Strategic Outsourcing in the IT Industry: Managing Costs and Enhancing Shareholder Value

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2. Agenda • The Market Environment • Strategic Outsourcing • IBM's Capabilities • On Demand

3. Companies are taking actions to improve their bottom line rather than waiting for “the recovery” to solve problems In a weak global economy, companies face uncertainty about their economic and strategic future • Slow economic growth and pressures to improve earnings are combining to make cost cutting the primary agenda item for a large majority (78%) of companies • Growth is emerging as an important issue as economic recovery has been postponed (and may be slow to return). • IT continues to be an important lever in achieving the cost saving objective for most companies in two very different ways • IT is being tasked to enable business process efficiency • IT spending is also a source of savings as budgets for all functions are being trimmed. • In general, IT budget pressure is in line with the overall business, however 30% of respondents indicate that IT spending has been cut more than other functions while 10% state that IT has been protected from cuts Source: 2003 SO Market Insights study of 300 senior executives, Mercer Management Consulting

4. Strategic Needs • Improved core business focus • Transformed business design • Additional dollars invested in higher-value projects Management Needs • Real-time decision support analytics and tools • Operating model flexibility • Financial Needs • Reduce and control operating costs • Improve cash flow • Improve return on capital Shareholder Value Today’s Economy is Forcing Companies to Address Complex Needs to Enhance Shareholder Value

5. Why outsource? To increase shareholder value... • "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 FTSE 100." • - Source: Morgan Chambers, • "Outsourcing in the FTSE 100: The Definitive Study" • "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"

6. Cost Revenue Customer Efficiency Growth Satisfaction Source: 2003 SO Market Insights study, Mercer Management Consulting -- 300 interviews with senior executives Senior Executive Priorities

7. The Marketplace Market Opportunity The Marketplace Market Opportunity Customers Top two business priorities - cost efficiency and revenue growth Services-savvy customers; increasing 3rd party involvement Sophisticated marketplace (customers, suppliers) CIOs playing a strong role in outsourcing decision making Increasing interest in On Demand Growing interest/expectation of a collaborative relationship Deals Price pressure – offshore acceptance Competition is fierce More complex deal structures Source: GMV 2H03 SO is a Mainstream IT Solution Substantial market growth over last five years; growth anticipated at 9% through 2007. IBM is a market share leader.

8. 19% SO as percentage of IBM revenue SO Other IBM 28% SO as percentage of IBM PTI 21% SO as percentage of IBM employees Strategic Outsourcing represents a major source of revenue and profit for IBM

9. Customers are tending to view IT as a support or enabler The strategic (transformational) and constraint (necessary evil) segments are becoming less prevalent.

10. 60% of Fortune 100 firms have their outsourcing business strategies in place Fortune 10 Fortune 25 Fortune 100 Fortune 500 Fortune 1000 80% 64% 60% 36% 23% Percent of the Fortune X that Outsourced from 1997 - 2002 Source: IDC – Contracts Database 1997-2002 Outsourcing has become a common business strategy

11. Cost reduction Ability to focus on core competencies Increase availability of specific skills and resources Improve stability, effectiveness and service levels of IT Enable rapid business change / expansion Obtain access to advanced technologies & research, and to industry, business and technology experts Predictable expense management Gain contractually committed service levels Flexibility to transition to the next generation of infrastructure and applications Build a long term strategic relationship ... for competitive advantage Increase shareholder value Strategic Outsourcing : What is the Value for the Customer ?

12. A Roadmap to Successful Outsourcing • Understand your core competencies in light of your business strategy • Determine what portions of your portfolio to outsource • IBM can partner with your company in a variety of ways -- from out-tasking, to selective outsourcing of one of more IT functions, to full-scale outsourcing • Select an outsourcing provider who will build a strong relationship with your company • IBM takes a relationship approach that ensures clear expectations, allows for flexibility, collaborative planning and mutual accountability

13. Keys to a Successful Outsourcing Relationship • A successful outsourcing relationship focuses on: • Setting clear expectations for the relationship at the outset • Establishing appropriate governance protocols to guide joint action that can deliver on the promise of the relationship • Recognizing the need to adjust the relationship over time • Shared risk and return • Meeting service level expectations --not just SLAs • Contract flexibility -- the ability to change the scale and content of what is being delivered as the business environment changes