The document discusses the impact of the recession on outsourcing trends in 2009, noting declines in contract activity and a shift towards cost-focused outsourcing strategies, including renegotiations and renewals. It highlights the increasing importance of 'green IT' and cloud computing in outsourcing agreements, influencing service provider selection and cost structures. Additionally, it outlines significant industry realignments, mergers, and the evolving nature of technology services amidst economic pressures.

1. OUTSOURCING TRENDS - 2009 Richard Austin October 23, 2009

2. OUTSOURCING TRENDS The Impact of the Recession Renegotiations, Restructuring and Renewals Green IT Industry Realignment Cloud Computing

3. I. The Impact of the Recession Global outsourcing market declined in first six months of 2009: TPI Index noted, in first six months of 2009, 11 percent fewer contracts, 22 percent lower Total Contract Value and 28 percent lower Annual Contract Value 1 ; Decline attributed by TPI to reduction in mega-deals in Europe and lower global spending on Business Process Outsourcing 2 ; and Gartner predicted in March 2009 that, as a result of the uncertain economic climate, the prices of IT outsourcing services would shrink 5 to 20 percent through 2010 3 .

4. I. The Impact of the Recession cont’d Study carried out in Q2 2009 by Centre for Outsourcing Research and Education (CORE), IDC and Prima Management Inc. 4 dealing with the impact of the recession on Canadian Outsourcing Market (the “CORE Study”) noted: Recession is stimulating demand for outsourcing services Customers are focussed on cost reductions. 5 At the same time, CIOs focused on aligning Information Technology to their business objectives, rather than just on service delivery 6 A significant portion of the increase in the service providers’ pipelines relates to renegotiations or renewals of existing deals 7 Increased offshoring resulting from the Customer focus on reduced costs likely a permanent change in Canadian outsourcing market 8

5. I. The Impact of the Recession cont’d Recession is strengthening existing contracting trends 9 : Shorter deal terms and more multi-sourcing/best-of-breed sourcing; Less financial engineering; Customer concerns for cost reductions a higher priority than commitments for continued employment of transitioning employees; and Customer reluctance to make volume commitments. Impact of recession on risk transfer terms (damages for breach of privacy and confidentiality, greater liability for consequential damages) unclear 10 .

6. II. Renegotiations, Restructuring and Renewals Renegotiation and restructuring is a normal part of outsourcing contracts, often happening in first 18 - 36 months 11 , for example due to: Changed financial circumstances of customer or service provider, e.g. after the customer and service provider agree that the costs of an initial transformation of the services will be spread over the term, one party is unable to fund its portion of the transformation costs Change in control of the service provider Acquisition by customer of a competitor of the service provider Sale by customer of part of its business Default/inability to perform by one party

7. II. Renegotiations cont’d Exercise of right of renewal is, in effect, a renegotiation. In 2007, TPI noted 12 : Customers were not renegotiating because of service delivery problems but, rather, because of change in their business Most commonly cited reasons for restructuring outsourcing contracts were: Change in business volume Change in scope of services Service pricing issues Contract revised after expiry

8. II. Renegotiations cont’d In 2009, many more customers are renegotiating for cost reasons. The CORE Study 13 noted the change in customer priorities as a result of the recession: Number of firms cutting IT spending doubled in first six months of 2009; Renewals and renegotiations are a significant part of current outsourcing demand; and Companies are focussing on finding cost savings and efficiencies.

9. II. Renegotiations cont’d Approach renegotiation of an outsourcing agreement in the same manner as negotiation of the original arrangement – preparation is key. 1. Legal Review As a first step, review the situation with counsel. Contract and Performance Review Parties should review performance of the services against: provisions of the contract; and the situation prevailing when the contract was entered into . The contract/performance review needs to be performed: in an unbiased manner; having regard to other party’s likely response on each issue; and considering the issues likely to be raised by the other party.

10. II. Renegotiations cont’d Contract and Performance Review cont’d Provisions to be reviewed in the course of preparation should include: Benchmarking (prices, services and service levels) The benchmarking clause can be used to justify reliance on market data from other sources if benchmarking not done; and Benchmark clause may provide fallback strategy. Scope of Services Validate if service provider is delivering all of the services specified in the outsourcing agreement; Analyze the impact of any “sweeps” clauses; and Customer to confirm if it requires all of the services specified in the SOW or if the scope of services can be adjusted.

11. II. Renegotiations cont’d Contract and Performance Review cont’d Service Levels Are services being provided at contracted for service levels?; Impact of any “continuous improvement” provisions; and Can Customer adjust/relax service levels to achieve cost savings? Pricing Review invoices and invoice detail to confirm accuracy of charges (quantities of unit price resources, entitlement to and accuracy of pass through charges, taxes, etc.); Verify Change Order charges; and Review application of price certification/adjustment provisions (MFC clauses, COLA adjustments, etc.).

12. II. Renegotiations cont’d Contract and Performance Review cont’d Other contract commitments to be reviewed to determine compliance and customer’s ability to adjust/amend: Technology refresh; Technology innovation; Commitment s to provide services in accordance with applicable laws, at industry standard, etc.; “ Best efforts” provisions; and Other representations and warranties. Allocation of risk Review limits of liability (caps and responsibility for consequential damages)

13. II. Renegotiations cont’d 3. Process Parties should assemble a complete list of issues Parties to agree on process/parameters for the renegotiation: Whether to use an independent, third party facilitator Characterization of renegotiation for purposes of dispute resolution provisions of the contract “ Without prejudice” Days, times and places of meetings Where to meet How to negotiate the issues How progress will be documented Impact of interim agreements on issues Target for completion

14. IV. Green IT “ Green IT” means some, or all, of: Recycling and reductions in e-waste; Utilization of energy efficient processes, software and equipment; Utilization of renewable energy resources; Eliminating unnecessary energy use; More efficient data centres and other premises; Reducing a company’s carbon footprint; and Compliance with applicable environmental laws.

15. IV. Green IT cont’d Customers’ ongoing concerns for Green IT reflect: Cost concerns Regulatory issues Reputational issues Company culture

16. IV. Green IT cont’d Outsourcing service providers can address Green IT issues: Services providers have “Green IT” service offerings Cloud computing offers more efficient use of IT resources Service providers experiencing similar pressures to reduce waste and inefficiency Service providers’ best practices and economies of scale Spreading the costs of “going green”

17. IV. Green IT cont’d Issues to be addressed in contracting for Green IT: How important an issue for purposes of service provider selection? Identification of the customer’s specific objectives – what does “Greener IT” mean? Identification and validation of customer baselines Availability of resources Responsibilities of the customer and service provider for costs Increased energy costs and COLA clauses Pricing 14

18. IV. Green IT cont’d Issues to be addressed in contracting for Green IT cont’d: Service Levels: What are industry best practices? What are the “outcomes”-based service levels that are to be measured? What are the performance levels to be achieved? Do the levels adjust over time? What are the penalties and incentives?

19. IV. Green IT cont’d Issues to be addressed in contracting for Green IT cont’d: Audit rights Definition of risk and appropriate risk sharing Effect of subcontracting and offshoring Impact of Carbon Cap-and-Trade legislation: Whose and what laws? Effect of obligations to comply with applicable laws Ownership of any carbon credits Damages for non-performance (direct or indirect ?) (How much?)

20. IV. Industry Realignment Changes in the top tier of global outsourcing firms 15 : HP acquires EDS in August 2008 for U.S. $13.2 billion Dell agrees in September 2009 to purchase Perot Systems for U.S. $3.9 billion CGI confirms plans to spend up to $2 billion to expand Xerox agrees on September 28, 2009 to acquire Affiliated Computer Services for U.S. $6.4 billion IBM announces October 5, 2009 its agreement with Bank of America to acquire core operating assets of Wilshire Credit Corporation (mortgage servicing)

21. IV. Industry Realignment cont’d Technology companies: Hardware revenues under pressure from goods produced in lower cost economies Want higher margin services and long term customer relationships that service companies provide Focussing on delivering business solutions rather than technology solutions Seeking to become “one stop shops” for customers – more end-to-end integrated deals 16

22. IV. Industry Realignment cont’d Questions: Impact of Dell/Perot deal on IT services delivery model and pricing Impact of Cloud Computing on end-to-end integrated deals – more multi-sourcing/best-of-breed sourcing? Who is next? Can service providers still rely on organic growth? How will the India-based firms respond (Wipro, TCS, Infosys, HCL Technologies, etc.)? Will integration activities (Dell/Perot, Xerox/ACS) drive more offshoring of software services? Will this lead to a resurgence of BPO deals 17 ?

23. V. Cloud Computing Cloud Computing: anything that involves delivering hosted services over the Internet 18 or the dynamic provisioning of IT capabilities (hardware, software, or services) from third parties over a network 19 Cloud Computing encompasses: Infrastructure-as-a-Service (IaaS) Platform-as-a-Service (PaaS) Software-as-a-Service (SaaS )

24. V. Cloud Computing cont’d Characterized by: Dynamically scaleable (customers do not have to engineer for peak load limits) Customers do not own physical infrastructure but rent usage Customers may not require extensive knowledge of underlying infrastructure Shorter contracts Examples: Zimbra Desktop, Google Docs Salesforce.com MessageLabs HP Cloud Assure IBM Blue Cloud Unisys Secure Cloud

25. V. Cloud Computing cont’d Advantages of Cloud Computing: Reduced upfront and (maybe) ongoing operating costs Reduced risk of technology obsolescence Allows customers to focus on the business processes rather than the underlying infrastructure Shorter time to ``go live`` Scales without effort

26. V. Cloud Computing cont’d Issues: Security, storage and control of customer data (including personal information) determined by the Cloud Computing vendor Customer responsible to understand services to: Verify compliance with laws, e.g. Export Controls Integrate/use Cloud Computing services with other services, systems and data React to changes in services Fulfill responsibilities for business continuity and agility Understand compatibility to competitor offerings

27. V. Cloud Computing cont’d Issues cont’d: Interruption or cessation of service (including due to bankruptcy) Customer options on termination: Ability of customer to insource/resource Obligations of vendor to provide termination transition assistance Ability to contract for/obtain customer-specific requirements re quality of service, service levels, privacy, confidentiality, security, audits, governance, breach notification, limits of liability, etc. Jurisdiction and applicable law

28. V. Cloud Computing cont’d Cloud computing currently: Most suited for small companies facing large investments in computing and communications infrastructure or where high variance in resource demands Less appropriate for large entities with complex applications or complicated organizational structure or for systems that have stable and predictable usage 20

29. V. Cloud Computing cont’d Impacts for customers: Cloud Computing financial value propositions (cost savings, no upfront capital expenditures) are attractive to companies during a recession Expanded Cloud Computing service offerings, technological advances and Green IT will motivate customers to utilize Cloud Computing service offerings Complicated Issues to understand, negotiate and resolve

30. V. Cloud Computing cont’d Cloud Computing represents a challenge to service providers (especially offshore service providers) who have provided skilled workers at low cost. Traditional outsourcing service providers will: Develop Cloud Computing service offerings, e.g.: IBM Blue Cloud Unisys Secure Cloud HP Cloud Assure Wipro w-SaaS platform (hosting service for companies intending to offer products in a Software-as-a-Service model) Partner with cloud computing service providers Will customers move from traditional outsourcing to multi-sourcing to the Cloud?

31. NOTES 1 Technology Partners International, Inc. (“TPI”) publishes the TPI Index. The TPI Index measures contracts with a contract value of U.S. $25 million or more. The 2009 results are compared against the first six months of 2008 (where there was record activity). See “ The Economy Still Holding Outsourcing Market Back” , Technology Partners International, Inc., July 21, 2009 at http://www.tpi.net/newsevents/news/releases/090721-US.html . 2 This is consistent with a study done by the Global Sourcing Group of Morrison & Foerster LLP in early 2009 which noted a downturn in Business Process Outsourcing transactions: see Rosenthal, Beth Ellen, “ Morrison & Foerster’s Study: How the Recession Has Changed Outsourcing ”, Everest Partners, September 2009 at http://www.outsourcing-requests.com/center/jsp/requests/print/story.jsp?id=7011 3 See “ IT outsourcing prices to fall – Gartner ” Reuters, 23 March 2009 at http://www.reuters.com/articlePrint?articleID=USLN39805520090323 4 See “Recession and Impact on Outsourcing” , CORE Webinar held June 30, 2009 5 See also Fersht, Phil, “ Outsourcing drivers in today’s climate: large companies want to globalize, mid-sized companies seek expertise ”, AMR Research, 27 June 2009 at http://blogs.amrresearch.com/outsourcing/2009/06/outsourcing-drivers.html where it is noted that close to four-fifths of firms view cost-reduction as the primary driver for outsourcing 6 The focus of CIOs on aligning Information Technology to business objectives is reflected in the renewed focus of technology companies on delivering business solutions as opposed to technology solutions (see Part IV , Industry Realignment)

32. NOTES 7 Restructuring of outsourcing agreements – transactions renegotiated before their original term expires as well as contract extensions and renewals – have always represented a significant component of IT outsourcing transactions. TPI. noted in 2006 that in 2005 restructurings amounted to almost 25% of U.S. $75 billion TCV: see Khakhar, Elesh and Warren, Glen, “ Restructuring Outsourcing Contracts: Making Change Work for You” , Technology Partners International, Inc., November 2006 at http://www.tpi.net/pdf/papers/Restructuring%20Outsourcing%20Contracts.pdf 8 The willingness to offshore may well be affected by rising protectionism. TPI has noted that many recipients of funding from the Troubled Asset Relief Program (TARP) in the United States have slowed down or stopped offshoring initiatives: Duckham, Paul, “TARP Participation and Rising Unemployment: Implications for Outsourcing and Offshoring in the Global Economy”, Technology Partners International, Inc., 2009 at http://www.tpi.net/pdf/pointofview/TARP%20POV.pdf 9 These trends are identified in the CORE Study. Similar trends are also identified in the study carried out by the Global Sourcing Group of Morrison & Foerster LLP that is referred to in note 2 above. Other factors, such as Cloud Computing discussed in Part V of the presentation, are also contributing to these trends. 10 The Core Study identifies from its research that customers were seeking to transfer more risk to service providers, demanding more severe penalties for privacy and confidentiality breaches and greater liability for consequential damages. The study carried out by the Global Sourcing Group of Morrison & Foerster LLP referred to at note 2 above notes that customers are focussing on transferring such risks to service providers but observes that the service providers are becoming more restrictive about accepting risk.

33. NOTES 11 The frequency with which outsourcing agreements are renegotiated suggests that parties should take account of the likelihood that the agreement will be renegotiated when they initially enter into the contract. Each of the customer and the service provider should consider in the initial negotiations, for example, the information that it will likely require from the other in the event of a renegotiation. Having identified this information, the party should seek to include provisions in the outsourcing contractrequiring the other party to make this information available, preferably on a regular, periodic basis but in any event in the event of a renegotiation. 12 “ Restructuring Outsourcing Agreements: An Indication of Failure, or a Tool to Increase Value ”, Technology Partners International, Inc., January 2007 at http://www.tpi.net/pdf/researchreports/Restructuring_ResearchReport%20Jan_24_07.pdf 13 There are a number of articles on outsourcing and the impact of the recession that identify the renewed focus on cost savings: see, for example, Hanson, Vivian and Milner, Gordon, “ Outsourcing Services in the Face of an Economic Downturn ”, Morrison & Foerster LLP, November 2008 at http://www.mofo.com/news/updates/bulletins/14767.html . 14 The challenge is to develop an effective pricing methodology that supports the parties’ business objectives including any related to Green IT. Q9 Networks Inc. is a provider of data centre co-location services that charges for its services on a “capacity-reservation” basis. Under this model, each customer reserves a dedicated portion of the total power and cooling capacity of a Q9 data centre facility and is billed for this capacity on a dollars/volt amp (VA) basis. As capacity is reserved, it is removed from Q9’s inventory for the facility. The customer is allotted space in the data centre to meet its equipment co-location needs but is not charged for the space on a square footage basis. This pricing methodology provides incentives to customers to utilize energy efficient equipment to remain within their capacity reservation. 15 The list does not include Oracle’s agreement to buy Sun Microsystems for U.S. $7.4 billion

34. NOTES 16 Gartner analyst Dane Anderson quoted in Pimentel, Benjamin, “ Xerox, Dell mergers reveal the draw of IT services” 28 September 2009 at http://www.physorg.com/news173379581.html suggests that “capturing customer value from services will be a top driver of consolidation going forward”. 17 TPI noted that there had been a significant decline in the first six months of 2009 in BPO transactions. The number, TCV and ACT of BPO contracts was lower in first six months of 2009 than in any of past five years. TPI also observed that this trend appeared to extend beyond the current economic recession: See note 1 above. However Everest Group notes that the Xerox acquisition of Affiliated Computer Services has created a very strong player in the “transactional” or “operational” BPO: See Bendor-Samuel, Peter and Menzigian, Katrina, ” Xerox Acquiring ACS” , Everest Group, September 2009 at www.outsourcing-requests.com/common/sponsors/4665/Xerox_Acquiring_ACS_Outsourcings_Top_Tier_Landscape_Continues_to_Rapidly_Evolve.pdf 18 As defined by Whatis.com at http://searchcloudcomputing.techtarget.com/sDefinition/0,,sid201_gci1287881,00.html 19 This definition, from Accenture, is quoted in Fogarty, Kevin “ Cloud Computing Definitions and Solutions` `, IT World, 10 September 2009 at http://www.itworld.com/saas/77239/cloud-computing-definitions-and-solutions 20 Arnold, Charles and Singh, Jack, “ Cloud an Outsourcing Option in Troubled Times””, CIO Insight, 11 February 2009 at http://www.cioinsight.com/c/a/Outsourcing/Cloud-an-Outsourcing-Option-in-Troubled-Times/

35. Questions?