Michael R. FoleyVice President, Utility Services

First Data Utility GroupApril 13, 2005

 

Why Outsourcing has worked in other industries….

And, why it works for Utilities

                                                              

Outsourcing is a Major Driver of

North American Economy

Pervasive throughout all industries Service providers are everywhere; on,

near and offshore Standardization of models—portability

and compliance built in Web-based technology platforms

enable performance anywhere, anytime Outsourcing cannot be reversed or

ignored—any legislation will fail US economy is largely dependent upon

outsourcing

Reasons Companies Outsource

10%

12%

12%

18%

20%

25%

36%

38%

54%

55%

0% 10% 20% 30% 40% 50% 60%

Function difficult to manage

Take advantage of offshore capabilities

Share risks

Reduce time-to-market

Accelerate reengineering benefits

Resources not available internally

Gain access to world-class capabilities

Free resources for other purposes

Reduce and control operating costs

Improve company focus

Ris

ing

“ In the end this is why companies look for help” DJO

Source: The Outsourcing Institute, Fifth Annual Outsourcing Index, December 2002

Model Type Typical Characteristics

Evolving Outsourcing Business Models

Asset Purchase/Divestiture

Cash for assets, funded byBTO, cost savings guarantees

Business Transformation Outsourcing (BTO)

A little or a lot….

Business Process Outsourcing (BPO)

Multiple processes, SLAsobligation to re-engineer,gain sharing, cost savings

Single or Multiple processes,SLAs, cost savings

Evolving Outsourcing Business Models

Key Success Factors

Transaction UtilityTransaction Utility

Value Proposition:Lowest Cost

Transaction UtilityTransaction Utility

Value Proposition:Lowest Cost

Transaction UtilityTransaction Utility

Value Proposition:Lowest Cost

Process OutsourcingProcess Outsourcing

Value Proposition:Cost ReductionService Levels

User Satisfaction

Process OutsourcingProcess Outsourcing

Value Proposition:Cost ReductionService Levels

User Satisfaction

TransformationTransformation

Value Proposition:Competency Focus

Business ImpactThought

Leadership

IT Outsourcing(Apps + Infrastructure)

• Business model• Consulting capability• Vertical industry

credibility

• Deep process/subject matter expertise• Leverageable solutions• Program management

• Delivery capability . . .– Low cost– Multi-client– Multifunction– Best shore

Customer Value

Company Processes Outsourced

Virtually any business process can be being outsourced

General Motors Manufacturing, Design

Delta AirlinesMaintenance, HR

Catering, Call Center

Typical examples

Comcast Billing, Customer Service

Industries where Outsourcing prevails:

Automotive Consumer

Goods Financial

Services Government Health Care Insurance

Manufacturing Technology Transportation Telco, Cable &

ISP Utilities and

Energy

Utility Industry Structural Issues Driving Outsourcing Decisions

Customer Expectations Shareholder Expectations Regulatory Expectations Restructuring/Competition – it’s

here to stay Energy/Utilities Industry emerging

from capital crunch Failed diversification efforts put

focus back on wires and pipes Focus on operational efficiencies

and technology

Changing Business Environment Forcing Utilities to a “Run the Business Better Strategy”

Outsourcing Isn’t New To The Utility Industry

0%

10%

20%

30%

40%

50%

60%

1999 2001 2002 2003

% U

tili

ties

Ou

tso

urc

ing

Cer

tain

Car

e A

ctiv

itie

s

Utilities have increasingly used outsourcing to reduce

cost …

0 10 20 30 40 50

RemittanceProcessing

After Hour Calls

BillProcessing

Call Overflow

Credit &Collections

% Outsourcing

… but only in a fragmented way

Source: Chartwell; 2003

We believe a more comprehensive outsourcing approach that is integrated with business strategies and goals will yield substantially greater benefit.

Through consolidation, standardization, better technology and labor costs

Improvements in quality through error reduction and business process improvement.

Service level agreements that align with contractual and regulatory requirements

Typical Savings Potential: 15% to 40%

The Business Case for Utilities is Compelling

Credit/ Collections

25%-35% Reduction

Technology

15%-20% Reduction

Billing

15%-20% Reduction

Contact Center

35%-55% Reduction

$100

$60-$75

Baseline Costs

Projected Stable

Operations (no inflation)

Cost Advantage of Outsourcing and Offshoring

Co

st p

er T

ran

sact

ion

(In

dex

)

Client Volume Outsourcer Volume

Transaction VolumeSource: Booz Allen Hamilton

100 -

85 -

68 -

58 -

50 -

5% - 10%ProcessOptimization

15% - 20%Scale

10% - 20%OffshoreLabor &Overhead

U.S. Outsourcer

Client Today

Client with Reengineeredand Restructured Services

Outsourcer WithOffshoreCapabilities

CaptiveOffshore

“Demand for BPO services will continue to grow in 2004 and beyond... Through 2005 business process outsourcing (BPO) and business transformation outsourcing (BTO) will ultimately become synonymous…”

METAGroup, John Van Decker / Stan Lepeak, August 20, 2004

“….Predict that half of all G2000 companies will use enterprise HRO by 2008…” METAGroup, Ron Hanscome Enterprise HR Outsourcing: Ready or not Feb

24, 2004

"During 2004/05, continuing pressure to achieve operational efficiency, adoption of the asset management model, and a regulatory environment favoring the purchase of services versus internal provisioning will drive significant increases in outsourcing…”

Meta Group, Dr. Zarco Sumic, May 20, 2004

Market Point of View

What Should Utilities Outsource?

Prop

rieta

ry N

atur

e of

Fun

ctio

n

NotProprietary

Data isProprietary

BusinessProcess isProprietary

Profit Model isProprietary

Source: Harvard Business Review,February 2005 Uniqueness of Business Process or Function

Unique to self Common acrossIndustries

High Priority forOutsourcing

Medium Priority forOutsourcing

Low Priority forOutsourcing

How Strong are Your Capabilities?

Outsource to increasecapability at Lower

Cost

Com

pany

’s A

bili

ty to

Per

form

Func

tion

Betterthan

Sufficient

NotSufficent

Sufficient

Company’s Cost per Transaction

Above industrymedian

At industrymedian

Below industrymedian

Outsource to increasecapability even at higher

cost if necessary

ConsiderCreationof new

businessunit, if

adjacentto corebusiness

Outsource to reduce cost;sacrifice capability if

necessary

Outsource to reducecost

Source: HarvardBusiness ReviewFebruary, 2005

Significant Outsourcing Deals

Cap Gemini/TXU --Meter to Cash, Shared Services Xcel Energy – IT, Back Office Outsourcing Puget Sound – CIS Hosting, Application Management NStar, Entergy, PSEG, Cinergy, Avista– IT Outsourcing City of Austin, Orlando Utilities – CIS Hosting,

Application Mgmt Metro St. Louis – CIS, EBPP Direct Energy – Back office processes LIPA – Electric Operations, Back Office Enbridge, Hydro One – Meter to Cash Southern Company Gas – Back Office BC Hydro – Meter to Cash, Shared Services Williams Companies – Back Office Operations NiSource -- Pending

… And Capital Markets See The Value Outsourcing Creates

“Strategic outsourcing positively impacts shareholder value. Our research suggests the difference is in the order of 5.4% above the individual sector average and 4.9% above the overall FTSE100.”

Source: Morgan Chambers, “Outsourcing in the FTSE 100; The Definitive Study”, 2001

“Evidence shows that IT outsourcing has a discernible positive impact on share prices. A study of 27 companies undertaking large IT outsourcing initiatives indicates an average gain in shareholder value of 5.7% over and above the general market trend.”

Source: Stern Stewart, “IT Outsourcing and Shareholder Value”, August, 2000

Source: Stern Stewart, “IT Outsourcing and Shareholder Value”,

August, 2000

$94

$96

$98

$100

$102

$104

$106

$108

$110

$112

$114

$94

$96

$98

$100

$102

$104

$106

$108

$110

$112

$114

-40 -30 -20 -10 0 10 20 30 40

Performance Of Outsourcing Companies Versus The Market

Measured From 40 Days Before Announcement To 40 Days After Announcement

Outsourcing Index $110.98

Market Index $106.33

Day Of Press Release

Obstacles to Utility Outsourcing

Control Issues Risk (Actual or

Perceived) Regulatory Political Organized Labor Aging Workforce Other Stakeholders

Summary Top 10 Reasons for Utility

Outsourcing

Focus on core competency

Increase enterprise flexibility

Increase customer satisfaction

Innovation

Gain access to markets

Generate cash Free up capital Turn fixed

costs into variable costs

Reduce costs Spread risk

In the Fortune 500 listing, First Data ranked number 216 based on revenues in 2004.

In Fortune's 2004 Most Admired Companies, First Data ranked second in the category of computer data services companies.

“We have world-class technology, processes, and experienced people that are highly transferable to other markets. We have unmatched scale and a business model that is extendable. We’re looking at opportunities that leverage the business model across a spectrum of industries.

- Charlie Fote, CEO and President, First Data Corporation

First Data CorporationAmong America’s Most Admired

Companies

Outsourcing?

“Do what you do best; outsource the rest…”

Tom Peters

In Search of Excellence