Anatomy of a Canadian Outsourcing Deal

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• Anatomy of a Canadian Outsourcing Deal
• (Client Side Tips and Strategies)

3rd Annual CIO Outsourcing Summit Toronto,
Ontario Richard Corley (Blakes) Margaret Wiebe
(CWB)
June 15, 2005
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Overview

• Advancing the transaction by
• Tailoring the RFP
• Preparing the Draft Outsourcing Contract
• Engaging with Service Providers
• Down Selecting
• Price Competitiveness Strategies
• Preparing for Negotiations
• Enhancing the Effectiveness of Negotiations

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Tailoring the RFP (1)

• Customer needs to have a clear picture of its key
  objectives and value drivers
• Lack of internal coherence and a common vision is
  particularly damaging to mid-size sourcing
  projects
• Senior management focus and support is critical
• Customer needs to consider what can be done to
  make the opportunity attractive to competing
  service providers
• Customer should try to view the opportunity from
  the perspective of the service providers

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Tailoring the RFP (2)

• Preparation by a service provider of an RFP
  response represents a substantial commitment of
  resources
• Limit the number of service providers to those
  which are best qualified (to increase the value
  of the opportunity to the service providers)
• An RFP which clearly communicates a coherent
  sourcing vision demonstrates to service providers
  that customer has done the required due
  diligence, is committed to the project and not
  merely testing the water

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Outsourcing Contract (1)

• Inclusion of an excessively one-sided draft
  contract in the RFP is likely to give rise to a
  number of problems in the context of a mid-sized
  transaction
• Deter potential service providers from vigorously
  pursuing the sourcing opportunity
• Delays in the negotiations resulting in missed
  deadlines, delayed implementation and loss of
  credibility with stakeholders, etc.
• Additional process costs
• Harm to the relationship (which may prevent the
  parties from arriving at an optimal outsourcing
  solution)

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Outsourcing Contract (2)

• Use of an initial draft contract that is
  reasonably balanced (but includes all customary
  protections of the customer) can expedite the
  negotiations and avoid the problems that result
  from use of a one-sided contract
• Employ reasonable risk allocation principles that
  address risks of changes in a manner that fairly
  considers the source of the costs (e.g., customer
  bears unavoidable costs of new taxes for which
  the customer would inevitably have paid without
  the outsourcing)

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Engaging with Service Providers (1)

• Due diligence should have allowed customer to
  determine with reasonable accuracy the current
  base case, the optimized base case and to
  identify the areas in which benefits may be
  achieved as a result of outsourcing
• Effectively share due diligence materials to
  improve service providers knowledge of the
  opportunity (and to help them to reduce amounts
  for contingencies, included in price)
• Engage with service providers to understand keys
  to improving the value of the opportunity

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Engaging with Service Providers (2)

• Reconsider which functions should be retained or
  outsourced based on comparative advantages of
  customer and service providers
• Explore alternative strategies based on clear
  understanding of comparative advantages
• Consider short term / long term staffing
  requirements in terms of skill, customer control
  of strategy and cost implications
• Explore alternative capital refresh models
• Consider the tax efficiency of alternative
  structures and the potential for savings

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Down Selecting (1)

• The evaluation criteria should be established
  prior to issuing the RFP, and should be reflected
  in the RFP
• Customer needs to consider the key factors that
  will drive the selection of the successful
  service provider, including
• Objective factors such as price, service levels,
  response times, etc.
• Subjective factors such as reputation, culture,
  quality of the response, location of facilities,
  depth of operational team, etc.

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Down Selecting (2)

• Customer must determine the weight to be assigned
  to each factor, and how to effectively quantify
  each factor
• Subjective factors, such as culture, working
  relationship and information gathered from site
  visits with other customers frequently play an
  important role in the down select decision
• It is critical that customer and service provider
  be able to work effectively together in a
  collaborative relationship in order for the
  outsourcing to succeed

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Price Competitiveness Strategies (1)

• Extracting meaningful cost savings from mid-sized
  transactions may be challenging for a number of
  reasons including
• Limits on the ability to achieve scale savings
  due to the necessity for customer and service
  provider to retain personnel with specialized
  skills
• The relatively higher ratio of overhead costs to
  savings
• The relatively higher ratio of transaction costs
  to savings
• Other sources of higher than expected prices can
  include the specification of service and service
  level requirements beyond those actually required
  by customer

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Price Competitiveness Strategies (2)

• Strategies which may be employed to enhance
  potential savings include
• Expanding scope to increase the value of the
  transaction due to the synergies which may be
  realized through the performance by the services
  provider of additional complementary functions
• Extending the duration of the transaction to
  provide the service provider with additional
  opportunities (and incentives) to make process
  improvement and to reap the benefits of such
  optimizations
• Opportunities to perform additional related work
  (which may, for example, be offered on a right of
  first proposal basis)

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Price Competitiveness Strategies (3)

• However, changes to expand the scope or duration
  of the transaction will increase the importance
  of contractual safeguards, such as
• Limitations on price increases over the term
• Automatic price/performance price reductions (to
  reflect the expected saving resulting from
  technological advances)
• Benchmarking mechanisms
• Early termination rights
• Other market pricing or repricing mechanisms
  (such as the use of market scans, most favored
  customer provisions, etc.)

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Price Competitiveness Strategies (4)

• Other strategies which may be employed to enhance
  potential savings include
• Setting more realistic service and service level
  requirements (for example, to more accurately
  reflect current performance and user
  expectations)
• Eliminating service levels that are not required
  (e.g., those that do not truly reflect
  operational needs)
• Moving from custom to more generic services
  (which can be provided more efficiently in a
  shared service environment)
• Working with the service provider to identify and
  exploit other opportunities for cost savings and
  the achievement of greater efficiencies

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Price Competitiveness Strategies (5)

• Controlling the cost of the administration of the
  outsourcing arrangement is another area which may
  provide some potential savings
• The customer will typically want to retain the
  expertise required to develop its strategic
  direction and to effectively manage the delivery
  of the outsourced services but should avoid
  duplicating functions performed by the service
  provider

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Preparing for Negotiations (1)

• Customer should try to reduce the number of
  issues arising from the procurement by starting
  with a reasonably balanced contract
• The RFP should ask service providers to identify
  in an issues list significant concerns with draft
  contract
• The parties counsel should try to resolve and
  clarify issues prior to the full team negotiating
  meetings
• The parties should agree to rules of engagement
  and governance protocols for the negotiations at
  the outset

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Preparing for Negotiations (2)

• As part of the preparation for the negotiations
  the parties should
• Agree generally as to the make up of negotiating
  team and ensure that members of the negotiating
  team are dedicated, and are available to
  participate throughout the negotiations
• Arrange to have subject matter experts available
  to participate in the negotiating meetings as
  required
• Prepare a list of principal issues to be
  negotiated during the meetings and, prior to the
  negotiations, each party is to clarify its views
  on each issue
• Empower their negotiating teams to negotiate
  reasonable solutions to the issues

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Negotiation Governance

• The governance rules for the negotiation should
  include the following
• the negotiations are to be interest-based, and
  are to avoid the adoption of positional
  approaches
• the negotiating team should be empowered to
  address and resolve (in a fashion that the party
  believes to be reasonable) all issues, but the
  negotiating team is not to negotiate to a
  deadlock (rather the negotiating teams are to
  clearly identify the interests which each party
  believes should govern with respect to each
  unresolved matter)
• Unresolved issues (and interests) should then be
  escalated to a senior executive steering
  committee for resolution

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Negotiation Strategies

• Use issues list to identify issues, facilitate an
  exchange of views about such issues, prioritize
  issues and facilitate resolution
• Impose per issue time limitations on initial
  discussions to facilitate an efficient canvas of
  all outstanding issues
• To avoid the need for escalation, the parties
  should try to develop creative options to reframe
  the discussion and break the logjam
• As issues are resolved, the Parties should
  jointly revise the draft contract to reflect the
  agreed resolution

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• Questions?

richard.corley_at_blakes.com margaret_wiebe_at_cwb.ca
June 15, 2005