NEW DELHI — The founder of Satyam Computer Services, B. Ramalinga Raju, made a risky proposition to win his first big client, the tractor maker John Deere: If you don't like our service, you don't pay.
With that pitch, which is now the stuff of legend in India, he persuaded John Deere in 1991 to allow his computer programmers to work just across the street from the client's U.S. headquarters, in a house Raju dubbed "Little India." Working only overnight shifts, with no physical contact with John Deere's executives, the programmers got the job done - proving Raju's theory that they could work just as well from India, and helping give birth to the country's outsourcing industry.
Satyam's fall from pioneering iconoclast to the largest corporate fraud in India has been rapid, unexpected and shocking. Now, some analysts and investors are wondering whether the same coolness under pressure and willingness to take risks that attracted supporters, employees and investors to Raju may have laid the groundwork for fraud.
Raju admitted last week to faking about $1 billion in cash on Satyam's books and vastly inflating the company's profit margins, after what he described as a small discrepancy bloomed out of control. The company's survival is in question, and Raju, his brother, B. Rama Raju, and the company's chief financial officer, Srinivas Vadlamani, were in jail Sunday night. The Rajus were arrested Friday, and Vadlamani on Sunday; all three are being investigated on suspicion of cheating, forgery, criminal breach of trust and falsifying documents.
In a move that would have been unfathomable just a month ago, the Indian government ousted Satyam's board Friday. On Sunday, India's minister for corporate affairs filled some of those seats, appointing Deepak Parekh, the chairman of the Housing Development Finance Corp.; Kiran Karnik, the former head of the National Association of Software and Services Companies, a trade group; and C. Achuthan, a lawyer and former member of the country's market regulator, the Securities and Exchange Board of India. As many as seven other directors are expected to be nominated this week.
As Raju increased Satyam's client roster from John Deere to a third of the companies on the Fortune 500 list, iconoclastic moves became something of a trademark. Satyam was one of the first outsourcing companies to move employees outside of Indian urban centers, and one of the first Indian companies to list on the Nasdaq and the New York Stock Exchange. It has been more aggressive than most about opening offices in Europe, and setting up training facilities in Western counties like Australia.
Satyam's now-ousted board did contain outsiders - including Krishna Palepu, a professor at Harvard Business School who teaches classes on corporate governance. But the board, and auditors, failed to pick up on the fraud at the company. Instead Palepu and three other board members quietly quit a week before Raju's admission of fraud.
The Indian offshoring industry went through a painful transition in 2004 and 2005, as Western giants like IBM and Accenture started to cut into their business. They were pushed to transform; rather than sending Indians from their headquarters to manage sales and customer relationships, and tightly controlling what they did, these companies started hiring much more expensive local staffs and giving them autonomy.
While there is no evidence that the pricing and market share squeeze caused Raju to embark on the huge fraud that he admitted to last week, they "certainly helped to contribute to the pressures" that he and other executives felt, she said.
A confident, low-key demeanor helped to ingratiate him politically and socially as well. With the expansion of Satyam, the Raju family became leading figures in Hyderabad. They were among the many "Andhras" - the term used to describe Telugu-speaking Hindus from rural villages in Andhra Pradesh - who began moving into Hyderabad beginning in the 1970s and 1980s.
Inspired by Raju, Naidu embarked on a campaign to re-brand Hyderabad, the capital of Andhra Pradesh, as "Cyberabad," and Raju became an informal ambassador helping to lure other technology companies to the city. Microsoft decided to open a new product development center in the city in 1999, and the U.S. president at the time, Bill Clinton, visited the city during a trip to India in March 2000. In gratitude, Naidu helped Raju obtain state land for Satyam's expansion. Many of Raju's other business interests, including the construction companies managed by his sons, also benefited from state contracts.
Those construction companies helped to set Satyam on its downward spiral, as investors balked at what otherwise might have been seen as another pioneering move. On Dec. 16, Satyam said it was planning to acquire two companies, Maytas Properties and Maytas Infra, for $1.6 billion. The two companies are run by Raju's sons, and he and his brother Rama Raju had stakes in them.
People were very concerned about what was going on," said one Satyam executive. "There had never been talk of diversification in Satyam. We were hard-core IT. It just didn't make sense."
When Raju and his top executives met with shareholders that evening, they were faced with a full-scale revolt. The company's stock plummeted, leading to the margin calls that ultimately led Raju to admit the fraud, he said in his confession.
One executive who saw Raju the day after that board meeting said he appeared tired but not especially stressed. "You would never see him frazzled," she said. "His temperament was always very even. He would never lose his cool."
The company has in the past week asked customers to give them assurances, in writing if possible, that they will remain with the company, according to a Satyam executive handling one of its largest accounts, who spoke on condition of anonymity. So far, he said, about 60 percent of its customers had provided such assurances.
