Strategic Enablers: Transitioning to Outcome Based Models

1. Strategic Enablers:Transitioning to Outcome Based Models Amit Chadha

2. Setting The Context Strategic Enabler for Growth and Progression Defining Outcome Based Models … “OBM’s” • “Outcome-based model is a mechanism in which the service providers’ fees are linked to business/ technical results achieved by the client attributable to the work done by the service provider. • The service provider instead of charging for man-hours spent or units of resources deployed, charges on the basis of outcome delivered such as savings achieved, increased profits, revenue growth, etc.” • – kpmg.com/in Nov 2010 A Vast majority of Projects Executed By L&T are Outcome based. L&T IES is extending this in the Engineering Services domain.

3. Key Levers for OBMs ESPs Clients Catering from Concept-to-consumer, they develop full service Capabilities and seek larger volumes of work. Organizations outsource more and do more concurrent engineering with internal/ external parties OBMs Want to pass on more risk from their balance sheet Over a period of time, mature-up and seek more independent control of projects/ work Find Innovative ways to pay for product launch and product sustenance as consumers press for lesser wastage and improved value from each dollar spent

4. Key Industry Segments for OBMs Industry Specific Driver Heat Map Aero Auto/Trucks & Off Highway Medical Devices/ Pharma. Oil & Gas/ CPG Consumer/ Industrial Products High High High Medium Risk Profile Low Long Medium Medium Medium Time to Launch (VoC to Production) Short High High High Medium Medium Average Cost To Launch High High Where are ESPs Getting engaged in Outcome Based models? Medium Medium Low The tendency to contract OBM’s is pure Math, read as: f (Liability, Cost, Time/Schedule, Complexity, number of hands offs, Proximity to client base, Degree of product’s tangible Factor, Industry Trends)

5. Variants of OBMs… Case Example Model Outcome Remuneration Critical Success Factors Unit Based Pricing % Fees Based on successful Launch of product Deliver a “Productive” Product Assured Cost take out Deliver a “Productive” Product • Program Management • Meet Deadlines • Meet quality and price point parameters Co-creation of Revenues Client: Medical Device Company Client: Engine Manufacturer Client: Construction Equipment Mfr. Client: Semiconductor Company Outcome Definition: Launch a certified product at $xxx a piece in the Asian market within 24 months … VOC to production Fees: 75% of our fees based on successful launch of product within price point and time lines Outcome Definition: Covert “x” number of models for a major conversion program. Fees: slab structure based on criticality, complexity and speed of delivery. Outcome Definition: Simplify product to meet cost target in a price sensitive market. Fees: Remuneration a multiple of what we were able to save per piece on manufactured cost • Industry Domain • Understand client’s market • Work with channel partners and client eco-system Co-creation of revenues Outcome Definition: Develop a next-gen controller protocol for the IP domain. Fees: 40% of Project base cost is recovered upfront. Annual royalty collected from Product sales for a three year period % of sale price of Product % of Savings paid as fees • Technical Skills • Re – Engineering/ • Re- Design of product and manufacturing process Assured Cost takeout Critical Success Factors: Technical Skills Critical Success Factors: Factory Management Critical Success Factor: Program Management Critical Success Factor: Domain Knowledge • Factory approach • Processes and Quality Control • Tools and Methodologies Paid based on Unit’s delivered Unit based pricing

6. How Do We Prepare & Transition To This ?

7. Pitfalls to be Avoided

8. In Summary, To Transition Into Outcome Based Models, • Build Confidence on Both Sides • Innovate to achieve desired throughputs. • Assess business process re-engineering requirements. • 360oRisk Management framework. • Industrialize and integrate delivery models. As service providers accelerate towards larger volumes of work and client organizations strategize towards balancing their portfolio, Outcome Based Models become a significant enabler to ensure a win-win ecosystem.

10. Progressing between Sourcing Models Description •Vendor undertakes larger responsibility of Project delivery Pros •Vendors can bring in their best practices •Collaborative model –where risks and rewards are shared Cons •Need to understand and deploy offshore model for best benefits •Need for standard processes in gathering business requirements Description •Vendor and client partner on setting joint strategic goals with defined results and incentives for achieving the same. Pros •Vendor provides an integrated outsourcing solution •SLAs are transparent and structured Cons •Very high proximity to Client’s business outcome •Multi-vendor strategy could get complex Description •Seed resources, process, technology internally Pros •Promotes IP security and core competence •Staffing is functional and aligned to company organization Cons •Can limit creativity to available resources •Averse to large change or dramatically different project handling Description •Supplementation of existing staff capacity via on-demand vendor FTE Pros •Quick commodity approach to acquire resources •Low cost of resource acquisition Cons •Costs can increase drastically with variable demand •Prone to inaccurate staffing estimations •Resources may not understand business

11. L & T- Overview Buildings & Factories • Larsen & Toubro (L&T), a $11.7 Bn, technology, engineering, manufacturing and construction conglomerate • 7 decade history in India • Plant and equipment marketed to industries in over 40 countries • Manufacturing facilities in India, China, and Gulf • Supply chain extends across 5 continents • Over 45,000 associates worldwide • Listed in all major stock exchange • in India Infrastructure Industrial Projects & Water Power Heavy Engineering & Systems Electrical & Automation IT & Engineering Services Machinery & Industrial Products Hydrocarbon

12. - L&T Integrate Engineering Services Significant Experience in Major Industry Segments Deep Domain Knowledge Over 70 Patent contributions Over 5000 highly skilled Engineers Diverse Resource Pool Thought Leadership Major Competencies in Mechanical Engineering, Embedded Engineering as well as Civil Engineering ISO 9001:2008 and CMMi Level 5 Certified Operating Globally Global Presence World Class Quality • USA • Canada • UK • France • Germany • Sweden • Denmark • Netherlands • Japan Branch Offices

13. What % Of Your Portfolio Can Potentially Be Outcome Based? Outcome Based Models typically span between 10 to 20%. A part of the business portfolio can be based on outcome model while the rest is still running on T&M/FB/Other Models Business Portfolio New Business 20% T&M / FB Outcome Based: 10 – 20% Existing clients/ Business 80% Traditional 80% T&M/FB/Other