Indian outsourcing companies will have a hard time regaining the trust lost from the recent Satyam scandal, says Saritha Rai.

It has been a frosty winter in Bangalore, and not just weather-wise.

Thousands of outsourcing professionals in the city have caught the chills after B Ramalinga Raju, chairman of Satyam Computer Services, India’s fourth largest outsourcing company, revealed the company’s revenue had been massively inflated, revealing “non existent” cash and interest was logged on the company’s balance sheet in September 2008.

Outsourcing workers, already shaken by an industry slowdown and global recession, are anxious. Are similar skeletons lurking in the closets of other companies, they ask privately? Are their jobs and futures at risk?

The insecurity is dulling the mood in Bangalore whose population predominantly consists of technology workers. The city’s economy – its shopping malls, pubs, restaurants, multiplex cinemas and rock concerts – are driven by the spending power of an estimated three-quarters of a million employees in the technology and outsourcing industry.

Local businesses are now reporting sales slumps in the New Year as Bangalore’s techies cut down on spending.

“How can I splurge when I cannot be sure that I am guaranteed a paycheck three months from now?” asked Vinay, an employee of a medium-sized outsourcing firm who wanted to be identified only by his first name. He said thousands of Satyam employees are thronging the already-weak job market. The firm had close to 60,000 employees on last count.

The scandal has shocked and shamed many outsourcing workers who took pride that they were part of a high-growth industry, one that has been considered a shining example in India’s ascent as a global economic power.

Many could not believe former Satyam chairman Raju’s disclosure that he had been conjuring a non-existent $1bn in cash profits. Before he was arrested, Raju said in a letter that he had been “riding a tiger, not knowing how to get off without being eaten”.

“It is unthinkable that one of India’s corporate icons is in jail,” said a soon-to-graduate student of a leading engineering school in Bangalore. Even though he has an outsourcing job offer in hand, he said he is attending more job interviews so he could have a fallback “in case something goes drastically wrong like in the case of Satyam”.

For the global customers and investors of Indian outsourcing companies, the recent scandals have also gone beyond mere shock value. Post-liberalisation era outsourcing firms – new economy companies with professed superior corporate governance principles and transparency standards – have been the proverbial breath of fresh air in corporate India.

The timing of the Satyam scandal could not have been worse for Indian outsourcing companies. They have already been hit by the recent Wall Street meltdown: many of them had substantial work from the very investment banks and financial institutions which are now struggling. Add to that the worsening worldwide economic recession and November’s terror attacks in Mumbai and you have a troubled atmosphere.

Satyam made Hyderabad, the southern Indian city where it was founded and headquartered, synonymous with high-tech. Raju, the son of a farmer who studied business at the University of Ohio, founded Satyam and grew it to 60,000 employees and 600 customers, many of them Fortune 500 corporations.

Both Satyam and Raju were the stuff of Indian dreams. And Hyderabad was the envy of smaller and upcoming wannabe tech cities in India.

The question now on everybody’s mind in Bangalore and elsewhere is whether Satyam is a one-off episode.

Investors and employees worry it could hint at a broader pattern of a lack of corporate governance and accountability standards among Indian companies, even ‘new economy’ companies.

“Investors are beginning to question the spectacular performance of every top company,” said Vinay Couto, head of outsourcing advisory at Booz & Company, told me.

The risk tolerance of customers and investors towards Indian outsourcing companies will change, say experts.

Now Indian outsourcing companies and their workers can only hope that customers still appreciate India’s outsourcing fundamentals and value proposition for IT and back-office services enough to stay on board.