Innovative Outsourcing Deal Structures by Trowbridge Group Innovative Outsourcing Deal Structures by Trowbridge Group Innovative Outsourcing Deal Structures by Trowbridge Group, Ben Trowbridge, CEO & Managing Partner, Trowbridge Group, outsourcing, innovative, January 25, 2005

1. Innovative Outsourcing Deal Structures
that Change the Rules and Unlock Value
SIG New York Regional Meeting
January 25, 2005
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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?
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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 illill prepared to follow
However, most Executives are 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
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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
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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
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6. JVsourcing Structure & Contract
Traditional Outsourcing 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
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7. Risk/Reward Sharing (50/50% JV)
Loss Breakeven Profit
0 % Net Income 0 % Return 50 % of
Vendor
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.
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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)
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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
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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.
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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
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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.
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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?
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14. Ben Trowbridge
CEO & Managing Partner
Email: bt@TrowbridgeGroup.net
Trowbridge Group, Addison Park Place, 4560 Beltline Road, Suite 330, Addison TX 75001
Tel: 214-696-6410 Fax: 214-239-0698
www.TrowbridgeGroup.net
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