Virtual Captives The Future of Offshore

1
Virtual Captives The Future of Offshore?

• Peter Allen, Partner Managing Director, TPI
• Sanjay Gupta, Senior Vice President, Strategic
  Initiatives - Wachovia Corporation

NASSCOM 2006 India Leadership Forum 15-17
February 2006 Hotel Grand Hyatt Mumbai, India
2
Discussion Overview

• Offshore BPO Key Trends
• Wachovia and the Virtual Captive
• A Sign of Things to Follow?
• QA

3
Seeking the Best of All Worlds
Companies consider multiple alternatives when
optimizing their service delivery models and
are using more than one alternative to drive
their agenda for change.
Services Delivery Framework

• Sourcing Objectives
• Specify and source services at fixed prices
• Support business strategy
• Influence strategy by providing new capabilities
  (flexibility, cost variability etc.)

Transform the Organization
Set up a Shared Services Operation
Establish a Captive Offshore Center
Outsource
Target Operating Model
Target Operating Model
Operating Model
Roadmap
4
Global Sourcing Drivers
Capital markets and global competition have
raised the bar on performance. Sourcing can do
more than reduce costs - address underperforming
processes, scale operating models and variabilize
cost structures.
Globalization Drivers
1
2
Cost Reduction
Cost Efficiency

• Move to more efficient cost structures
• Improved scale at lower cost
• Increase variable costs

• Labor Arbitrage
• Reduced cost/unit

3
4
5
Skills Experience
Competitive Changes
Improve Quality

• Access to qualified personnel and specialized
  skills
• Access to investment in specialized capabilities
  outside your core
• Legacy migration to offshore operations keep
  key resources focused on core business critical
  areas

• Leverage supplier processes best practices
• Improved testing
• Source to someone whose core business what is
  non-core to you

• New Markets / Growth Strategy
• MA Activity
• New Products Services
• New Process/System Improvements
• Increased Capacity

5
Offshore Service Delivery Plays an Ever Expanding
Role
TPI-Advised Global Service Delivery Contracts
of Competitive versus Sole Source Contracts
of TPIAdvised Transactions with Scope Moving
Offshore (Based on )
Scope with Offshore
Scope with no Offshore
Offshore Sole Source
Offshore - Competitive
2005 TPI-Advised Contracts Scope of Contracts
with GSD
When transactions contain Global Service
Delivery, its almost always been competitive for
service providers
6
Indian Providers and MNCs Capabilities Are
Converging
MNCs Strengths Weaknesses

Indian Providers Strengths Weakn
esses

• Very good at relationship building with client,
  working hard to bridge the cultural divide
• Presents capabilities in a way that makes their
  work look like the clients process, not the
  service providers process
• Very flexible contractually (less rigorous around
  TC)
• Very price competitive
• Excellent sales and delivery teams

• Knowledge of clients business
• Better track record than anyone else
• Strong executive relationships
• Superior global delivery model
• Strong operational capabilities
• Looks real good when bringing A team to table

Convergence

• Not as innovative or aggressive solution often
  focusing on selling their solution rather than
  the process and price
• Rigidness at negotiating table
• Relatively expensive with a bias on additional
  services within proposed solution
• High transition and termination costs can hurt
  client credibility in contract negotiation

• Still working to understand the contracting
  process
• Too deferential on some issues
• Newer, less experienced staff
• Possibility for slight over-commitments

7
Heterogeneous Service Delivery Models
Best practice companies are adopting a range of
delivery models--sourced from multiple vendors
and designed to handle the full range of business
functions, from simple to complex.
Customized
Zone of Customization

• Full accountability for business results
• People
• Process
• Technology
• Facilities

Client Requirements
Shared technologies, processes, accountability
Discrete processes and functions
Where do Virtual Captives fit?
Out-Tasking
Traditional Captive
Hybrid Models
BPO / KPO
Standard
Client
Provider
8
Late Entrants To Global Sourcing Can Leapfrog the
Competition

• There is an opportunity for late adopters to
  leapfrog competitors by leveraging early
  adopters experience and avoiding the mistakes
  they made
• Best practices are better established
• Key service levels are better understood
• Mix of control and trust needed to manage vendor
  relationships is better understood

Stage 4 - Global Service Delivery
Stage 3 Strategic Outsourcing

• Driver cost optimization - improve core
  processes to create sustainable competitive
  advantage by building global operating
  capabilities
• Multiple global locations
• Sophisticated blending of in-sourcing and
  outsourcing and of near- and offshore locations
• Sourcing is seen as a dimension of business
  planning captive or third party sourcing in
  emerging markets supports marketing penetration
  push
• Option to move to pure outsourcing

Stage 2 - Relational Outsourcing

• Sourcing rises to be a corporate-level initiative
  driven by the corporate center
• Identify economies of scale that are implicit in
  business strategy
• Develop sourcing governance that balances need to
  leverage corporate scale with responsiveness to
  needs of business units
• Source services centrally but offer variable
  flavors of these services by business unit and
  geography
• Create demand management to encourage use of
  centrally sourced services

Stage 1 - Ad Hoc Outsourcing

• Realization that win/lose economics do not work
• Emphasis on longer-term relationship commitments
  and provider investment in infrastructure,
  knowledge transfer
• Have providers identify dependencies, synergies
  and touch points that allow portfolio
  consolidation
• Key mindsets management of service levels and
  results

• Driver cost reduction
• Staff supplementation and project-by-project
  outsourcing
• Key mindset manage the vendors processes
• Emphasis on input-based measurements such as
  FTEs, cost per hour to measure effectiveness
• Outsource processes that require less
  interaction with the business

9
Establish Offshore Foothold Then Expand It - A
Strategy for MNCs And India-based Providers
Master Service Agreement

• Two Global Master Services Agreements and
  associated operational Schedules
• Delivered by onshore offshore resources
• Fixed price Application Support Services
• Infosys/TCS were lower price than IBM ACN
• Five identical framework agreements
• No fixed ABN commitment to spend
• Work to be contractually agreed under a work
  order
• On-shore and off-shore mix TBD

Schedule 1
Committed Work enables provider to invest in
client-specific capacity
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Service Orders for incremental
work/processes
Schedule 6
Schedule 7
Schedule 8

Provides flexibility and does not obligate the
client financially Minimizes and diversifies
risk via contracts with backup providers if main
vendors fail Leverages individual service
provider strengths and specialized skills

• Overarching MSA and subsequent individual
  "service orders"
• Flexibility on approach to pricing
• Capgemini proposed a single center offering based
  out of Krakow, Poland with offshoring to follow
  later
• Offered a near shore solution at offshore rates
• Client has high level of visibility into
  providers costs and other economic drivers

Schedule n
10
Introduction to the Wachovia GenpactVirtual
Captive Relationship

• Genpact is creating a unit in India that feels to
  stakeholders like a Wachovia captive center but
  will be run by Genpact
• Genpact will be able to serve other clients,
  utilizing capabilities created by the
  relationship with Wachovia
• The agreement is innovative in striking a new
  kind of balance between dedicated capacity,
  specialized capability and transfer of risk
• The agreement involves an unusually high degree
  of mutual partnership between service provider
  and service recipient
• Is this a sign of things to come?

11
Discussion Overview

• Offshore BPO Key Trends
• Wachovia and the Virtual Captive
• A Sign of Things to Follow?
• QA

12
 
Key Elements of Todays Presentation

• Who is Wachovia?
• How does Offshoring fit into Wachovias
  Enterprise Strategy?
• What is Wachovias strategy for Offshore
  Operations?
• What is the Virtual Captive paradigm?
• What implications exist for industry BPO models?

13
Who Is Wachovia?
Wachovia is one of the largest banks in the world
and is headquartered in Charlotte, North Carolina.

• Diversified Banking Institution
• Retail and Commercial Banking
• Corporate and Investment Banking
• Retail Brokerage and Asset Management
• Wealth Management
• 95,000 employees globally

14
Who Is Wachovia?
At over 500 billion, Wachovia has assets greater
then the entire Indian Banking System and is one
of the top 10 banks in the world.
15
Wachovia leads US Banks in Customer Experience
Wachovias offshoring strategy must support
operational excellence and customer experience
efforts that are part of the organizational
strategy.

• Wachovia has been the leader in Customer
  Satisfaction for the last four years
• - American Customer Satisfaction Index
  (Banking)
• Wachovia leads the banking industry in merger
  integrations and customer focus during mergers
  (Wachovia-First Union, Prudential and
  SouthTrust).
• Wachovia, First Union merger integration is a
  model for the banking industry
• The Business Journal

16
Offshoring Strategy is Designed to Support
Operational Efficiency Program
Wachovia is pursuing offshoring as a strategic
tool to strengthen business processes while
gaining efficiencies to invest in the business.

• Wachovia Profit and EPS growth have been strong,
  but it has lagged its peers in Operating
  Efficiency ratio.
• Wachovia plans to improve its Operating
  Efficiency ratio by achieving 600 million 1
  billion in annual efficiency savings.
• Wachovia will reinvest significant part of
  efficiency savings to grow the businesses and
  invest in revenue generating activities.
• Efficiency Improvement Program is being executed
  while Wachovia is in a position of financial
  strength and will be completed over next 2-3
  years.

17
Bank Regulatory and Risk Considerations Were
Significant Considerations for the Offshoring
Strategy
OCC guidelines on offshoring
Wide range of regulations impacting global
sourcing SOX, GLB, AML
Regulatory factors and operational risk
guidelines played key roles in the development of
Wachovias offshore strategy
18
Internal Considerations for Offshore Strategy
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Key Elements to Executing Wachovia Strategy

• High Executive priority
• Use offshoring as transformational tool with
  ability to drive process excellence
• Ensure consistently strong delivery across
  Wachovia
• Build internal capability to assess, transition
  and manage process on an ongoing basis
• Organizational change management and
  communication focus integral part of program
• Proactively identify and mitigate risks

20
Virtual Captive Paradigm Key to Offshore
Strategy
Wachovia considered the pros and cons of existing
offshore models and none fit external and
internal requirements a new model was needed.

• The Virtual Captive Paradigm
• Looks and feels like a captive operation and has
  Wachovia Operations mindset across Lines of
  Business.
• Best of breed Global Partner with complementary
  strengths
• Genpact - Operational excellence, infrastructure,
  risk approach, people practices (attract,
  develop, retain top talent)
• Wachovia - Domain knowledge, operations, people
  practices, regulatory areas
• Supports operational excellence efforts across
  Wachovia outside of offshoring
• Skin in the game for both parties

21
Strong Governance and Execution Are Keys to
Success

• Established clear Governance and Relationship
  Model upfront
• Operationalizing Virtual Captive approach
  both in spirit and letter of the law.
• Joint strategic and operational oversight
• Ongoing leadership support, organizational change
  management
• Accountability is with Lines of Business -
  supported by central Strategy Governance
  oversight

22
Whats the appropriate offshore BPO paradigm?
Some questions to consider as you develop an
offshore BPO / KPO model.

• What model will
• Attract and retain top talent on a sustained
  basis?
• Manage organizational control needs?
• Address regulatory and risk issues?
• Provide transformational capabilities for the
  business?
• Ensure strong adoption across different business
  areas/units?

23
Discussion Overview

• Offshore BPO Key Trends
• Wachovia and the Virtual Captive
• A Sign of Things to Follow?
• QA

24
Thank You

• Peter A. Allen
• Partner Managing Director
• TPI
• 1.425.985.3799 (m)
• 1.603.465.6662 (w)
• Peter.Allen_at_tpi.net

Sanjay Gupta Senior Vice President, Strategic
Initiatives Wachovia Corporation 1.704.604.3151
(m) 1.704.383.2481 (w) sanjay.gupta_at_wachovia.com