The Hindu Business Line : European IT majors feel the heat of Satyam fiasco

Mumbai, Jan. 11 Several European IT majors seem to be feeling the pinch following the sensational disclosures by the scam-tainted ex-chairman of Satyam Computer Services. The reason: IT vendors such as NNIT of Denmark and Arvato Systems of Germany have sub-contracted a slice of their clients’ IT work to the Hyderabad-based company.

France-based Capgemini too has several ongoing projects, especially in the automobile space, with Satyam. With the financial mess that Satyam is in, these European firms are worried about Satyam’s ability to keep its pre-defined commitment related to timely and quality delivery of IT services.

If the work handed out to Satyam is not completed on time or has quality issues, then the delivery of the final project (to be made by European firms to their clients) may also get delayed, according to industry sources. “NNIT is, of course, following the matter closely, staying in close dialogue with Satyam. We have asked Satyam for an account on how they plan to guarantee their deliveries to NNIT in this situation, and are awaiting their answer,” Mr Karsten Fogh Ho-Lanng, Corporate Vice-President and Chief Technology Officer of Denmark’s fourth largest IT supplier, said in a statement to Business Line.

Satyam and NNIT had partnered in 2006 to jointly develop SAP solutions and provide support to pharmaceutical clients in Denmark. Established in 2001, NNIT had reported revenues of Danish Krone 1.2 billion for 2007.

Partner strategy

Partnering with European vendors for sub-contracted work has been a strategy for Indian IT firms to break into key customer accounts, especially in outsourcing-averse markets such as Denmark, Germany, and France. Indian vendors are generally contracted for providing services such as software testing, product maintenance, application development and support, etc.

By off-shoring 20 per cent of any IT project to a company like Satyam, European IT firms are able to price their services cheaper compared to those vendors who do not enjoy offshore presence, Dr Carsten Bittner, Director, Managed Services International of the € 4.9-billion Arvato Systems, had said in November 2008.

In December 2007, the 52,000-employee strong Arvato and Satyam joined hands to provide offshore services to the medium-sized enterprise market in Germany, Austria, and Switzerland. Both companies had together set up a 25-member strong offshore development centre in Hyderabad to service their common client base. So what is Arvato`s stand on the recent turn of events at Satyam?

Got an exit clause

“We are closely monitoring the developments at Satyam; currently our relationship with Satyam continues unhindered. However, we cannot give any insight into the future,” a spokesperson for Arvato said in a telephonic conversation from Germany. The spokesperson added that both companies have factored in an exit clause in their contracts (with each other) which could be invoked “if it is necessary”.

It may be noted that Satyam is currently the only Indian partner for both Arvato and NNIT; companies such as HP-EDS and Capgemini generally award sub-contracts to multiple players, analysts say. In 2006, HP and Capgemini had sub-contracted $150 million of outsourcing work pertaining to General Motors to Satyam for a five-year period.

On Sunday evening, neither company could be reached for a comment. Though IT outsourcing contracts are generally described as “sticky” and hence difficult to do away with overnight, transitioning a subcontract is relatively less cumbersome.

However, a lot will now depend on the kind of assurances that clients and partners are able to get from the new board which was unveiled by the Government on Sunday.