Setting Expectations for Outsourcing Cost Savings. Peter Allen Chris Kalnik

Transcription

1 Web Exchange Market Education Series Setting Expectations for Outsourcing Cost Savings Presented by: Peter Allen Chris Kalnik June 22,

2 Session Agenda Introductions and Stage Setting Financial Considerations in Outsourcing Historical Metrics Discussion 2

3 TPI Credentials Unique Capabilities: 18 years of experience and a wealth of market and Service Provider data makes our guidance credible and timely Real-world Expertise: A deep bench of skilled advisors (350+) allows TPI to put the right team on every project every time Value: Transactions average savings of 15 percent; virtually 100 percent of clients say they are satisfied Speed-to-Results: Rapid deployment of cost-effective, streamlined service delivery models Risk Mitigation: Enduring solutions; mitigated operating risk and minimal business disruption 3

4 Peter Allen Meet The Experts Partner and Managing Director for Market Development Market Research & Intelligence Sourcing Industry Relations TPI Index Over 20 years of industry participation Service delivery to corporate governance SG&A operational and cost effectiveness Technology-enabled business support functions including Shared Services. Industry spokesperson for TPI The Wall Street Journal, Business Week, Forbes.com, American Banker, Asia Pulse, Computerworld CNN/fn and NBC Nightly News 4

5 Chris Kalnik Meet The Experts TPI's Chief Knowledge Officer and Financial Analysis Practice Lead Responsible for approval of TPI's tools and methodologies Skilled in analysis of complex financial transactions Expert leadership in developing innovative pricing mechanisms Over 22 years of industry participation Provides clients with expert financial advice and negotiating knowledge Has worked with major national and international companies in telecommunications, forest products, energy, healthcare, retail, insurance, manufacturing and transportation industries Recent clients include Aetna, BellSouth, Duke Energy, Federated Systems Group, Kroger, Royal & SunAlliance 5

6 Discussion Roadmap When evaluating outsourcing, corporations need a clear understanding of Service Provider pricing and the cost savings that are reasonably achievable and which are considered relative to an understood baseline. 6

7 Financial Considerations in Outsourcing 7

8 How to Look at Current Costs While there are various ways to interpret current costs, our experience shows that a comprehensive projection informed by industry expertise is essential. Building a financial Base Case Factoring investments Making productivity, growth, and other assumptions Projecting over the proper time horizon Contrasting projections against a budget 8

9 Outsourcing Evaluation Building Blocks An outsourcing proposition includes a multitude of components, each related to the others; the business case is not complete without the full picture. Business and Legal Terms HR Provisions Financial Base Case Case Statement of Work Governance Model Pricing Proposals Service Level Agreements Current Environment Description Definitions Request for Proposal / Offer Document 9

10 Financial Base Case Financial Base Case plays the following role in an outsourcing evaluation: Provides projected internal costs for the period of the proposed sourcing transaction Provides the financial information required by the service providers for the sourcing proposal and analysis Provides the basis against which the service providers proposals will be evaluated Includes client-retained, service provider-assumed, and passthrough costs An essential element of the sourcing Business Case HR Provisions Financial Base Case Statement of Work Business & Legal Terms Current Environment Description Definitions Governance Model Pricing Proposals Service Level Agreements Request for Proposal / Offer Document 10

11 Financial Base Case Components Category Base Year Year 1 Year 2 Year n 10 Direct Staff - Overhead Direct Staff - Countable Consultants - Countable Total Category Base Year Year 1 Year 2 Year n 10 Salary Direct 0 Staff - 0Overhead 0 0 Fringe Benefits Direct 0 Staff - 0Countable 0 0 Other (salary related) 0 Consultants 0-0Countable 0 Contractors 0Total Facilities / Premises Category0 0 0 Base Year 0 Year 1 Year 2 Year n 10 Training Salary Direct Staff 0 - Overhead Telecommunications Fringe 0 Benefits Direct Staff 0 - Countable Furniture Other 0 (salary 0related) 0 0 Consultants 0 - Countable Equipment Contractors Total Category Base 0 Year Year 1 Year 2 Year Year n 10 Travel and expenses Facilities 0 / Premises Data Center Training Salary Direct 0 0Staff - Overhead Other Telecommunications Fringe Benefits Direct 0 0Staff - Countable Other Furniture Other (salary 0 related) 0 0 Consultants Countable Equipment Contractors Total 0 Travel and expenses Facilities 0/ Premises Grand Total Data 0 Center Training Salary 0 Other Telecommunications Fringe 0 0Benefits Other Furniture0 0 0 Other 0 0(salary related) Service Provider Assumed + Equipment Contractors 0 Travel and expenses Facilities 0 / Premises Grand Total Data Center Training 0 Other Telecommunications Other Furniture Equipment Pass-Through Travel and expenses Grand Total Data Center Other Other + Client Retained Grand Total = Total Client Base Case 11

12 Resource Usage Assumptions Total Client Base Case Category Base Year Year 1 Year 2 Year 10 n Direct Category Staff - Overhead Base 0 Year Year 0 1 Year 0 2 Year 0 10 n Direct Staff - Countable Consultants Direct Category - Staff Countable - Overhead 0 Base 0Year0 Year Year 0 2 0Year 0 10 n TotalDirect Staff - Countable Consultants Direct Category Staff - Countable - Overhead 0 Base 0 Year0 Year Year 0 2 0Year 0 10 n Salary Total Direct Staff - Countable 0 Fringe Benefits Consultants Direct - Staff Countable - Overhead 0 Other (salary Salary Total related) Direct Staff - Countable 0 0 Contractors Fringe Benefits Consultants - Countable 0 Facilities Other / Premises Salary (salary Total related) 0 0 Training Contractors Fringe Benefits 0 Telecommunications Facilities Other / Premises (salary Salary related) 0 0 Furniture Training Contractors Fringe Benefits 0 0 Equipment Telecommunications Facilities Other / Premises (salary related) 0 0 Travel Furniture and expenses Training Contractors 0 0 Data Center Equipment Telecommunications Facilities / Premises 0 0 Other Travel Furniture and expenses Training 0 0 Other Data Center Equipment Telecommunications 0 0 Other Travel Furniture and expenses 0 0 Other Data Center Equipment 0 Grand Total Other Travel and expenses 0 0 Other Data Center Grand Total Other 0 Other Grand Total Grand Total The Resource Baselines are used in developing long-term projections; they are essential for achieving cost variability through consumption. Client Resource Baselines Base Year 1 Year 2 Year n 10 Active Employees Participating Employees Expatriates Domestic Relocations Electronic Invoices Manual Expense Reports Actively Managed Accounts IDs PBX ports 12

13 Evaluating Outsourcing Costs Pricing from candidate Service Providers Volume-sensitive Resource Units Transition and Transformation Costs Severance Taxes Governance Inflation / Deflation Legal / Advisory Fees 13

14 Service Provider Pricing Client Resource Baselines Base Year 1 Year 2 Year n 10 Active Employees Participating Employees Expatriates Domestic Relocations Electronic Invoices Manual Expense Reports Actively Managed Accounts IDs PBX ports Service Provider s Price Year 1 Year 2 Year n 10 HR Base Price F&A Base Price Base Price Network Base Price The Resource Baselines drive the Service Provider s Price Total Service Provider Base Price Service Provider Transition Price Service Provider Total Price

15 Understand Service Providers Proposals The price each Service Provider proposes must be normalized. Understand scope of services bid by each Service Provider Clarify retained, assumed, and pass-through responsibilities Understand the service levels bid by each Service Provider Understand what s not included in each proposal and the implications Evaluate the benefits and implications of value adds Understand any inflation coverage included in each Service Provider s price and the proposed share ratio if inflation/deflation varies 15

16 Develop Business Case Total Client Base Case Category Base Year Year 1 Year 2 Year n 10 Direct Staff Category - Overhead Base 0 Year Year 0 1 Year 0 2 Year 0 10 n; Direct Staff - Countable Consultants Direct - Countable Staff Category - Overhead 0 Base 0 Year 0 Year 0 10 Year 0 20 Year 0 10 n Total Direct Staff - Countable Consultants Direct - Countable Staff Category - Overhead 0 Base 0 Year 0 Year 0 10 Year 0 20 Year 0 10 n Salary Total Direct Staff - Countable Fringe BenefitsConsultants Direct - Countable Staff - Overhead Other (salary Salaryrelated) Total Direct Staff - Countable Contractors Fringe BenefitsConsultants - Countable Facilities Other / Premises (salary Salaryrelated) Total TrainingContractors Fringe Benefits Telecommunications Facilities Other / Premises (salary Salaryrelated) Furniture TrainingContractors Fringe Benefits Equipment Telecommunications Facilities Other / Premises (salary related) Travel and Furniture expenses TrainingContractors Data Center Equipment Telecommunications Facilities / Premises Other Travel and Furniture expenses Training Other Data Center Equipment Telecommunications Other Travel and Furniture expenses Other Data Center Equipment Grand Total Other Travel and expenses Other Data Center Grand Total Other Other Grand Total Grand Total Client Resource Baselines Base Year 1 Year 2 Year n 10 Active Employees Participating Employees Expatriates Domestic Relocations Electronic Invoices Manual Expense Reports Actively Managed Accounts IDs PBX ports Service Provider s Price Year 1 Year 2 Year 10 n With these inputs, the Client can develop the Business Case HR Base Price F&A Base Price Base Price Network Base Price Total Service Provider Base Price Service Provider Transition Price Service Provider Total Price

17 Develop Total Cost of Sourcing Total Client Base Case Category Base Year Year 1 Year 2 Year N10 Category Base Year Year 1 Year 2 Year N10 Direct Staff - Overhead Direct Staff - Countable Direct Staff Category - Overhead 0Base Year 0 Year 1 0 Year 2 Year 0 N10 Consultants - Countable Direct Staff - Countable Total Category Base 0 Year 0 Year 0 10 Year 0 2 Consultants Direct - Countable Staff - Overhead 0 0 Year 0 0 n10 Total Direct Staff - Countable Salary Direct Staff - Overhead Consultants - Countable Fringe Benefits Direct Staff - Countable Salary Total Other (salary related) Consultants - Countable Fringe Benefits Contractors Total Other (salary Salary related) Facilities / Premises Contractors Fringe Benefits Training Salary Facilities / Other Premises (salary related) Telecommunications Fringe Benefits Training Contractors Furniture Other (salary related) Telecommunications Facilities / Premises Equipment Contractors Furniture Training Travel and expenses Facilities / Premises Equipment Telecommunications Data Center Training Travel and Furniture expenses Other Telecommunications Data Center Equipment Other Furniture Other Travel and expenses Equipment Other Data Center Travel and expenses Other Grand Total Data Center Other Other Grand Total Other Grand Total Service Provider s Price Year 1 Year 2 Year n 10 HR Base Price F&A Base Price Base Price Network Base Price Total Service Provider Base Price Service Provider Transition Price Service Provider Total Price Grand Total Client Retained and Pass-Through Costs Category Base Year Year 1 Year 2 Year n10 Other Client Costs Category Base Year Year 1 Year 2 Year 10 n Service Provider s Price Category Staff - Overhead Base 0Year Year 0 1 Year 0 2 Year 0 10n Direct Direct Staff - Countable Consultants Direct - Staff Countable - Overhead TotalDirect Staff - Countable Consultants - Countable Salary Total Benefits Fringe Other Salary (salary related) Contractors Fringe Benefits Facilities Other / Premises (salary related) Training Contractors Telecommunications Facilities / Premises Furniture Training Equipment Telecommunications Travel and expenses Furniture Center Data Equipment Travel and Other expenses Data Center Other Other Other Total Grand Direct Staff - Overhead Direct Staff - Countable Consultants - Countable Total Salary Fringe Benefits Other (salary related) Contractors Facilities / Premises Training Telecommunications Furniture Equipment Travel and expenses Data Center Other Other Grand Total Year 1 Year 2 Year 10 n HR Base Price F&A Base Price Base Price Network Base Price 0 0 0= Total Service Provider Base Price Service Provider Transition Price Service Provider Total Price Total Client Costs of Sourcing with a candidate Service Provider Grand Total 17

18 Savings Analysis Total Client Base Case Category Base Year Year 1 Year 2 Year 10 n Direct Category Staff - Overhead Base 0Year Year 0 1 Year 0 2 Year 0 10 n Direct Staff - Countable Consultants Direct Staff Category - Countable - Overhead Base 0 0 Year Year Year Year 0 n 10 Total Direct Staff - Countable Consultants Direct - Staff Category Countable - Overhead 0 Base 0 Year 0 Year Year Year 0 n 10 Salary Total Direct Staff - Countable 0 Fringe Benefits Consultants Direct - Staff Countable - Overhead 0 Other Salary (salary related) Total Direct Staff - Countable Contractors Fringe Benefits Consultants - Countable Facilities Other / Premises (salary Salaryrelated) Total Training Contractors Fringe Benefits 0 Telecommunications Facilities Other / Premises (salary Salaryrelated) Furniture Training Contractors Fringe Benefits Equipment Telecommunications Facilities Other / Premises (salary related) Travel Furniture and expenses Training Contractors Data Center Equipment Telecommunications Facilities / Premises Other Travel Furniture and expenses Training Other Data Center Equipment Telecommunications Other Travel Furniture and expenses Other Data Center Equipment Grand Total Other Travel and expenses Other Data Center Grand Total Other Other Grand Total Grand Total Versus Service Providers TCOS Total COMPANY XYZ Total Costs COMPANY of Sourcing XYZ Total Costs Costs withofof Supplier Sourcing A with (TCOS) Supplier with each A Service Provider Savings after normalization Savings without financial engineering Savings comparisons with Base Case and other Service Provider s proposals Cumulative savings analysis NPV of savings 18

19 Metrics 19

20 Outsourcing Transactions: Historical Results We ve evaluated 59 transactions awarded to characterize the range of anticipated cost savings at time of contract award. Sample selected based on completeness of financial data available Represents Transactions comprising $25B of Total Contract Value (TCV) BPO = 27% > $200m = 58% ITO = 73% $50m - $199m = 42% Range of Scope Considered Range of Transaction Size Considered 20

21 Anticipated Net Operating Savings Outsourcing evaluations must consider much more than the pricing offered by a candidate Service Provider. Aggressive Projection of Internal Costs - Total Costs of Sourcing* Net Operating Savings Committed prices at projected volumes + Transition & Transformation + Advisor/Legal fees + Severance + Taxes + Ongoing Governance *Total Costs of Sourcing 21

22 Anticipated Net Operating Savings Summary Results The transactions reviewed yielded 15.2% net operating savings on average. 12 = 0-10% 3 = -4% - 0% 4 = > 30% Range of savings 39% to (4%) mean = 15.2% median = 15.0% Number of transactions in range > 30% 28 = 10-20% 12 = 20-30% 20% to 30% 10% to 20% 0% to 10% -4% to 0% 22

23 How Do Cost Savings Materialize? Actual costs incurred through outsourcing rely on a mixture of contractual commitments and sourcing management competencies. Contractual Savings Opportunities Less expensive labor Economies of scale Facilities Systems / Applications Capital Expense Avoidance Sound Sourcing Management Demand Management Change Management New Services Reduced Complexity Productivity improvements Workflow Standardized Processes Greater Variability / Less Fixed Costs 23

24 Trends in Anticipated Cost Savings Across all transactions analyzed, savings averaged 15.2%. 100% 80% 60% 40% 20% 0% % Savings Generated: TPI Advised Transactions % TCOS % Savings Generated 12.0% 17.6% 16.1% 88.0% 82.4% 83.9% Influencing Influencing Factors Factors Average Average TCV TCV declined declined considerably considerably Lessened Lessened capital capital intensity intensity Increased Increased use use of of offshore offshore resources resources Multi-sourcing Multi-sourcing strategies strategies Shorter Shorter contract contract terms terms for for ITO ITO deals deals Inherent Inherent floor: floor: Generally, Generally, transactions transactions are are not not awarded awarded without without at at least least 10% 10% cost cost savings savings Year Total TCV Total Provider- Assumed Base Case Total Cost of Sourcing Savings Savings Generated as a % of Base Case Sample Size Average Transaction Size ($) 2003 $10,847,105,949 $16,331,164,000 $14,377,664,000 $1,953,500, % 18 $600m 2004 $6,996,537,079 $15,921,149,000 $13,126,710,000 $2,794,439, % 20 $350m 2005 $7,939,345,221 $14,991,064, 000 $12,575,824,000 $2,415,240, % 21 $378m Total $25,782,988,249 $47,243,377,000 $40,080,198,000 $7,163,179, % 59 $437m 24

25 TPI-Advised Transactions: ITO Recent ITO transactions, comprising infrastructure and applications services, generate average net operating cost savings greater than 15%. 100% 80% 60% 40% % Savings Savings Generated: Generated: TPI TPI Advised Advised Transactions Transactions % TCOS % Savings Generated 12.0% 88.0% 20.6% 15.8% 79.4% 84.2% Observations Observations of of Analyzed Analyzed Transactions Transactions Recent Recent increase increase in in average average transaction transaction size size In In 2003, 2003, mega mega deal deal with with minimal minimal savings savings depressed depressed average average 20% 0% Year Total TCV Total Provider- Assumed Base Case Total Cost of Sourcing Savings Savings Generated as a % of Base Case Sample Size Average ITO Transaction Size ($) 2003 $10,337,105,949 $15,584,316,000 $13,710,422,000 $1,873,894, % 16 $646m 2004 $5,370,212,079 $12,638,916,000 $10,040,100,000 $2,598,816, % 14 $383m 2005 $6,178,284,221 $11,895,669,000 $10,014,967,000 $1,880,702, % 13 $475m Total $21,885,602,249 $40,118,901,000 $33,765,489,000 $6,353,412, % 43 $508m 25

26 TPI-Advised Transactions by TCV Band On average, smaller transactions generate 13.4% in net operating in savings, versus 15.3% on average. % Savings Savings Generated: Generated: TPI TPI Advised Advised Transactions Transactions % Savings Savings Generated: Generated: TPI TPI Advised Advised Transactions Transactions % TCOS % Savings Generated % TCOS % Savings Generated 100% 80% 13.4% 8.4% 21.7% 100% 80% 11.9% 18.9% 15.6% 60% 40% 86.6% 91.6% 78.3% 60% 40% 88.1% 81.1% 84.4% 20% 20% 0% % Average transaction size: $127m Average transaction size: $710m 26

27 Actual Results Will Differ from Expected Informal surveys reveal that most companies find it difficult to compare actual results with those originally expected. Change Orders / New Services Volumes / Consumption Shadow Organizations Inflation / Deflation Corporate Structural Changes 27

28 Summary of Key Points While actual results will differ from expected, in general the historical transactions evaluated yield a relatively consistent range of anticipated cost savings. Build a complete Business Case using a multi-year Financial Base Case Realistic consideration of the internal option Evaluate outsourcing alternatives in various contexts Scope Duration Service Provider offerings Set expectations internally and understand why proposals may vary from the norm Over-aggressive pricing may be a sign of operational risks 28

29 How to compare apples to oranges What to expect in the way of net average operating cost savings Critical levers to achieve those results in practice Discussion 29

30 To Learn More To learn more, please contact Peter Allen Partner and Managing Director for Market Development Chris Kalnik Partner and Chief Knowledge Officer

31 Additional Resources TPI offers additional insight and information on a range of service delivery topics Next TPI Summer Series WebExchange Remote Infrastructure Management 29 June, 2006, 10:00 AM Eastern Register: New! Look out for our July inaugural issue of the TPI Platform, a monthly e-newsletter to receive, send us your address: platformsubscribe@tpi.net Visit our website: 31

32 Thank you for attending this TPI WebExchange 32