(Published in The Manila Times under the Managing for Society column, January 27, 2009)
When Ramalingam Raju, chairman and CEO of India’s fourth largest outsourcing vendor, Satyam Computer Services, admitted on January 7, 2009, that he had illegally boosted the company’s earnings numbers and created a fictitious cash balance of more than $1 billion, the corporate world was shocked by the weak, if not the lack of corporate governance in one of India’s most admired firms.
Like a prognostication coming true, the World Bank banned Satyam in 2008 from participating in its procurement contracts for eight years, when it discovered Satyam employees had accessed sensitive information in its database. In 2003, Satyam won a lucrative five-year “sole source” contract to design, write and maintain all of the World Bank’s information systems. The contract, which began at $10 million, had grown to over $100 million by 2007. In 2008, the contract was not renewed.
The Indian corporate governance crisis deepened recently when the World Bank decided to ban India’s third largest outsourcing group, Wipro, from dealing with the agency for four years. The agency’s decision was based on its findings that Wipro offered shares to World Bank employees when it floated stock in the US in 2000.
But what will strikingly emerge from these governance lapses from Indian outsourcing vendors is a razor-sharp focus on a more robust governance framework with two major pillars—corporate governance and operating governance.
Corporate governance (CG) framework spells out the various regulations, laws, practices, and benchmarks used to govern a corporation. This framework is directed toward fulfilling organizational obligations to its shareholders. Shareholders, board of directors, management and employees form the four-tier hierarchy impacted by the CG framework. Efficient coordination between the four tiers and smooth inter-tier operations form the basis of an effective CG policy.
Past governance problems in the corporate world, such as those at Enron, Global Crossings, Worldcom and others, have resulted in new legislation such as the Sarbanes-Oxley Act, stronger regulations and tightened supervisory framework which vary from country to country.
Particularly in India, the corporate governance crisis is a big blow to its local outsourcing industry, and may have a deep impact on the global outsourcing industry, in terms of regulatory, commercial and governance frameworks. We will see the Indian government reexamining its corporate governance framework aimed at strengthening it or ensuring that the existing frameworks are stringently implemented. Governments in other offshoring and outsourcing destinations such as those in the Philippines, should also evaluate their existing governance frameworks to protect the growing industry.
Operating governance (OG) framework, on the other hand, is directed towards the fulfillment of obligations between the outsourcing provider and client. It enables the outsourcing provider and client to mutually manage their relationship, expectations, contractual agreements and services. It includes management, control, measurement and assessment, with quantifiable measurement being a key component of OG. It is guided by a defined set of standard, documented processes and best practices. The alleged security breach in the information database of World Bank by Satyam employees is a breakdown in the control aspect of OG.
With a focus on the aforementioned governance frameworks amid the Indian governance crisis, clients all over will be taking a more stringent stance on making governance a major criterion in outsourcing provider selection. On the provider side, a good governance practice will become a competitive advantage among vendors to bag more outsourcing contracts.
That’s why we forecast that the more established and governance-focused outsourcing vendors, the likes of IBM, will win over the current and former clients of Satyam. These providers are also well-prepared to capitalize on the rise of the likewise governance-focused clients.
As with the local and medium-sized outsourcing providers, it is also critical for them to adopt stricter and more comprehensive governance structure and practice to compete with the bigger players.
---------------------
Reynaldo C. Lugtu Jr teaches management and marketing courses in the MBA Program of De La Salle University Ramon V. del Rosario Sr. Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.
When Ramalingam Raju, chairman and CEO of India’s fourth largest outsourcing vendor, Satyam Computer Services, admitted on January 7, 2009, that he had illegally boosted the company’s earnings numbers and created a fictitious cash balance of more than $1 billion, the corporate world was shocked by the weak, if not the lack of corporate governance in one of India’s most admired firms.
Like a prognostication coming true, the World Bank banned Satyam in 2008 from participating in its procurement contracts for eight years, when it discovered Satyam employees had accessed sensitive information in its database. In 2003, Satyam won a lucrative five-year “sole source” contract to design, write and maintain all of the World Bank’s information systems. The contract, which began at $10 million, had grown to over $100 million by 2007. In 2008, the contract was not renewed.
The Indian corporate governance crisis deepened recently when the World Bank decided to ban India’s third largest outsourcing group, Wipro, from dealing with the agency for four years. The agency’s decision was based on its findings that Wipro offered shares to World Bank employees when it floated stock in the US in 2000.
But what will strikingly emerge from these governance lapses from Indian outsourcing vendors is a razor-sharp focus on a more robust governance framework with two major pillars—corporate governance and operating governance.
Corporate governance (CG) framework spells out the various regulations, laws, practices, and benchmarks used to govern a corporation. This framework is directed toward fulfilling organizational obligations to its shareholders. Shareholders, board of directors, management and employees form the four-tier hierarchy impacted by the CG framework. Efficient coordination between the four tiers and smooth inter-tier operations form the basis of an effective CG policy.
Past governance problems in the corporate world, such as those at Enron, Global Crossings, Worldcom and others, have resulted in new legislation such as the Sarbanes-Oxley Act, stronger regulations and tightened supervisory framework which vary from country to country.
Particularly in India, the corporate governance crisis is a big blow to its local outsourcing industry, and may have a deep impact on the global outsourcing industry, in terms of regulatory, commercial and governance frameworks. We will see the Indian government reexamining its corporate governance framework aimed at strengthening it or ensuring that the existing frameworks are stringently implemented. Governments in other offshoring and outsourcing destinations such as those in the Philippines, should also evaluate their existing governance frameworks to protect the growing industry.
Operating governance (OG) framework, on the other hand, is directed towards the fulfillment of obligations between the outsourcing provider and client. It enables the outsourcing provider and client to mutually manage their relationship, expectations, contractual agreements and services. It includes management, control, measurement and assessment, with quantifiable measurement being a key component of OG. It is guided by a defined set of standard, documented processes and best practices. The alleged security breach in the information database of World Bank by Satyam employees is a breakdown in the control aspect of OG.
With a focus on the aforementioned governance frameworks amid the Indian governance crisis, clients all over will be taking a more stringent stance on making governance a major criterion in outsourcing provider selection. On the provider side, a good governance practice will become a competitive advantage among vendors to bag more outsourcing contracts.
That’s why we forecast that the more established and governance-focused outsourcing vendors, the likes of IBM, will win over the current and former clients of Satyam. These providers are also well-prepared to capitalize on the rise of the likewise governance-focused clients.
As with the local and medium-sized outsourcing providers, it is also critical for them to adopt stricter and more comprehensive governance structure and practice to compete with the bigger players.
---------------------
Reynaldo C. Lugtu Jr teaches management and marketing courses in the MBA Program of De La Salle University Ramon V. del Rosario Sr. Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.
Comments