NCMA 41st Annual West Coast Educational Conference

1
Open Book, Risk/Reward Relationship Model

• Steve Ayers
• Senior Vice President for Contracts Procurement
• Science Applications International Corporation
• July 17, 2003

2
Outsourcing Relationships
3
One Size Doesnt Fit All
Outsourcing Agreement
4
Key Contract Model Principles

• The Open Book, Shared Risk/Reward Relationship is
  a performance based contract that creates a
  collaborative approach to managing complex
  contract relationships
• Open book accounting
• Mutually agreed upon baseline for scope of work
  and Clients actual current cost experience
• Periodic cost target setting
• Incentives for technical performance, cost
  reduction, and improved client satisfaction

5
Key Contract Model Principles
TANSTAAFL
There
Aint
No
Such
Thing
As
A
Free
Lunch
6
Primary Benefits

• Ensures that SAICs and the Enterprisesbusiness
  objectives are aligned - Transparency
• Both Parties are equally committed to control
  costs
• Well defined and documented service levels
• Improved client/user satisfaction
• Achievement of overall business objectives
• Non-adversarial Forges a collaborative approach
  to managing Enterprises IT needs
• Flexibility to change requirements and scope

7
Appropriate for Enterprises

• Undergoing significant change
• Requiring step change in technology
• Undergoing mergers/acquisitions
• Business process changes that may be taking place
  in the market space of the enterprise
• Requiring extraordinary flexibility to alter
  services, service levels or volumes
• With highly complex or dynamic IT environments
• Where IT costs and service quality has not been
  previously baselined or benchmarked

8
Model Provisions

• Contract agreement is structured with incentives
  that ensures that performance aligns with the
  primary objectives of the enterprise
• Cost reduction
• Service quality improvement
• Technology revitalization
• Open communication, trust
• Commitment to work together

9
Commercial ApproachesFixed-Price versus SAIC
Model
In typical IT industry Fixed-Price contracts all
savings become profit to the contractor for the
life of the contract.
Savings retained as profit by contractor
Yr 5
Yr 4
Yr 3
Base
Yr 1
Yr 2
Reducing Cost profile
SAICs Target-based Risk/Reward Model
Savings returned to client
Contractor profit
Yr 5
Yr 4
Yr 3
Base
Yr 1
Yr 2
Reducing Cost profile
(Commercial Approaches Fixed-Price versus SAIC
Model)
10
Commercial ApproachesFixed-Price versus SAIC
Model
In typical IT industry Fixed-Price contracts all
savings become profit to the contractor for the
life of the contract.
Savings retained as profit by contractor
Reducing Cost profile
Yr 5
Yr 4
Yr 3
Base
Yr 1
Yr 2
SAICs Target-based Risk/Reward Model
Savings returned to client
Contractor profit
Reducing Cost profile
Yr 4
Yr 5
Yr 3
Base
Yr 1
Yr 2
(Commercial Approaches Fixed-Price versus SAIC
Model)
11
Continuous Cost Reduction Incentive

• A significant portion of SAICs profit is earned
  by reducing the clients actual cost of the
  services
• Target setting mechanism and the share ratio
  promotes rapid cost reductions so the Enterprise
  receives the benefit of the reduced cost base
  throughout the balance of the contract term
• Share ratios at the beginning of the contract
  typically favors the service provider thereby
  creating a powerful incentive to quickly reduce
  costs
• Client retains all savings from prior years in
  the succeeding years

12
Model for Continuous Cost Improvement
Client Share
10 Savings
Share Ratio
SAIC Share
10 Savings
13
Balanced Business Scorecard Approach

• Multiple Levers to fine tune objectives
• Cost Share ratios
• Sharing ratios typically put emphasis on driving
  costs down early quickly
• Quality Incentive Fee/Penalty
• Ensures that cost reductions are not at the
  expense of service quality
• Customer Satisfaction Ratings
• Can be fine tuned to meet the needs of the
  different stakeholders in an account.
• Alignment with other Client objectives
• Risk sharing takes contingency out of the
  price

14
Balanced Business Scorecard Approach

• Continuous Quality/Performance Incentive
• Service quality incentives ensure that minimum
  service requirements are met and encourages
  enhanced service
• A portion of profit paid to SAIC is based on a
  sliding scale of performance measurements
• A significant portion of SAICs profit is
  achievable based on the satisfaction of the
  enterprise and exceeding performance goals, thus
  providing the incentive for SAIC to provide
  quality services as well as cost reductions

15
Balanced Business Scorecard Approach

• Continuous Focus on Customer Satisfaction
• Meeting minimum service levels does not ensure
  high end user satisfaction
• SAIC regularly conducts customer surveys at a
  variety of level to establish a satisfaction
  baseline against which subsequent performance is
  measured
• Results of external satisfaction measurement
  results can also be incorporated
• Establishment of business facing service metrics

16
Balanced Business Scorecard
Cost Control
Client Vision Strategy
Customer Satisfaction
Technical Performance
Other Objectives
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Target Setting Process

• Cost Target is detailed by cost element
• Cost Target is segregated by service line
• It can be further broken down into a unit cost
  target for certain service lines
• Facilitates benchmarking and simplifies
  adjustments for volume changes
• Information and data is shared and easily
  accessible to facilitate adjustments as a result
  of the changes in the environment
• Costs are can be verified by the client (open
  book)
• Periodic review of service levels and other
  objectives

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Key Benefits

• Open Book environment creates a trust based
  relationship simplifying the negotiation of
  changes
• IT services are focused on the Enterprises
  current and strategic business environment
• Balanced Business Scorecard methodology helps to
  ensure that SAICs performance is aligned with
  the clients objectives
• Client remains in control of its IT strategy
• A collaborative approach to risk management
• Results in long term relationship between the
  client and the service provider