1. Outsourcing and Financial Institutions Three Hats: Customer, Provider, Funder 7 July 2009

2. Agenda Tuesday 7 July 14:00 - 14:15 Registration 14:15 - 14:30 Chairman's Introduction Nigel Swycher, Head of Outsourcing, Olswang 14:30 - 15:00 Outsourcing – where next for financial institutions? Phil Brooke, Senior Consultant, Financial Services Practice, EquaTerra 15:00 - 15:30 Managing the outsourcing lifecycle – not the contract Nigel Swycher, Olswang Data Protection and Security Marc Dautlich, Olswang 15:30 - 16:00 BREAK 16:00 - 16:30 Commercial relationships – Theory vs Practice Clive Rees, IT Procurement Director, Lloyds Banking Group 16:30 - 17:00 Industry consolidation / regulatory considerations Charles Kerrigan and Brian McDonnell, Olswang 17:00 - 17:30 Panel discussion Moderated by Harry Taylor 17:30 Drinks will be served immediately after the event

3. Research » Strategy » Transformation » Governance Outsourcing – Where next for FIs? Olswang, 3 Hats Seminar 7 th July 2009 Phil Brooke Financial Services Practice

4. Copyright © EquaTerra 2009. All rights are reserved. Contents FS Market Challenges 1 1 Today’s Outsource Drivers 2 2 FS Sourcing Market Trends 3 3 Commercial Legacy of the Crunch 4 4 Outsourcing Vendors 5 5 This document is Copyright © EquaTerra 2009, and all rights are reserved. Permission is hereby granted to reproduce this document in whole or in part for non-commercial purposes, provided that EquaTerra is prominently cited as the originator and copyright holder and provided that information on how to contact EquaTerra is included. The prior written permission of EquaTerra is required to reproduce all or any part of this document, in any form whether physical or electronic, for any commercial purpose.

5. Copyright © EquaTerra 2009. All rights are reserved. the world will never be the same again..... 5 Never has there been such turmoil and upheaval in the Global Financial Services market. In addition the state(s) has provided loans and guarantees to most FI’s, and there has been significant non-state equity investment in Barclays, BOA, GoldmanSachs, Morgan Stanley, JP Morgan Chase, and Credit Suisse. Nationalised Nationalised Taken Over Collapsed Nationalised Pt. Nationalised Collapsed Taken Over Nationalised Rescued Rescued Pt. Nationalised Nationalised Nationalised Taken Over Nationalised Pt. Nationalised

6. Copyright © EquaTerra 2009. All rights are reserved. As an FI you may have a few things on your mind... »Boost the Share price »Shore up the Balance Sheet »Absorb hastily made mergers/acquisitions »Sell off unnecessary share holdings »Minimise exposure to the rise in bad debts »Manage the decline in investment returns »Re-align capacity to falling demand....and for the those that benefited from state handouts there’s that small matter of repayment....... 6

7. Copyright © EquaTerra 2009. All rights are reserved. N=85 7 For what reasons are you considering increasing your existing levels of outsourcing? Outsourcing Drivers

8. Copyright © EquaTerra 2009. All rights are reserved. Outsource Drivers are far more focused... »Cost Savings –Run costs –Cost Avoidance / Cash conservation –Asset value realisation –Shorter ROI –‘nice to haves’ have taken a back seat eg. Service improvement »Increased Flexibility –Operationally –Commercially –Skills availability »Transformation included only when pragmatism dictates 8

9. Copyright © EquaTerra 2009. All rights are reserved. Knee jerk reactions giving way to pragmatism... »Trend for pick up of Outsourcing & offshoring is in early days »Everything is on the table – Even the Sacred Cows are being sacrificed »Target Operating Models built around ‘Multi-sourcing’ strategy »Service Integration will be key to multi-sourcing success »Continued examination of pre-crunch contracts to ensure ‘Fit for Purpose’ »M&A activity has created unique opportunities »More Customer Due Diligence on Supplier »Buyer preference for ‘safe buying’ 9

10. Copyright © EquaTerra 2009. All rights are reserved. Some pre-Crunch trends will continue.... »India will remain the offshore destination of choice, despite –Mumbai bombings –Satyam Scandal »Monetarising of offshore arrangements –Captive arrangements to outsource agreements eg. Citi –Build-Operate-Transfer (BOT) deals to outsource agreements eg. Aviva »Even greater hurry to ‘speed to execution’ »Regulation, Security, and Risk won’t be Showstoppers 10

11. Copyright © EquaTerra 2009. All rights are reserved. 11 Application Management End User Management Infrastructure Management N=97 Process outsourced Plans to outsource Not outsourced, no plans Which of the following processes are currently outsourced by your organisation? IT Outsourcing set to continue growing....

12. Copyright © EquaTerra 2009. All rights are reserved. More IT Near and Offshoring.... 12 Increase Same Decrease Application Management End User Management Infrastructure Management N=62 In the future, do you expect there to be changes to your near or offshore strategy?

13. Copyright © EquaTerra 2009. All rights are reserved. »Tangible short term savings, with medium-long term potential »Financial engineering – take benefits upfront, realise asset values »Fixed to variable cost base »KPIs driving the right commercial behaviour in the Service Provider »Capacity / Demand mechanisms that flex like never before »Enhancements to Step-in, Exit, Ownership, Separation, and Audit provisions »Norm will be 5 year contract terms (less mega-deals and long terms deals) »More focus on Knowledge Management and Knowledge transfer to/from »Increase Customer Due Diligence on Supplier (Deal and Business) »Increased focus on risk profile, use of Risk and Financial Health KPIs »More emphasis on Data Security (part. where offshoring involved) »Additional Data Security Breach Notification provisions 13 Cost Savings Flexibility Risk & Security Regulatory Impact Regulatory Impact Commercial legacy of the crunch....... ?

14. Copyright © EquaTerra 2009. All rights are reserved. Effective Governance will be critical to success 14 Weak Average Good Excellent N=102 How would you qualify the overall skills/competencies of your organisation to manage your existing outsource providers?

15. Copyright © EquaTerra 2009. All rights are reserved. Impact on Outsourcing Vendors.... »Vendors have felt the pain; –Non-essential projects deferred –Reduction in discretionary spend –More commercially aggressive clients –Cost of servicing debt has increased »Business focus is firmly on; –Filling existing capacity, less Strategic investment –Core service offerings (qualifying harder) –Providing more aggressive pricing –Re-negotiation of existing deals –Growth markets (part. those with sustainable revenues) »Expect further consolidation and rationalisation »Crunch has been a good test of client-vendor relationships 15

16. Copyright © EquaTerra 2009. All rights are reserved. Conclusion »More Outsourcing »More Offshoring »More Regulation & Scrutiny »Unprecedented focus on Risk and Security 16

17. Copyright © EquaTerra 2009. All rights are reserved. 17 About EquaTerra EquaTerra sourcing advisors help clients achieve sustainable value in their IT and business processes. Our advisors average more than 20 years of industry experience and have supported over 2000 transformation and outsourcing projects across more than 60 countries. Supporting clients throughout the Americas, Europe, and Asia Pacific, we have deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critical business processes. EquaTerra helps clients achieve significant cost savings and process improvement with internal transformation, shared services and outsourcing solutions. Key Contact Phil Brooke Senior Consultant, Financial Services Practice +44 (0) 7595 565121 phil.brooke@equaterra.com Contact us BeLux: +32 (0)2 709 29 32 infobelux@equaterra.com China: 86 (0)21 28909093 infochina@equaterra.com Finland (Baltics and Russia): +358(0) 925 108100 infofinland@equaterra.com Germany: +49 (0)69 67733423 infogermany@equaterra.com India: +91 80 4022 4209 infoindia@equaterra.com Netherlands: +31 (0)88 002 2900 infonl@equaterra.com infonl@equaterra.com Sweden (Nordic HQ): +46 (0)8 662 30 67 infonordics@equaterra.com UK: +44 (0) 845 838 7500 infouk@equaterra.com US: +1 713 470 9812 infona@equaterra.com infona@equaterra.com

18. Managing the outsourcing lifecycle - not the contract Nigel Swycher 7 July 2009

19. The Outsourcing Lifecycle “Nothing endures but change” Heraclitus (c500BC) BEFORE Preparation DURING Selection and negotiation AFTER Delivery to exit

20. The Outsourcing Health Check An integrated legal and consultancy service which takes a holistic review of an outsourcing relationship: before, during and after. Symptoms and diagnosis  Case Study 1: Out of control  Case Study 2: Not my idea  Case Study 3: It’ll be alright on the night  Case Study 4: We know better

21. Lies, damn lies and… …statistics 50% of outsourcing relationships end short of full term, BUT fate need not be determined by the flip of a coin.

22. Q&A For more information please contact: Nigel Swycher +44 (0)20 7067 3237 nigel.swycher@olswang.com 3647634-1

23. Data Security Marc Dautlich 7 July 2009

24. Data Security in Outsourcing – True or False Impregnable information security is virtually impossible True/False Many security incidents are avoidable True/False Compliance risk can be outsourced True/False

25. Data Security Outsourcing – “Before, During and After” Providing supplier with usable information about the pre- outsourcing security environment Identifying a supplier with adequate capabilities Creating and agreeing incentives for maintaining/improving security environment post- transition Monitoring supplier’s performance, adjusting incentives/enforcing remedies and managing exit “Before” “During” “After”

26. Legal Context – A Dual Regime? FSA Regime FSA Principles: 2 – “conduct business with due skill, care and diligence” 3 – “take reasonable care to organise and control affairs responsibly and effectively, with adequate risk management systems” SYSC 6.1.1R “procedures sufficient to ensure compliance … with obligations under regulatory system and for countering risk that firm used to further financial crime” Treating Customers Fairly initiative Guidance e.g. “Data Security in Financial Services” April 2008 ICO Regime DPA 1998 7 th principle: “technical and organisational measures … to prevent unauthorised processing … and accidental loss” Guidance e.g. security breach notification

27. FSAICO Formal investigationRequest for assessment Public CensureInformation and enforcement notices Financial penaltiesFinancial penalties (2010?) Vary an authorised person’s permission or cancel it Data breach notification (voluntary) Good practice assessment (voluntary) Legal Context (continued) – FSA vs. ICO Powers: Comparison

28. Legal Context (continued) – Conclusion Left hand vs. right hand Co-operation protocol between FSA and ICO Mind the gap Regulatory guidance to bridge gap between principles–based regulation and practical security solutions

29. Outsourcing to Third Party Suppliers – FSA Data Security Guidance, April 2008 Before “Over-reliance on contract” → Pre-contract planning assessing supplier’s competence (“due diligence”) assessing economics of good information security (“business case”) → Setting appropriate remedies and liability regime “last man standing” is not the answer

30. Outsourcing to Third Party Suppliers – FSA Data Security Guidance (continued) During “Insufficient attention to staff vetting” → Due diligence or negotiation needs to reveal answers to questions such as: ● how are third party staff vetted? ● when and who: access to customer data? → Exercising governance and audit rights in-flight during transition and delivery ● a question of execution and judgment

31. Data Security – Outsourcing Contract Provisions During (continued) Core obligation provisions e.g. preservation of data integrity/prevention of data loss or corruption “Accountable individual” provisions Breach notification obligations Remedies: restoration of corrupted data an aside on “loss” indemnities unauthorised access to Supplier infrastructure or Customer service environment hacking fraud

32. Conclusion and Questions What happened to “After”? Datonomy: www.datonomy.blogspot.comwww.datonomy.blogspot.com

33. For more information please contact: Marc Dautlich +44 (0)20 7067 3142 marc.dautlich@olswang.com 3648196 Data Security

34. Outsourcing and Financial Institutions Three Hats: Customer, Provider, Funder 7 July 2009

35. Commercial Relationships Theory versus practice Clive Rees- IT Procurement Director Lloyds Banking Group 2009

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37. 37 Nelson Mandela As a young lawyer challenged the political system in his country Burned his “passbook” in 1950’s Sent to prison for 27 years Released after years of leading the African National Congress Became President of South Africa in 1994 Dismantled apartheid and managed to create one nation

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39. 39 John F Kennedy Charismatic President of the United States 1961- 1963 “Ask not what your country can do for you but what you can do for your country” “Ich bin ein Berliner” Shot dead in 1963 in Dallas, Texas Remembered for being champion of Civil Rights and his management of the Cuban Missile Crisis Created a strong positive economy within the United States

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41. 41 Sir Alex Ferguson Manchester United football manager for past 20 plus years Fiery Scot who throws cups, saucers and hairdryers! Successful Gets the maximum out of the resources he has through effective relationship management

42. 42 Common themes Influence Convince Communicate effectively Empathetic Listen Understand Develop trust Know how to manage relationships

43. 43 Lloyds Banking Group Brands

44. 30 million Individual & Corporate Customers Number 1 LBG Market Position in Insurance Number 1 LBG Market Position in Savings, Current Accounts and Personal Loans Number 1 LBG is the largest UK Retail Bank £4.4 billion Total LBG annual external spend £4.4 billion 80% LBG IT spend with 100 suppliers 50 People in the IT Procurement Team 0 Goals my football team scores each week 93 The bus I caught here 70% LBG IT spend with 18 suppliers 55% LBG IT Spend is with 6 suppliers £1 billion LBG IT Procurement annual external spend

45. 45 Relevance to Commercial Relationships? Know what it is you want from the other party before you go to market Service improvement Cost reduction Transformation Innovation Be clear and create a definitive requirements document Know who has the capability in the market place to provide the service / products you want & understand what the deal would mean to them - invest in due diligence of potential partners

46. 46 Manage the process well Create a definitive and clear tender document (don’t let the suppliers tell you what you need) Be sure to include the relevant terms under which you’ll contract with successful party and issue with tender (avoids arguments further down the track) State and stick to the timetables Know what governance process will exist through the negotiation and post contract signature

47. 47 Selection Pick the partner who best satisfies your original requirements- obvious but not always the outcome Don’t be tempted by the lowest financial offer- pick a competitive and sustainable price from a partner you can trust or you’ll only regret it during the term of the contract Ensure the “A” team stays after the deal is done to service the account Ensure the contract is simple & easily understandable – remember someone will have to manage it (clear SLA’s, ongoing governance and escalation are a must have)

48. 48 Three key Principles of our deals Competitive Sustainable Flexible

49. 49 What happens in practice then? Two Case Studies Case study 1 Supplier X and a Bank – 5year £30m p.a contract for provision of complex IT services Supplier had been very keen to win the business and bid accordingly Supplier X won the business but 2 years into the contract realised “hurting” in margin return; started to cut corners and change control at every opportunity Bank had not been supplier managing Relationship deteriorated

50. 50 Case Study 1 New legal and procurement teams to solve the crisis that had resulted and re-structure the deal with lots of pain for both parties So who was to blame ? Supplier X or a Bank? What could have been done differently? What went wrong?

51. 51 Case Study 2 Supplier Y and a Bank contracted for 3 years for IT services £9m p.a Expectations of both parties were documented, discussed and agreed at the outset Both resourced up to make the relationship work in practice Appropriate and agreed reporting and governance were put in place Service delivery, SLA’s and “value adds” all materialised Why was this relationship successful?

52. 52 Summary Theory and Practice are not always replicated Commercial Relationships are not easy to maintain but require constant attention Set clear expectations for both parties Work together so that the supplier gets healthy margin (sustains the relationship) and the recipient gets the service wants rather than service imposed upon it Confront issues, resolved them through the “right” governance forum

53. Industry consolidation / regulatory considerations Charles Kerrigan and Brian McDonnell 7 July 2009

54. outsourcing “things that are more fundamental to the value of a business” – Roland Berger Gartner survey shows outsourcing in Europe is growing during economic downturn, June 2009 Retailers rethink outsourcing - Joanna Perry, April 2009 Credit Crunch changes economics of outsourcing - Siobhan Chapman, January 2009

55. Consolidation - Lessons from the Market Core business outsourcing – will institutions accept the exercise of business judgement by an outsourcer? Credit crisis – was effective outsourcing of risk management to third parties a contributory factor? JP Morgan Chase – integrated risk management as part of corporate strategy Financial institution mergers e.g. Lloyds – HBoS: integration issues RBS – brings back in house IT infrastructure and application development activities; retains ABN Amro’s Indian operations If there is pressure on rates will suppliers re-engineer the process to a lower standard? In-house offshore operations (“captives”) – Eran Eisenberg, senior legal counsel, Barclays

56. Lending to Outsourcing Businesses Testing predictability of revenue – cashflow lending, invoice discounting Assets available for security – evaluation of fixed or liquid assets Contracts with termination rights – position if all rights are exercised Defining material contracts – identification of core revenues and long-term business relationships Control over borrower and implications for fixed charge security – impact of consolidation Cross-border issues – local security and insolvency laws

57. Lending to Businesses with Outsourced Operations Use of LMA/ISDA forms of document – outsourcing core business function Loss or compromise of sensitive data – effectiveness of disaster recovery plans Due diligence on security risk mitigation – access to borrower audit information Service level performance discussions – lender rights to have input into relationship Payments to outsourcer – lender and outsourcer are competing creditors of the business and both critical to its continued success Insolvency of outsourcer – visibility of financial condition of outsourcer

58. Certainty vs Flexibility Certainty Assists in enforcing legal rights Enables benchmarking of services Suits investors and regulators Provides specific remedies on default Flexibility Suits changing market conditions Can deal with volatility (weakening sterling, changing funding costs) Potential for creative solutions to disputes Avoids “over-reliance” on contractual provisions

59. Certainty vs Flexibility Flexibility Certainty Core Non-core [Captives] Document Management Document terms LMA, ISDA Integration Issues Payroll IT

60. Outsourcing – regulatory considerations Material outsourcing outsourcing services of such importance that weakness, or failure, of the services would cast serious doubt upon the firm’s continuing satisfaction of the threshold conditions or compliance with the Principles general provisions Outsourcing of “critical or important” functions and investment services and activities an operational function is regarded as “critical or important” if a defect or failure in its performance would materially impair the continuing compliance of a common platform firm with the conditions and obligations of its authorisation or its other obligations under the regulatory system or its financial performance, or the soundness or the continuity of its relevant services and activities SYSC 8

61. Outsourcing – regulatory change FSA approach - “Light touch” to “Be afraid” More enforcement focus – in particular on senior management Regulatory capital and liquidity reforms EU competition concerns Proposed new EU regulation of hedge funds and private equity Corporate governance and remuneration Regulatory institutional change – role of BoE; and pan-European institutions Treating Customers Fairly / The Retail Distribution Review Implementation of the Payment Services Directive

62. For more information please contact: Charles Kerrigan +44 (0)20 7067 3437 charles.kerrigan@olswang.com Brian McDonnell +44 (0)20 7067 3748 brian.mcdonnell@olswang.com Industry consolidation / regulatory considerations

63. Outsourcing and Financial Institutions Three Hats: Customer, Provider, Funder 7 July 2009