The Fundamentals of Vested Outsourcing®

1. The Fundamentals of Vested Outsourcing® IAOP Summit 2012

2. “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” We would like you to think differently about outsourcing 2

3. Case Study OneFinance

4. OneFinance The Need For Change • In 2006. . . • 95 countries with 95 unique processes • Inefficient processes were costly and negatively impacting quality • Over 95% of the off-line reporting was manual • 370,000 hours just producing reports! • 34% journal entries were merely “correcting entries” • Microsoft’s financial transaction were in the fourth quartile measured in terms of cost • Valuable human resources were focused on non-strategic activities • Financial controllers, for example, spent more than 75 percent of their resources on supporting transactions, compliance activities and local reporting • Little time for higher value activities such as developing business insight or strategy

5. OneFinance – A Real Winner! • By 2008. . . • In 2008 “Most Strategic Outsourcing Contract” by the Outsourcing Center. • In 2010“Best Mature Outsourced Service Delivery Award” by the Shared Services Outsource Network • In 2011 “GEO Award for Outsourcing Innovation” by the International Association for Outsourcing Professionals

6. Transformation • “So why do we get these awards?? • I say it is because of TOGETHER. • We face all things TOGETHER. • We win TOGETHER.  • We face difficulties TOGETHER. • We never go YOU against US.   • We have all seen what that lead to…… • I couldn’t be more proud than I am right now. Proud TOGETHER with all of you!!!  • Thanks for the hard work you all do!!!!!” 

7. I WIN with lowest possible costs I WIN with higher margins/profits I WIN with higher service levels Procurement / Finance Supplier Business Units / Customer Everybody Wins WIIFWe

8. Following The Rules Of Outsourcing OneFinance

9. What are the 5 Rules of Vested Outsourcing?

10. Today’s Discussion Topics • The Mind Shift Change of Vested Outsourcing. • The Five Rules of Vested Outsourcing. • Want to Get Started?

11. The Mind Shift Change of Vested Outsourcing.

12. Based on research by….. Why Tells the real stories of… What How

13. Vested Outsourcing is…. • A game changing approach to outsourcing that • Is a hybrid business model for buying services • Leverages “win-win” thinking associated with Game Theory / Behavioral Economics • Is centered around buying results instead of tasks and/or activities with the conscious effort to use incentives to drive process innovation, which prevents many perverse incentives of conventional outsourcing • Creates a contract that follows “Five Rules” • Uses incentives to transform the work to achieve “trade-ups” versus conventional cost/service tradeoffs • Transformational when applied • Endorsed by the Outsourcing Institute, Sourcing Interest Group, Center for Outsourcing Research, and the International Association for Contract and Commercial Management • Regarded as the “business concept of the decade” similar to Lean and Six Sigma

14. Benefits of a Vested Outsourcing Approach • Genuine Competitive Advantage: not just transactions, solutions • Supplier buy-in and shared interests • Variety of solutions from which to choose • Supplier flexibility in proposing solutions • Focus on intended results, not activities • Increased likelihood of meeting corporate goals and objectives • Mutually beneficial, shared incentives drive innovation and cost effectiveness • Parties have a vested interest in other’s success; shared risk and reward • Overall better value and enhanced performance!

15. Conventional Outsourcing ApproachThere is an inherent flaw in the business model • Specify Buy Quantities / Manage demand • Pay for each on a Unit Price or Transaction basis • Assume all risk for: • right product • right locations • right time • right quantities • Customer satisfaction • System uptime Contract Mfg The more we sell, the more profit we make! High Risk Call Center Low Risk Warehouse Provider Company Outsource Manager IT Service Provider

16. Vested Outsourcing ApproachBoth parties have a vested interest in each other’s success The less I use, the more profit I make! Shared Risk/ Reward Shared Risk/ Reward • Develop Solutions • Motivated to improve processes and decrease costs • Specify Performance Outcomes • Prioritize internal efforts

17. Win-Win or Win-Lose? Buyer Supplier

18. Win-Win Thinking is Steeped in Research… “The best result will come from everyone in the group doing what is good for himself and the group. It is the only way we all win” John Forbes Nash Nobel Prize Winner

19. Win-Win Thinking Is the Real Deal Behavioral Economics: • Game theory mathematically captures behavior in strategic situations, in which an individual's success in making choices depends on the choices of others. • A game consists of a set of players, a set of moves (or strategies) available to those players, and a specification of payoffs for each combination of strategies • Eight game theorists have won Nobel prizes in economics – it is not a passing fad

20. Win-Win Thinking Is the Real Deal Win-Win thinking strives to develop "solution concepts” Vested is the strategy-changer: It changes the point of equilibrium in the outsourcing relationship into a real WIN-WIN strategy!

21. Win-Win Thinking is … • Non-zero-sum games: a gain by one player does not necessarily correspond with a loss by another • Win-win game theory emphasizes the importance of cooperation, sharing and over-all group success in contrast to domination and personal gain • All players are treated as equally important and valuable

22. Why Vested Outsourcing WorksWIIFWe Drives Supplier Innovation • Vested Outsourcing is the creation of a mutual symbiotic “deal” where all parties win. • All parties become aligned to the same quantifiable objectives • The rules of the game are clearly spelled out through the contract • Contract incentives balance risk/reward, encourages supplier innovation Procurement I WIN with lowest possible costs PERFORMANCE PARTNERSHIPS THAT OPTIMIZES FOR MUTUAL DESIRED OUTCOMES GOAL I WIN with higher service levels I WIN with higher profits Business/Customer Supplier

23. Why it Works “Morality is what people should do. Economics is what people do.”

24. Identifying the Pony • The Pony is the difference between the value of the current solution and the potential optimized solution • The Pony represents what the outsourcing company wants – but was not able to get on their own or with existing service providers – and is a result of the balance shown in the Performance Pyramid • Use the Pony to derive the appropriate incentive levels for the service provider • The bigger the Pony – the bigger the incentives the service provider could earn

25. An Example of How it Works The Baseline “Deal” is in Blue I want $9m $10M costs PERFORMANCE PARTNERSHIPS THAT OPTIMIZES FOR MUTUAL DESIRED OUTCOMES I’ll be motivated to find a solution if I can EARN 30% Margin! GOAL I want 98% I’ll be motivated to invest in that solution if I know the work is sticking around! 95% Service Levels 10% Margin

26. Example: Breaking the Paradigm Thinking Baseline “Deal” is in Blue Vested “Deal” is in Green $9M X $10M costs I’ve been found! I’ve been found! GOAL 30% (which he EARNS upon achieving availability and cost targets) 98% X 95% Service Levels X 10% Margin

27. Breaking the Paradigm Thinking Sr. Leadership has to drive the paradigm shift! It’s OK to have a long term contract when it makes sense to incentivize for investments It’s OK for a service provider to earn 30% margins…if they achieve things we would not get with traditional approaches Senior Leadership It’s OK for the service provider to play some of the “management” role if they are better at it that we are

28. Vested Outsourcing Doesn’t Change the Basics…But it Does Change the Way Services are Purchased • At the operational level, Vested Outsourcing does not change the basic elements • A process still needs resources to perform tasks (order management, facilities management, fulfillment, call centers, invoice processing, lines of code, servers provided, etc.) • Vested Outsourcing does change the way in which companies acquire or purchase outsourced services • We specify “WHAT” level of performance we need • We MOVE the responsibility for determining the “HOW” (quantity, schedule, location) to a Outsource Provider Vested Outsourcing is a clean break from conventional outsourcing approaches

29. The Mind Shift Change of Vested Outsourcing • Vested Outsourcing is much more than doing an activity at a higher level of service. For example, it is: • NOT about answering 95% of all calls in 20 seconds versus 30 seconds • NOT about achieving spelling accuracy from 3000 DPPM to 3.4 (six sigma) DPPMs from your email tech support provider • NOT about shipping 98% of products on time vs 95% …and the list can go on and on • Vested Outsourcing is a fundamental business model paradigm shift in how the company that is outsourcing and the service providers work together to do business

30. When to do Vested Outsourcing Not all relationships should be Vested. It ONLY make sense when there is a high potential that parties can find the Pony. Don’t go through the effort if there is not high potential and a win for everyone. • NON-Core Core Activity Don’t Outsource HIGH TM Potential Value to the Organization • NON-Core • Commodity Focused • Transaction-Based / • Managed Services NON-Core Staff Augmentation / Labor Arbitrage LOW HIGH LOW Organizational Expertise

31. The Five Rules of Vested Outsourcing®

32. The 5 Rules of Vested Outsourcing

33. Rule 1: Outcome Based vs. Transaction Based Business Model

34. Rule 1:Outcome Based vs. Transaction Based Model It’s not about spinning your wheels to do the same activities better, faster or cheaper; It’s about transforming the work to achieve the desired results! • Most outsourcing relationships follow a transaction-based business model • This can be cost plus or a fixed price per transaction where the service provider gets paid a transaction fee for each activity that is performed • $ per minute to answer the phone • $ per touch to assemble a product • $ per mile to ship a product • $ per server managed • Vested Outsourcing moves to an outcome-based business model where the service provider is paid for achieving results, not just for performing tasks or activities

35. Rule 2: Focus on the What, not the How

36. Rule 2. Focus on the WHAT, not the HOW • Most companies use detailed statement of works (SOWs) and Service Level Agreements (SLAs) to define how the service provider should perform the work. • Don’t outsource to the expert and then tell them how to do the work! • Instead – tell them WHAT your problem is and let your service provider (the expert) tell you HOW they will solve your problem!

37. Joy’s Law No matter who you are, most of the bright people don’t work for you • “For every P&G researcher, there were 200 scientists or engineers elsewhere that were just as good. That meant there was a total of perhaps 1.5 million people whose talents they could potentially use.”

38. Rule 3: Clearly Defined and Measureable Desired Outcomes

39. Rule 3. Clearly Defined/Measurable Desired Outcomes You got to be very careful if you don't know where you're going, because you might not get there. - Yogi Berra

40. What is Success? • What are the Desired Outcomes your team wishes to achieve? • Ask yourself… • “What problems are we trying to solve?” • “What are our strategic objectives?” • “What do we want to achieve from out relationship?” • Then clearly define how to measure success! • Some typical high level desired outcomes seek improvements to: • Cost • Schedule • Performance

41. Rule 4: Pricing Model (not prices for tasks)

42. Rule 4:Pricing Model Incentives Optimize for Trade-ups! • A pricing model should have an “investment” mentality and offer the service provider the expectation that if it achieves results – it will be rewarded • Use incentives to encourage service providers to optimize for cost/service tradeoffs and reward for achieving “trade-ups” – not trade-offs • The deal should span a long enough timeframe to provide a ROI for investments made in transforming the business

43. Solow’s Law (Robert Solow, Nobel Prize Economist) 87% of Economic growth is driven by “technical change” which is driven by improvements in business process or technical improvements in products. Labor & physical capital 13% (e.g buildings, machinery) The vast majority of today’s outsourcing contracts are for labor and physical capital rather than for innovation and problem solving! Innovation & Technical Change 87% Solow’s Findings

44. Rule 5: Insight verses Oversight Governance

45. Rule 5:Insight vs. Oversight Governance Structure • Many of today’s governance structures are poor to non-existent • Those that do have governance structures tend to rely on a culture of oversight vs. insight • A good governance structure works to get the “Rhythm of the Business” and use fact-based data to help solve problems

46. Manage the Business…Not Just the Supplier! ME WE • Getting the supplier to meet my needs • Finding a way to meet both our needs BECOMES • Work together to achieve performance and compensation goals • It’s in the contract, now it’s the supplier’s problem • Communicate the issues, jointly find solutions • Blame and punish the supplier • Integrated planning and communications • Unpleasant surprises

47. Playing by the Rules Really Works!

48. Playing By the Rules Really Works(book release date Sept 2012 – Palgrave Macmillan) • P&G (Real Estate/Facilities Management) • Microsoft (BPO) • McDonald’s (Supply Chain) • U.S. Dept. of Energy (Environmental Services) • State of Minnesota Dept. of Transportation (Construction) • Integrated Management Services (Staffing) • Diversey (IT) • Water for People (non-profit NGO support in developing countries)

49. Case Study OneFinance

50. Hybrid/ Transformational Outcome Based 1. Outcome Based vs. Transaction Based Model Transaction Based Managed Services