SERVICE PROVIDER ALIGNMENT

SERVICE PROVIDER ALIGNMENT Presented to: Presented by: Larry Ebert Cushman & Wakefield

1 A G E N D A INTRODUCTION ENTERPRISE ALIGNMENT SERVICE PROVIDER ALIGNMENT VESTED OUTSOURCING CASE STUDY QUESTIONS AND ANSWERS

ALIGNING FOR VALUE CREATION 2 Core Strategy CRM Insight and Strategic Planning Strategic Supplier Management (SRM) Partnering w / HR, IT, Fin CRE Management Program Management Performance Management Lease Administration Contract Management Transaction Management Sourced Delivery Facilities Management Project Management Brokerage / Leasing Energy Management Food Services Office Services

ALIGNING FOR VALUE CREATION 3

ALIGNING FOR VALUE CREATION 4 Degree of Outsourcing Varies by Function N/A Sustainability Mgmt Site services Risk Management Construction Management Facility or Workplace Design Strategic Planning Portfolio Management Lease Administration Transaction Management Project Management Activities are outsourced through a strategic partner relationship Some activities are outsourced in a strategic manner Some activities are outtasked or outsourced, but not necessarily in a strategic manner Most activities are outtasked on a case-by-case basis Some activities are outtasked on a case-by-case basis Few activities are out-tasked on a case-by-case basis Facilities Management 0% 20% 40% 60% 80% All work is completed inhouse

STRATEGY ALIGNMENT 5 Strategic Alignment Capital One Case Study $7.00 $6.00 EPS $6.60-$7.00 $6.21 $5.00 $4.00 $3.00 $2.00 $1.00 $1.72 $1.32 $0.48 $0.64 $0.77$0.93 $2.24 $2.91 $3.93 $4.55 $0.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20042005(E)

STRATEGY ALIGNMENT 6 Strategic Alignment Capital One Case Study Millions $2,500 Revenue $2,000 $1,500 $1,000 $500 $0 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Strategic Alignment Capital One Case Study STRATEGY ALIGNMENT 7 Corporate Vision Corporate Workplace Vision CRE Vision Vision: who we want to be our aspirations Deliver superior shareholder value as a diversified consumer financial services company People sensitive, providing a stimulating work environment Strong, differentiating, values driven culture Distributed, agile workforce Efficient, economic infrastructure CRE contributes to Capital One s success by creating a tangible and differentiating atmosphere which enables associates to feel valued, supported and productive in a cost efficient manner. Strategy: a 2-3 year plan on how we plan to get there Corporate Strategies Build an enduring card franchise Build a diversified consumer financial institution Lead the transformation CRE Strategies Optimize workplace investments Revolutionize the workplace Reinvent workplace services Lead the transformation CRE Key Results Optimize workplace costs Increase workforce performance Improve associate satisfaction Improve CRE capabilities 7

STRATEGY ALIGNMENT Strategic Alignment Capital One Case Study 8 Company Priorities Build an enduring card franchise Build a diversified consumer financial institution Lead the transformation CRE Strategy Optimize investments Revolutionize the workplace Reinvent workplace services Lead the transformation Results CRE Key Optimize real estate costs Increase workforce performance Improve associate satisfaction Improve CRE capabilities

STRATEGY ALIGNMENT 9 CRE Strategy involves running the CRE engine and anticipating future real estate needs CRE Strategy Run the Engine Anticipate Future Needs Reinvent Workplace Services Optimize Investments Revolutionize the Workplace Lead the Transformation

STRATEGY ALIGNMENT 10 OWN THE ATMOSPHERE CRE Strategy Optimize Investments Revolutionize the Workplace Reinvent Workplace Services Lead the Transformation CRE Programs Manage the Footprint: Build, lease and exit locations in alignment with business plans Support merger & acquisition activity and enable integration of acquired real estate Partner with business clients to align investments and services with business objectives Pilot FOW, assess results and develop a broader rollout Partner with HR and IT to offer our customers integrated services for their workforce Provide self-service access for key services Deliver innovative services that support customer needs in all work environments Provide services that support a distributed work environment Execute with discipline and controls Infuse managing through information into the way we do business Enhance CRE s customer focus Win with our associates Key Results Optimize Real Estate Costs Increase Workforce Performance Improve Associate Satisfaction Improve CRE Capabilities

DELIVERY PLATFORMS SUPPORTING ALIGNMENT 11 More Centralized Governance Degree of Centralization Sourcing Models Best-In-Class CRE 60% 50% 40% 30% 20% SP SP SP SP Bundled CRE Service Provider 10% 0% Real Estate Facilities Decentralized Function Minor elements of centralization Partially Centralized More than partially Centralized Fully Centralized Integrator CRE Integrator SP SP SP SP

SINGLE POINT OF CONTACT - SPOC 12 CRE EXEC SERVICE PROVIDER

Service Provider Alignment VESTED RELATIONSHIPS 13 Shared vision statement Clear scope of work focused on outcomes High Performing Relationships Clearly defined and measured outcomes Fair and balanced set of win/win incentives and lose/lose risks for nonperformance

Service Provider Alignment VESTED APPROACH 14 Align Expectations Measure Performance Reporting Scorecards Fee At Risk The lose-lose stick You don t pay it if we don t earn it Aligned Incentives The win-win carrot Shared Savings Commitment Based Incentives Employees Subcontractors

15 Confidential Case Study - Facilities Management Outsourcing Agreement

BACKGROUND 16 Extensive network of facilities Five campuses and a 10 million sq. foot real estate portfolio under original scope First generation facilities management outsourcing included vendor integration of outsourced tasks with management control remaining with Client (negotiated bid contract with narrow performance criteria) Contacted Expense Management Solutions (EMS) to assist in the next generation outsourcing of facilities management services Original fee at risk EMS deal grew to a more vested deal over term of the agreement

RULES OF VESTED OUTSOURCING 17 2. Focus on the WHAT not the HOW 3. Clearly Defined and Measurable Desired Outcomes 4. Pricing Model Incentives are Optimized for Cost/Service Tradeoffs 1. Outcome-Based vs. Transaction- Based Business Model Win/Win (WIIFWe) Relationship 5. Insight vs. Oversight Governance Structure

10 ELEMENTS OF A VESTED OUTSOURCING AGREEMENT 18 Vested Agreements embrace all 10 elements establishing successful win-win relationships. 10 Elements of a Vested Outsourcing Agreement Rule 1: Outcome-Based vs. Transaction-Based Business Model Element 1 Business Model Element 2 Shared Vision Statement and Statement of Intent Rule 2: Focus on the WHAT, not the HOW Element 3 Statement of Objectives/Workload Allocation Rule 3: Clearly Defined and Measurable Desired Outcomes Element 4 Performance Metrics for Desired Outcomes Element 5 Performance Management Rule 4: Pricing Model Incentives are Optimized for Cost/Service Tradeoffs Element 6 Pricing Model (Margin Matching Frameworks/ Incentives Framework) Rule 5: Insight vs. Oversight Governance Structure Element 7 Relationship Management Framework Element 8 Transformation Management Element 9 Exit Management Plan Element 10 Special Concerns and External Regulations

Minimal Levels of Dependency Interdependent Vested Outsourcing Case Study OUTCOME BASED BUSINESS MODEL 19 Transaction-Based Business Model Preferred Provider Low Investment-Based Business Model Shared Value-Based Business Model Outcome-Based Business Model Outcome-Based/ Performance-Based Relationship Simple Transaction Provider Approved Provider Shared Value Vested Outsourcing Relationship Equitable Partner (e.g. Joint Venture) High Base business model is fixed cost with fee at risk performance payout Incentives based on shared savings Opportunity to share value of improvements

OUTCOME BASED BUSINESS MODEL 20 Elements of a Vested Outsourcing Agreement Agreement Strengths Agreement Weaknesses Rule 1: Outcome-Based vs. Transaction-Based Business Model Element 1 Business Model Business model not transaction based Stressed innovation over cost improvement alone Promoted collaboration and cooperation Very performance based and cost savings vs. value based incentives

SHARED VISION AND STATEMENT OF INTENT 21 The agreement did not have a formal shared vision, but the Client had a clear vision for their group which includes innovation as a key enabler. Innovate. Lead. Exceed. Exceptional people leading innovative, workplace solutions that exceed client expectations and advance the industry. INDUSTRY LEADERSHIP GLOBAL CRITICAL TO CLIENT SUCCESS DYNAMIC SOLUTIONS INTEGRATOR Recognized and rewarded for advancing the profession, the workplace and our people Globally aligned organization providing business strategy and insight to our clients Strategic advisor anticipating and exceeding client expectations Thought leadership in providing innovative and intelligent solutions that inspire Use our unique insight to deliver seamless solutions

SHARED VISION AND STATEMENT OF INTENT 22 Elements of a Vested Outsourcing Agreement Agreement Strengths Agreement Weaknesses Rule 1: Outcome-Based vs. Transaction-Based Business Model Element 2 Shared Vision Statement and Statement of Intent Common goals and aligned interests Process to share Client s vision imperatives and align improvement commitments Lack formal Vision Statement Lack formal Statement of Intent Service Provider s strategic goals and objectives not discussed

Provider Input Vested Outsourcing Case Study STATEMENT OF OBJECTIVES/WORKLOAD ALLOCATION 23 The agreement should follow a simple format to document work scope at the appropriate levels, providing clarity and avoiding micromanagement: Function - objective of the service is focused on what needs to be accomplished Responsibilities - detail out the services to be performed and the results expected much like a Performance Work Statement. Service Volumes - establish expected limits of normal volumes permitting parties to respond to changes in the business environment Hours of Service - sets a clear expectation of when the service is available Service Expectations - are clear performance standards linked to the performance scorecard High Low Agreement Work Scope was an excellent balance of clarity and detail. Tasks Many SOW PWS Specificity of the Tasks Objectives SOO SOW = Statement of Work SOO = Statement of Objectives PWS = Performance Work Statement None

STATEMENT OF OBJECTIVES/WORKLOAD ALLOCATION 24 Elements of a Vested Outsourcing Agreement Agreement Strengths Rule 2: Focus on the WHAT, not the HOW Element 3 Statement of Objectives/ Workload Allocation Services defined in terms of what needs to be accomplished, not how to accomplish it A common format used to define all services Work clearly allocated to a responsible party Service matrices allow for localization of services and service levels Agreement Weaknesses Requirements were too extensive for most services

CLEARLY DEFINED PERFORMANCE METRICS 25 Service Provider Client Consensus scorecard gets Client/Service Provider to one version of the truth Gap in expectations and performance between SP and Client decreased by 91.5% in the first 2 years Neutral third party managed scorecard and validates scores Lacked two-way metrics; Client should have SLAs as well Lacked 360 review overall relationship health measures

CLEARLY DEFINED PERFORMANCE METRICS 26 Elements of a Vested Outsourcing Agreement Agreement Strengths Agreement Weaknesses Rule 3: Clearly Defined and Measurable Desired Outcomes Element 4 Metrics well balanced Low response rate for Performance Metrics for Standardized customer customer surveys Desired Outcomes service survey Metrics were not twoway, Follow up to customer service rating at/below 3.0 by a local manager or the call center no measure that track Client performance Use neutral third party for cost benchmarking (BOMA)

PERFORMANCE MANAGEMENT PROCESS 27 Strong performance management program Clear metrics tied to service objectives Metrics roll up to high level processes linked to performance incentive payments Culture of continuous improvement

PERFORMANCE MANAGEMENT PROCESS 28 Elements of a Vested Outsourcing Agreement Agreement Strengths Agreement Weaknesses Rule 3: Clearly Defined and Measurable Desired Outcomes Element 5 Performance Clear reporting requirements Approval requirement led to micro-management of Management Frequent review of KPI s SP by Client Reporting requirements were flexible Automated performance tracking fed into excel SP tracks and collects service level / customer survey performance systematically reports and manual scorecards Culture of continuous improvement

PRICING MODEL 29 Facilities Management Price Model Pass Through Costs Management Fee Shared Savings Incentive Commitment Incentive Model Manage goods, 3 rd party services and utilities $0.XX PSF 64% Base 36% At Risk Funded by the first 25% of demonstrated savings Funded by the second 25% of demonstrated savings Caps or Adjustments None 36% at risk based on performance Capped @ $0.XX PSF Capped @ $0.01 PSF Payout None Paid Qtly Based on Performance Agreed to lower cap for FY09/10 Annually Based on Performance Agreed to forgo for FY09/10 Annually Based on Performance Percent of total SP fee 0% 69% 25% 6%

INCENTIVES OPTIMIZATION 30 Incentive Caps are Good for Client.but not for Service Provider Service Provider delivered value faster to Client than to itself Preference is not having incentive caps as a way to prevent sandbagging

PRICING MODEL/INCENTIVES OPTIMIZATION 31 Elements of a Vested Outsourcing Agreement Agreement Strengths Agreement Weaknesses Rule 4: Pricing Model Incentives are Optimized for Cost/Service Tradeoffs Element 6 Pricing Model (Margin Matching Frameworks/ Incentives Framework) Fixed fee with fee at risk based on performance; Service Provider was vested to achieve performance targets Multiple incentives Well documented pricing model tied to an excellent performance management system The base fee amount was below SP s administrative and corporate overhead costs and places all of SP s profit at risk Incentive caps

RELATIONSHIP MANAGEMENT FRAMEWORK 32 Multi-tier governance structure is needed to provide insight, visibility and transparency Daily Attended by peers from both parties Monthly Attended by managers from both parties Quarterly Attended by senior executives from both parties Operational Management Group Joint Operations Committee Board of Advisors Oversees day to day operations in each location There will be several working management groups (for example, regional service delivery management groups, or projectbased transformation groups) Provides direction regarding service delivery Monitors progress of the outsourcing relationship and scope of work Responsible for service quality across all locations Set continuous innovation and implementation priorities Provides overall sponsorship, vision and goals Sets strategic direction and feedback regarding progress against Desired Outcomes and overall performance Make decisions related to escalated issues and grant approval of large transformation projects Governance protocols embedded in the service management framework to ensure continuous performance review, ongoing course correction and service improvement.

RELATIONSHIP MANAGEMENT FRAMEWORK 33 Informal process to manage the rhythm of the business Daily Attended by peers from both parties Monthly Attended by managers from both parties Operational Management Group Joint Operations Committee Strong operational level controls Daily peer to peer tracking of operations at each location Multiple operations teams are in place based on project or service Agreement outlined account manager role only Management team monitors performance to the SLA Management team responds to quality and SLA issues Operational performance metrics reviewed monthly Quarterly Attended by managers both parties unclear of executive participation Board of Advisors Overall executive sponsorship unclear as was strategic planning outside agreement renewal Governance structure not defined in agreement QBR focused on operational metrics and budget variance Informal approval of improvement/innovation projects The governance framework was not specified in the agreement

RELATIONSHIP MANAGEMENT FRAMEWORK 34 Company A B C D Traditional Bow Tie Company Prgm Mgr Supplier Acct Mgr Supplier A B C D Agreement Documented a traditional bow tie alignment Called for the Account Manager to be the focus communication Company Prgm Mgr By Location Reverse Bow Tie Company Supplier A A B B C C D D Supplier Acct Mgr Actual Alignment Peer to peer at lower levels Account manager aligned with Client counterpart Senior management interest waned

RELATIONSHIP MANAGEMENT FRAMEWORK 35 Elements of a Vested Outsourcing Agreement Agreement Strengths Rule 5: Insight vs. Oversight Governance Structure Element 7 Peer to peer Relationship Management communication structure at Framework low levels Regular communications at the operations level Well defined performance management process Hold regular business reviews (at the operational performance level) Agreement Weaknesses Agreement lacked formal governance team structure Lacked governance plan and charter Limited strategic reviews Too dependent on good relationships of individuals

TRANSFORMATION MANAGEMENT PROCESS 36 Parameter Attributes Agreement Continuous Formal program to identify root cause - Informal Improvement Joint commitment to collaboration Joint commitment Program: Assigned roles and responsibilities - Informal Review and evaluate the continuous improvement X Not Done strategy Innovation Process for submitting and evaluating ideas - Informal Management Assess the appropriate level of investment and the X Process not defined Process: desired outcomes Scoring process creates a prioritized list of opportunities Steering Committee evaluates and approves opportunity Clear method to share the winnings from collaboration Measurement and reporting to track the success of each initiative - Informal X No leadership committee - Incentive based on PSF, but capped Commitment tracking The programs for continuous improvement and innovation were informal and not clearly defined in the governance structure.

TRANSFORMATION MANAGEMENT PROCESS 37 Elements of a Vested Outsourcing Agreement Agreement Strengths Rule 5: Insight vs. Oversight Governance Structure Element 8 Informal management of Transformation improvement idea Management generation and implementation Strong change management control process Agreement Weaknesses Change was very cost focused Lacked formal governance over continuous improvement and innovation management programs Informal root cause analysis

EXIT MANAGEMENT PLAN 38 What happens at the end of the agreement? Including an exit management plan in your Vested Agreement is good business It is vital to get the governance structure right at both ends of the relationship Termination/ Expiration Assistance section sets guidelines for exiting the agreement Termination Section Includes Obligations Support Transition planning Final accounting

EXIT MANAGEMENT PLAN 39 Elements of a Vested Outsourcing Agreement Agreement Strengths Rule 5: Insight vs. Oversight Governance Structure Element 9 Key exit requirements are Exit Management Plan documented Agreement Weaknesses Tilted toward Client s interests

WIN-WIN/WIIFWe 40 2. Focuses on the WHAT not the HOW 3. Clearly Defined and Measurable Desired Outcomes 4. Pricing Model Incentives are Optimized for Cost/Service Tradeoffs 1. Outcome- Based vs. Transaction- Based Business Model Win/Win (WIIFWe) Relationship 5. Insight vs. Oversight Governance Structure

WIN-WIN MENTALITY 41 Vested Outsourcing agreements achieve mutual success based on optimizing three key goals Company Not Vested Reduced Cost to Company Vested Outsourcing Mutual Benefit But No Mechanism to Achieve Goals Innovation, Improved Service Improved Margins to Provider Service Provider Not Vested

RESULTS 42 Results It Really Does Work! Global Process Standardization SLA compliance at 94%; Performance score improvement of 47.6% after first 2 years Customer satisfaction from surveys (CSAT) of 4.1 on a 5 point scale Critical preventative maintenance compliance of 98% Non-Critical preventative maintenance compliance of 99% I WIN with lowest possible costs Procurement/Financ e WIIFWe I WIN with higher service levels Business Units / Customer I WIN with higher margins/profits Supplier FY10 is 9% lower cost Per SF than FY02 Held costs below BOMA benchmarks (an average 7% increase) Cumulative costs reductions totaling over $30M 2 Contract Extensions Book of business expanded into 4 new countries and scope of services Higher profitability; share of transformation value in profits

43 QUESTIONS?