Outsourcing Option Models

0
Pricing Models : Linear to Non-Linear
25th November ‘08

Company Confidential 1
Outsourcing Pricing Framework
Outsourcing
Traditional
T&M
FP/SLA
Managed
Services
BOT
Reverse
Traditional
JV
Profit & Risk
Sharing
Innovative
Pricing
Transaction
base
Subscriptio
n base
Ticket base
Revenue
sharing
R&D
offshorizing
• Standardize RFP process management for all kinds of deal depending on deal size
• Authority Metrics and sign-off authority by Delivery, Sales and Finance as per deal size
• Published Pricing manual

Traditional Vendor Model
• Offshorization of IT services, Infrastructure management services, CIS & BPO and Product
Engineering Services – spanning Staff Augmentation to Managed Services model
Key
Rationale
Key
Benefits
● Cost advantage on Talent / Infrastructure, Productivity Improvements
● Capabilities, Operational Integration
Pricing
Structure
• Time & material ( Time & Expenses)
• Fixed Price project
• Patni can consider offering volume based discounts, deferral/waive off of transition
cost based on volume commitments
Points to
Ponder
• Ability to consistently offer Productivity savings
• Dilution of control
• YOY Price uplifts, Attrition
• Domain Capability, Scale & Delivery Excellence
• Global sourcing solutions from Patni have helped organizations worldwide to reduce
cost and scale up operations while focusing on their core competency
• Patni’s next generation Managed Services Model has an built-in ability to effectively
predict the impact on cost and also provide plug and play service levels to address
events, such as, acquisitions, divestitures, rollouts, and expansion into new geographies
Patni’s
Expertise
Strategic Value due to
global consulting
experience

Traditional Vendor Model – TCO Savings
• Global outsourcing models have helped realized savings for strategic customers in terms of labor arbitrage, economies
of scale due to application consolidation, robust project management. A typical savings realized in TCO is demonstrated
as under :
TCO : As-Is TCO : To Be TCO : IT Transformation*
Realized 20%-25% savings in GDM
model for strategic customers as
continuous productivity
improvements
Additional Investments required to
drive platform rationalization and
agility, Monetized upfront
investments.

Build Operate & Transfer (BOT) Model
• The Build-Operate-Transfer (BOT) model offers a middle path to help organizations enjoy the
benefit from offshore services while mitigating the risks involved, with the flexibility of going
captive at any time.
Key
Rationale
Key
Benefits
● End To End Process Control, Intellectual Property
● Access to global best practices in offshoring
Pricing
Structure
• Set up of Captive Operations : Capital expenditure + Service fees for program management
• Ongoing recurring fees until transfer : Transition Fees + Fixed fees/FTE till transfer
• Transfer Fees : Fee associated with transfer of resources based on # of months revenues per
FTE transferred
• Patni can consider (a) sharing of Joining bonus for employees transferred (b) offering volume based
discounts (c ) waive off transfer fees post minimum number of years of operations say six to seven years
Points to
Ponder
• Higher attrition by ~ 10%-15%, utilization lower by ~ 5%-10% due to skill Gaps and lack of
productivity tools, Ability to flatten pyramid, Lack of growth, underutilized facility
• Incremental Management Overheads
• Low visibility on career path for resources
• Patni has successfully executed BOT models in BPO and Product Engineering Services
segment. In collaboration with Patni, organizations have transformed its IT services
into a high-performance, cost-effective function and built sustainable captive units
Patni’s
Expertise
Matured Model on
experience Curve
Client in BPO

Outsourcing
BOT commercial structure can be designed to follow client objectives
Year 1 Year 2 Year 3 Year 4 Year 5
Objectives
Time period & maturity of relationship and experience
Outsourcing
Year 1 -2
• “Best in class” Outsourcing Program
• Global delivery leverage
• Immediate cost reduction,
• Robust Service Delivery Framework
• Customized Transition Methodology
• Centralized delivery platform
• High degree of Operations control
• Robust delivery platform
• Immediate process improvements / standardization
Year 2 – 3
• Sustained outsourced model
• New geographies
• New Service Offerings
• Continuous process improvement
• Transformation and process re-engineering
• Valuation best practices
• Mutually identify opportunities to expand the coverage in
service outsourcing
• Innovation Center to support Client to identify-validate
and incubate new services areas
• Explore markets for commercialization opportunities
• Gain Sharing
• Explore alternate engagement
models:
1. Transfer Model to create
captive
2. Create New Entity for joint-
go-to market
• Continue in Outsourced Model
Year 3-5
2 Options

Outsourcing
BOT New entity creation (Capex monetization)
Objectives
Outsourcing
Year 1 -2
Year 2 – 3
• New geographies
Exercise of
Create
option
CREATE New Entity
• Develop and implement Business Plan
- Market Size
- Competitive landscape
- Customer Profiling
- Go to market strategy
- Commercial “Product” development
- Financial Outlay / mutual investments
- Executive structure
- Contingency Planning, Risk Mitigation
- Exit Plan
Flexibility for Capex monetization
Sustained productivity and processes
Metric Improvement

Outsourcing
Transfer Options
Objectives
Outsourcing
Year 1 -2
Year 2 – 3
• New geographies
Trigger TRANSFER option:
• Option to Transfer and create a 100
% owned Captive
• Trigger Point of Transfer can be at at
the end of 2nd year, 3rd Year and can
be exercisable till end of 5th year
• Sliding scale Transfer fee for
termination during Years 3,4,5
Exercise of
Transfer
option
The transfer fees model can be structured as under:
— Transfer at the end of Year 2 – X months fees
— Transfer at the end of Year 3 – X-Y months fees
— Transfer at the end of Year 4 – X-Y-Z months fees

Inception Y 1 Y 2 Y 3 Y 4 Y 5
BOT : 2nd Year BOT : 3rd Year Captive Centre Managed Services - ODC
 Transfer Fees
 Incremental Capex for new
Facility post transfer
BOT TCO Example : Comparison with Captive Set up
 Upfront Capex for Customer
for setting up a Captive
Centre
Typically Capex will be TIME NEUTRAL….under BOT
operations
Typical savings in TCO would be ~ 15%-20% for 300 + HC ODC
Capex Monetization can be considered while structuring the deal

Estimated additional Y%
savings
BOT Program Benefits
Up to 25-30% Cost
Savings due to
Offshoring
• USD YY 6Mn savings in year 1
• USD YYMn savings in year 2
Consolidation,
Standardization &
Functionalization
Global Delivery Model
• Consistent Execution
• Captive like Control
IT Transformation, best shoring location coupled with ongoing productivity improvements
PLUS
Optimized Cost Structures to the client
End to End Process Control Intellectual Property Delivery Excellence
Benefits
Key Value Adds
Patni is one of the few organizations to have executed a SUCCESSFUL large scale BOT

Joint Venture (JV) Model
• In a JV model, client and offshore supplier may set up a joint venture vehicle, which will
predominantly service the client's business. The offshore supplier brings the local expertise
and service skills while the client brings its knowledge of its existing business function and
maintains greater management control.
Key
Rationale
Key
Benefits
● Joint Go-To- Market Plan, selling services in open market and high revenue creation
● Easy transition of assets/staff and high service continuity
Model
Structure
• Tie up with the vendor firm : Taking up equity stake in vendor firm OR Forming an independent entity
in which each party contributes
• Profit sharing hinges on various factors i.e.
• Investment profile, risk sharing, Existing contracts/relationships
• Ability to influence incremental revenues into JV
• Pull through revenues from Go-To-Market plan and addition of new service lines
Points to
Ponder
• Slower decision making, Cultural integration
• Consolidation and economies of scale may be sub optimal
• Patni has a scale and strategically poised to successfully execute JV models in IT
outsourcing domains.
• Patni has requisite expertise to operate JV models and thereby mitigate the risks of
internalization for client organizations
Patni’s
Expertise
M & A Expertise
can be leveraged
Client in Japan

JV Transaction Rationale
Objectives
Year 1
• Creation of Entity
• Margin accretive
• Memorandum of understanding
• Integration
• Go-To-Market Plan
• Global delivery & sales platform
Year 2-3
• Steady State model
• Revenue Growth
• Additional Investments
Trigger Exit option:
• Option to Exit on mutually agreeable
terms
• Valuation of JV and transfer of
ownershipExit
option

• Partner transfers its’ existing in-house call centers/ Captive centre/Projects to a subsidiary
• Patni acquires 51% equity stake in the subsidiary forming a JV at a valuation of 0.5 x revenue
multiple
• Partner will transfer to the JV the requisite resources currently employed in the call centers
• Patni will at its’ cost set up a dedicated offshore call center to support the JV
• JV will provide services to the Partner at ~ 30% guaranteed savings to its’ current costs
• JV to be incorporated in a Tax efficient location
• Patni will buyout the balance 49% equity stake in equal tranches at the end of year 3, 4 and 5
• The buyout will be at pre-agreed valuation.
A Suggested JV Partnership Model
Key
Hypothesis
• Assured savings of 30% from day 1, Competitive edge by lowering costs,
• Complete control on quality
• Assurance of Patni support and continuity of services post divestment
• Partner will be able to consolidate revenue and profits from JV into its own P&L
• Immediate increase in profits - positive impact on market cap
Advantage To
Partner
• Equity ratio 51:49, Outsourced services (500 resources growing @ 10% for 5 years)
• Partner cost of own resources - US $ 40 per hour (fully loaded post utilization) at 75%
utilization factor
• Blended billing rate - US $ 28 per hour, blended cost of resources from Patni $ 15 per hour
• SG&A cost - 2% of sales
Key
Assumptions

JV Estimated Profit Outlook for Partner

Value Propositions
Estimated Savings For Partner
Value Creation

TCO Comparison : As-IS v/s Outsourcing v/s JV …1

TCO Comparison : As-IS v/s Outsourcing v/s JV …2
0.0
12.0
24.0
36.0
48.0
60.0
Y-1 Y-2 Y-3 Y-4 Y-5
AS-IS OutSourcing JV Proposal
Twin advantage through JV Model : Value Creation & Optimum TCO

Gain Sharing Model (GSM)
• In a GSM model, client and offshore supplier agree to share financial benefits of setting up /
rationalizing IT solutions. This will be more popular in scenarios wherein client wants to cut
the flab from its application portfolios (License, infrastructure and man power savings) and
align IT to business drivers without upfront investments.
Key
Rational
Key
Benefits
● Trim the entire application portfolio by retiring/ consolidating applications/functionalities.
Business-IT alignment of key business processes.
Model/ Pricing
Structure
• Gain Sharing based on agreed ratio between Client and Vendor
• Gain = (Financial benefits from IT rationalization/New solution set up – Client’s cost of
implementing the solution )
• Gain Sharing % hinges on various factors i.e.
• Project complexity
• Amount of risks assumed in delivering the project
• Client and Vendor can equate the gain sharing % with Internal Rate of Return and arrive at the WIN-WIN
agreement
Points to
Ponder
• Tangibility of financial benefits, need to have pre-determined metrics of measurements.
• The business case ratification depends heavily on ROI analysis, low ROI cases may not qualify
• Patni has effectively executed GSM models for its key strategic customers and has
requisite expertise to offer desired solutions to its clients which will share the risks of
solutions’ effectiveness as well reduction of operating IT expenditure.
Patni’s
Expertise
Maturing on experience
Curve
No. of clients in BPO and financial services sector

A Suggested GSM Model …1
• A Joint PMO to be formed to execute projects based on GSM.
• Patni will do detailed assessment of a set of applications and present the opportunities to
execute projects under the above framework to the Joint PMO.
• The joint PMO would evaluate, prioritize and decide the projects for execution.
• The following criterion would be used to evaluate project from a commercial standpoint to be
executed under the gain sharing model
• Category A : Delivery Efforts ranging between 200 to 300 Person days with Minimum net
savings of $ 200,000
• Category B : Delivery Efforts ranging between 300 to 1000 Person days with Minimum
net savings of $ 300,000
• Based on individual project parameters such as savings schedule a 12 month or an 18 month
period can be used to arrive at the Net Savings.
• Any project which would do not satisfy the above criterion for effort and net savings would
have to be discussed and negotiated separately for eligibility for execution and payout.
• Net Savings: Potential Benefits (as agreed per standard tools and methodologies ) –
Customers Costs of implementation including any cost for third party services other than Patni
Gain-Sharing
Framework
• Customer partner wants to reduce total cost of ownership through Application Portfolio
Rationalization to be leveraged through license, infrastructure, man power optimization.
• The outsourced projects will result into measurable savings for the customer and these savings
will be share as per agreed ratio. GSM will act as “Mortgaging the future” for customers.
Key
Hypothesis

Metric Category A Category B
Payout to Patni 50% 50%
Payout Schedule Paid over 4 qtrly installments 15% - First Milestone
35% - 4 qtrly Installments
Gain-Sharing
Payout
Indicative Only
As-IS Outsourced
Key Benefits to Customer
•Guaranteed minimum savings
From vendor
•TCO reduction compared to
traditional outsourcing
•Productivity improvement
•No upfront investment
0.5 m
As-IS
Costs
TCO Example
Category A Projects
Vendor
Fees
0.2 m
Own
Costs
0.1 m
Vendor
Gain Share
0.25 m
Gain Share
0.3 m 0.25 m

Revenue Sharing Model (RSM) through Product takeover
• In an RSM model, offshore supplier agree take over one/selective product line segment
including responsibility of Product R&D management, upgrade, break-fix, warranty etc
• Product take over can be an asset take over AND/OR revenue sharing agreement
Key
Rational
Key
Benefits
• Improvement in IT product margin profile
• To de-risk initial investments and offering true partnership by sharing business risks
Model/ Pricing
Structure
• Depending on the Product lifecycle, revenue sharing can rest on various factors i.e.
• Risk assumed by Vendor
• Investment needs and incremental costs of developing the new product
• Marketing efforts by client organization
• Revenue Sharing can be either of
• A blanket revenue sharing % between Client and Vendor
• A step up revenue sharing model based on # of units of product sale.
• Client and Vendor can equate the gain sharing % with Internal Rate of Return and arrive at the WIN-WIN
agreement
Points to
Ponder
• IP rights, marketing strategy, product maturity
• Sustainable market and ability to generate upgrades refresh
• Patni has embarked on RSM models for its key strategic customers and has been in
discussion to successfully execute this model by leveraging it’s global sourcing solution
expertise.
Patni’s
Expertise
Gaining traction
Proposed to CA, another potential client in
Insurance sector

A suggested Revenue Share Model ..1
• To develop Customers IT product line, upgrade the existing product etc.
• To explore options to develop/takeover IT product line segments thereby improving :
• Customer’s IT products margin profile on accretive basis by minimizing the initial
investment needs for product development,
• Offering a revenue sharing pricing model.
Business Model /
Hypothesis
Product Takeover
Options /Rational
Scenarios
• To develop Product at offshore
• To re-badge product R&D employees
• To Take over entire product line segment including responsibility of Product R&D
management, upgrade, break-fix, warranty etc.
• Product take over can be an asset take over AND/OR revenue sharing agreement.
• To de-risk initial investments and become partner in true sense by sharing business risk.
• Two scenarios assumed :
• Scenario -1 : Develop new version of product and launch at < 15% compared
to current price of $ 800 per unit
• Scenario -2 : Develop new version of product and launch at > 15% price
compared to current price of $ 800 per unit

A suggested Revenue Share Model ..2
Product
Development
• Patni will develop new version of product/ new product
• Product lifecycle assumed for three years. Development phase 3-6 months and sales cycle for
2.5 years
• Development and support team will operate from offshore
• No upgrades assumed during the lifecycle
Product Sales &
Marketing
• Sale of 2800 Units of Parent product & 2500 Units of add-on products assumed
• Direct sale assumed at 75% while 25% sale through distributors. Sale through distributors
assumed to be at 30% discount.
• 30% sale in Yr-1, 45% in Yr-2 and 25% in Yr-3.
Revenue
Sharing
• Patni Proposes Step up Revenue Sharing model to Customer on product sale.
• Revenues < $ 2 m : 33 % Revenue Share to Customer
• Revenues $ 2 m - $ 4 m : 50% Revenue Share to Customer
• Revenues > $ 4 m : 67% Revenue Share to Customer
• The rational for revenue sharing considers key attributes i.e. Risk assumed by Patni, Margin
Accretion for Customer, No upfront investments for Customer etc.
Summary
Financials
• Revenues for scenario I works out to $ 3.3 m, while for Scenario II works out to $ 5 m,
Customer will earn ~ 29% net margins on product sale post 10% Sales & Marking costs.
• All revenues will be shown under Customer’s books as top line

Summary Financials : Customer’s P&L Account
Scenario I :
Price @ $ 600
Scenario II :
Price @ $ 900
Revenue Share to Customer~ 39% ($1.3m)
Marketing Costs ~ 10%
Revenue Share to Customer~ 47% ($2.3m)
Marketing Costs ~ 10%

SPV (real or virtual) Pricing Structure :Creation of IT platform on a joint
venture basis, creation of IP, sharing of risk and reward, joint investment by partners, creation of enterprise value over a
period of time, partners can exit the model by getting share in enterprise value.
Pricing Structure
First 9 months:
Re-badging
Ongoing Fees until
exit from SPV
Ongoing Fees post
exit from SPV
Enterprise Value
On-going
Operations
On-going
Operations
Enterprise Value
On-going
Operations
• Upfront $YY mn
receipt of
Enterprise value
• Fees associated
with Rebadged
resources to be
billed at 5% mark
up to SPV
• Amortization of
5% mark up in
Year 2 and 3
• Fee associated
with FTEs
engaged in
Operations for
Onsite (20%) and
Offshore (80%)
• Balance share of
Enterprise Value
• Fee associated
with FTEs
engaged in
Operations for
Onsite (20%) and
Offshore (80%)
Receivable by customer Payable by customer
Couple of clients in Europe,
virtual SPV

Revenue from multiple elements; buy out asset, further
development and maintenance of the asset and share upside.
• IP Purchase of “Platform A” - educational management information system for GBP ZZZM
• Development of enhanced technological version “IP B” and maintain both “A” and “B” IP.
• Committed Revenue Stream ~ GBP YYm for 7 years
• Incremental Revenues –linked to success of the new product . Huge Potential as current
market share of XXX is only 20%.
• XXX part of XXX group plc , a GBP 4 billion group. XXX group is a FTSE 100 international service
company which combines commercial know-how with a deep public service ethos.
• XXX Learning provides innovative, 21st century educational technology solutions to schools and
local authorities throughout the UK and abroad.
• Our relationship with XXX started in 2007.
• Currently we have revenues of $8mn annually primarily in enterprise software.
Company Profile
Patni – XXX
Association
Transaction
Scope
Upfront payment (Capital Payout) of GBP ZZZ mn to purchase the IP.
• Two Contracts to be created.
•Contracting Entity from Patni : Patni UK
•1st Contract: Patni UK to purchase IP from XXX Ireland; 2nd Contract: Services contract between
Patni UK & XXX UK .
•Revenues to be as “Service Income” for the minimal guaranteed amount. For Additional/Incremental
Revenues; terminology to be decided. Can be called as “Royalty / Bonus revenues”.
Deal Construct

Strategic Considerations in Outsourcing
Metric Point of View
Upfront Cash Infusion One time Cash infusion of $ Y mn or monetization of IT transformation Costs
Leverage Based Incentives Gain Sharing with customer for incremental offshore leverage
Price Uplift Cooling Period To be decided mutually for large to very large deals
KT/RT Deferment The cost of Transition, both Knowledge Transition and Responsibility Transition, may not
be invoiced as incurred, but charged to customer on a over the 36 month engagement
period.
Innovation Funding Establishment of an Innovation Fund to be used for R&D. innovations and productivity
improvement. The magnitude of this will be decided mutually.
Upfront Discount Upfront payment of discount for the entire contract period can be considered
Forex Coverage Upto 5%+/- absorption of forex movement
Retention Bonus Specifically applicable in BOT/JV agreements, sharing of retention bonus for employees
getting transferred to Customer under transfer option in BOT
Re-Badging Rebadging of Customer’s existing IT resources
Asset Take Over Cash infusion by engaging a third party lease back of customer’s assets
Productivity Based Incentives Productivity linked incentive bonus maximum of 2% yearly invoiced amount
IP Acquisition Acquiring the IP and monetization
Virtual Special Purpose
vehicle
Creation of IT platform on a joint venture basis, creation of IP, sharing of risk and
reward, joint investment by partners, creation of enterprise value over a period of
time, partners can exit the model by getting share in enterprise value.

Outsourcing Model Comparison – Summary view
Metric Traditional
Vendor
BOT JV Gain Sharing Revenue
Sharing
Service Portfolio IT Services,
Product Eng,
BPO, CIS, IMS
IT Services, Product
Eng,
BPO, CIS, IMS
Traditional IT
services, New
Geography
expansion
IT Portfolio
rationalization
Business-IT
alignment
Existing Product
Take over / New
Product
development
Vendor Involvement High High Till Transfer
Phase
Shared High High
Cost Reduction/
Financial benefits
Substantial Substantial Substantial Substantial Substantial
Enhance Quality Maximum Maximum Maximum Maximum Maximum
Flexibility High High Medium Medium Medium
Degree of Control Medium High Shared Shared Shared
Compliance Framework High High High High High
Level of Management
Bandwidth
Moderate High High High High
Upfront Investment Low Low Medium NIL NIL
Financial Risks Low Moderate High Moderate Moderate
Ease of Exit Moderate Moderate High Moderate Moderate
Cost of Exit Minimal High Moderate Moderate Moderate
Linear Sub-Non Linear Non Linear

• Customer partner wants to reduce total cost of ownership through Application Portfolio
Rationalization to be leveraged through license, infrastructure, man power optimization.
• The outsourced projects will result into measurable savings for the customer and these savings
will be share as per agreed ratio. GSM will act as “Mortgaging the future” for customers.
Key
Hypothesis
• Partner has various application, each with their backend on Oracle, which can be consolidated
thereby achieving a license rationalization.
• The licensing contracts may be per processor, while optimizing on few application
(hosted on server X), certain number of processors can be freed up in server X.
• If the licensing contract is per user, total number of users can be optimized.
License
Savings
• Application consolidation and infrastructure optimization will require lower FTEs
Man Power
Savings
• Consolidation of partner’s application/retiring application certain servers can be freed up and
effectively Server hardware cost, hardware maintenance cost, OS charges, backup, storage cost
and Disaster recovery can be saved.
Infrastructure
Savings
• Post assessment study, Patni agrees to offer measurable tangible financial benefits
• For optimization in License usage, Infrastructure, map power reduction
• Productivity improvement YOY
Gain-Sharing
Proposition

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