Breakout Session # Bernie Clendenin, Project Director – Relationship Management Practice, EquaTerra Date: Monday, Octob

2. Optimizing Value: Best Practices in Outsourcing Relationship Management Providing participants with practical strategies and best practices to optimize the value of an outsourcing relationship. Breakout Session # Bernie Clendenin, Project Director – Relationship Management Practice, EquaTerra Date: Monday, October 17th, 2005 Time: 11:00 am – 12:00 pm NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

3. Bernie Clendenin • Project Director, EquaTerra’s Relationship Management Practice • Bernie co-created the consulting practice known as Customer Value Relationship Management, now known as IBM Relationship Alignment Solutions (RAS). He assumed the position of Director of Customer Relations Development providing functional guidance worldwide. This leading edge business design has been implemented in over 70 engagements. • Prior to creating RAS, Bernie spent many years with IBM in various leadership roles. In 1995, he accepted the position of Director of External Business Relations responsible for ISSC and Global Services - Americas strategic supplier relationship management. In this role, Bernie and his team negotiated and managed relationships that saved IBM millions of dollars for computer products and services. • Bernie began his entrepreneurial career with IBM by completing a utilization analysis of personal computers in a corporate IT infrastructure environment and identifying the considerations for effective use of this new technology. This project and his experience in banking shared services initiated his knowledge and understanding of BPO and how to advise clients on sourcing solutions. NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

4. – Introduction – NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

5. Evolution of Outsourcing • 1960s: Timesharing used to manage costs • 1980s: Entire IT operations shifted to an external provider • 1990s+: Extension of outsourcing to IT- intensive business processes: • Customer Care • Financial and payment services • Human Resources services • Primary drivers: • Increased competitive pressures • Need to access world-class capabilities • Desire to share risk NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

6. Contracting Trends • Length of contracts has stabilized in the 5-7 year range • Maturing contracts in BPO are now coming up for rebid or renegotiation • Globalization of service delivery is complicating the financial structures • Demand for multi-tower deals is rising and driving new and interesting economic models • Selected providers in specialized industries are experiencing “full dance cards” • Shrinking timeframe to “get to contract” NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

7. Outsourcing: Satisfaction • Many customers have achieved benefits and are satisfied with their current BPO supplier Source: 2004 META Group Research of IT and Business Executives Satisfaction Rating Scale: 1 = Dissatisfied to 5 = Fully Satisfied NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

8. Relationship Management is Key to Achieving Value ...Ineffective relationship management can reduce returns by as much as 75 percent Loss of Outsourcing Value from Ineffective Vendor Management Efforts Duplicated Resources Wasted Problems Not Managed Performance Not at Expected Levels Between 50 and 75 Percent of Relationship Value may be lost due to poor Relationship Management Vendors Deployed Against Conflicting Or Wrong Goal 10%-10% Value Loss Operational Challenges Opportunities Untapped 20%-30% Value Loss Performance Challenges 5%-10% Value Loss Portfolio Management Challenges Total Potential Value Gained From the Outsourcing Relationship “Net” Value Gained From the Outsourcing Relationship NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

9. Outsourcing Philosophy • Our focus is to create viable long-term relationships • Our process establishes successful and balanced relationships by: • Being collaborative • Enabling convergent behaviors • Encouraging mutual respect • We’ve abandoned adversarial behaviors • We advocate the long-term view and emphasize long-term solutions and the operational relationship • The lifetime success of outsourcing agreements is critically dependent on effective relationship management and governance - we introduce this concept early and often NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

10. Meet contractual obligations Ensure effective management Rapid resolution of issues Ensure management control Provide consistent direction to Provider Risk Mitigation Value Realization Purpose of Relationship Management & Governance • Ensure delivery of expected Savings • Ensure market pricing • Manage demand • Create optimization through standardization • Leverage and focus Provider capabilities • Institutionalize process improvement Relationship Mgt & Governance must effectively balance these objectives while bringing the intent of the deal to life NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

11. Optimizing the Value of Outsourcing Governance Operating Model Intent of the Deal Commercial Management Relationship Management To achieve optimum value from an outsourcing relationship, all 3 governance components must be tailored to the intent of the deal and adjusted over the life of the relationship NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

12. Relationship Management– The “Skill” of Governance – Governance Operating Model Intent of the Deal Commercial Management Relationship Management NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

13. The process of aligning, assessing, and improving business relationships Involves setting and managing expectations Relies heavily on collaboration skills & communication skills Relationship Management Defined Service Provider Governance Business Units Retained Organization NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

14. Substantive Issues Service levels Pricing Replace/Refresh hardware Terms of employee transfers Third-party software Timely performance reporting Relational Issues Understanding each other’s objectives Building trust/mutual respect Feeling fairly treated/not coerced Consulting with other party in timely way Open, quality communications Substantive vs. Relational Issues NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

15. Relationship Issues • Contract terms and performance expectations have diverged • Buyer wanted an advisor/collaborator, but got new operations management • Staff turnover has resulted in unmanaged expectations & priorities • Scoped functions are being managed effectively, but changes in business requirements are straining the relationship • Incentives do not align with outsourcing objectives • Difficult conversations & negotiation cause strife & trust erosion • Assumption of predatory motives leads to counterproductive behavior & inability to capture value of outsourcing NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

16. Relationship Management is Key to Achieving Value ...Ineffective relationship management can reduce returns by as much as 75 percent Loss of Outsourcing Value from Ineffective Vendor Management Efforts Duplicated Resources Wasted Problems Not Managed Performance Not at Expected Levels Between 50 and 75 Percent of Relationship Value may be lost due to poor Relationship Management Vendors Deployed Against Conflicting Or Wrong Goal 10%-10% Value Loss Operational Challenges Opportunities Untapped 20%-30% Value Loss Performance Challenges 5%-10% Value Loss Portfolio Management Challenges Total Potential Value Gained From the Outsourcing Relationship “Net” Value Gained From the Outsourcing Relationship NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

17. Relationship Mgmt & Value Capture The Intent of the Deal guides the selection of the right Relationship Type Governance Operating Model Capturing Value requires: • Relationship Mgmt Framework • New Skills & institutionalized capability • Continuing Relationship Focus Intent of the Deal Commercial Management Relationship Management Achieving optimized value requires institutionalized focus and execution of relationship management capabilities tailored to the intent of the deal and adjusted to the changing business needs NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

18. – The Relationship Continuum – NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

19. The Relationship Continuum Outsourcing can be viewed on a continuum: at one end are commodity suppliers, and at the other end, solution providers or partners Transactional Collaborative Partnership Enhanced Commodity Price Interchangeable Product Customized Value Integrated Solution NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

20. Transactional Relationships Description • Market Pricing • Commodity Product or Service • Mass Production Characteristics • No Knowledge of Each Other’s Processes • Price is only differentiator • Unable to Beat Competition with Relationship Service provider does same for you as for everyone else NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

21. Enhanced Relationships Description • Some Customized Expertise • Expectations Negotiated • Performance Contract • Little Willingness to Change Process Characteristics • Customer Service and/or Product Quality are Superior • Value Derived From Reliability • Some Client Knowledge/Intimacy Service provider uses limited customer knowledge to provide value-added services NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

22. Collaborative Relationships Description • Customized Expertise • Integration of Process Characteristics • Joint planning and sharing of information • High Degree of Client Knowledge and Intimacy • High Degree of Loyalty Develop an appreciation for each others capabilities, and use that knowledge to develop solutions NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

23. Partnership Relationships Description • Customized Expertise • Full Process Integration • Shared Responsibility • Focused on Outcome Characteristics • Intent to Innovate • High Degree of Mutual Knowledge and Intimacy • High Degree of Loyalty • Shared Risks/Rewards New competitive capability through joint innovation NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

24. The Relationship Continuum Characteristics Transactional Collaborative Partnership Enhanced • Shared risks & investment • Deeply integrated • Mutually dependent • Customized/ individualized • Process & data integration • Solutions oriented • Shared rewards • Some customization • Flexibility/levels of service • Special knowledge • Commodity Price • Interchangeable Product • Highly specifieddeliverables NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

25. Establishing a Collaborative Relationship Requires a Paradigm Shift Attributes of a typical customer-vendor relationship • “This is about getting them to meet our needs” • When things go wrong, assign blame and apply contractual penalties • Customer decides, vendor executes • Customer defines metrics; supplier is evaluated • Negotiations are often adversarial; produce arbitrary outcomes • Each party is often surprised and learns of decisions after they are made Attributes of a collaborative relationship • “This is about meeting both our needs in a sustainable way” • When things go wrong, diagnose joint contributions and work to avoid repetition • Wise decisions need joint input • At least some metrics are jointly developed and shared, or symmetrical • Negotiations focus on problem-solving; produce good precedents • Surprises are rare; planning is highly integrated; communication is frequent and robust This implies a behavioral change in dealing with the BPO service provider NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

26. Size and Scale of Governance Team Global BPO agreements typically require Collaborative Relationships and an annual investment sized to the scope of the deal. Transactional Collaborative Partnership Enhanced % of annual Contract Value • Delivery Management • Quality Management • Operational Customization • Joint Planning • Coordination & Communication • Program Management • Value Management & Reporting Focus NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

27. Now think of a Current or Desired Relationship • What type of relationship do you/did you desire in the long-term? Why? • What type of relationship do you have? Why? Transactional Collaborative Partnership Enhanced NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

28. How to… close the gap between the starting Relationship and the Desired Long term Relationship NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

29. Relationship Management Assessment Transactional Partnership Vendor Partner NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

30. Relationship Components Task Culture Business Model Economic Value Innovation Risk Sharing Operations Context Value Awareness DevelopmentofTrust Shared goals Incentives Leadership Assets Knowledge Processes Inter-dependence Commitment Performance Assumptions Predisposition Attitudes Experience Expectations Solutions Issue Resolution The Relationship Components were derived from the work of John Henderson, Boston University NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

31. Actions Needed? Value – Commitment – Assumptions NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

32. Relationship Components Awareness: • How well are any contractual obligations understood by the people in each organization – i.e. task awareness? • Are company cultures compatible enough for collaboration? • Are the people in each organization aware of the each other’s business environment: business model, decision making processes, operational tasks? NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

33. Relationship Components Inter-Dependence: • To what extent will the organizations be able to leverage each other’s strengths – or assets? • How integrated do processes need to become? • To what extent is knowledge transfer important? • How dependent will you become on the Service Provider’s industry or functional area expertise? NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

34. Relationship Components Performance: • How will contract service level changes keep up with business environment changes – how will you manage ever changing expectations? • What are the mechanisms/processes for issue resolution? • Was the relationship established for commodity-type services, or was it established to leverage the provider’s solution orientation? NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

35. Actions Needed? Awareness – Interdependence – Performance NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

36. Governance Operating Model – The Work of Governance – Governance Operating Model Intent of the Deal Commercial Management Relationship Management NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

37. Meet contractual obligations Ensure effective management Rapid resolution of issues Ensure management control Provide consistent direction to Provider Risk Mitigation Value Realization Purpose of Governance • Ensure delivery of expected Savings • Ensure market pricing • Manage demand • Create optimization through standardization • Leverage and focus Provider capabilities • Institutionalize process improvement Governance must effectively balance these objectives while bringing the intent of the deal to life NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

38. Most BPO Deals are Transformational • Companies are outsourcing for more than cost savings, they are interested in transformation • 46% said transformational services plus operating capability was the most important selection criteria in choosing a BPO provider • 22% said lowest cost solution was most important • Even Transactional deals may require some degree of organizational transformation The Governance design must foster and facilitate collaboration Source: IDC Outsourcing Forum April 20, 2004 NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

39. Parent Guaranty Scope of Services Service Levels Fees Reports Managed and Assigned Agreements Key supplier Personnel Data Privacy and Protections Personnel Transfers Transition Plan Service Locations Loaned Employee Agreement Governance Approved Subcontractors Software DRP & BCP SP Competitors Records Management Plan Form Confidentiality Agreement Governance Requirements Governance enables all Italicized Contract Schedules An analysis of the Intent of the Deal,the contract, the Relationship Type and the Role of Governance will identify the Governance requirements NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

40. Deconstructing Governance Standardization/Efficiency Defined Service Management Involvement/Knowledge Transfer • Decision Rights Development • Transformation Planning • Project Portfolio Management • Commercial Decision-making • Client/Provider Alignment • Customer Relationship Mgt. • Project Prioritization & Approval • ID Business Requirements • Communications Planning & Delivery • Solution Development “Strategic” Activities Specific Division/Location • Report Consolidation & Generation Report Distribution • Issue Tracking and Monitoring • Contact Administration • Governance Process Mgt. • Asset Tracking • Tool Implementation & Mgt. • General Administrative • Issue Resolution • Benchmarking • Compliance Audits • Root Cause Analysis • Tools Selection • Best Practice Introduction “Transactional” Activities “Consultative” Activities Generic NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

41. Functional View of Governance Value Creation / Realization Risk Mitigation / Control Governance encompasses the management of these functions Service Quality Financial & Contractual Compliance Change & Program Management Issues & Problems Communications NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

42. Commercial Management and Compliance Management Financial/Contract Management Compliance Management • Address contractual requests • Monitor financial performance • Ensure accuracy of all invoices and validate receipt of service • Facilitate payment approval process and controls • Facilitate business case development • Monitor asset management • Provide regular financial reviews • Calculate and process cost allocations where appropriate • Maintain industry knowledge of pricing and contract terms Statutory & Regulatory • Ensure adequate internal controls to meet audit and regulatory requirements Internal Controls • Provide advice and guidance on security, business continuity and other internal standards Contract • Ensure contract provisions are being enforced • Ensure visibility into service provider operational changes • Ensure governance protocols are developed, maintained and renewed NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

43. Governance is multi-dimensional and complex Service Provider Governance Business Units Retained Organization NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

44. Decision Rights • A Decision Rights model facilitates high-quality decision making in a complex multi-stakeholder relationship • So that • It is clear who participates in decision making, • Who facilitates the decision process, and • Who has decision authority. • Decision making does not have to be a binary choice (a person makes the decision or doesn’t) – multiple people/groups can participate in different ways NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

45. Why do we need Decision Rights? • To define the role, and authority, of Governance and how it interacts with other key stakeholders • To set expectations at the beginning of the outsourcing relationship • Maintain control during a period of transition and uncertainty • To avoid the churn that happens in the first several months • Sets the proper tone with the service provider Decision Rights are the design points for the governance processes and job descriptions NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

46. Sample Governance Guiding Principles • Foster a fair, productive and collaborative relationship between Client and Provider • Develop an environment of mutual respect • Empower Provider to provide the best services possible • Leverage Provider’s expertise wherever possible • Be proactive in planning, problem, and change management • Don’t duplicate Provider’s responsibilities • Oversee and manage the What not the How • Retain and develop the capability to establish and enforce: • Policy setting • Decision Rights • Performance oversight and reporting • Strategy and innovation NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

47. Processes: • Are how the work of governance gets done • Help institutionalize governance capability • Reinforce the interdependence of the governance team NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

48. Governance Staffing Do you have the right mix of roles, skills and attributes to perform these functions? NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

49. Governance Roles and Responsibilities Governance Executive Service Quality & Compliance Program Management Office Commercial Management Relationship Management • Ensures timeliness and accuracy of performance reporting • Facilitates planning for Transformation and Transition • Acts as Transition lead for Client • Responsible for timely and accurate payment of service provider • Responsible for value tracking and all financial reporting • Ensures compliance with contract commitments • Prepares the organization for change • Communicates the value of outsourcing and other changes • Collects demand forecasts and business requirements • Escalates business issues NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners

50. Optimizing the Value of Outsourcing Governance Operating Model Intent of the Deal Commercial Management Relationship Management To achieve optimum value from an outsourcing relationship, all (3) components must be tailored to the intent of the deal and adjusted over the life of the relationship NCMA 5th Annual Commercial Contract Management Conference Make the Connection: Your Customers, Suppliers, and Partners