Broadway Conf Captive Entities

2007 financial servicesfinance executives’ forum* a one day program exploring technical and business issues

*connectedthinking

Thursday | May 17 | 2007

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Using the lessons of the captive entity to improve sourcing strategy

C. Steven CrosbyManaging Director

Advisory Investment Management

PricewaterhouseCoopers

2007 financial services finance executives’ forum PricewaterhouseCoopers May 17, 2007

Page 3

Sourcing: Principles and Approach

What is your strategy to continually meet the challenges of sourcing?

Sourcing is more than just off shoring. It is about getting it right not once, but over and over again.

You need to re-think your business functions in terms of mobile assets in a global portfolio, and apply hedging and risk theory.

Your business, the industry, and offshore markets have become highly mobile, and dynamic – you need to constantly align your goals accordingly to secure maximum value for your portfolio of functions.

PwC

Vision: The Key To Unlocking Value

INFORMEDOFFSHORING

DECISION

INFORMEDOFFSHORING

DECISION


Page 4

Fundamental Questions In The Global Quest For Talent

What is the Right Answer?

Alternatives?

• Internal transformation

• Internal standardization and centralization

• Internal shared services

• Outsource to provider

Where?

• On-shore

• Near-shore

• Off-shore

• Combination

How?

• Captive

• Transitional

• Outsource

What Model?

• Fee based

• Joint Venture

• Build/operate/transfer

Sourcing Intent

Sourcing Strategy

Strategic Vision

What to Source?

Align Executives & Business Leaders

Why Source

Internal or External?

Where?

On-shore

Near-shore

Off-shore

How?

Captive

Transitional

Outsource

What Model?

Fee-based Contract

Joint Venture

Build Operator

Model


Page 5

Sourcing: Principles and Approach

There are many low cost jurisdictions, each with its own unique value proposition and service offering – choosing where to go and when is the new challenge.

MALAYSIA• Pan Asian support• Call centers• Data processing centers

INDIA• Call centers• Software development• Engineering and design• Back-office operations/data

entry

UKRAINE• Software

CARIBBEAN• Data entry

IRELAND• Software development• Call centers• Shared services

PHILIPPINES• Software development• BPO• Call centers• Data entry

Canada• Software Support• Call Center

Mexico•Customer Support•Date entry

China•Data entry•Application development•System engineering

Poland• Data center• Data entry• Pan-European

Support


Page 6

In Most Firms Captive Entity Networks Are UnderleveragedMigrating To Captive Entity Models Is Essential To Empower Large Global Firms To Controlling Risk, Saving Money and Increasing Efficiency

Captive Joint Venture Build-Operate-Transfer (BOT)

More complex to set up

Moderate investment

Less staffing risk Opportunity to

share reward Local knowledge

of the JV partner helpful

Security and data privacy issues

Knowledge transfer issues

Facilities Management

Requires highest initial investment

Specialized management commitment

Potentially high risk without solid governance and decision models

Significant opportunity to realize savings

Opportunities for scale around data, security, load balancing and privacy

Outsourced

Requires robust vendor management

Heavy management focus in the multi-vendor model

Opportunity to employ Best-of-Breed providers


Knowledge transfer issues

Enterprise’s own offshore “shared service center.” Examples include GE, American Express and HSBC.

An offshore center with joint ownership between the client and a third party partner

An offshore center built and operated by a third party for a finite time period after which the ownership transfers to the client firm.

Helpful when a firm wants to retain control but lacks local knowledge

Also appropriate when vendors lack domain experience


Poor knowledge transfer

An offshore center fully owned by the enterprise, facilities management (real estate, security, transportation, cafeteria, etc.) provided by a third party . Helpful when an

entity wants to retain control but lacks local knowledge

Also appropriate when vendors lack domain experience


Poor knowledge transfer

Popular choice for low-end business processes or contact centers. Could have two or more vendors and multiple countries

Extended OrganizationProprietary


Page 7

Creating Common Utilities in Low Cost JurisdictionsAllows Us to Serve Our Businesses Cost Effectively While Moving to Scale and Meeting the Global Challenge of Data Privacy and Risk

Implementation

Patches/Updates

Maintenance Extension

Training Security

Upgrades Deployment Development

ApplicationManagement

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Business Process

Management

Marketing/ Sales

Billing

Customer Care

Support the Business

Network Provisioning Service Assurance

Service Provisioning

Procurement HR

InfrastructureManagement

Network Mgmt

Disaster Recovery

Database Mgmt Server Mgmt

Desktop Mgmt

Performance Mgmt

Security

Storage Mgmt

Patches/Updates

Shared Services

Knowledge Process

Management

Performance Analytics

Reconciliations

Financial Reporting

Reference Data

Research Security Master Maintenance

Fund Accounting

Quantitative Analytics Algos


Page 8

What has been done?

• Large firms have launched Right Placement usually on a limited basis

• Significant movement has been made in terms of moving to lower cost jurisdictions

• Right Placement provides as-yet untapped benefits for BPO

• KPO remains an uncharted opportunity set

• Number of low cost centers keeps growing

• Control varies between the business and corporate

• Direction and management of the flow of work into centers is mixed

• Evolution into other higher evolved sourcing is muted

• Often no optimized control structure or means to secure commitment to use

• P&L control precludes true cost savings and actually reinforces inefficiency

• Incentives are not aligned to performance

• Opportunities to create shareholder value are neutralized by current structure


Page 9

What Some Firms Have DoneCenter Of Excellence CharacteristicsIndication of the importance of each characteristic:

Experience

IPR Protection

Industrial strengthProven methodologies

Infrastructure

Vendor/affiliates(Universities)

Leading edge/Thought leadership

Certification

People trained and available

1

2

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5

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Sector

Center


Page 10

What is the rest of the industry doing?

Never Really Got Done In An Optimal Fashion Created New Shared Service Challenge Over Stretched Lines Of Communication Legacy Knowledge Capital Diluted

Result: At Best A Stack Of Process, Technology, Function

Opportunity: Streamline Into High Performance Function

Fix and Ship Drag and Drop Repair On Site


Page 11

Information Characteristics

_____________________________________________________________________________________________________

People Process Technology Organizational Design Data ________________________________________________________________________________________________________ SkillsCompetencies

EducationLicensesSecurity

CostQuality

RetentionLift out /sourced

Maturity (CMM)Best Practice

OptimizedSourced

Business ArchitectureStandards ITIL

COBITTechnology ArchitectureCentralized/Distributed

NetworkBPR/DR

ScaleSourced

(BS7799/ISO27001)

LocalRegionalGlobal

Internal ProvisioningExternal ProvisioningShared Service Utility

StandardsGranularity

SecurityPrivacy

Trans-border-legal Issues

Levers Of Organizational Change

PricewaterhouseCoopersPage 12

Get the Basic FactsSummarize and Determine

DriversDetermine Root Causes

for Priority AreasGenerate and quantify

Ideas

Implement effective policies to control usage of IT

Consolidate IT standards

Implement strong IT supplier management policies

IT OPEXIT OPEX

DemandDemand

SupplySupply

FunctionalityFunctionality

AvailabilityAvailability

TransactionperformanceTransactionperformance

Change infunctionalityChange in

functionality

Use offunctionality

Use offunctionality

Complexity (level ofstandardization)


Implementation of projectsImplementation of projects

Complexity of infrastructureComplexity of infrastructure

Maturity of IT organizationMaturity of IT organization

Size of servicesSize of services

Quality of technologyQuality of technology

ProcessProcess

Capability/ peopleCapability/ people

Structure/ organizationStructure/ organization

IT OPEXIT OPEX

DemandDemand

SupplySupply

FunctionalityFunctionality

AvailabilityAvailability

TransactionperformanceTransactionperformance

Change infunctionalityChange in

functionality

Use offunctionality

Use offunctionality



Implementation of projectsImplementation of projects

Complexity of infrastructureComplexity of infrastructure

Maturity of IT organizationMaturity of IT organization

Size of servicesSize of servicesSize of services

Quality of technologyQuality of technology

ProcessProcess

Capability/ peopleCapability/ people

Structure/ organizationStructure/ organization

Drivers of IT Operating Expenditures

Activity Based CostingPwC’s Technique To Get To True Cost of ServiceProvides Accurate Baseline for ROI/TCO

2007 financial services finance executives’ forum May 17, 2007


Page 13

Introducing A New Concept: Lean ManufacturingLets Build Something Greater Than Just An Accumulated Replica of The Status Quo

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Traditional Shared Services Utility

Pushes Action To Business User To

Generate Information To Fuel The Leaning Tower of Risk

Risk Analyst

Pulls Information From The Business

Bringing It To A Single Place Where It Can Be Analyzed By The Best And Brightest

One Time

Universe Of Business Data

Tools

Standar

dsFrameworks

Reporting

Lean Model Utility


Page 14

The Lean KPO Enterprise: Knowledge Process OutsourcingCreating The Compliance Utility Of The Future

“A” TeamKnowledge

Analyst

Creating “Islands Of Innovation” To Address Complex Risk and Compliance Processing With Integrated Centralized Teams Of Specialists Supported By The Best Tools, Frameworks, Standards and Reporting Techniques. Pulling What Is Need From The Business Bring Data To Where It Can Best Be Analyzed and Acted Upon.

Universe Of Business Data

Tools

Standar

dsFrameworks

Reporting

• Framework Architects• Model builders• Testers• Certifiers• Check In/Out • Tracking

• Standardized Packages• Digital Reporting• Interactive Data• Network

• CMMI• ITIL• COSO• COBIT• XBRL

• Analytics• Database• Data stores• Parsers/Scrapers• Quants• Algo’s• Intelligent Agents• Transaction Monitors

• Full Time Focused Team• Educated/Licensed• Risk Professional• Knowledge Worker

CSU/Business InterfaceTool Island

Framework Island Standards Island

Reporting Island

Human Capital Island

Business

ü


Page 15

Captive Entity Decision Assessment Approach

In reviewing specific applications, functions, and infrastructure components, PwC brings a holistic perspective that addresses issues of risk and quality in any deployment or implementation. This supports the selection and management of specific service providers and assessments of the optimal jurisdictions for initial and future repatriation of function. A long term strategy treating the function as a mobile asset is one of the best risk mitigation and quality assurance measures.

CaptiveEntitySourceSupport

CaptiveEntitySource Preparation

CaptiveEntitySourceTCO/ROI

• Select applications, infrastructure, processes, and service components using the PwC CaptiveEntitySource selection tool.

• Determine the optimal mix of delivery models (in-source, outsource, managed services, joint venture, captive, etc.)

• Estimate ROI and time to benefit using the CaptiveEntitySource TCO and ROI models.

• Align business drivers and requirements with current array of right placement options as well as future markets and other solutions.

• Assess organizational readiness.• Identify risk factors incident various

sourcing strategies, including infrastructure, regulatory geopolitical and human capital dimensions.

• Support client selection of potential partners, including optimizing legal and economic buyer positioning.

• Provide support in negotiation of business agreements, and service level agreement including definition of critical controls, metrics and measures.

• Help identify, select and train “Away Team” and design effective communication plan and knowledge transfer plan for in country team assimilation and acculturation.

• Pre-Launch Readiness Assessment and clearance.

• Deployment optimization including regulatory approvals and sign offs, testing, and quality measures.

• Prepare standby function and rapid reaction force to address any issues and maintain client facing service quality.

• Support development, and transition from host country to in country away team, service provider or other entity.

• Maintain balanced score card, initial performance measures, and potential for change management requests and other initial transition considerations.


Page 16

Illustrative Geopolitical Risk ExampleSpecimen Analysis Stability vs. Market Orientation

Source: PwC and EurasiaGroup

Hungary

Egypt

MexicoPoland

South Africa

Turkey

India

Thailand Brazil

ColombiaBulgaria

PakistanPhilippines

Ukraine

Saudi Arabia China

VenezuelaIndonesia

Argentina

Nigeria

Iran

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low Policy Stability high

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Page 17

Business Goal Impact Organizational Impact

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ssWhat To Do With What Is Left Behind?Process Improvement: Root Cause Analysis

Response Time

Turnaround Time+Cycle

Time =

Reduce Cycle TimeNon conforming value of

Key Performance IndicatorTurnaround

Time

Impacts

Examples:• Support systems and applications lack functionality and are defective• Level 3 support team lacks business functional and technical skills.• Support personnel not available to handle the Incident• No knowledge repository of past Incidents and Problems• Level 2 support team is not being utilized

Causal AnalysisIncident

ManagementProblem

Management

Skills

Culture

Process Definition Systems Knowledge

Management

People Technology GovernanceProcess Information

ImpactsImpactsImpacts

Documentation

ProjectManagement

Service LevelManagement

RiskManagement


Page 18

What To Do With What Is Left Behind?Creating An Index To Measure Performance On The Ground

• Review with stakeholders and assign a relative weight to each parameter, based on estimated impact on end goal

• Also assess the Gap from expected

• Use the two to compute the index

• Compute weighted index and benchmark against actual performance to correct weights assigned

Parameter Weighting(1:lowest – 9: highest)

Gap(1:lowest – 9: highest

Impact

Training coverage 1 4 4

Documented processes

2 5 10

Availability of vendor personnel

3 1 3

Promptness of vendor personnel

6 8 48

Knowledge exhibited

8 7 56

Process adherence

7 2 14

Ownership 9 9 81

System availability 4 3 12

Retention 5 6 30

TOTAL 258

INDEX/Score 258/9 = 28.67

2007

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Contact InformationC. Steven Crosby(646) [email protected]

mailto:[email protected]

2007 financial services finance executives’ forum

© 2007 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP.