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Ephor Group | 1-(800) 379-9330 | www.ephorgroup.com | 24 E. Greenway Plaza Suite 440 | Houston, TX 77046

Wealth Creation Strategies Valuation Model for Technology Enabled Solutions Providers (TEBS) The outsourced solutions sector is highly fragmented, and rich in opportunities for consolidation and therefore attractive to institutional investment with the right portfolio of recurring revenues and a unique business model. There is a large pool of un-invested capital seeking returns; along with increasing number of active corporate and strategic buyers. Transaction multiples for technology enabled businesses are 4 - 8X times EBITDA for scale transactions, and therefore, for subscale transactions (<$20M) 1 to 3X Net Revenues (based on Ephor Group transaction comparables, CapitalIQ and Thomson Financial data). By year, multiples do change however scale businesses that are “best-in-class” performers with unique models can attract up to a 2X – 3X. Valuation Roadmap Management Action Steps:

1. Validate the Platform & Portfolios Approach (Buyers, Offerings, Revenue Strategy) through partnering, alliances and acquisitions; and

2. Create “best-in-class” operating performance against KPI benchmarks. Valuation Drivers:

Revenue Multiple (4 to 8X EBITDA) Raving Fans by Vertical Recurring Revenues Repeatable Processes Best-In-Class Key Performance Indicators Client Dependency Scalability of COGS Scalability of SG&A Scalability of G&A Risk Mitigation Dependency (people dependency, client dependency, etc.) Brand Equities, Franchise Effects (such as pod theory) & Portfolio Attributes (for solutions,

for revenues, for lifecycle management)


Reasons to Create the Platform Platform Means Scalability (NLTV, $)

Holistic Model Means > Share of Wallet ($)

Brand Equities

Equity Valuation Arbitrage

Wealth Creation Components:

The P&L Needs Additional Products:

“Don’t take a slice of the pie. Grow the entire pie through a Branded Platform.”


Q1 2011 Research Findings Based on market research surveys conducted in Q1 2011 with outsourcing solutions providers (50% of survey respondents), software and technology firms (25% of survey respondents), business services (7%), and a scattering of agencies and professional services, the majority of companies have reengineered their models (8 in 10) and/or portfolio (6 in 10) and are looking to expand with the majority of companies testing new revenue strategies and tactics to grow in 2011 and beyond. Business Performance in 2010 Against Goals

Revenue Growth Strategies & Spending Budget Research Survey Findings

Half planning on expansion into new markets

Half launching additional products and/or solutions; 2 out 3 added recurring solutions

1 in 5 have added channel partnerships 1 in 10 looking at global expansion Less than 10% using primary

Intelligence (market, competitive) as most favor leaning on industry data

Key Takeaway: Spending to date and forecasted for 2011 reliant on either:

i. Expansion Plans ii. The concept of spend now to save resources in the long-run (i.e. via either a

move from fixed costs to variable costs plus significant positive TCO or ROI model).


Outsourcing Adoption The following chart highlights the market adoption and utilization among small to medium enterprises regarding outsourcing by functional area.

Outsourcing Findings:

→ Nearly 80% outsourcing at least one function. The “big bang” approach has given way to a focused by function and/or deliverable scope as opposed to a “lift and shift.”

→ Approximately 10% of the market evaluating outsourcing a new/additional function. While buyers continue to be cautious,

→ 40% believe in the value-proposition of outsourcing is achievable or attained for their company.

→ Overall, the SME market is characterized with regional leaders and highly fragmented SMB providers. While competition is prevalent, regional leaders continue to strengthen their standing in their local markets through expansion and acquisitions. BestInClass performers have Gross Margins > 70% but Net Income (EBITDA) is single digits or zero (< 10% have multiyear contracts). < 10 % using offshore. The majority have started bundling and continue to progress:

o Bundling of products and services o Bundling of services and management o Bundling of technology and services


Top Challenges in Evaluating Providers

1. “Finding someone great” a. Analyzing the ROI vs Internal Resources b. Industry knowledge c. Price vs. Benefit d. Analyzing Value Proposition e. quality experience f. Minimizing risk of a bad choice

2. “Fit”

a. Understanding how they match-up to our needs b. Finding internal resources to make sure external providers are delivering c. Cost d. Capability e. Reliable delivery

Q: What Are Your Growth Options? A: The Three Wedges of Growth.

New capabilities, brands, vendor relationships, geographies

Each wedge 20%+%

Double in five years

New products, new customers, or both,

growth through

Each wedge requires

increased aptitude

4% ‐ 9%

12% ‐ 19%

Same products to same

growth through increased volumes

4% 9%

Same products to same customers, growth

through price increases

“A&I i d d t t f th “A&I is a recommended strategy for growth companies that have proven portfolio and

distribution.”

“A&I Excellence” insures budgeted pro forma forecasts are made into business realizations.”

1


Management Science Introduction Strategy is the intersection of a desired future state and the action(s) designed to achieve that desired state. The success of any Strategy is dependent upon relevant experience, knowledge, management science, effective forecasting and planning, i.e. “being able to see around the corner” and a detailed understanding of the resources required and available to execute on the strategy. The success to which a company grows is a function of both strategy and tactical execution. An effective strategy reduces risk, ensures efficient use of capital and resources, and provides significant results. What we know is; strategy is rarely successful without analysis, evaluation and validation. Ephor’s Management Science delivers strategy validation. The Ephor approach concludes with insourcing the Management Science programs such that they become internally institutionalized to our client companies.

Results of Implementing Management Science Routines: Provides significant validation to your strategy while creating revenue sources and marketing assets.

Results Created by MANAGEMENT SCIENCE

Measures

Profitability Improvements

Pricing Intelligence Margins by Buyer, Segment, Portfolio Effective and Utilization Rates Satisfaction & Retention Client NLTV and Client Lifecycle Unit Economics Customer Acquisition Model Benchmarks

Market Validated Expansion Strategies for Growth for new product/solution or geography/market

Demand Price Curve Client Utility Curves Sales Revenue Model Channel Partner Model Location specific knowledge: Competition

pricing, Partners, early adopters

Traditional sales planning relies on the fact that “new clients will resemble the old clients”; while this approach in prosperous times has some merit it possibly leaves out the significant potential of expansion and inserts the risk of marketplace changes. Benefits of Management Science:

Validate new products and solutions in an economically efficient manner

Validate pricing: map price demand curves

Validate messaging by buyer type: what resonates and causes the decision to act

Assess brand rank, promise, attributes to better understand your obstacles

To conclude: MANAGEMENT SCIENCE enables executives to avoid “Trial and Error Management.” Assets created by MANAGEMENT SCIENCE include: → Ongoing system and infrastructure

for Market Intelligence.

→ A Pipeline of opportunities, nurtured prospects, and partners.

→ Database Integrity; leverage your greatest asset.

→ Marketing Optimization: ensure your marketing and sales spend is efficient, optimize campaigns to maximize response, and maximize your brand awareness programs


Ephor’s Management Science is designed to validate your strategy through a pragmatic and research based program which simultaneously gathers real-world data, scores responses into probability segments and provides the information thru valuable, publishable industry research reports, which can be used for additional promotional and opportunity generation initiatives. The revenue benefits of Management Science include:

→ Systematically profile your target market in order to identify those companies that match your qualification criteria and rank them as “A”, “B” or “C” leads.

→ Produces assets for continual use in its ongoing efforts (pipeline of prospects, promotional materials).

→ Better understand what drives your buyer segments including their demographic, psychographic, buyergraphic, and infographics profiles.

→ Determine what price are they willing to pay? → Determine what needs/priorities are unsatisfied?

Are you satisfied with your strategy?

• Do you desire a predictable, forecast able steady stream of clients?

• Are you predictably and consistently developing next months and next quarters pipeline?

Management Science “Gaps” for today’s emerging businesses include: Win Loss Analysis SWOT Pricing Intelligence Price-to-Value Perception: Utility Mapping & Measurement Mystery Shopping Market Intelligence Competitive Intelligence Buyer Preferences, Demands, Trends, Drivers Buyer Budgets, Priorities Brand Equities, Brand Awareness Benchmarks

Can you realize and appreciate the effect that pragmatic Management

Science will have on your organization and its success?


Management Science Sequence of Events for Implementation

Management Science is typically implemented over a 5 to 9 month period and consists of the following stages:

STAGE: PreLaunch Launch AutoPilot

FOCUS: Strategy Planning Testing, Measurement, Refinement Execution

ACTIVITIES:

Competitive Evaluation Concept Testing Define strategy including Milestones,

Assumptions and Tasks (MAT) Feasibility Assessment Grade Assets & Capabilities (current

versus desired future state) Product Forecasting Segmentation Validate response models

Revenue Portfolio Testing & Forecasting Revenue/Profit models Retention/Loyalty/Persistency models Lifetime value models Prototyping Usability Engineering Q&A & Testing Concept Refinement Performance Tuning Documentation Commercialization & Deployment

Implementation of Intelligence Routines

Repeat surveys: Customer, Brand, Prospect, Partner, Channel

Benchmarking Sales Support, Training Customer Lifecycle Management MAPPING Portfolio Mix Management

ASSETS: Messaging, Model (Revenue and Profitability), Surveys, & Campaigns

Pipeline of opportunities, prospects, partners

Intelligence Routines Brand Surveys Campaign Templates Promotional Materials

OUTCOMES: Intelligence Mapping, Infrastructure, & System

Validated Strategy ↑ Loyalty ↑ NLTV ↑ Brand Awareness

For most service organizations, information is their most valuable asset. We turn data into intelligence and therefore assets using an array of advanced tools and tactics to exploit the strategic potential of your organization. The result is reinvigorated response rates, heightened customer loyalty, and predictable revenue and profits.

Why Ephor’ Management Science? Ephor Group’s approach is pragmatic, proven, and performance-oriented. Ephor serves agencies, software and technology, consultancies, and outsourcing providers and has led and invested in some of the most successful businesses in the Americas.


Implementing Management Science Routines The key benefit of Management Science is real-time pathways (connections) with online communities, analysts, competitors, strategic partners, and potential and current clients. The only way to stay ahead of the competition is to gather as much significant and prioritized information as possible. Your strategic objectives can only be attained to their full potential by deploying ongoing Intelligence Routines which will help you: 1. Compete and secure your market position 2. Grow sales and clients 3. Enforce business integrity by managing risks 4. Advance your core business capabilities 5. Satisfy escalating client expectations 6. Leverage today's most advanced analytics 7. Act upon intelligence to drive accountability, teamwork,

and performance Managing risks creates sustainable business value. Moreover, intelligence should be used to create scenario modeling and predictive analytics such as a predictive score for each buyer segment, customer or other organizational element. With intelligence tied to modeling and predictive analytics, the business learns from its cumulative experiences and can take action to apply what's been learned. Management Science: a “Magic Bullet” for Executives. Question: How do I plan for tomorrow? Answer. Implement Management Science. How to plan for tomorrow is an often asked and seldom answered question. Technology, regulations, and client demographics are constantly changing the marketplace; therefore it is imperative your organization adapt, change or the risk of failure is prevalent.

At a round table dinner discussion recently, the table leader asked: “What are the most significant challenges facing executives these days?” Responses ranged from your typical: cash management, to inventory control, to human capital decisions, to tax and regulatory issues, to sales. Today, we have way too much of “well that’s the way we have always done it.” At Ephor we believe legacy management techniques and thought processes are not necessarily appropriate for the “New Normal Economy.” What is missing from the business community is the understanding and appreciation of Intelligence, and more important how to apply Intelligence to the significant challenges facing businesses today. Applying Intelligence requires a commitment to evolving your business: its’ people, its’ processes and systems. Why not make that commitment now!


Beating the Odds When You Expand Did you know that expansion is costly and resource heavy?

→ 85% of expansion plans fail to achieve ROI within the first few years. → 2/3 of expansion plans are abandoned within six months.

Effective managers aren’t cowboys; they are methodical managers of risk. At every turn prudent managers reduce risk before making any significant investment or action.

→ For example, presale new products or to new markets to ensure cash flow profitability. → Tackle the right risks first such as confirming Demand and Product mix before spending any dollars

on marketing or operations. When risks are removed, value is increased. Not all risks need to be removed, simply the most uncertain coupled with the most costly. All plans are partly right and partly wrong; experimentation and intelligence is the pathway to success. The amount risked should be limited to the cost of the prototype and initial design. Effective management is all about constantly identifying risks and finding creative ways to mitigate them. Two paths of expansion: 1. Risky Path:

a. Spending dollars creating promotional materials without testing messaging and pricing on beta or trial clients.

b. Hiring sales personnel without validating the market needs and creating a pipeline. c. Implementing “on the ground” operational oversight in the form of branch managers without

established clients and partners.

2. Intelligence Path: o Implement cross functional team using existing current resources to validate the market need,

create beta clients and partners. o Leverage Intelligence from beta or prototype clients and partners for “on the ground” needs

including, but not limited to user feedback on sales, service, distribution. Also, confirm the size (#,$) of the demand by customer segment and product mix.

o Achieve the 3 R’s: Recurring Revenues, Raving Fans, and Repeatable Routines before formally expanding with “feet on the street” in new markets.

Ephor Group | 1 (800) 379-9330 | www.ephorgroup.com | 24 Greenway Plaza Suite 440 | Houston, TX 77046

Garry Meier’s “Yellow Brick Road to Wealth Creation” This overview describes the wealth creation methodologies used and lessons learned from having been a part of some of the most successful business success stories of the past two decades as well as numerous successful investments. Key Success Factors Required to Create Wealth

Resources Required Status Talented People “A Talented Team” assembled and supported by industry leaders,

domain experts, and strategic partners. Unique Business Model Model needs to be efficient, scalable and have clear differentiators in

the marketplace and “be known”. Capital to Execute

Capitalization of the company to implement its growth strategy.

Routines

Business plan supported by operational processes performing at BIC1 rates. The business model is refined and made economically efficient including all processes, measurements, and business development methodologies.

Factors Impacting Valuation (and thus Wealth Creation)

1. Quantity and quality of recurring revenues and the profitability of the platform; 2. Scalable operating infrastructure to ensure performance is maximized, cost-efficient and

delivers on the full promise of the outsourcing value-proposition; plus 3. Company had best-in-class customer acquisition economics, has significant alternative

distribution, and is realizing the benefits of having achieved “Branded Franchise Effects.” How Do I Position My Business to Maximize Value?

1 BIC = “Best In Class”

Market Leadership

Scale

Strong Leadership

• Acqusition platform

• Become "need‐to‐have" capability for others to reach customer base

•Defensible market niche

•Excellent growth prospects

• Above average margins

• Higher multiples attributed to larger firms

• Ability to add financial leverage

• Proven ability to generate consistent performance

• Focused strategy & vision

• Clear leadership with strong supporting team – – well defined roles

• No reliance on top management to achieve objectives

Ephor Group | 1 (800) 379-9330 | www.ephorgroup.com | 24 Greenway Plaza Suite 440 | Houston, TX 77046

Wealth Creation Roadmap to Improving Valuation 1. Provide alterative value proposition; 2. Provide full lifecycle services through a portfolio of distribution; and 3. Carve out dominance in attractive industry sectors.

Key Organizational Drivers

Improvement Initiative

Goal Measures

Revenue Predictable, cost-effective revenue.

• Customer Acquisition Cost Per Customer Per Source

• Cost-Per-Lead Per Source • Duration (Avg. sales stage length in # of days) • Velocity (# of new qualified buyers) • # of Raving Fans by vertical

G&A Back-office efficiency and scale.

• % of administrative payroll to gross profit • Non-payroll G&A to gross profit • DSOs (Days Sales Outstanding)

Operations Efficiency and scale.

• Revenue per Operations Employee • Quality/Client satisfaction/At-risk clients

Workforce

Motivated, Capable of Growth, and Productive.

• Revenue/Profit-Per-Employee • Productivity • Employee Engagement • Days from onboarding to standard productivity

Management Science

Platform for growth.

• Operating working capital • % of operations with process mapping and

documented instruction • Balanced portfolio of revenue streams • Pervasive measurement and metrics • % of ‘A’ and ‘B Players’

Should you consider acquisitions?

Q: What is Your Growth Strategy?

q

My organization is organically growing

No

1. Get financing squared away

2. Come to a natural stopping place on major projects

Yes 1. Identify the strategic initiatives with the lowest cost/risk and greatest benefitYes

I can tolerate someplace on major projects3. Put the principles into

practice2. Use the “four P’s” to guide

implementation

No

I can tolerate some risk to drive growth

1. Use the “four P’s” to drive continual improvement in the core

2. Be judicious in how hard you push the second wedge

Ephor Group’s Track Record of Success

Return on Invested Capital Avg 300%

Our track-record of model improvement as seen through KPI (key performance indicators):

Corporate Performance

Return on Invested CapitalValuation Improvement Brand Value, Brand EquitiesMarket Positioning

Avg. = 300% From <4X to >8X EBITDA > Margins & Retention #1 or #2

Operating Performance Field Level EBITDAProfit Per EmployeeRevenue Per Partner

>30%+ >$25k per EE >$500k

Functional Performance

Revenues per ExecutiveRevenues per Account ManagerCost Per LeadCost Per Sell (new client)

>500k >300k <$100 1X first year revenues

“In 2011 and beyond, wealth will be created forthose unique business models that are the most those unique business models, that are the most economically efficient, promote and excel at change management, and invest in their people and focus on a few key strategic initiatives.”

-Garry E. Meier, Ephor Group Founder

> Download additional resources at: http://www.ephorgroup.com/resources.asp

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