- The Washington Times - Monday, January 20, 2003

CALCUTTA, India, Jan. 20 (UPI) — For Arun Jain, chief executive officer of Polaris Software, India's fifth largest software services company, the meeting on Dec. 13, 2002, with executives at the headquarters of the Bank Artha Graha in Jakarta, Indonesia, was supposed to be just another meeting to thrash out a misunderstanding. But it turned out to be his worst nightmare.

Within minutes, the local police with the help of the Indonesian army arrested Jain and his three colleagues. While two of them were later released, Jain and one of his key lieutenants, continued to languish in Jakarta's jail almost held hostage with demands of $10 million.

Subsequently, India's external affairs minister Yashwant Sinha had to speak to his Indonesian counterpart and later on, as reports suggest, even the information technology minister and the Prime Minister's Office had to approach their Indonesian counterparts to get Jain and his colleague freed, which happened 10 days later.

"This is probably the first case of its kind, where the government threw its full weight behind securing the release of a business professional who was wrongly confined," said Kiran Karnik, president of India's leading information-technology industry lobby, The National Association of Software Companies.

But even as this drama sent shivers down the Indian software industry's spine, it made apparent a more serious concern: the risks associated with the Indian software industry's exploration of newer markets as it desperately tries to reduce dependence on Unites States, its largest customer accounting for almost 70 percent of its annual $10 billion revenues.

In the past two years, Indian software companies have aggressively pursued a de-risking strategy to reduce their dependence on the U.S. markets, which have been hit by huge reductions in technology spending.

Although they have been quite successful in venturing into emerging and promising IT markets like those in Africa as well as East and West Asia, by doing so it is now apparent that Indian software service providers have confronted newer risks associated with politics.

What were the problems in Indonesia all about?

A $1.3-million contract was awarded to Polaris to implement three software modules for Bank Artha Graha, which has an asset base of $500 million. However, according to Polaris official response, "in the run-up to the milestones, there had been some disagreement and a certain amount of bad blood had built up over the past six months."

In November, the bank terminated the contract and demanded the $662,000 it had paid as an advance, apart from a penalty of $10 million.

Obviously, the amount was too high for a company whose second-quarter net profits at the end of September were $4.5 million. Jain volunteered to lead a team to Jakarta to convince the client to change its mind but when the two met, the bank charged Polaris with fraud, while Jain contended it was merely a commercial liability and should be resolved through arbitration. Before Jain realized what was happening, they had been arrested.

Perhaps the worst impact of this incident is that it rudely nudges awake Indian software companies from the dream that since they are often considered among the best technically and cost-effectively, they have reasons enough for the world to come to their doors.

"A key lesson that his incident has taught Indian software player is to cross check the background of the client," said Ganesh Natarajan, CEO of the software company Zensar Technologies. "Similar incidents can happen to any other player and in any other country. But some countries clearly don't have a proper legal system, and hence it is more dangerous to do business with companies in such countries."

So shaken is the industry that Nasccom is already preparing a database of international companies that have created problems in the past.

"We're working with software services associations in other countries to prepare a cautionary list of companies that vendors will have advance warning about," says Karnik. "Nasscom can — with the experience of its members — caution them on the risks associated with doing business in certain countries."

Sources admit that the software industry learned a few more lessons from this experience. For one, according to Som Mittal of Digital Globalsoft a HP India subsidiary, legal heads of Indian software companies have been forced to create a best-practices manual that can be a ready reckoner for all companies entering into contracts in the future.

Some even consider this incident as a blessing in disguise.

According to Pavan Duggal, an attorney at India' Supreme Court, "as a brighter side, this incident would make Indian firms less aggressive in chasing newer clients."

"In their desperation to tap other parts of the world," says Duggal, "most Indian software companies do not devote enough time in a due diligence study of newer clients," said Duggal. "I believe, thanks to this particular incident, Indian companies will now spend more time in studying their clients."

Clearly, according to Sunil Mehta, vice president at Nasscom, many companies in the Indian software industry haven't yet attained the maturity to work throughout the global environment.

Mehta added that Nasscom in association with the management consultancy firm KPMG, has initiated a survey on the business practices of Indian software and business process outsourcing companies.

But he adds hastily, the success of Nasscom's efforts will depend on how the Indian software industry manages new risks. "While there's potential to grow business in newer markets, as well as through increased outsourcing by U.S. clients, the risks involved are also higher" he says. "And, if one isn't careful enough, the possible losses can wreak havoc."

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