TM OBTransformation.com. C-Level Trends of Note ISSUES OF NOTE Funding New Business Entering New Markets Globalization REQUIRES Innovation Flexibility.

TM

OBTransformation.com

ISSUES OF NOTE• Funding New Business• Entering New Markets• Globalization

REQUIRES• Innovation• Flexibility• Responsiveness

CHALLENGE• Transforming Significant Investments in IT and Business Processes• Funding the Transformation

Challenge

Economic value and measurement“Innovation” as a means to growth Business agility and responsiveness to

change Responsiveness to market and company goalsQuality service and delivery for both external

and internal customers.  

Take significant investments in IT and business processes and transform them to provide:

ISSUES OF NOTE• Funding New Business• Entering New Markets• Globalization

REQUIRES• Innovation• Flexibility• Responsiveness

CHALLENGE• Transforming Significant Investments in IT and Business Processes• Funding the Transformation

Limited Capital Available

DESIRE• Win Transformation Business • Grow

MARKET DYNAMICS• Extremely Competitive• Little Differentiation• Cash Generating

CHALLENGE• Differentiate “Offerings”• Maintain Margin

DESIRE• Win Transformation Business • Grow

MARKET DYNAMICS• Extremely Competitive• Little Differentiation• Cash Generating

CHALLENGE• Differentiate “Offerings”• Maintain Margin

Leverage cash to differentiateand win new business

Valu

e

Alignment

Time & Materials

Pay on Performance

Pay Per Utilization

Transaction - Based

Pay on Results

Fixed Price

Incentive Based - Gainsharing

Incentive Based – Business Performance

Benefits Funding

Carve Out

Shared Risk/Reward

Resource Pool

Rewards Based

Investment Based

Consumption Based

Performance Based

Equity Based

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2.0

3.0

4.0

5.0

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ECopyright Michael Filak 2008

Partners should be chosen on the basis of what economic value and alignment they can bring

Redefine Sourcing PartnershipsPartner absorbs some of the investment costs

Ensure alignmentAllocate risk to partners best positioned to neutralize

the risk The cost of capital for software projects undertaken by

companies who own the projects’ outcomes are much lower than for the peer projects undertaken by companies for hire

A provider who has real skin in the game is likelier to deliver as promised than an equally expert provider who doesn’t

Company receivesReduction in Upfront Cash RequirementReduced RiskHigher ROIMore “Transformation” for the Same Amount of Budget

•Apply specific methodology for agreeing on and tracking project milestones and outcomes Normalized license and margin deferral clauses

Investment

Equity/JV

Provider is an execution agent whose fees are partially deferred until, and/or contingent upon project milestones and/or project outcomes

Provider is a contributing provider of funds for project financing, and an owner of a part of resulting cash flows

Provider is a legal co-founder and co-owner of an income-generating entity

•Establish new legal entity with investments from clients and Provider•Establish all required Accounting, Reporting, HR, etc. procedures•Establish management structures, etc.

Create new/ modify existing set of internal account procedures to obtain internal P&L tracking actual financial performance of transformed process Supplement management structures as needed

Rewards

• Isolate a project or group of projects that can be tied directly to business-based KPIs• Determine funding requirements and develop a business plan (modeling of expected returns)• Determine project financing options • Create a sharing mechanism that gives the “funder” an acceptable return • Agree upon appropriate contract terms

Provider

Client

Funds

Project 1

Project 2

Project N

Opportunity Thesis

Returns

Where It Works - ExamplesNew Product Development – Universal/ Time

WarnerNew Geographies – RChina Transformation/Lower TCO – CA

ProcurementAnd…..

•Investment targeting returns of unlevered ROI of greater than 25%

• Operational savings in the range of 15% - 20% annually – direct impact to EPS

• Cash generated to provide fund strategic projects and initiatives.

• Positive impact on the balance sheet.

•Process performs more effectively than previously.

Newco

Co-Ownership

Provider

Anchor Client

Business Process

Services Agreement

Services Agreement

Customer 1

Customer 2

Customer N

PE

Services Fees

Equity Carve Out

ExamplesGenpactEXL

• Meaningful reduction in CAPEX through partners who invest in your transformation• More projects for the same budget• Measured economic value and performance• Reduced risk of transformation execution• Outcome-based fee structure

• Differentiation• Win new business• Utilizing capital effectively • Investment protects margin

Client Provider

Alignment