Satyam Computer Services, an India-based outsourcing company that provides varied “backoffice” IT and business process services to more than a one-third of the Fortune 500, announced that it had regularly provided false financial information in its public reports, fraudulently inflating its earnings and assets for years. More than 90% of Satyam’s stated cash and short-term assets are nonexistent.

Companies contracted with Satyam are evaluating their back office operations and determining whether to terminate (or already terminated) their business dealings with Satyam. The New York Times quoted one analyst reporting that “we will see a lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro.”

Insurance and other financial services institutions that have entered into outsourcing arrangements will want to examine how best to protect their investments, whether the service provider is located in a foreign country or the U.S. For example, it can be helpful to:

  • Diversify your “service provider portfolio” – As long as performance does not suffer as a result, distribute your outsourced IT and business process requirements across several service providers. Like investing, don’t put all your eggs in one provider’s basket.
  • Be diligent in the selection and oversight of your service providers – Retain appropriate legal counsel and accounting advice in the evaluation of potential service providers.
  • Perform ongoing reviews of your selected providers’ performance and financials, including audits of their operating and financial books, records and on-site audits of their operations.
  • Include flexible exit strategies in your outsourcing contracts (by amendment, if necessary). For instance, include the right to terminate the contract upon written notice and without penalty or liability in the event of possible “finance fraud” by the provider.