it outsourcing 2005
TRANSCRIPT
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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G L O B A L S O U R C I N G
The Eclectic Agenda
Marketplace Perspectives Overall analysis - the “Big Picture”
ITO
BPO
Offshoring
Sourcing Strategy
Lessons Learned
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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
“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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G L O B A L S O U R C I N G
“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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G L O B A L S O U R C I N G
“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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G L O B A L S O U R C I N G
“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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G L O B A L S O U R C I N G
Shaw Pittman
Where Law, Business and Technology Converge
Full service
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Nearly 400 professionals
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Soon to be Pillsbury Winthrop Shaw Pittman LLP
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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
IT InfrastructureIte
m P
roce
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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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G L O B A L S O U R C I N G
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