The recent drama involving the arrest of Polaris CEO Arun Jain in Jakarta, Indonesia, has the Indian software industry in a tizzy. While Jain is now back home, questions on business practices and other issues are beginning to surface. Punita Jasrotia, Srikanth R P & Akhtar Pasha find out how this incident has affected the industry, and what needs to be done to avoid other unsavoury incidents

Although recession ruled the roost at the beginning of the year, things started improving for the Indian software services industry in the second half of 2002. Then came Friday the 13th. On December 13, 2002, Arun Jain, CEO of Polaris Software Labs and Rajiv Malhotra, a Polaris vice president heading the bankware products division, were arrested in Indonesia and charged with criminal embezzlement by Bank Artha Graha.

While commercial disputes are commonplace, and the software services sector is no exception, this case, where Jain and Malhotra were almost held hostage with demands of $10 million and criminal charges hanging like an axe over their heads, has sent shivers down the Indian software industry’s collective spine.

Jain and Malhotra are back in India after some tough diplomatic wrangling, and everyone’s all praise for the Indian government’s handling of the issue. Says Kiran Karnik, president of Nasccom, “This is probably the first case of its kind where the government has thrown its full weight behind securing the release of a business professional who was wrongly confined.”

Today, caution is the mantra being chanted across the industry, as far as this case is concerned. On the one hand Indian companies are seething over what happened, but are also afraid that any angry reactions can result in the Indonesian market closing gates to Indian software services firms. Smaller firms are even more worried because they wonder what would happen if something like this happened to one of them—Polaris is among the Top 5 software services firms in India—and if it took a week for Jain to be brought back, one can only imagine the fate of a CEO or employees of a smaller firm in a similar situation.

According to Govind Singhal, executive director of Polaris (who was also appointed acting CEO till Arun Jain’s return), Indonesia accounts for just Rs 5 crore of Polaris’s business. Polaris is holding a board meeting to examine the possibility of initiating legal action, including a defamation suit, against the Indonesian bank under whose instructions they were detained. According to company officials, the episode seemed pre-planned and premeditated, going by the swiftness at which events took place.

But there are some who feel that Polaris should have been more cautious, and say that this holds a lesson for other companies. “Not only has this incident impacted employee morale at Polaris, but could also impact the company’s future business by almost 15-20 percent, which is quite a lot,” says an analyst.

Many experts are of the opinion that besides impacting the company’s stock market image, this incident can also impact future revenues. While existing clients might stay, it may have a cascading effect on the quantum growth that Polaris was expecting.

Shares of Polaris fell by 4.37 percent on December 17 on news of Arun Jain’s arrest. According to market operators, the fall in the stock price is basically on the back of negative news and a sustained fall is not expected in the coming days.

Kiran Karnik says Nasscom plans to form strong pressure groups, both nationally and internationally, so that incidents like Arun Jain/Polaris can be avoided in future

Industry-wide impact
The unfortunate incident tremendously affected the Indian IT industry, which was rudely awoken from the dream that since they were among the best technically, and also cost-effective, that itself was reason enough for the world to come to their doors.

Indonesia has sharply slid in the industry’s priority list for doing business, because according to sections of the industry, it would be very difficult to conduct business in the Indonesian environment now.

Scared by the experience in Jakarta, Polaris Software Labs is evaluating the possibility of doing business in Indonesia. Says Arun Jain, CEO, Polaris, “Indonesia is a large market but we will not look at doing business there immediately for at least six months to one year.”

Commenting on the impact on Indian software companies, V Shekhar Avasthy, head of Internet communications and convergence research at IDC India feels that there would be more caution in dealing with those nations that are developing economies with weak legal frameworks. “The incident reflects upon the immaturity of the Indonesian firm. Good organisations usually do not indulge in bullying tactics to resolve business conflicts. On the brighter side, this incident would make Indian firms more cautious in dealing with new clients and they would not engage in business only considering the value of the deal but would also pay attention to finer aspects like the track record of the customer organisation.”

As for Bank Artha Graha, it may have harmed its own interests greatly by its role in the episode. It may find it difficult to deal with other suppliers in future—Indian as well as other global firms.

However, not everyone believes that all IT business between Indonesia and India will come to a standstill, thanks to this issue. Says the CEO of a leading mid-sized firm, “The current incident is only an aberration and not one to be taken seriously. One has to look at this incident as an exceptional case, which is not likely to happen in the future. As each country is different in its own way, I personally feel that our Embassies are better equipped to handle things on their own rather than have an industry organisation step in and complicate things further.” Citing one instance, he says, “Most of us face visa issues regarding our employees regularly. In such cases it is up to the concerned company to make the required adjustments and solve the matter amicably. What happened in Polaris’s case is just an exceptional case and it should be treated as such.”

Key lessons
Thanks to the US economic slowdown, Indian firms have been desperately trying to enter new markets. Newer frontiers have being opened in regions like Europe, Southeast Asia, West Asia, the Middle East and even Africa. Though these countries offer lots of opportunity (considering emerging market needs), opportunity alone does not guarantee or guard against the political and business environments that dominate some of these nations. The country in question, Indonesia, has been rated one of the most corrupt nations in the world by Transparency International. Many other countries too are in this group. At the same time, while it’s easy to blame Bank Artha Graha, Indian firms would also need to tone down aggressive marketing, accompanied by unrealistic promises and delivery schedules, which may have been the original cause of the Polaris crisis.

But the one thing that the incident has taught Indian firms is to cross check the background of the client. Similar incidents can happen to any other firm 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. For instance, one can recollect a similar incident which happened in India in the case of i-flex and Saraswat Bank. Saraswat Bank had threatened to file a suit against i-flex for allegedly not honouring the terms of their contract. A similar incident in Indonesia saw the Polaris head honchos in jail. And for analysts who say that Polaris lacked an understanding of the legalities involved, one has to just take a look at the legal contract that says that arbitration issues, if any, were to be settled in Singapore.

The Indonesian incident would make every Indian software player think twice about the safety of its employees. Ganesh Natrajan, managing director of Zensar Technologies, rightly says that caution needs to prevail while doing business with China and some of the Gulf states, considering the political scenarios in such places.

V Ramakrishna, managing director of EximSoft Technologies says that even though China does not have proper legal systems in place, they are pragmatic. “Chinese companies make sure that their commercial interests are protected before doing business with any foreign companies.” He however also cautions Indian software firms wanting to do business in China. “Indian software firms should look at increasing relationships with clients, both during the best of times and during periods of crisis. Increasing ‘faith’ can reduce unfortunate incidents such as these,” he adds.

Nasccom is preparing a database of international companies that have created problems in the past, but Karnik refuses to term it as a blacklist. Atul Nishar, chairman of Hexaware Technologies, feels that companies should not ban certain countries taking into account only one incident. He feels the best way forward would be to gauge the risks associated with every country and then decide accordingly on the decision to set up operations or do business. “While it is up to each and every organisation to gauge the risks versus the business opportunity in any country, Nasscom can with the experience of its members caution organisations on the risks associated with doing business in certain countries,” he says.

Ganesh Natarajan says that caution needs to prevail while doing business with China and some of the Gulf states, considering the political scenarios in those places

Going ahead
Hence, the way forward is for companies to gauge the market opportunity keeping in mind the risks involved. Starting with this incident, more and more Indian companies will start assessing client and country risk. “This is more of a lesson to be learnt as to where things have gone wrong,” says Pavan Duggal, senior advocate with the Supreme Court and a renowned expert on cyber law. According to him, the main reason behind this problem is the slack behaviour of most Indian software companies, who don’t pay any attention to the legal background of a company or a country where they are going to get business.

As mentioned before, thanks to the US slowdown, Indian companies are desperate to tap other parts of the world. But not enough time and money is invested in finding more about the antecedents of customer companies, as well as the legal background in the country where the customer company is based. “I believe that thanks to this particular incident Indian companies will now pay heed to the need for legal contribution in a contract. There are basically two areas where we need to be careful—the first is in doing business and the second is in insuring your presence. Such an incident can finish off a smaller company,” says Duggal. What needs to be done is that rather than considering the most likely scenario, Indian firms should rather consider the most pessimistic scenario as well.

However, a defensive Singhal of Polaris feels that there aren’t many changes that need to be brought about in Polaris’s legal framework, as he claims they have been cautious and so chose Singapore as the country for arbitration right at the time of signing the contract. He however admits that Polaris too may take some more steps for mitigating risks.

There is also a need to create a manual of best practices that can be a ready reckoner for all Indian companies entering into contracts. Besides working on a database of companies that have doubtful antecedents or are best avoided because of past incidents, Nasscom is also working to create an additional layer in a strong legal framework for dispute settlement. Plus, there would also be the formation of strong ‘pressure groups,’ both nationally and internationally, so that such cases can be avoided in future. “All these measures are targeted towards the SME sector, so that there is a better security for them,” says Karnik.

Another area of major concern is employee morale. Counselling sessions, accompanied by a risk mitigation strategy can help Indian firms deal with employee morale in situations like these. Adds Avasthy, “This is certainly an area that has been neglected by the industry. Most Indian software firms, and particularly the SME segment, either totally ignore this or see this as a cost centre. This attitude must change.” After all, in a knowledge-based, employee-intensive industry, critical success or failure factors are employees themselves. Hence, their interests need to be protected in any case.

While the Arun Jain/Polaris incident was unfortunate, it’s pretty clear that it has also served as a wake-up call for the Indian software industry and Nasscom. Hopefully, the checks and balances that are now being put in place will ensure that Indian Software Inc never again has to wake up to news of a fellow CEO in a similar situation.

Check list for India Software Inc

• Check out background and track record of the customer, and how have they dealt with commercial disputes earlier.
• Go through legal clauses in contract with a fine-tooth comb.
• Assess the kind of protection available concerning commercial cases in country where work is to be done. Also find out how commercial issues have been dealt in earlier disputes in the country.
• Companies should weigh risks against opportunities before signing any contract.
• Companies should set up facilities to ensure that employees have access to counselling in cases like this.

Sequence of events

• December 13: Polaris CEO Arun Jain and vice president Rajiv Malhotra arrested in Jakarta, Indonesia.
• December 17: Industry in panic mode—Nasscom and government work in tandem to secure Jain's release.
• December 20: Arun Jain and Rajiv Malhotra released from detention.
• December 24: Indonesia returns passports.
• December 25: Arun Jain and Rajiv Malhotra return back to India.