Innovative Outsourcing Deal Structures

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Offshore Outsourcing - Workshop In today’s world of sourcing, no conference would be complete without focusing on how to effectively employ Global Sourcing. It will discuss the essential considerations for capturing the benefits and managing the risks of offshore, as applied to both IT and Business Process Outsourcing. Participants will benefit from learning: The major offshoring models and what has been changing India vs. the others – host country tradeoffs Major contractual differences

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Innovative Outsourcing Deal Structures

  1. 1. Outsourcing Insourcing Leading Change Innovative Outsourcing Deal Structures that Change the Rules and Unlock Value May 26, 2005 North America Europe Addison Park Place 22-24 Ely Place 4560 Beltline Road, suite 330 London, EC1N 6TE Addison, TX 75001 United Kingdom Tel: +1 214-696-6410 Tel: +44 (0)207-242-0666 Fax: +1 214-239-0698 Fax: +44 (0)207-242-0667 Email: EnquiryUSA@Alsbridge.com Email: EnquiryUK@Alsbridge.com © Alsbridge 2005 Confidential and www.alsbridge.com Proprietary
  2. 2. Pressures SHOULD I OUTSOURCE? How do I How do I evaluate the Manage risk? Offshore option? Outsourcing What functions Which provider will should I really support my outsource? Shared BPO unique needs? Services & IT Can I really save Traditional Contract 25-50% ? or Joint Venture? Is there a new way to approach contracting for the Service? © Alsbridge 2005 Confidential and 1 Proprietary
  3. 3. Reaching For Change Plotting a New Course Plotting a New Course Executives are usually under short-term pressure to • • Executives are usually under short-term pressure to reduce costs and long term pressure to deliver reduce costs and long term pressure to deliver strategic advantage. strategic advantage. Some companies are starting to respond through • • Some companies are starting to respond through adopting more radical sourcing arrangements to adopting more radical sourcing arrangements to achieve aa step change that tries to address both achieve step change that tries to address both needs and improve performance. needs and improve performance. However, most Executives are ill prepared to follow • • However, most Executives are ill prepared to follow this lead: this lead: previous outsourcing experiences have been previous outsourcing experiences have been focused on “lowest cost” focused on “lowest cost” “best practice” lessons are interesting, but they “best practice” lessons are interesting, but they fail to address the complexities of the new fail to address the complexities of the new breadth of sourcing options breadth of sourcing options © Alsbridge 2005 Confidential and 2 Proprietary
  4. 4. Strategic Considerations Common Reasons to Outsource Tactical Strategic Objectives Considerations • Access management & organization processes Governance Technical Operations • Improve automation • Value lever Scope of Services Product Development • Lower cost Industry Leadership Business Process • Achieve economies of scale Project Management • Keep supplier profit margins low Product Management • Reduce balance sheet assets • Alter cash flow structure • Improve responsiveness to change • Scalable resource pools • Effective resource skill Risk-Adjusted deployment • Access higher skills Financial Impact • Improve effectiveness • Sourcing objectives Net Benefit Striking the • Reduce cost Timeline Balance • Improve financial structure Risk © Alsbridge 2005 Confidential and 3 Proprietary
  5. 5. The Sourcing Matrix BPO BPO IT IT Captive Service Captive Service Selective Outsource Selective Outsource Total Outsource Total Outsource Joint Venture Joint Venture Center Center • • “Many variations” “Many variations” • • Execution responsibility Execution responsibility • • BTO/Market Facing BTO/Market Facing • • Client execution Client execution • • Leverage capabilities Leverage capabilities • • Shared ownership Shared ownership • • Requires CapX Requires CapX • • No Capx No Capx • • Shared risk and reward Shared risk and reward • • Complete control Complete control • • Infrastructure established Infrastructure established • • Access to partner skills Access to partner skills • • Accountability Accountability • • Contract flexibility Contract flexibility • • Relationship Alignment Relationship Alignment • • HR build-out HR build-out • • Disciplined execution Disciplined execution • • Minimum transformation Minimum transformation • • Cost controls Cost controls • • Relationship Alignment Relationship Alignment • • Competitive Market Competitive Market Onshore • • Relationship Alignment Relationship Alignment Off Shore Near Shore © Alsbridge 2005 Confidential and 4 Proprietary
  6. 6. Joint Venture Sourcing Traditional Outsourcing Contract JVsourcing Structure & Contributions sm $ $ Payment for Services 50% 50% Employees and Assets Consulting Services Client SourcingCo Vendor Co Vendor Co $ Payment for Assets Partner/Employee Transfer $ Service Contract With Service Level Guarantees Guaranteed Payments Capital Funding Start-Up Capital Provider Vendor Contributions Vendor Contributions ••Capital to fund start-up Capital to fund start-up and change and change • Asset Lease • Debt/Equity ••Tools, methods and Tools, methods and Client Contributions Client Contributions techniques to manage ••People • Securitization of the techniques to manage People JV contract change change ••Assets Assets ••Experience in leading Experience in leading ••Commitment as customer Commitment as customer change and innovation change and innovation ••Capital Capital ••Transfer resources and Transfer resources and ••Subject matter experts Subject matter experts staff to Transco staff to Transco ••Commitment to success Commitment to success © Alsbridge 2005 Confidential and 5 Proprietary
  7. 7. Risk/Reward Sharing (50/50% JV) Loss Breakeven Profit Vendor 0 % Net Income 0 % Return 50 % of on Investment on Investment Net Income 50 % of Loss Client 50 % of Loss On Target, 50 % of On Budget Net Income You should price the JV services at the same level as the base case in-scope budget. © Alsbridge 2005 Confidential and 6 Proprietary
  8. 8. JVSourcing Governance Board of Directors • Equal representation (5/5, with one being a rotating chairman) • Operating/capital budget approval • Strategic plan approval – 3-year plan Governance has multiple checks and balances. – Annual adjustments Many change issues can be addressed at the JV level • Super majority rights – Partner business dealings (except services agreement) – JVSourcing services/opportunities with third parties – Executive management Operations Management • CEO (Client) • COO (Vendor) © Alsbridge 2005 Confidential and 7 Proprietary
  9. 9. Joint Venture Variations Transitional Balanced Market Facing Joint Venture Examples Swiss Bank - Perot TXU - Cap Gemini Farmland Industries - E&Y Shell - E&Y Jardine Matherson - E&Y AT&T - Delta Preussen Elektra - E&Y © Alsbridge 2005 Confidential and 8 Proprietary
  10. 10. Transitional – Shell TASCO Client Profile: • Royal Dutch Shell and Shell Transport and Trading ($162B) own and manage • the country based operations Globally and in the Pan-European region. Each business unit within each country provided their own organic accounting services to support local requirements. Overall effort was a part of European centralization drive to consolidate and streamline finance in Europe. Deal Overview: • Vendor/Client: Ernst & Young/Shell International, LTD • Sector Energy • Deal Type Business Process Outsourcing (Accounting and Finance) • Geography European Region • Structure Joint Venture • Duration 15+ Years • Start Date November 1997 Bought out by Shell in 2001 • TCV $2.3B • Staff Number 2000+/- located in multiple countries Deal Solutions and Benefits: • Joint Venture called TASCO (The Accounting Services Company) owned by Shell and Ernst & Young developed and set up to provide Pan-European Finance and Accounting services to multiple business units within Shell and to 3rd party market customers. • Rationalize Finance and Accounting efforts into a single centralized accounting center located in Glasgow. • Initial effort was to move the work and to strategize process once moved. • Multiple business units in each country negotiated and signed individual Service Level Agreements with the JV. • Work site was a single-purpose build, multi-language accounting center based in Glasgow, Scotland. © Alsbridge 2005 Confidential and 9 Proprietary
  11. 11. Balanced - Farmland Client Profile: • Farmland Industries ($9B Agricultural cooperative), based in Kansas City, Missouri provides services to more than 1,400 farmer cooperative associations in 70 countries. Deal Overview: • Vendor/Client Ernst & Young/Farmland Industries • Sector Agricultural Cooperative • Deal Type Full IT and Limited Business Process Outsourcing • Geography North America • Structure 50/50 % Joint Venture • Duration 15 Years • Start Date Started May 1997. Bought out by Cap Gemini in 2002 • TCV $2.1B • Staff Number 500 Transferred Deal Solutions and Benefits: • Farmland contributed assets and staff and EY contributed capital and leadership to implement the required changes and to develop a unique dedicated sourcing organization. • Farmland initiated its joint venture (OneSystem Group) when it realized it lacked the in-house expertise to manage the transformation of an information system which had grown to include137 mainframe applications, 86 different databases and seven hardware platforms supporting ten business units. • OneSystem Group is designed to push Farmland toward its technological goals faster, decrease costs, utilize resources more effectively, and share the risks and rewards of technological investments. • Prime delivery location: Kansas City, MO © Alsbridge 2005 Confidential and 10 Proprietary
  12. 12. Market Facing – TXU Client Profile: • TXU, a Dallas-based energy company, manages a portfolio of competitive and regulated energy businesses in North America, primarily in Texas providing power to 2.9 million delivery points over more than 98,000 miles of distribution and 14,000 miles of transmission lines. Deal Overview: • Vendor/Client Cap Gemini/TXU • Sector Utilities • Deal Type Full IT and Business Process Outsourcing • Geography North America • Structure Joint Venture • Duration 10 Years • Start Date May 2004 • TCV $4.1 Billion • Staff Number 2,700 Transferred Deal Solutions and Benefits: • Provide information technology, call center, billing, human resources, supply chain, accounts payable, and finance and accounting services to TXU and other energy companies. • Develop and implement new business processes and rationalize existing services in order to enhance operational efficiencies and leverage new technologies. • Minimize business disruption and achieve significant reduction in cost of provision of these services. • Prime delivery locations: North America, Poland and India. © Alsbridge 2005 Confidential and 11 Proprietary
  13. 13. Conclusion • The contract structure you choose will drive behaviors • The JV deal structure is intended for larger contracts • Scope and base case must be determined prior to detailed JV discussions • Think about alignment of interests (not JV) as a driver • JVs are not everyone’s cup of tea • Is it possible to take some of the best concepts in JV and insert them in a more traditional contract structure? © Alsbridge 2005 Confidential and 12 Proprietary
  14. 14. Outsourcing Insourcing Leading Change Ben Trowbridge Managing Partner, Alsbridge US Email: Ben.Trowbridge@alsbridge.com North America Europe Addison Park Place 22-24 Ely Place 4560 Beltline Road, suite 330 London, EC1N 6TE Addison, TX 75001 United Kingdom Tel: +1 214-696-6410 Tel: +44 (0)207-242-0666 Fax: +1 214-239-0698 Fax: +44 (0)207-242-0667 Email: EnquiryUSA@Alsbridge.com Email: EnquiryUK@Alsbridge.com © Alsbridge 2005 Confidential and www.alsbridge.com Proprietary
  15. 15. JVsourcing Structure & Contributions sm $ Payment for Services 50% 50% Consulting Services Sourcing Co Vendor Co Partner/Employee Transfer Service Level Guarantees Vendor Contributions Vendor Contributions ••Capital to fund start-up Capital to fund start-up and change and change ••Tools, methods and Tools, methods and Client Contributions Client Contributions techniques to manage ••People techniques to manage People change change ••Assets Assets ••Experience in leading Experience in leading ••Commitment as customer Commitment as customer change and innovation change and innovation ••Capital Capital ••Transfer resources and Transfer resources and ••Subject matter experts Subject matter experts staff to Transco staff to Transco ••Commitment to success Commitment to success © Alsbridge 2005 Confidential and 14 Proprietary

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