Infosys Struggles Show No Satyam Hangover

Infosys, second only to Tata Consultancy Services among Indian outsourcing firms in terms of revenues, gave the markets a double dose of bad news yesterday, forecasting its first-ever drop in revenue for the financial year ending next March, and revealing the extent of the decline in its overall market.

Infosys is the first of the large Indian outsourcing companies to report earnings, and is widely considered an industry bellwether. If its financial results are a depressing reflection of the state of global IT, the Indian outsource industry can take comfort that it isn’t suffering from a hangover resulting from the effects of pervasive fraud at Satyam.

Infosys said revenue for the year ending March 2009 was $4.66 billion, up 11.7 percent from a year earlier. Those results were in line with market expectations, but guidance for the coming year was lower than expected; the company said revenue for the 12 months ending March 31, 2010 would fall by between three and six-and-a-half percent, to as low as $4.35 billion. Much of that decline will be the result of falling prices, as outsourcing companies will be forced to compete more aggressively for shrinking IT dollars.

That’s where the second helping of bad news comes in: Infosys said the results of its annual customer survey indicate that most companies are slashing IT budgets. S Gopalakrishnan, chief executive of Infosys, told the Financial Times that 139 of the company’s clients, representing 83 per cent of its revenue, said they would cut IT spending, some by up to 10 percent.

If there’s any good news at all, it seems that the Indian outsourcing industry as a whole is not suffering from the misdeeds of Satyam, which perpetrated corporate fraud of Enron-like proportions and is now being acquired by Tech Mahindra. U.S. corporations, which represent a significant portion of revenues for companies such as Infosys, are coming under increasing shareholder and regulatory pressure to manage and mitigate risks represented by third parties. A recent publication from the Federal Deposit Insurance Corporation (FDIC) advises:

An institution’s board of directors and senior management are ultimately responsible for managing activities conducted through third-party relationships, and identifying and controlling the risks arising from such relationships, to the same extent as if the activity were handled within the institution… Management should tailor the principles contained in this guidance to each significant third-party arrangement, taking into consideration such factors as the complexity, magnitude, and nature of the arrangement and associated risks.

Despite these pressures, however, U.S.-based companies don’t seem to be backing away from offshoring as a means of cutting costs. Sath Sathyanarayan, president and principal consultant at Global Development Consulting, an offshore and outsourcing consultancy, told me he hasn’t detected any pattern of U.S. companies fleeing Indian outsourcing. If anything, he said, U.S. companies are increasing the amount of offshore labor they use as a proportion of total outsourcing.

“Companies in India are hurting for business,” Sathyanarayan told me. But they’re suffering because U.S. companies have reduced staffing across the board, not because of a reluctance to do business with Indian firms.

Sathyanarayan also noted that well more than 50 percent of outsourcing engagements don’t meet original expectations because they’re not well-managed. “It takes a lot of work by the client company to establish the right business processes to manage an outsource partner,” he told me.

That said, no amount of due diligence can guarantee that a partner like Satyam isn’t engaging in fraud. “There is no way to prevent this,” he said.