Why Outsourcing has worked in other industries…. And, why it works for Utilities

1. Why Outsourcing has worked in other industries….And, why it works for Utilities Michael R. Foley Vice President, Utility Services First Data Utility Group April 13, 2005

2. 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

3. Rising Reasons Companies Outsource “ In the end this is why companies look for help” DJO Source: The Outsourcing Institute, Fifth Annual Outsourcing Index, December 2002

4. Model Type Typical Characteristics Evolving Outsourcing Business Models A little or a lot…. Cash for assets, funded by BTO, cost savings guarantees Asset Purchase/Divestiture Multiple processes, SLAs obligation to re-engineer, gain sharing, cost savings Business Transformation Outsourcing (BTO) Business Process Outsourcing (BPO) Single or Multiple processes, SLAs, cost savings

5. Process Outsourcing Transformation Process Outsourcing Value Proposition:Cost Reduction Service Levels User Satisfaction Value Proposition:Competency Focus Business Impact Thought Leadership Value Proposition:Cost Reduction Service Levels User Satisfaction Transaction Utility Transaction Utility Transaction Utility Value Proposition:Lowest Cost Value Proposition:Lowest Cost Value Proposition:Lowest Cost Evolving Outsourcing Business Models Key Success Factors • Business model • Consulting capability • Vertical industry credibility Customer Value • Deep process/subject matter expertise • Leverageable solutions • Program management • Delivery capability . . . • Low cost • Multi-client • Multifunction • Best shore IT Outsourcing(Apps + Infrastructure)

6. Company ProcessesOutsourced Virtually any business process can be being outsourced Typical examples General Motors Manufacturing, Design Maintenance, HR Catering, Call Center Delta Airlines Billing, Customer Service Comcast

7. Automotive Consumer Goods Financial Services Government Health Care Insurance Manufacturing Technology Transportation Telco, Cable & ISP Utilities and Energy Industries where Outsourcing prevails:

8. 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”

9. Outsourcing Isn’t New To The Utility Industry … but only in a fragmented way Utilities have increasingly used outsourcing to reduce cost … We believe a more comprehensive outsourcing approach that is integrated with business strategies and goals will yield substantially greater benefit. Source: Chartwell; 2003

10. The Business Case for Utilities is Compelling Typical Savings Potential: 15% to 40% $100 Credit/ Collections 25%-35% Reduction • 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 $60-$75 Technology 15%-20% Reduction Billing 15%-20% Reduction Contact Center 35%-55% Reduction Baseline Costs Projected Stable Operations (no inflation)

11. Cost Advantage of Outsourcing and Offshoring Client Today 100 - 5% - 10%ProcessOptimization Client with Reengineeredand Restructured Services 85 - 15% - 20%Scale U.S. Outsourcer 68 - Cost per Transaction (Index) Outsourcer WithOffshore Capabilities 10% - 20%OffshoreLabor &Overhead 58 - 50 - CaptiveOffshore Client Volume Outsourcer Volume Source: Booz Allen Hamilton Transaction Volume

12. Market Point of View • “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

13. What Should Utilities Outsource?

14. How Strong are Your Capabilities?

15. 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

16. Performance Of Outsourcing Companies Versus The Market Measured From 40 Days Before Announcement To 40 Days After Announcement $114 $114 Outsourcing Index $110.98 $112 $112 $110 $110 Day Of Press Release $108 $108 $106 $106 $104 $104 $102 $102 Market Index $106.33 $100 $100 $98 $98 $96 $96 $94 $94 - 40 - 30 - 20 - 10 0 10 20 30 40 … 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 impacton share prices. A study of 27 companies undertaking large IT outsourcinginitiatives indicates an average gain in shareholder value of5.7% over and above the general market trend.” • Source: Stern Stewart, “IT Outsourcing andShareholder Value”, August, 2000 • Source: Stern Stewart, “IT Outsourcing andShareholder Value”, August, 2000

17. Obstacles to Utility Outsourcing • Control Issues • Risk (Actual or Perceived) • Regulatory • Political • Organized Labor • Aging Workforce • Other Stakeholders

18. 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 Summary Top 10 Reasons for Utility Outsourcing

19. First Data Corporation Among America’s Most Admired Companies • 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

20. Outsourcing? “Do what you do best; outsource the rest…” Tom Peters In Search of Excellence