euro (exclusive of VAT), six-year agreement for their existing joint venture, BP2I, to support and manage the overall information technology (IT) infrastructure operations of BNP Paribas' subsidiary office, Banca Nazionale del Lavoro (BNL) in Italy. 
Van Lanschot Bankiers Awards Accenture Seven-Year Application Outsourcing Contract
Accenture has signed a seven-year, multimillion-dollar application outsourcing contract with Van Lanschot Bankiers, the oldest independent bank in the Netherlands, to develop and maintain the bank’s overall core banking applications, including credit services, asset and risk management. This contract is part of an IT transformation project that the bank launched under its business transformation program, which seeks to grow its business through enhanced operational efficiency and improved customer service.
Marks & Spencer picks Fujitsu for in-store IT support
Marks & Spencer (M&S) has signed a seven year contract with Fujitsu Services to provide in-store IT support for 600 stores. The contract, an extension of the two firms' existing 30 year relationship, includes the installation and ongoing service and support of IT systems more multiple vendors.
Capita Life & Pensions closes Steria outsourcing deal
Capita Life & Pensions has closed a deal with Steria for the outsourcing of its IT application development and support services as part of an effort to reduce costs and cut the time involved in processing customer claims.
Virgin Media shifts to Convergys billing system - Telecoms
Virgin Media has migrated the billing accounts of over four million customers, so far scattered in four different legacy systems, to Convergys’ ICOMS customer care and BSS system.	
 	
 Service Provider News	
 	
IBM Signs Outsourcing Services Agreement With Grupo Nacional Provincial
Grupo Nacional Provincial, one of the largest insurance companies in Mexico, has signed a five-year contract, with two optional extension years, for infrastructure and application outsourcing services.
Unisys Wins IT Outsourcing Services Contract with Dr Pepper ...
Under the terms of the agreement, which extends a relationship that began in 2005, Unisys will provide managed services for 5,000 Dr Pepper Snapple Group information technology (IT) users in the Americas. The services include service desk; field support, including information technology (IT) equipment maintenance; equipment installs, moves, adds and changes (IMACs); and deskside support for hardware and software.
TCS bags multi-million Ducati deal
TCS signed a multimillion dollar, multi-year agreement with Italy-based Ducati Motor Holdings to deliver technology-based services to the company.
CSC Wins DoD HPC Tasks Valued At $82M
Computer Sciences Corporation announced it was awarded four task orders to support the Department of Defence (DoD) High Performance Computing Modernization Program by providing technical operations as well as user support and outreach services at two DoD sites.
WNS Renews Multi-Year Contract With SITA
WNS (Holdings) Limited announced the signing of a five-year contract with SITA, the world's leading specialist in air transport communication and information technology (IT) solutions. The new contract is a renewal of WNS' existing six-year agreement with SITA. WNS will continue to optimize supply chain management and enhance service levels for SITA, which operates in more than 140 countries.
World Bank Satyam projects goes to TCS
The World Bank has hired another Indian IT major Tata Consultancy Services to do much of the work previously being done by Satyam, which has now been debarred by the bank from doing business with it. 'We have hired Tata Consultancy Services (TCS) to do much of the IT work that Satyam used to do,' a World Bank spokesperson told PTI.
Wipro bags UK-based Morrisons' IT contract
UK-based food retailer Morrisons, with 375 stores and annual turnover of £13bn has tied up with India's third largest IT company Wipro Technologies for development of its IT applications and systems.
EDS Awarded $176 Million Contract For Medicare Administrative Services In Northeast
EDS, an HP company, today announced that the Centres for Medicare & Medicaid Services (CMS) awarded EDS subsidiary NHIC Corp. a contract to administer Part A and Part B Medicare claims payments for health care providers in five north-eastern states.
CSC win $265 Million contract from North Carolina Department of Health and Human Services
Under the terms of the contract, CSC will develop a new enterprise MMIS solution for healthcare administration supporting multiple agencies within the NC DHHS.
Fidelity Reportedly Selling India IT Operation
Mutual fund company Fidelity Investments is looking to sell its India-based IT unit. According to The Economic Times of India, Fidelity expects to get between $150 million and $180 million for its Indian IT 'captive,' with competitive bids coming from IBM and Infosys, while Wipro also retains an outside shot at the acquisition.
Wipro Releases 3Q Results
Wipro has reported a 9% increase in net income to INR 8.98 billion ($185m) for the third quarter, compared to INR 8.26 billion ($168.5m) in the year-ago quarter, on revenue up 25% at INR 65.39 billion ($1.35 billion). Operating income during the quarter grew 19% to INR 10.62 billion ($219m), while diluted EPS grew 9% to INR 6.17 ($0.13). It added 31 new customers and won 4 multi-year multimillion-dollar deals. During the quarter, the company completed the acquisition of Citi Technology Services.	

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