How to survive your outsourcer's downfall

Due diligence and up-front preventative investments are key to ensuring a smooth transition away from a scuttling -- or scandalized -- outsource provider

If the Satyam scandal out of Hyderbad, India, happened a couple of years ago, there might have been a lot of I-told-you-sos from folks who said using vendors thousands of miles away is risky business.

But two years later, after the collapse of the largest financial institutions right here in our own backyard, followed by one of the biggest frauds -- the Madoff scandal -- ever, finger-pointing is not allowed.

[ Therefore, I respectfully disagree with fellow InfoWorld columnist Martin Heller, who says Satyam fraud is a black eye for Indian outsourcing. ]

Instead of focusing on one bad apple, the wiser choice is to look ahead and decide how best to protect your company no matter who your supplier is.

Primary due diligence: Vet and invest
I spoke with a couple of executives at outsourcing consultancies -- in other words, companies that don't do outsourcing rather they advise companies on how to do it -- in order to gain some insights into preventive business practices.I also spoke with GlobalLogic, a product development firm.

Before Steve Martin, partner at Pace Harmon, even spoke to me about what to do, he offered a caveat. While due diligence is key, even PricewaterhouseCoopers missed the hanky-panky at Satyam, and PwC was looking inside the books, he said. Caveat aside, Martin outlines primary and secondary due diligence that should be pursued.

First, you need to sit down with your prospective vendor at its physical location, the datacenter or the development center where the work will be done. Management should be interviewed, as should the project managers involved. Also, while you are there, look around. Make sure the vendor has a state-of-the-art infrastructure. Of course, as in the Satyam example, it wasn't the infrastructure that was faulty.

Most companies will share only publicly available financial information, Martin says, but there are techniques to get behind that. For example, you should ask for the prior month's revenue statement.

"You can ask for a lot more financial information than is available publicly," Martin said, meaning, I believe, that if they want your business they will have no choice but to accept your prying eyes.