September 2–3, 2004Royal Sonesta Hotel New OrleansNew Orleans, LA

State of the Business Process Outsourcing(BPO) Industry

September 3rd, 2004

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Mark B. Hodges – Chairman & Foundermark.hodges@equaterra.com; 281-733-0263

EquaTerra – co-founded the first sourcing lifecycle management company. Assists clients in the assessment of internal transformation (e.g. shared services) vs. external BPO including Outsourcing Centers of Excellence.

Exult – played key executive roles in creating the first comprehensive, global HR and F&A outsourcing company. TPI – founded and led their BPO practice. GartnerGroup – advised emerging and mature BPO and ITO services companies. G2 Research – advised companies on commercialization of their business functions into outsourcing companies.

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EquaTerra Overview

We support the G & A process improvement lifecycle…

Knowledge & Knowledge & EducationEducation

Knowledge & Knowledge & EducationEducation

Strategy & Strategy & AssessmentAssessment

Strategy & Strategy & AssessmentAssessment

Insource or Insource or OutsourceOutsourceAdvisoryAdvisory

Insource or Insource or OutsourceOutsourceAdvisoryAdvisory

GovernanceGovernanceGovernanceGovernance

G & A Processes - Human Resources, Finance & Accounting, Information Technology, Procurement, CRM

Across Industries - Manufacturing, Consumer Products, Utilities, Energy, Financial Services, Healthcare, Public Sector, etc.

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Content Overview

Why are Corporations Signing BPO Contracts?

State of the BPO Market

A Pragmatic Approach for Evaluating BPO for your Company

Realizing the BPO Business Case: Governance

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Why are Corporations Signing BPO Contracts?

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Lack of resources and focus for process improvement

Shareholders and stock price pressures

Lack of capital for ERP investments

Change: M&A, divestitures, contraction, growth

Focus on value added, business partner activities

The denominator (# of employees) keeps getting smaller

Regulatory pressures

BPO Demand Catalysts

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What are the Alternatives to BPO? Continue course of existing services with additional cost reduction:

• reduction of people and administrative products and processes• service improvement within corporate staff functions and • “captive” offshoring

Continue opportunistic outsourcing with individual process providers

Substantial investment in technology to further enable MSS and ESS and reduce G&A FTEs

Change G&A functional grades and pay structure and benefits structure (market-based vs industry-based)

Do nothing

Comprehensive BPO

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Systems

Administration

Consultative

Governance

Legend: = Client = BPO Provider

Process Examples

Strategy Governance Policy Decisions

Expertise Development Reengineering Innovation

Systems Technology Transactions Infrastructure

Operations Administration Execution Context

= Collaborative

Process Layers

In-Scope Functions for BPO | Exiting the Administrative Transactions Business

Finance & Accounting

Human Resources

ProcurementInformation Technology

Other

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Guaranteed cost savings on 7-10 year contract

Cost savings of 15% - 25% vs. existing baseline costs

BPO provider funds transition costs for in-scope processes

Provider makes investments in ERP technology and other technology applications

Savings can be front loaded or begin after the transition of each process

BPO provider often assumes employee and process costs post transition of each process

BPO provider takes responsibility for IT personnel, systems hosting and ongoing maintenance costs

Client retains ERP license costs

Overall implementation timeframe often 12-24 months faster than internal transformation

The BPO Value Proposition is Compelling

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State of the BPO Market

The HR Function | 23 Processes

Compensation Benefits (DC,

DB, H&W) Payroll Travel &

Expense

Compensation,

Benefits & Rewards

Data Records and Management

HRIT/HRIS Employee &

Manager Self Service

Workforce Analytics

Employee Data Management

Recruiting, Staffing & Resourcing

Expatriate Administration

Domestic Relocation

Workforce Deployment

Severance Administration

Workforce Planning & Deployment

HR Strategy Labor &

Employee Relations

3rd Party Vendor Management

Employee Communications

Policy & Legal Compliance

Human Capital

Services

Organizational &

People Development

Organizational Development

Performance Management

Training Employee

Development Succession

Planning

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HR – What Can be Outsourced?

“Consultative” Activities

“Strategic” Activities

Standardization/Efficiency/Defined Service

Management Involvement/Knowledge Transfer

SpecificDivision/Location

Generic/Companywide

• Site specific policy development

• Site specific employee relations

• Substance Abuse Testing

• Vendor Management

• Learning Administration

• ESC and Tier 0/1 Inquiries

• Severance/Outplacement

• Payroll and T&E Administration

• Relocation/Expatriate Admin.

• Compensation Administration

• Benefit Administration

• HRIS/HRIT & Data/Records

• Staffing Administration

• Organizational Development

• Compensation Design

• Benefits Design

• Learning Development

• Succession Planning

• Performance Management

• Staffing Policy and Tools

• Communications Development

• HR Strategy

• Workforce Planning

• Talent Management

• Labor Relations

• Policy & Legal Compliance

“Transactional” Activities

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Since 1999, Many Corporations Have Adopted HRO American Express (Mellon)

Avaya BASF (Mellon) AT&T Bank of America Bank of Montreal BC Hydro British Aerospace British Petroleum British Telecom Cable & Wireless CIBC Circuit City Dynegy Equifax Fifth Third Bancorp (Convergys) Fleet Boston Gateway

Goldman Sachs GE General Motors Goodyear IBM International Paper Lincoln National Lockheed Martin (Mellon) McKesson Medco Motorola Procter & Gamble Prudential Financial Rohm & Haas Sony Telecom Italia Unisys Williams

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The Universe of Potential HRO Providers

AON

Arinso

Deloitte

Fidelity (FESCO)

Hewitt

IBM

Mellon

Spherion

SnHRgy

Towers Perrin

Xchanging

Offshore Players

Private Equity Firms

ACS

ExultAccenture

EDS

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The Finance & Accounting Function 33 Processes

Accounts Payable

Accounts Receivable

Travel & Expense Reporting

Leases Credit

Transaction Managemen

t

General Ledger Accounting

Revenue/ Cost Accounting

Debt/ Equity Accounting

Statutory Accounting

Business Unit Accounting

General Accounting

Tax Compliance & Planning

Reverse Audits

Tax Consulting & Compliance

Financial Accounting & Reporting

ERP or Financial System

Financial Reporting &

Data

Policies & Procedures

Controls & Design

Controls Implementation

Internal Audit Services

BusinessContinuity Planning

Business Process Risk Assessment

Risk Managemen

t

Transaction Analysis

Exception Reporting & Resolution

Financial Analysis

Operating Budgets

Capital Investments

Treasury Functions

Debt Equity Financing

Cash Management

Performance Analysis

Financial Management

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Standardization/Efficiency/Defined Service

Management InvolvementKnowledge Transfer

SpecificDivision/Location

Generic/Companywide

• Inventory Accounting

• Cost/Plant Accounting

• Sales/Marketing Accounting

• Site specific analysis

• Project accounting

• Senior Finance Management

• Financial Analysis

• Financial Planning

• Management Reporting

• Budgeting/Forecasting

• Credit Policy

• Accounts Payable

• Travel and Entertainment

• Fixed Asset Accounting

• Accounts Receivable/Collection

• General Accounting

• Payroll Processing

• Employee Administration

• Cash Application

• Banking and Cash Management

• Billing

• Tax Compliance/Planning

• Internal Audit

• Banking

• Risk Management

• Treasury Management

• External & Statutory Reporting

Methods of Adding ValueMethods of Adding ValueMethods of Adding ValueMethods of Adding Value

Process Process CharacteristicsCharacteristics

Process Process CharacteristicsCharacteristics

F&A Services | What Should be Retained?

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Leading F&A BPO Providers

Accenture

ACS

Cap GeminiErnst & Young

Creditek

Deloitte Consulting

EDS

Exult

EquitantEquitant

GE

OPI PwC (IBM)

SourceNet Solutions

Unisys

Xansa

HP

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F&A BPO Providers | New Entrants

Perot Systems

Ephinay

EXL

WNS

HP

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A Pragmatic Approach to Evaluating BPO For

Your Business

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STAGE 3Bid Evaluation,

Negotiation and Transition

(6 – 8 weeks)

A Staged Approach | Stages 1, 2 & 3

Get these right, the first time . . .

STAGE 2Relationship Development

and Structuring

(8 – 10 weeks)

STAGE 1Analysis, Education,

RFI and Sourcing Strategy

(4 – 6 weeks)

JOINT ACTIVITIES

• Analysis of Costs and Processes

• Education

• Sourcing Strategy

• RFI or RFP

JOINT ACTIVITIES

• Statements of Work

• Service Levels and Volumetrics

• Financial Analysis

• Develop Business Case

• Pricing

• Governance and RM Design

JOINT ACTIVITIES

• Distribute RFP

• Visits by BPO providers

• Reference site visits

• Negotiations

• Governance and RM Build and Implementation

• Transition Planning

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STAGE 3Bid Evaluation,

Negotiation and Transition

(6 – 8 weeks)

A Staged Approach | Stages 4, 5 & 6

Design with the end in mind . . .

STAGE 2Relationship Development

and Structuring

(8 – 10 weeks)

STAGE 1Analysis, Education,

RFI and Sourcing Strategy

(4 – 6 weeks)

JOINT ACTIVITIES

• Analysis of Costs and Processes

• Education

• Sourcing Strategy

• RFI or RFP

JOINT ACTIVITIES

• Statements of Work

• Service Levels and Volumetrics

• Financial Analysis

• Develop Business Case

• Pricing

• Governance and RM Design

JOINT ACTIVITIES

• Distribute RFP

• Visits by BPO providers

• Reference site visits

• Negotiations

• Governance and RM Build and Implementation

• Transition Planning

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Future State Service Delivery

Future State Service Delivery

Current Service Levels &

Volumetrics

EquaTerraKnowledge & Tool

Sets

Future State – Initial Design

BPOProviders – RFI or RFP Approach

ERP Best Practice Maps

Internal Costs & FTE Baselines

Key Inputs

Determining Best Practice Service Delivery for BPO

Inte

rnal

Exte

rnal

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The Definitive BPO Checklist

Statement of Work (process maps, documented activities, future state)

Service Levels, Methodology and Service Level Agreement

Financial Model (5-10 year projection)

Schedules (e.g. existing 3rd party contracts)

List of Likely G&A BPO Providers

Pricing and Charging Units

Exhibits (e.g. in-scope countries, personnel)

Sourcing Strategy

Service Contract and Business Terms

Service Delivery Management

Contract Management

Governance

Financial Management

Pre-RFP

RFP

Governance &

Relationship

Management

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BPO is growing in other functional areas across all major industry segments

11.7%CAGR

Communi-cation

Distribution

Financial Services

Energy &

Industrial

Public

Sectors Opportunity2004

$5 $10 $15 $20 $25

F&A

HR

Proc.

CRM

Solution Areas Opportunity2004

Billions

Source: IBM analysis based on multiple industry sources (Gartner, Dataquest, IDC, AMR)

$10

$20

$30

$40

$37.9B,12% CAGR

$8.9B,15% CAGR

$20.1B,13% CAGR

$21.3B, 15% CAGR

$12.4B

$12.0B

$24.4B

$17.6B

$23.1B

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. . . as more leading corporations adopt BPO

F&A

AFC EnterprisesAirgasANZ BankAT&T Wireless CompaqCiscoFox MediaHewlett PackardHome DepotIngersoll RandMicrosoftVivendi

HR

BASFCable and

WirelessCelaneseCIBCFifth ThirdGoldmanGoodyearIBMMcKessonSonyState of FloridaUnisysUnited Healthcare

IT outsourcing has been in existence since the late 80’s, and is not listed separately. It is included in most of the agreements across areas.

IT, F&A and HR (Two or More)

Bank of AmericaBank of MontrealBarclay’s BankBC HydroBritish

AerospaceBritish

PetroleumBritish TelecommDynegyEquifaxGatewayGeneral MotorsGE

International Paper

LucentMRGMotorolaNortelProcter &

GamblePrudential

FinancialRoyal Dutch

ShellTelecomm ItaliaThomas Cook

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Max

imiz

ing

Cos

t Sav

ings

Service Delivery Model

In-Scope Employees

Technology

Scope - # of Processes

Scope - % of Processes

• Standard • Tailored

• Terminated • Transitioned

• Provider Site • Client Site

• > 10 • < 5

• 75% • < 50%

30% - 50%Annual Run

Rate SavingsKey Factor

10% - 20% Annual

Run Rate Savings

Location• Multi-shore • Onshore

Max

imiz

ing

Org

aniz

atio

nal C

omfo

rt

BPO Sourcing Strategy – Sample Decision Set

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Leading G&A BPO Providers

Comprehensive

• Accenture• ACS• CGEY*• Hewlett Packard*• IBM (PwC)• Perot Systems*

F&A

• Accenture• ACS• CGEY• Hewlett Packard• IBM (PwC)• Perot Systems

HR

• Accenture• ACS• CGEY*• Hewlett Packard*• IBM (PwC)• Perot Systems*

IT

• Accenture*• ACS• CGEY• Hewlett Packard• IBM (PwC)• Perot Systems

• Deloitte• Ephinay• Equitant• OPI• Sourcenet• Unisys• WNS• Xansa

• Aon• Arinso• Convergys• EDS• Exult• Fidelity (FESCO)• Hewitt• Mellon • SynHRgy

(Mercer)

• CSC• EDS• Infosys• Keane• SAIC• Satyam• Unisys• Wipro

* “Comprehensive” servicescould be delivered withan existing partner

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Improved Quality

Decreased Concentration Risk

Dramatic Cost Savings

Time Compression and Multiple Shifts

Top Global Talent

Resource Flexibility

Closer Location and Access to Global Markets

What Customers are Finding: Offshore BPO

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180 Day Project Plan K

ey

Act

ivit

ies

Stage 1 Stage 2 Stage 3

Analysis of Costs & Processes

• Validate Phase I results• FTEs• Indirect & Direct Costs• Sub-processes• Projected Investments

Education• Governance & Relationship Management (RM) Reqs• Retained processes• Retained organization• Internal improvement opportunities.• RFI Process

Sourcing Strategy• Single vs. multiple providers• Selective vs. comprehensive• Intelligence on BPO providers• Business Terms• Sole source or competitive bid

Statements of Work• Accounts Payable• Payroll• Accounts Receivable• Travel & Expense Reimburs.

Service Levels• Current• Target (internal vs. external)

Financial Analysis• Economic factors• Productivity factors• 5 – 10 year projection

Develop Business Case• Cost savings• Process improvement• Tangible & Intangible

Pricing• Fixed vs. variable• Output-based pricing

Governance & RM Design

Distribute RFP• To qualified BPO providers• Based on Sourcing Strategy

Visits by HRO providers• Preliminary evaluation• Shortlist determination• Preliminary negotiation

Reference Site Visits• 3-5 customer visits

Negotiations• Final business terms• Final legal terms• Final negotiation

Governance & RM Build & Implementation

Transition Planning

Analysis, Education and Sourcing Strategy

(Months 1 & 2)

RFP Development and Pricing

(Months 3 & 4)

Bid Evaluation & Negotiation

(Months 5 & 6)

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BPO: Realizing the Business Case

Key Characteristics for BPO Success Common Pitfalls in the BPO Process Governance & Relationship Management Key Market Terms and Conditions

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Key Characteristics for BPO SuccessAppropriate use of RFI and/or RFP with competitive process

Excellent change management as well as internal and external communications

Commitment from executive leadership with a strategic imperative to act

Strong governance design and implementation

Executive sponsor is personally involved and passionate

Business objectives are clearly understood and internal interests are aligned

A firm timeline (or willingness to set a firm deadline)

Precise understanding of internal cost

Resources have been identified, empowered and budgeted including internal resources and expert external advisor and legal

Agnostic as to “how” and “where” BPO is performed (focus on “what”)

Processes have undergone conceptual “future state” reengineering

Emphasis on a long term relationship not the “transaction”

Collaborative approach to the process and negotiations

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Common Pitfalls in the BPO Process

Decision criteria and their relative importance are poorly defined such as price points, provider qualifications, etc.

Poor design and implementation of governance and retained organizations

Internal approval levels and process are unclear

Potential providers are permitted to bypass the process and communications protocol

Focus is on first/second years savings rather than on balanced short/long term benefits

Potential providers are used to frame the requirements and the sourcing process

Reliance on future negotiations to re-position the deal

Over-reliance on “free” providers’ advice, assessments and RFP development

Choice of commercial model disconnected from change drivers

Shortcuts are taken to expedite the deal

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CONTRACT MANAGEMENT

PROCESS

RELATIONSHIP MANAGEMENT

TOOLS

Outsourcing Governance | Maximizing the Value of BPO

PEOPLE

Financial Administration

Customer Care Monitoring Communications

Governance Protocols Corporate Standards and Policy

ENTERPRISECAPABILITY

Satisfaction Planning

Driving Value

Costs Compliance Competitive

SERVICE DELIVERY MANAGEMENT Service Provider

Performance Program Management Internal Services

Informed DecisionsEffective Execution

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Contract Management | 12 Processes

Facing Service Providers and Business Units

CONTRACT MANAGEMENT

TOOLSPEOPLE

ENTERPRISECAPABILITY

Controlled Costs ConsistentCompliance

FinancialPayments Invoice VerificationService Provider paymentsCharge BackAnalysis & PlanningForecasting & TrackingConsumption AnalysisFinancial Compliance

AdministrationContract Change Control &

DocumentationInternal Controls & ReviewBenchmarking & Competitive AnalysisThird Party Vendor Contracts

PROCESS

Informed DecisionsEffective Execution

Coordination and

Collaboration

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Relationship Management | 9 Processes

Facing Service Providers and Business Units

ENTERPRISECAPABILITY

PROCESS

TOOLSPEOPLE

Informed DecisionsEffective Execution

Satisfaction Planning

Driving Value

Controlled CostsConsistentCompliance

Coordination and

Collaboration

PROCESS

RELATIONSHIP MANAGEMENT

ENTERPRISECAPABILITY

Governance Protocols Decision Rights Steering Committee(s) Issue Management Corporate Standards & Policy

Customer Care MonitoringCommunicationsPlanning & Review (Monthly, Quarterly, Annual)Renegotiation & New Services

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Service Delivery Management | 11 Processes

Facing Service Providers and Business Units

ENTERPRISECAPABILITY

TOOLSPEOPLE

Controlled CostsConsistentCompliance

Coordination and

Collaboration

ENTERPRISECAPABILITY

PROCESS

InformedDecisionsEffective

Executions

Service Provider PerformanceBreach Tracking & MonitoringNotification & ReportingProblem Escalation & Resolution

Program ManagementForecasting & BudgetingWork Initiation & AuthorizationProject MonitoringNotification & Reporting

Internal ServicesSecurity ManagementBusiness Continuity ManagementConsumption Advisory ServicesRegulatory Compliance

SERVICE DELIVERY MANAGEMENT

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Effective Contracting | Key Terms & Conditions Strong governance and relationship management Key client control rights and approvals

Key service provider personnel Service provider actions that could negatively impact the business Key subcontractors Software that is introduced into the client’s environment Notification when the location of service provision is changed

Right to use 3rd parties – non-exclusive Termination rights

Change of control Convenience Cause (with known & minimal costs)

Financial performance credits Continuous improvement of service levels each year Meaningful benchmarking & performance reviews

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Questions?

Please contact:

Mark B. Hodges Chairman & FounderEquaTerramark.hodges@equaterra.com; 281-733-

0263