Why Outsourcing has worked in other industries And

Why Outsourcing has worked in other industries…. And, why it works for Utilities Michael R. Foley Vice President, Utility Services First Data Utility Group April 13, 2005

Outsourcing is a Major Driver of North American Economy è è è Pervasive throughout all industries Service providers are everywhere; on, near and offshore Standardization of models—portability and compliance built in Web-based technology platforms enable performance anywhere, anytime Outsourcing cannot be reversed or ignored— any legislation will fail US economy is largely dependent upon outsourcing

Reasons Companies Outsource Rising “ In the end this is why companies look for help” DJO Source: The Outsourcing Institute, Fifth Annual Outsourcing Index, December 2002

Evolving Outsourcing Business Models A little or a lot…. Model Type Typical Characteristics Asset Purchase/Divestiture Cash for assets, funded by BTO, cost savings guarantees Business Transformation Outsourcing (BTO) Multiple processes, SLAs obligation to re-engineer, gain sharing, cost savings Business Process Outsourcing (BPO) Single or Multiple processes, SLAs, cost savings

Evolving Outsourcing Business Models lue a r. V e m C to s u Transformation Value Proposition: Competency Focus Business Impact Thought Leadership Process Outsourcing Value Proposition: Cost Reduction Service Levels User Satisfaction Transaction Utility Value Proposition: Lowest Cost IT Outsourcing (Apps + Infrastructure) Key Success Factors • Business model • Consulting capability • Vertical industry credibility • Deep process/subject matter expertise • Leverageable solutions • Program management • Delivery capability. . . – Low cost – Multi-client – Multifunction – Best shore

Virtually any business process can be being outsourced Typical examples Company Processes Outsourced General Motors Manufacturing, Design Delta Airlines Maintenance, HR Catering, Call Center Comcast Billing, Customer Service

Industries where Outsourcing prevails: è è è Automotive Consumer Goods Financial Services Government Health Care Insurance è è è Manufacturing Technology Transportation Telco, Cable & ISP Utilities and Energy

Utility Industry Structural Issues Driving Outsourcing Decisions è Customer Expectations è Shareholder Expectations è Regulatory Expectations è Restructuring/Competition – it’s here to stay è Energy/Utilities Industry emerging from capital crunch è Failed diversification efforts put focus back on wires and pipes è Focus on operational efficiencies and technology Changing Business Environment Forcing Utilities to a “Run the Business Better Strategy”

Outsourcing Isn’t New To The Utility Industry Utilities have increasingly used outsourcing to reduce cost … Source: Chartwell; 2003 … but only in a fragmented way We believe a more comprehensive outsourcing approach that is integrated with business strategies and goals will yield substantially greater benefit.

The Business Case for Utilities is Compelling $100 Credit/ Collections 25%-35% Reduction $60 -$75 Technology 15%-20% Reduction Billing 15%-20% Reduction Baseline Costs Contact Center 35%-55% Reduction Projected Stable Operations (no inflation) Typical Savings Potential: 15% to 40% § Through consolidation, standardization, better technology and labor costs § Improvements in quality through error reduction and business process improvement. § Service level agreements that align with contractual and regulatory requirements

Cost Advantage of Outsourcing and Offshoring Cost per Transaction (Index) 100 - 85 - Client Today 5% - 10% Process Optimization Client with Reengineered and Restructured Services U. S. Outsourcer 68 - Outsourcer With Offshore Capabilities 58 50 - Captive Offshore Client Volume Source: Booz Allen Hamilton Outsourcer Volume Transaction Volume 15% - 20% Scale 10% - 20% Offshore Labor & Overhead

Market Point of View “Demand for BPO services will continue to grow in 2004 and beyond. . . Through 2005 business process outsourcing (BPO) and business transformation outsourcing (BTO) will ultimately become synonymous…” METAGroup, John Van Decker / Stan Lepeak, August 20, 2004 “…. Predict that half of all G 2000 companies will use enterprise HRO by 2008…” METAGroup, Ron Hanscome Enterprise HR Outsourcing: Ready or not Feb 24, 2004 "During 2004/05, continuing pressure to achieve operational efficiency, adoption of the asset management model, and a regulatory environment favoring the purchase of services versus internal provisioning will drive significant increases in outsourcing…” Meta Group, Dr. Zarco Sumic, May 20, 2004

What Should Utilities Outsource?

How Strong are Your Capabilities?

Significant Outsourcing Deals è è è è Cap Gemini/TXU --Meter to Cash, Shared Services Xcel Energy – IT, Back Office Outsourcing Puget Sound – CIS Hosting, Application Management NStar, Entergy, PSEG, Cinergy, Avista– IT Outsourcing City of Austin, Orlando Utilities – CIS Hosting, Application Mgmt Metro St. Louis – CIS, EBPP Direct Energy – Back office processes LIPA – Electric Operations, Back Office Enbridge, Hydro One – Meter to Cash Southern Company Gas – Back Office BC Hydro – Meter to Cash, Shared Services Williams Companies – Back Office Operations Ni. Source -- Pending

… And Capital Markets See The Value Outsourcing Creates Performance Of Outsourcing Companies Versus The Market Measured From 40 Days Before Announcement To 40 Days After Announcement $114 Outsourcing Index $110. 98 $112 $110 Day Of Press Release $108 “Strategic outsourcing positively impacts shareholder value. Our research suggests the difference is in the order of 5. 4% above the individual sector average and 4. 9% above the overall FTSE 100. ” - Source: Morgan Chambers, “Outsourcing in the FTSE 100; The Definitive Study”, 2001 $106 “Evidence shows that IT outsourcing has a discernible positive impact on share prices. A study of 27 companies undertaking large IT outsourcing initiatives indicates an average gain in shareholder value of 5. 7% over and above the general market trend. ” $104 $102 Market Index $106. 33 $100 $98 $96 $94 -40 -30 -20 -10 0 10 -Source: Stern Stewart, “IT Outsourcing and Shareholder Value”, August, 2000 20 30 40 - Source: Stern Stewart, “IT Outsourcing and Shareholder Value”, August, 2000

Obstacles to Utility Outsourcing è è è è Control Issues Risk (Actual or Perceived) Regulatory Political Organized Labor Aging Workforce Other Stakeholders

Summary Top 10 Reasons for Utility Outsourcing è è Focus on core competency Increase enterprise flexibility Increase customer satisfaction Innovation è è è Gain access to markets Generate cash Free up capital Turn fixed costs into variable costs Reduce costs Spread risk

First Data Corporation Among America’s Most Admired Companies è è In the Fortune 500 listing, First Data ranked number 216 based on revenues in 2004. In Fortune's 2004 Most Admired Companies, First Data ranked second in the category of computer data services companies. “We have world-class technology, processes, and experienced people that are highly transferable to other markets. We have unmatched scale and a business model that is extendable. We’re looking at opportunities that leverage the business model across a spectrum of industries. - Charlie Fote, CEO and President, First Data Corporation

Outsourcing? “Do what you do best; outsource the rest…” Tom Peters In Search of Excellence