Peter Redshaw, Kimberly Harris-Ferrante, Alistair Newton, David Furlonger, Vinny Oliva and Kristin Moyer here today.
The recent accounting scandal at Satyam has been extensively reported on and analyzed by Gartner – see Prepare for Aftereffects of Satyam Accounting Scandal (and other research on this issue that will be published shortly). This report and others contain immediate advice about what current and prospective clients of Satyam and other offshore IT providers should do in the aftermath of this event.
Satyam has less than 0.1% share of the worldwide IT market for financial services institutions (FSIs) and is ranked 12th out of the IT providers to financial services with an Indian HQ. However, it does have significant presence in specific areas such as mortgage BPO and insurance IT services. In this post, we will focus on insight and advice that is specific to FSIs and insurers.
The first observation we have is that FSIs and insurers should be well-placed to select suppliers and negotiate deals better than other industries. FSIs and insurers should have the advantage of being expert in two key areas – diversification of investments (to spread risk) and the pricing of risk (we say should because the role of FSIs in the financial crisis suggests otherwise). They should exploit this expertise with their outsourcing and offshoring decisions to ensure that when outsourcing and offshoring they don’t put all their eggs in one basket. For example, don’t ignore systemic and geo-political risks (at both the corporate and country level) such as the risk of war or patent infringement, and include these risks in the negotiated pricing of the contract. Those are familiar concepts to traders and asset managers that have to look continuously at the prospects (and their exposure) for markets and asset classes as well as for individual entities. It now needs to be incorporated in their outsourcing practices, pricing and governance.
The second observation is that FSIs and insurers are in a different position to firms in other industries when it comes to their own risk management and transparency. Having been to a large extent responsible for initiating the current financial crisis and recession (rather than being the more or less culpable victim of it as many other firms in retail or manufacturing), FSIs and insurers now face intense scrutiny and likely more regulation over all their operations especially in areas such as financial and capital reporting. If a manufacturer’s offshore outsourcing fails, that may disrupt its supply chain in an embarrassing fashion. But an FSI or insurer can lose money, trades, personal data – pretty much everything – if it suffers an event like this. Large scale system projects may be halted, IP lost, and competitiveness injured due to system downtime or slowed business operations. Regulators, auditors, governments, central banks and other stakeholders will be more than usually vigilant in examining all of a company’s operations and that may make organizations more risk-averse than ever.
We believe there will be a profound dilemma between:
- Going offshore (which even with a risk premium probably makes economic sense and may be vital for the bank/insurer to remain competitive)
- Staying local (which is safer but may condemn them to a slow death through higher costs).
Offshore outsourcing may take on more calculated risks than before and be viewed more cautiously by shareholders and the overall general population. Correct distribution and pricing of risk will be the more scientific way of resolving that dilemma. However, this resolution may be difficult for less advanced companies without a long history of offshoring or in making large-scale offshore contract negotiations.