Satyam: Survival secrets

Overview

This article analyzes Satyam in the period of organiational crisis following the dramatic disclosure by its Mr Ramalinga Raju. It was widely speculated in the media that, among other things, the company would most likely disintegrate in a matter of days. However, the company did hold on and was doing well on serveral of the parameters, even before the takeover by Tech Mahindra.

The section 1,2 provides the background of the issue and section 3 describes the questions/challenges the were posed by the crisis. The section 4 lists some key observations in this period, and section 5 forms the central part of the disucssion wherein these observations are analyzed to arrive at the causative factors.

1.Introduction
This blog analyzes the conditions of uncertainty affecting the organization, and the observable pattern of responses in the immediate aftermath of the incident. The observation period for the pattern of responses is four months, i.e. until May, 2009.

Focus
The following are the key focus areas:
1. Filling in the leadership vacuum: What led to the emergence of a leadership team, at a time when the organization was headless?
2. Employee Motivation: What kept the employees motivated, and productive?
3. Employee Attrition: Why was the attrition rate lower than expected?

About Satyam
Satyam is a leading global business and information technology services company, delivering consulting, systems integration, and outsourcing solutions to clients in numerous industries across the globe.
Satyam leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance.

Satyam was incorporated as private limited company in 1987, and has been rated as the fourth largest IT services firm in India.

2.Crisis unfolds

The Shock
In one of the biggest frauds in India's corporate history, B. Ramalinga Raju, founder and Chairman of Satyam Computers announced on January 7, 2009 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion.

This revelation shocked the shareholders, clients, employee and the entire business community. The stock value plunged by about 77%, taking with it a great amount of shareholder wealth.

Satyam had been in the news for the wrong reasons for over three weeks prior to this disclosure. This was due to the botched attempt to invest $1.6 billion in Maytas Properties and Maytas Infra, two firms promoted and controlled by members of the Chairman’s family. On December 16, Satyam's board cleared the investment, sparking a negative reaction by investors, who pummelled its stock on the New York Stock Exchange and Nasdaq. The board hurriedly reconvened the same day and called off the proposed investment.

3. The Immediate Aftermath: Questions posed

The rest of this article attempts to analyze these questions, based on observable behaviour patterns and an interpretation of outcomes. The observations and inferences drawn are entirely empirical in nature.

Who is in charge?

Within 48 hours of the Maytas controversy, resignations streamed in from Satyam's non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors -- Mangalam Srinivasan, a management consultant and advisor to Harvard's Kennedy School of Government; Vinod Dham, called the "father of the Pentium chip" and now executive managing director of NEA Indo-US Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian School of Business in Hyderabad (ISB).

The board strength had reduced to six, from the original figure of ten. Of the remaining six, only three were independent directors, two were executive directors (Ramalinga Raju and Rama Raju), and one full-time director (Ram Mynampati)

With the resignation of Ramalinga Raju (Chairman) and Rama Raju (MD) on January 7th, the strength had come down to four leaving only one full-time director in Ram Mynampati (President).

On January 8th, the CFO, Srinivas Vadlamani had also sent in his resignation. To make matters worse, it was widely believed that Ramalinga Raju and the CFO were not in contact with the rest of the organisation. This meant that even if a second layer were to rise up to pick the reins, there was hardly any direction available.

This situation posed serious questions as to who was in charge. How would the company overcome this leadership vacuum?

Will the crisis affect business service delivery?
At the time of the crisis, Satyam was serving over 650 global clients, of which 180 were Fortune 500 corporations. The incidents of the past two weeks culminating in the resignation had sent shock waves through the clients of Satyam, given that most of the service delivery that it does were on mission-critical client systems and processes. Some of these clients had been engaging Satyam for more than a decade, and had entered into exclusive outsourcing projects.

It was feared that the employee attrition, low morale, leadership uncertainties, and the precarious financial position would impact the delivery service levels.

4. The Observation

This section provides three empirical observations which form the basis of the analysis in the remainder of the document.

Observation 1: Leadership succession

Within 36 hours of the resignation of the Chairman and MD, a group of 6 leaders addressed a press conference. They called themselves the ‘Task Force’, and represented the key vertical units, geographical units, delivery units and support units. This group of leaders presented a unified, coherent face while responding to the probing questions of the media.

Less than 2 days of the incident, the uncertainty on the leadership vacuum seemed to get lesser. This was a semblance of stability, but only for the most optimistic yet.

Observation 2: Increased productivity
Soon after the incident came to light, Forrester Research had predicted that about 30% of Satyam clients are likely to review their contracts with the company. Some companies such as Coca Cola and State Farm Insurance did sever their contracts. Others such as Nestle, FIFA, Ciba, Oracle, and Nissan had publically gone on record reposing their faith in the beleaguered IT giant.

By early February, many of the clients sighed in relief when they noted that the service levels were not affected as feared. The clients, who eventually severed their ties, did so out of considerations other than delivery service levels in the observation period.

The productivity and throughput (and thus motivation) had actually increased in this period.

Observation 3: Lower attrition (than feared)
On March 23, Kiran Karnik (new government appointed Chairman) stated that the company lost nearly 3,500 of its staff since the resignation of Mr Raju, which he clarified, was normal for a company of this size.

In relative terms, this ‘normal attrition rate’ was only 6%, as against an industry average between 15-20%.

Interestingly, the attrition rate was not as high as was feared.

5. The Analysis 

Filling in the Leadership vacuum

In this section, we look into the reasons that could have helped the organisation steer clear of the forces of instability encountered in a typical leadership vacuum. The leadership succession in this context is studied in its larger sense, at the organisational level, and not just the upper layer which was physically rendered void by the event of January 7th.

Full Life Cycle Business Model
Beginning 2005, Satyam transformed its business model completely, seeking to retain the entrepreneurial spirit that generates innovation without sacrificing quality in the face of phenomenal growth-from 100 employees in 1992 to more than 40,000. The spirit of this design was a conscious departure from the widely accepted change from the organic to mechanistic model that an entrepreneurial organisation undergoes as it scales up.

The key to this transformation was the concept of ‘Full Life Cycle Business (FLCB)’, and the ‘Full Life Cycle Leader (FLCL)’. This design enabled the development and empowerment of leaders from within the ranks who could act with independence and authority, akin to an entrepreneur or CEO of an independent business.

Each FLCB had a business leader, called the Full Life Cycle Leader who has end-to-end responsibility for managing and growing the business. The business ranges from a few projects (minimum annual revenue of $3 million USD) to the business as represented by an entire regional or vertical. The FLCL, typically, belongs to the Band B or above.

The key factors that differentiate this design from that of a standard services company is both in the nature of the autonomy provided to the individual, the sheer number of such individuals, and also in the underlying entrepreneurial spirit.

The individual FLCBs aggregate up to the four Integrated Groups – the Horizontal Competency Unit (HCU), the Vertical Business Unit (VBU), Regional Business Units (RBU) and the Strategic Support Units (SSU). These groupings eventually aggregate to the enterprise that is Satyam. The nested relationships are as depicted in the illustration below; each of the rectangles represent a distinct ‘business’ led by a independent leader with varying levels of independence and authority.

Each FLCB is concurrently independent and interdependent. The interdependences stems from the common brand, one-firm experience and the consistent measures.
This new framework helped in transforming many Satyam associates into leaders, by giving them end-to-end ownership of their responsibilities. This is distributed leadership in a true sense - the responsibilities for the day-to-day leadership of the company are distributed to FLCLs. As of December 2008, there were more than 1800 Full Life Cycle Leaders, leading businesses in Satyam.

Thus, Satyam had a culture of fostering and nurturing leadership on a mass scale, which shifted the organizational structure from teams to independent, yet interdependent, businesses.

What role did this structure play in the aftermath of the crisis?
The distributed leadership model had a stabilizing effect in the immediate aftermath of the crisis. The independent leaders had a stronger sense of affiliation to and attachment with the ‘businesses’ that they led and grew, than would have been conceivable in the traditional model. They had been operating in a culture that didn’t require them to ask or consult the enterprise on most routine matters.

Consequently, they were able to get into damage control mode very quickly, by reaching out to their respective clients and internal employees. Their connection with the ‘business’ manifested in the extra effort and care exhibited by the FLCLs during this period of crisis. Thus instead of one CEO, there were nearly 1800 CEOs on the task of resurrection.

Senior leadership
At the organisational level, a core Leadership team emerged. This was the team that comprised 6 senior, long time executives in charge of separate vertical and regional businesses. This leadership team filled in the vacuum that was left behind by the resignation of the Chairman and MD. In part, it can be hypothesized that the long term succession planning had a role to play in this smooth transition.

Motivating the employees
The higher levels of motivation observed in this period cannot be explained using the standard motivation theories, such as those proposed by Vroom, the Porter-Lawrence model or the other reward based theories. This is in part due to the special nature of the circumstances which effectively eliminates the concept of expectancy (correlation between effort, job performance and expected rewards as a motivator) and valence (importance of the outcome) from any discussions on motivation of the average Satyam employee during this time. For the average employee, the performance-to-output expectancy under these circumstances is, arguably, close to zero.

One model that can be used to explain this is the motivation theory as modified to include the aspects of affiliation (i.e. value of relationships) and extension (i.e. call of a super-ordinate goal, especially under pressure situations), especially from the unique Indian context of the situation.

In this section, the role played by the affiliation and extension motivators is described.

Affiliation motive
The affiliation motive is characterized by the value placed on relationships. This affiliation motive can be further divided into four categories in the Satyam context,

1.Vertical: This is fostered by the relations that the employees enjoy with their superiors and subordinates. This is the most formal of all internal affiliations.

2.Horizontal: The HR practices such as B-Channel (buddy referral program), Group Induction process for entry and lateral levels, and various social networking activities had a big role to play in the setting up the horizontal affiliation motivators.
a) Buddy referral: Satyam had been using buddy referral to a great deal of success. This process brings in a part of the employees social network within the organisation, which is beneficial in terms of performance and attrition.
b)Group Induction: The group induction process has an effect on establishing the identity of the individual with the group. This process has a tremendous impact on the individual during the rest of his career with the organisation, as explained in a subsequent section.
3.Client affiliation: The concept of FLCB, by which the team takes on a greater ‘business’ perspective and alignment with the client, provided the basis for the client affiliations. Most of these clients have been with the company for quite some time, and the personal relations were quite strong.
4.Corporate affiliation: This is the affiliation that the employees associate with the corporate, although in the current situations one would hypothesize on the dilution of this motivator.

Extension motive
In the Indian context, it is common to observe superior-subordinate relations having a certain, sometimes subdued, filial component. A popular study conducted by Wharton (‘DNA of Indian leadership’) stresses the fact that Indian leaders tend to focus more on internal issues on people management and employee motivation (as opposed to their western counterparts who focus to a large extent on the balance sheet and clients).

In India, the concept of un-employment welfare and state support is non-existent. Hence one of the desired attributes of a job is its promise of relative permanence (though the high growth industries are generally not the best examples of this trend). Accordingly, by the extension motive, for most leaders and middle level managers, it was imperative that they ensure theirs and their team’s job security by increasing the performance and keeping the client relations intact. This is a super-ordinate goal, above their official line of duty.

The extension motive is also manifested in the energy and passion that was unmistakable across the rank and file of the leadership. The leaders were spending more time at work, with employees, and with clients – all intended to contribute their bit to the task of resurrection, a greater common purpose at that hour.

An interesting observation in this regard is that Satyam has never been known to lay off any of its staff through the greater part of its history, although there were indications that this policy would have to change post January 7.

Managing Attrition
In order to understand the lower than expected levels of attrition, it is important to understand some of the HR practices linked to socialization and networking which have a pronounced effect even under normal circumstances.

In this section, these measures related to group identity, the common pledge and the role of communication is analyzed.

Group Identity
In Satyam, and in many other high growth companies, the volumes handled in recruitment are quite high. Consequently, the induction process is usually conducted in formal groups and typically takes between three to six months. To entry level employees who are just out of college, this is a very unique experience and is in many ways an extension of collegiate life, but with all the perks of a corporate employee.

It has been generally observed that the cohesiveness of this group is quite high; many years after the individual members have undergone the orientation processes and separated ways (such as deputed to different offices/units within a city, different cities in India, different worldwide locations). A crucial aspect to be noted here is that these groups are more in the lines of ‘affinity groups’ and hence are not characterized by frictions and polarizations caused by routine transactional issues as one would encounter in a ‘work group’. It can thus be safely interpreted that these groups have only a positive effect on the individuals, and that there is direct correlation between the years of service, cohesiveness and the organizational productivity emanating from the members of these groups.

Predictably, this group cohesiveness and identity would increase during times such as that experienced by Satyam. This has a positive effect on productivity, as depicted below.

The effect of this group identity on attrition is even more interesting. It was observed that most of the employees had by the first few hours of the issue got in touch with the members from their work groups and affinity groups, and continued to do so on a regular basis. The ensuing behaviour exhibited all the typical symptoms of groupthink think such as:
1. Aspect of vulnerability: Most Satyam employees disregarded the doomsday predictions in the media, and kept their confidence on the fundamentals of the company high. This behaviour was strengthened by the slow and gradual process of cultural reinforcement over the years, and the access to the primary sources of information during this crisis.
2.Aspect of unanimity: It was observed that the solidarity between employees increased to new levels in this period. As an example, many teams had reported that there was a significant decrease in the mundane squabbles (such as between Onsite/ Offshore, delivery and finance teams), which one would expect in large enterprises.
3.Aspect of common enemy: The employees in general were convinced that the media had a very dubious role in propagating incorrect, unchecked rumours. The setting up of a common enemy had the positive effect of cushioning the employee moral from the mindless charade enacted out in the media.
4.Aspect of self-censorship of deviations: While all this was going on, surely there were sceptics how didn’t doubt the doomsday predictions. But, as a code of conduct, they had exercised restraint in airing their doubts, and in many teams there was a pledge undertaken by members to abstain from speculating on the issue except during the breaks.
In contemporary management literature, the role of groupthink is, quite rightly, portrayed in poor light as in such cases the quest for unanimity overrides the motivation to realistically appraise alternative courses of action. However, in the Satyam incident it should be noted that groupthink had a positive effect due to the extra-ordinary nature of the circumstances.

Cascading pledge

In another interesting development, the 6 member task force, and the 20 member Leadership Council pledged to remain with Satyam. These were typically employees from the senior most levels of Vice President and Senior President. This pledge was taken almost with 48 hours of the incident, and was to have a far-reaching effect.The image of their senior leaders committed to the cause of business continuity, inspired similar downstream behaviour from the employees.

HR and Management Communication

Communication is perhaps the most important aspect of managing such a situation. The organisation needs to ensure that correct and timely information reaches all employees, and that the sources of rumours and internal speculation are arrested to the extent possible. In the case of Satyam, the quality of communication and the credibility was also supported by the fact that the employees in the HR unit, like the others, were in a state similar to the rest of the organisation.
To this effect, the management implemented a communication channel that linked all ‘team leaders’ in direct contact with the Head of HR through a maximum of three levels. The communication network that developed in this phase was a hybrid of the circular and chain network.

Increase in Transparency
An interesting effect of this issue on the corporate communication was the perceived increase in transparency. The employees noted that the management was making no attempt to sugar-coat the issue, and was very objective in its internal communication. There were none of those ‘Comical Ali statements’ of defiant rhetoric (' We are in Control' !), as added in jest by a senior Satyamite at that time. The questions on salary disruption, provident fund contributions etc. were dealt in the most appropriate and honest way; conspicuous by its absence was kind of the ‘creative managerial license’ generally associated with such situations.
It could be interpreted that the preceived onset of transparency in the proceedings, contributed in some way, to taking the sting out of the employee frustration.
The management also made a conscious decision not to respond to the barrage of ‘lies and unchecked rumours’ that were doing the rounds in the print and electronic media. This, in hindsight, was a wise decision as by not reacting to the media, the management was signalling its priorities and its complete disregard for the rumour mongering.

4. Endnote/ Conclusion

The analysis presented above points to the role of leadership pipeline, distributed leadership model, affiliation and extension motivators, group identities, socialization and communication in stabilizing the company during this period of unprecedented crisis.
As explained in the previous section, some of these behaviours/ observations contradict the established theories, while some others reinforce them. While making a judgement, it should be noted that the period of observation is relatively short, and the context to which the frameworks have been applied is characterized by chaos and organizational dysfunction. Also, some of these inferences need to be overlayed with the economic context of that time.

This analysis can be further qualified and reinforced by inspecting the above mentioned parameters for a longer period of time.