DAI/BSM

Telematica OutsourcingTelematica Outsourcing

A customer case: DSM Anti-Infectives A customer case: DSM Anti-Infectives

R.J. van der Horst, 21th March 2006

DAI/BSM

ContentsContents

1. Who is DSM Anti-Infectives

2. Why Outsourcing of Telematica activities at site Delft

3. Objectives of Outsourcing

4. Scope of the Activities

5. Compliant Purchasing Process Followed

6. Experiences until so far

7. Lessons Learned

8. Conclusion

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1. Who is DSM Anti-Infectives1. Who is DSM Anti-Infectives

• DSM is active worldwide in life science products, performance materials and industrial chemicals.The group has annual sales of around €8 billion and employs about 24,000 people worldwide. DSM is a leading world player in many of the markets in which it operates and has plants and facilities on every continent. The company’s head office is in the Netherlands.

• DSM Anti-Infectives (DAI) comprises DSM’s activities in the field of development, production and sale of raw materials, intermediates, and bulk actives for anti-infectives such as antibiotics (for combating bacterial infections) and anti-fungals (for combating fungal infections).

• DAI is present in 9 locations in The Netherlands, Spain, Sweden, Egypt, Mexico, India and China.

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1. Situation of DSM Anti-Infectives at Delft1. Situation of DSM Anti-Infectives at Delft

• Business Group Head Quarters and main production site

• Site is shared with 2 other business groups:• DSM Food Specialties• DSM Bakery Ingredients

• Site restructuring executed; facility services have been:• Outsourced or• Decentralized

• All restructuring activities to be aligned with other BG’s• Telematica site-wide: one ICT infrastructure for whole site

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2. Reasons for Outsourcing2. Reasons for Outsourcing

• DSM Anti-Infectives (DAI) is concentrating on core activities:• Innovation• Production• Marketing & Sales

• Non-Core activities (like ICT) are outsourced to a specialized party

• By doing so DAI expects to obtain:• more flexibility in services;• a lower price, because of economies of scale;• better access to new technologies and new services;• a reduced risk of premature write-off and replacement of technologies;• standardized Telecom services.

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2. Alternatives for NOT Outsourcing2. Alternatives for NOT Outsourcing

• Continue current situation• But: impossible to standardize Telecom services in-house

• Split shared services to Business Groups• But: there is one ICT infrastructure at site Delft

• Move function to Central Facility Department• But: there is no natural relation between Facilities Services and Telecom

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3. Objectives of Outsourcing3. Objectives of Outsourcing

• Endorse the “Black Box” concept• DSM focus on contract management only• Build level of trust in service delivery• Concentrate on objectively measurable results

• Aim for standardized, flexible and reliable services• Rely on partner to implement the services (they have done it before)• Look for creative solutions

• Find a reduction in TCO during contract period• Aim for open book cost calculation• Jointly find cost reductions over time

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4. Scope of the Activities4. Scope of the Activities

• Management of Telecom equipment• Central and non-moving devices

• Mobile devices• Cabling and monitoring• Patching of data points• Explosion save equipment• Consultancy

• Not: call cost

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4. Deliverables of the Project4. Deliverables of the Project

• Works Council Advice• Trade Union Acceptance• Works Council Acceptance

• Commercial Agreement• Preferred Supplier selection• Commercial Terms & Conditions

• Transfer Documents• Human Resources• Assets• Contracts

• Process Descriptions• Incident & Problem management• Change management• Service Level management• Contract management

• Internal Resale• Service Contract• Internal Agreement

• Internal Communication• Stakeholder Communication• End User Communication

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5. Compliant Purchase Process followed5. Compliant Purchase Process followed

(5) Tendering and Evaluation

(4) Sourcing Strategy &

Business Case

Pre-qualification(RFI process)

Bid Documentation &

Draft Contract

Bid Preparation(RFP process)

Tender Evaluation &

Initial Negotiation

(6) Due Diligence & Detailed Negotiation

(7) Transition & Service

Management

OngoingServiceDelivery

(2) Communications & Stakeholder Management

(1) Establish Project Governance

(3) Mobilise P

roject

(8) Project C

lose & P

ost Implem

entation Review

© PA Knowledge Limited 2005

DAI/BSM

5. Compliant Purchase Process followed5. Compliant Purchase Process followed

(5) Tendering and Evaluation

(4) Sourcing Strategy &

Business Case

Pre-qualification(RFI process)

Bid Documentation &

Draft Contract

Bid Preparation(RFP process)

Tender Evaluation &

Initial Negotiation

(6) Due Diligence & Detailed Negotiation

(7) Transition & Service

Management

OngoingServiceDelivery

(2) Communications & Stakeholder Management

(1) Establish Project Governance

(3) Mobilise P

roject

(8) Project C

lose & P

ost Implem

entation Review

© PA Knowledge Limited 2005Described Telematica

Product Portfolio

Involved PA Consulting Group

for Project Expertise

Interviewed employees about their aspirations

Requested 29 organization to

supply information

Produced RFP

Requested 5 organizations to

bid

Informed and involved DFS and

DBI

Received 5 proposals

4 suppliers invited for workshops to

discuss Price, Products and

Contract

3 suppliers submitted updated

proposals

Evaluation and Decision to start negotiations with

2 suppliers

Decision to continue

negotiations with Siemens

Decisions made by Project Steering

Committee

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5. Evaluation Over All5. Evaluation Over All

Company 4 Company 3 Company 2 Siemens

Product Portfolio - + + ++Contract 0 0 0 0Other Conditions - ++ + +Personnel - ++ -- +Price *) + ++ 0 +Sub Total -- ++ - +Partnership 0 0 - ++Culture 0 - -- ++Trust 0 0 0 ++Ability -- + 0 +Total -- + -- ++

*) based on NPV over 5 year

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5. Details: Compliant/Non compliant5. Details: Compliant/Non compliant

Product Portfolio SiemensCompany 2Company 3

Company 4

Contract Terms & Conditions Company 3Company 2

Company 4Siemens

Other Terms & Conditions Company 3Company 2

SiemensCompany 4

compliant non compliant

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5. Details: Price Evaluation5. Details: Price Evaluation

2004 2005 2006 2007 2008 2009

Siemens 1 (alt 1)Siemens 1 (alt 4)

Company 2Company 3Company 4

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5. Details: Qualitative Evaluation5. Details: Qualitative Evaluation

1

2

3

4

5

partnership

culture

trust

ability

Company 4Company 3Company 2Siemens

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5. Details: Personnel Take Over5. Details: Personnel Take Over

• All suppliers have taken into account:• Differences in personnel compensation package

• Individual development aspirations

• Proposals are sufficient quality to merit qualitative ranking:1.Company 3 ++

2.Siemens +

3.Company 4 -

4.Company 2 --

• Analysis of personnel take-over cost can only be done in the next stage, when more information is shared

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5. Decision 1: “Do Outsource Telematica”5. Decision 1: “Do Outsource Telematica”

• Four out of five tenders can be considered compliant enough to anticipate a successful award with clarification

• The business case is financially sound

• We recommend to outsource Telematica activities.

(Advice given to Project Steering Committee)

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5. Selecting The Last 25. Selecting The Last 2

• Initial negotiations started with Siemens and Company 3• As decided by Project Steering Committee• Aiming for “Open Book” pricing and maximum flexibility• With focus on bringing out “hidden cost”• For both parties the original proposal has been adjusted

• Reference visits paid to customers of suppliers• PWN for Siemens• Large City in The Netherlands for Company 3

• Further analysis made of expected employee compensation

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5. Decision 2: “Outsource to Siemens”5. Decision 2: “Outsource to Siemens”

Company 3 Siemens

Product Portfolio 3.0 4.0Contract 2.0 2.0Other Conditions 3.0 3.0Personnel 3.0 3.0Price *) 4.0 3.0Sub Total 3.0 3.0Partnership 1.0 4.0Culture 1.0 4.0Trust 1.0 4.0Ability 4.0 4.0Total 2.4 3.4*) based on NPV over 5 year

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5. Details: Employee Compensation5. Details: Employee Compensation

• Negotiations have shown• Employee compensation band was not in line with function• Applying Fuwa would down-rate the employee positions 2 or more scales• In corrected band, pay level within DSM was still above market

• Initial probing Works Council and Trade Unions showed:• Not in favor of Outsourcing• Rather see full redundancy compensation

• Reached agreement compensation package• Reorganization cost amounts to € 630k• Requested income guarantee for 5 years will not be rewarded by Siemens

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6. Experiences so far…6. Experiences so far…

• Our cultures do not fit, that’s why we match so well!• Both organizations are complementary• Siemens brings in a structured approach• DAI is continuously reorganizing

• We conducted tough but fair negotiations

• Both parties aim for a long term relationship

• Siemens demonstrates an eagerness to show good results (but faced some difficulties)

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7. Lessons Learned7. Lessons Learned

• Pit-falls we found:• We had misunderstandings on findings in the Due Diligence• There was a slow start up of Transition (3 months later, things are moving)• We experienced performance issues with ex-DSM staff

• Do not underestimate the HR&O issues!

• Conduct customer reference visits for decision making

• Engage a specialist in ICT sourcing• or seek in-house specialist

• Have your supplier conduct a full Due Diligence

• Invest in a sound relationship• Focus on Governing Principles of Service• “Contracts are for lawyers”

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8. Conclusion Telematica case8. Conclusion Telematica case

• Endorse the “Black Box” concept• DSM focus on contract management only• Build level of trust in service delivery• Concentrate on objectively measurable results

• Aim for standardized, flexible and reliable services• Rely on partner to implement the services (they have done it before)• Look for creative solutions

• Find a reduction in TCO during contract period• Aim for open book cost calculation• Jointly find cost reductions over time

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9. Other experiences9. Other experiences

• DSM Anti-Infectives has experiences with different kinds of sourcing models:• Own managed ERP & Plant Maintenance systems • Hybrid situation for IT sourcing of desktop/infrastructure and services, a

mixture of outsourced operations and strong DSM controls on these operations

• Black box model with Telematica

• The experiences show a wide variety but depend fully on the local situation

• Generic conclusions are difficult to draw but one thing is clear: there is no fixed model for each situation!!

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The outsourcings paradigmaThe outsourcings paradigma

+/-

Type of in/outsourcing: Own Managed   Hybrid   Black box

                   

Required management Little     Continuously More than expected

attention                

                 

Flexibility Too much   Little     Acceptable

                   

Cost:                  

- visibility Reasonable   Difficult   Clear  

- TCO Acceptable   More than expected According to expectation

                   

Overall score +     +/--     ++/-