it outsourcing 2005

G L O B A L S O U R C I N G

Copyright © 2005 Shaw Pittman LLP.All Rights Reserved.

Shaw Pittman Global Sourcing

An Eclectic Presentation on Strategic Outsourcing Issues

To theWashington Area CTO Roundtable

March 18, 2005

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The Eclectic Agenda

Marketplace Perspectives Overall analysis - the “Big Picture”

ITO

BPO

Offshoring

Sourcing Strategy

Lessons Learned

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The Big Picture

3 strategic trends The “market” is moving from products to services

The outsourcing services market is defined more bysupplier offerings and less by customer needs

Globalization is having two major impacts on the services market It is creating a need to deliver services in remote locations It produces extreme pressures to provide services

from low cost facilities

3 tactical trends IT outsourcing is becoming a commodity service

Business process outsourcers are only now developing capabilitiesto deliver business process functions on a broad scale

“Transformational” anything is a hot item

Implications Efficient, cost-effective global service delivery capabilities

Clarity of the services offered and the value proposition of such services

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Defining the marketplace

Information technology outsourcing (ITO) the delegation to a third party of a significant portion of a company’s IT

operations typically involving the transfer of personnel, the sale or assignment of hardware, and the granting of access rights to software

Business process outsourcing (BPO) the delegation to a third party of a significant portion of a company’s back

office, technology-enabled operations typically involving the transfer of personnel, the sale or assignment of hardware, and the granting of access rights to software

Tier 1 Providers IBM EDS CSC Accenture Hewlett-Packard

Tier 2 Providers Perot Systems CGI

Unisys

ACS (?)

Lockheed Martin

Siemens

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Information technology outsourcing (ITO)

The major forms of transaction in the marketplace today full-scope infrastructure transaction

applications development and maintenance (AD/M)

desktop procurement and support

network transaction

on-demand computing and utility pricing

Commercial (private sector) versus governmental (federal, state, local) outsourcing

Competitive issues IBM is in total control of the marketplace

New EDS CEO; perception of significant financial issues and unclear strategy

CSC has new President and similarly unclear strategy; doing very well recently

Hewlett-Packard may be emerging, but is the business being “bought”

ACS is Wall Street’s current darling; question whether that can be maintained

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Current marketplace perspectives

Outsourcing has become much more difficult for the supplier community substantially less risk taking by the large suppliers

problems in applying centralized deal model to de-centralized operations

shortage of truly skilled personnel in sales, marketing and business development support in service delivery

difficulties with “global” deals in projecting world-wide presence in delivering services

apparent decline in number of large mega deals

Market remains an oligopoly; only limited competition exists

Market participants beyond the big-3 have not been successful in landing large, high-profile transactions

IBM continues to very successful in attracting large, sole-source contracts

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It’s the economy, stupid!!!

Expense reduction never went out of style expense reduction should never be the only reason for outsourcing

but, expense reduction always has been, and always will be, a major driverfor outsourcing relationships

what changes is how explicit is the cost consideration

The issue, however, is that current outsourcing proposalsdo not show significant cost savings suppliers are totally unwilling to buy assets

suppliers look for clever ways to have the customer financenecessary, up-front investments

suppliers are substantially less willing to assume riskand appear less willing to “compete” for business

everyone only wants sole-source transactions

there may be only a limited cost-savings implicit in the current sourcing model

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Delivery is becoming problematic

We have in the past noted that no supplier is able to distinguish itself as materially better than any other supplier in delivering services this continues to surprise us it is a blot on the industry it puts greater emphasis on individuals and specific personnel being proposed

and substantially less importance on corporate capabilities

Performance on global transactions is especially poor Relationship governance and contract administration is appalling

certain suppliers are abusing the outsourcing model these deals never have been, and are not, tightly scoped transactions requiring

voluminous change orders subjecting the relationship to unpredictable price volatility

however, looking at particular transactions you would never know that

outsourcing customers (our clients) continue to fail to correctly understand the outsourcing paradigm and, as a result, continue to fail to properly manage the relationships

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The ascendancy of BPO

Business process outsourcing (BPO) defined: The delegation to a third party

Of a significant portion of a company’s Back office Technology-enabled Operations

That may or may not involve The transfer of personnel The sale or assignment of hardware The granting of access rights to software

BPO is an updated, re-incarnation of business process reengineering

The providers Accenture ACS Bearing Point CSC

Capgemini EDS IBM HP

Fidelity Hewitt (nee Exult) Indian/Offshore Numerous other niche suppliers

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BPO examples

Significant semantics issue BPO is treated as something new, yet many of the services labeled as BPO

have been around for years for example, payroll processing, item processing, claims processing what is new is the scale of the offering

large domain-specific transactions are a form of BPO multi-disciplinary BPO hardly exists (and, maybe not at all)

Major forms of transaction human resources finance and accounting procurement and supply chain call center but, the full-scope Procter & Gamble transaction was not completed

Offshore BPO Until the “shared services” BPO transaction is completed,

the marketplace is immature and not adequately established

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BPO market characteristics

The BPO market is immature

The product offerings are ill-defined

The value and role of offshore supply is unclear

The process for contracting is evolving

Nonetheless, the drivers for significant BPO activity are powerful Most information technology outsourcing (ITO) suppliers see their market

becoming commoditized

BPO suppliers are only now first developing meaningful capabilities to offer business process functions on a broad basis

Margins are higher and capital requirements are lower for BPO business

Elongated sales cycles can be covered by “consulting” engagements

The market is being driven by supplier offerings

Supplier “value propositions” can be very seductive to potential customers

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The impact of BPO on ITO

Thesis: business process outsourcing and information technology outsourcing cannot long survive together

The issue: how is BPO delivered?

The response: ① using the customer’s infrastructure

② using the supplier’s infrastructure

③ a combination of the two

The impact: ♦ the IT “factors of production” are part of the BPO transaction

♦ separately sourcing IT creates a hurdle for BPO

♦ customers need to have the flexibility to remove IT resources from their outsourcing

arrangements

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Don’t be fooled BPO is more difficult than ITO

There are some who say that, because BPO is aimed at a higher functional level (the end-service being delivered to the customer), it should be easier to identify, structure and complete a BPO transaction in addition, the claim goes that BPO can carry itself on the experiences learned from IT

outsourcing so a BPO transaction is not as risky as an early IT outsourcing deal

This is all wrong because the industry is less mature, there continues to be a need to focus

on the “right” statement of work, an “appropriate” set of service levels, and“meaningful” pricing constructs

from a supplier viewpoint, services among customers may be less fungible than in the IT area and variability in service delivery and pricing may be more difficult

from a customer viewpoint, understanding your own costs (and the supplier’s price) is more difficult since you are focused on outputs (the service delivered) and may have substantially less insights about the inputs (people, hardware, software, etc.) that drive cost and price

The IT outsourcing model does provide guidance, but brings to BPO the same baggage currently troubling IT outsourcing and does not sufficiently address the number of “one-off” activities inherent in people-based work

The Exult example

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Offshore outsourcing

Currently, hottest outsourcing activity separately, or

as part of a fuller scope outsourcing transaction

The major players are segmented between the integratorsand the native, pure-play offshore outsourcers TCS Consulting

HCL Technologies

Infosys

Major issues ability to scale operations

business continuity

confidentiality and non-disclosure

over-zealous competition

Wipro

Cognizant

Satyam

iGate

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Key Factors leading to Offshore Popularity

Globalization – companies with globally integrated delivery models have significant competitive advantage

Economic downturn leading to cost reduction mandates

Offshore has become an established business practice (in applications area) cost, quality, and productivity have been optimized by offshore service

providers mitigating risks for customers

Advances in telecommunications and other infrastructure

IP protection from governments in offshore locations

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What’s different?

Offshore!!! But, what does that mean? applications development and maintenance -- yes

back-office, paper-intensive processes -- yes

call centers, help desks, etc. -- yes, but (Dell experience)

these functions are generally all client focused

More importantly, offshoring is fundamentally changing how suppliers provide and deliver their services this is part of the suppliers’ response to the issues previously noted

may not be a direct challenge to indigenous Indian providers

key: in what manner and how effectively do the Tier 1 providers adopt and embrace offshore supply?

potentially, may impact clients

political objections to offshoring are serious, cannot be ignored, but ultimately will not impede the trend to offshore supply

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Outsourcing vs. Offshoring: The Marketplace

Domestic outsourcing is an established business practice in the areas of infrastructure systems management and applications management

Domestic outsourcing service providers are positioning themselves in business process outsourcing (BPO)

Offshoring is an established business practice in applications area

Offshore service providers are repositioning themselves in business process outsourcing

Domestic outsourcing service providers are establishing offshore centers to provide increased cost savings

Offshore service providers are establishing alliances with local companies to expand their footprint

Domestic outsourcing service providers now consider the top offshore service providers as a competitive threat

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Outsourcing vs. Offshoring: Transaction Structure

Outsourcing typically involves the transfer of people, hardware, software and third-party contracts

Offshoring typically does not involve the transfer of assets

Knowledge transfer is a mature process and, while not trivial, is not viewed as high risk

Knowledge transfer is a key element of both service and price, and is especially important since people often do not transfer

Arrangements usually are very long-term (7-10 years) and substantial efforts are made to develop a comprehensive SOW

Contracts are often short- to medium-term (3-5 years) and SOW’s are developed as needed

Termination is not easy (legally or practically) and can be quite expensive

Termination is often straight-forward (both legally and practically) without significant cost

Domestic jobs are usually not lost Domestic jobs are almost always lost

AssetTransfer

KnowledgeTransfer

Term;SOW

Termination

Jobs

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Sourcing

All companies source goods and services

The “make-or-buy” decision is a fundamental issue in all sourcing options

Sourcing is carried out over a continuous spectrum of sourcing alternatives

A sourcing strategy represents a structured and disciplined approach to: Identifying the key goods and services needed by a company to

perform its important processes

Evaluating the make-or-buy decision for those key goods and services

And, where the decision is to procure particular goods or services, determining the optimal procurement strategy

The objective of any sourcing strategy is to create value

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Sourcing spectrum

Procurement Delivery Management

In-house delivery: vendor provides some factors of production (or the inputs)

Contracting-out: vendor

provides some outputs

Outsourcing: vendor

delegated responsibility for performing major part of service

Employee responsibility; contractual performance based on timeliness of delivery and rudimentary quality of deliverable

Responsibility mixed between employee and vendor; service level performance for the specific outputs provided

Vendor responsibility; comprehensive performance standards tied to ultimate service delivered; rewards and penalties for failure to deliver results

Employer-employee relationship; annual budgeting process; maybe strategic information system plan

Focus on number and types of vendors; contract administration central

Paradigm shift to managing results rather than methods; has been surprisingly difficult to achieve

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Before scope can be defined, a wide range of objectives need to be identified…

… as well as the constraints

Sourcing strategy

A. StrategicRelationship Expectations

B. TacticalSourcing Expectations

C. OperationalDelivery Expectations (IT example)

Leverage tolerance Integration capabilities Operational involvement

Enable an acceleration in the pace of change

Identify solutions to achieve lower costs

Provide continuous access to leading edge processes, products, services, etc.

Improve capacity management of CPUs and storage

Reduce expense and/or need for software licenses

Improve performance levels on client-facing activities

Bring best practices to the operation

Simplify and strengthen the security perimeters

Exam

ple

s

Operational Financial Audit

Legal / Regulatory Cultural Geographic

etc.

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Sourcing strategy

Many of the strategic objectives can be facilitated by understanding three components

Differentiation

Positions itself to serve specific attributes important to buyers

Differentiation can be achieved through the product, its delivery system, marketing approach, etc.

Rewarded with a premium price

CostLeadership

Low cost producer Uses economies of scale, proprietary technologies, etc.

to achieve the cost advantage Typically standardized, no frills products

Identify the competitive model of the enterprise to understand the

Environment in which the operation exists

Contributions the operation are expected to deliver

Com

petitiv

e M

od

els

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Sourcing strategy

Centralized DecentralizedAccount

ManagementShared

Services

Identify the delivery model (current or future) to

Create linkage between the operation and the business units or geographies it serves

Describe the environment in which the sourcing must perform

Delivery Models

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Sourcing strategy

S C

C

CC

S S S S S S C C C

Integration

Delivery

C Customer

S Supplier

Relationship Management

Solution Management

GovernorSupplier

IntegratorSolution

IntegratorBuilder - Operator

CustomerView

Given the competitive model and the delivery model, identify the appropriate sourcing management structure to help determine the

Sourcing strategy to achieve the desired outcome

Change management activities

Procurement and contract documents

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“Lessons Learned” – The Key Elements

Outsourcing is all about shifting risks from client to supplier Performance/delivery risks

Pricing risks

Business risks

An understandable product Comprehensive scope descriptions

Meaningful service level commitments

Simple but variable pricing

Flexible terms and conditions

Commitment to client success and customer’s success

Demonstrable supplier capabilities Corporate track record

Management; especially project management skills

A willingness to “partner”

IT capabilities and experience

Where relevant, global extent

Bench strength; not just more people

“Consulting” capabilities; a mechanism to efficiently deliver value

A governance structure that is: Understandable Relates to the client’s organization Produces results within the supplier

organization

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“Lessons Learned” – Process

Effective use of competition creates the optimum environment to select from each supplier’s best offering to yield the best value package

Emphasize value in the selection process, not just price

Various suppliers have the capacity to meet your needs

Time driven processes may not yield the best value

Start with an appropriate supplier-base; down select when there is sufficient information to differentiate the top two competitors

Emphasize early and frequent communications with suppliers; bring them in regularly for updates and to ensure they are responding at the best of their ability

Kick-off the process as soon as scope is reasonably defined; conduct a supplier meeting to review scope and process and set the calendar

Manage to the announced calendar

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“Lessons Learned” – Substance

Select a supplier with the values and rapport needed to maintain and enhance an effective relationship over time

These deals are about technology and delivery capability and capacity

Prepare, circulate and gain acceptance of the goals and objectivesdesired by the business; align the transaction with those goals andobjectives

Focus on the supplier’s technical/commercial solution (how does thesupplier intend to deliver the services?); document that solutionand not some generic view of the services

Identify the small handful of key metrics that characterize good service and use those as the core for service level agreements

Keep the pricing simple; ensure that the pricing algorithms properly align your objectives and the supplier’s incentives

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“Lessons Learned” – Post Contract

As much as possible, the individuals who will manage delivery for you should be involved in the negotiations

Improperly crafted control and governance model implemented

Insufficient, unempowered and improperly trained management of the supplier by the customer

Unwillingness to hold the supplier accountable to the provisions of the agreement

Lack of alignment between the supplier and customer goals and objectives “Too good” a deal on either side

Customer inability to maintain surrogates for competition post implementation

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Shaw Pittman

Where Law, Business and Technology Converge

Full service

Transactionally focused

Nearly 400 professionals

Aviation Financial Services Intellectual Property

Bankruptcy Global Sourcing International Trade

Communications Government Contracts Litigation

Corporate & Securities Government Relations Nonprofit Organizations

Employment Life Sciences Real Estate

Energy Immigration Tax

Environmental Insurance Coverage Technology

Soon to be Pillsbury Winthrop Shaw Pittman LLP

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Global Sourcing

Serving sourcing customers Private Public

Addressing the full lifecycle of sourcing Design Build Operate

Over 100 professionals with the needed skill sets Legal Consulting Finance

Operating globally from four sites

Washington

DCNew York

NYNorthern California

CALondon

UK

Creating Successful Sourcing Relationships

SPGS provides integrated business and legal sourcing adviceand assistance on complex technology-enabled transactions

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IT InfrastructureIte

m P

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ssin

g IT A

D/M

HR

F&

A

Real E

state

Procurem

ent

Call C

enter

Energy

Car

d P

roce

ssin

g

Mor

tgag

e S

ervi

cing

Tra

de P

roce

ssin

g

Mar

ket D

ata

Pol

icy

Ser

vici

ng

Cla

ims

Pro

cess

ing

Banking

Distribution

Financial Services

Government

Health

Life Sciences

Hospitality

Manufacturing

Retail

Transportation

Utilities

Global Sourcing

Uniquely approaching customer-based sourcing initiatives

Industries

Horizontals

Verticals

Outsourcing

Software Licensing

Systems Development and Integration

Business Process Reengineering

Intellectual Property

Human Resources and Employment Law

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Background • Where SPGS serves

Strategic Tactical Operational

Design Build Operate

Busine

ss Strategy

Ope

rational Strategy

Sou

rcing S

trategy

Sou

rcing T

ransaction

Org

anizational Ch

ange

Process R

eengineering

Syste

ms In

tegration

Ope

rations

SPGS Services SPGS Services

Spectrum of Professional Services

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Background • Where SPGS serves

Mosaic complements our customers’ processes of operationalizing major change initiatives

Facilitating change through efficient sourcing design and procurement

SPGS Services

ChangeDevelopment

SourcingStrategy

SupplierSelection

Delivery

Change Initiatives– Vision– Objectives– Requirements– Constraints– Benefits

InitiativeSelection

Approved Initiatives– Analysis– Recommended

approach– Financial impact

statement

Approved Transactions– Sourcing structure– Roadmap– Inter-transaction

requirements– Delivery

responsibilities– Procurement

methods

SourcingTransactions

Approved Suppliers– RFPs– Supplier proposals– Down-select

suppliers– Business terms– Business cases

Services Agreements– Terms and

conditions– Statements of work– Service measures

and levels– Pricing

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Global Sourcing

1988 FIRSTLarge-Scale ITOFirst City Bank

1991 FIRSTMulti-Billion Dollar ITOContinental Airlines

1994 FIRSTNetworking Joint Venture and ITOAir Canada

1995 FIRSTWhole-of-Government ITOState of South Australia

1996 WATERSHEDAlliance-Based ITOJ.P. Morgan (Pinnacle Alliance)

1998 LANDMARKSale of Outsourcing BusinessGE Capital

Producing the milestone transactions in the outsourcing industry

1999 FIRSTLarge-Scale Procurement BPOANZ Bank

1999 LARGESTNetworking and ITO ($12B)WorldCom

1999 FIRSTGlobal HR BPOExult (BP Amoco)

2000 LARGESTPublic Sector Outsourcing ProgramCommonwealth of Australia

2001 LARGESTManaged Services NetworkEquant

2002 TWO LARGESTFinancial Services “Utility-Type” ITOAmerican Express ($4B) / JPMorgan Chase ($5B)

2003 LARGESTEuropean Policy Administration BPO Royal & Sun Alliance

2003 FIRSTValueChain-based Large-Scale ITOToronto-Dominion Bank

2004 LARGESTEuropean “Second Generation” OutsourcingInland Revenue (UK)

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Global Sourcing

An integrated team of attorneys and consultants that advises clients on all phases of the sourcing process

The most experienced firm in the business – architecting the largest outsourcing projects and strategic alliances

Over 450 transactions across a premier customer base worth more than US $350B

15 years’ experience in complex sourcing transactions

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Global Sourcing

Financial Services

American Express

ANZ Bank

Citibank

CNA Insurance

Continental Bank

Deutsche Bank

Dun & Bradstreet

Equifax

Fannie Mae

Fireman’s Fund Insurance

GE Capital

JPMorgan Chase

Merrill Lynch

Morgan Stanley Dean Witter

Old Mutual Life Insurance

Royal and Sun Alliance

Toronto-Dominion Bank

UBS

Manufacturing

Apple Computer

BASF

Bethlehem Steel

BHP Billiton

Borden Foods

BorgWarner

Eastman Kodak

Ford Motor Company

General Electric

Great Lakes Corporation

Iomega

Kubota Tractor

LTV Steel Company

Owens-Corning

Philips Electronics

Polaroid Corporation

Solectron

Xerox

Health & Life Sciences

AstraZeneca

Aventis Pharmaceuticals

BlueCross & BlueShield of MD.

BlueCross & BlueShield of MA.

Bristol-Myers Squibb

Children’s Hospital of L.A.

Eli Lilly

Faulding

Georgetown Univ. Medical Ctr.

GlaxoSmithKline

Howard Hughes Medical Center

NASCO

Northwestern Memorial

Oshner Health Plan

Oxford Health Plan

Tufts Health Plan

WellChoice

Transportation / Hospitality

Amtrak

Air Canada

Continental Airlines

CSX Transportation

Delta Airlines

ITT Sheraton

Marriott International

Norwegian Cruise Lines

Starwood Hotels & Resorts

Retail / Distribution

Ann Taylor

Canadian Tire

Federated Department Stores

Gap

Goodyear Tire & Rubber

J.Crew

Nike

Pathmark Stores

SUPERVALU

Thrifty Drug Stores

Advisor to many of the world’s leading companies

it outsourcing 2005

Technology

outsourcing services

s o u r c i n g delivery

s o u r c i n g copyright

outsourcing model

outsourcing relationships

outsourcing customers

outsourcing paradigm

strategic outsourcing