I FC L A H els ink i, 10-11 J une 2010 L eg a l C ouns el / A dvok a t L a urits A. J ørg ens en Page 1
Introduction to Carlsberg Group and Carlsberg Group Legal Case Study: Background: Carlsberg s European IT outsourcing set-up and strategy (timeline) Renegotiation and partly retendering why? A process! Carlsberg s perception of expected vs. realized benefits of outsourcing and; why did we end up in this situation? Focus on quality Focus on pricing structure and savings Change in scope of the outsourcing agreement and change in Carlsberg s European IT organisation What triggered the wish for renegotiation? Renegotiation the timeline and process Preparation The Result - what did the parties get? The Result learnings from a legal perspective Questions? Page 2
This is Carlsberg Group today No. 1 in Northern & Eastern Europe and fourth largest brewer in the world 150 markets around the world 500 different beer brands 43,000 employees on three continents 12,000,000,000 Litres of beer sold in 2009 Page 3
Carlsberg geography (2009) A balance between growth markets + mature markets NORTHERN AND WESTERN EUROPE EASTERN EUROPE 43% 44% 41% 52% OF EBIT OF EBIT Beer volume: 50.2 m.hl Beer volume: 51.3 m.hl Beer volume: 14.5 m.hl Net revenue: DKK 36.5bn Net revenue: DKK 18.5bn Net revenue: DKK 4.2bn EBITDA: DKK 6.4bn EBITDA: DKK 6.6bn EBITDA: 0.9bn Operating profit: DKK 4.2bn Operating profit: DKK 5.3bn Operating profit: DKK 666m Ensure profitable growth Build growth platform OF TOTAL VOLUME OF EBIT OF TOTAL VOLUME ASIA 13% OF TOTAL VOLUME 7% OBJECTIVE Improve competitiveness and earnings Page 4
Carlsberg Group Legal (HQ) 7 qualified lawyers (Danish, Scottish and German). App. 25 lawyers based in subsidiaries around the world. Each lawyer has certain key account responsibilities within HQ. For me those are: Carlsberg IT: Projects, outsourcing, software purchase, consultant agreements Group Supply Chain: Transfer Pricing / Inter-company Services, Sourcing and Licensing Agreements Real Property: Development of closed brewery sites and sale/lease of real property Export, License & Duty Free (ExLiD): international license production agreements, brewing/filling agreements and distribution agreements with third parties Each lawyer has specific country responsibilities day to day contact with subsidiary lawyers (Germany, Belgium, Switzerland, Italy, India, Nepal and Sri Lanka) Projects: M/A, etc. Page 5
Carlsberg s European IT outsourcing set-up and strategy - timeline June 2005: Outsourcing Agreement signed with IBM Danmark 2005 2007: Transition and transformation based on fixed prices 2008 2009: Day to day services based on a combination of fixed and variable prices 2009 2010: renegotiation and partly retendering Page 6
Carlsberg s European IT outsourcing set-up and strategy 2005 Outsourcing Agreement covered: Services Network Services Data Centre Services Desktop Services Service Desk Scope 7 years 11 countries in Europe App. 1000 servers App. 7500 users App. 170 locations Page 7
Carlsberg s European IT outsourcing set-up and strategy - renegotiation Why renegotiate in 2009/2010? the timing was right: Need for a changes in the pricing structure (after ended transformation/consolidation) General focus on savings Focus on quality (problems in specific delivery areas, processes and governance structures) Need for access to innovation and new technology Change in scope (Business Standardisation Programme (BSP), Scottish & Newcastle acquisition) Other. Page 8
Carlsberg s perception of expected vs. realized benefits of outsourcing (first 2-3 years) High Realised effect of outsourcing? Access to new technology Standardization and consolidation Cost savings and transparency on IT cost Free-up of CB resources Access to resources and competencies Higher quality of IT Services Low Low Expected effect of Outsourcing High Page 9
Why did we end up in this situation? Many reasons but bottom line was that fixing it would require changes on both sides - including proper legal follow-up! Carlsberg IT Act as a partner Immature organisation Lack in fixing service delivery issues Lack of focus on service quality delivered by service provider Not enough focus on processes Revisit of sourcing strategy High Realised effect of outsourcing Lack of proper contract management Service Provider Commitment to improve quality? Access to new technology Lack of focus on service quality Investing in improvements Act as a partner Standardization and consolidation Cost savings and transparency on IT cost Free-up of CB resources Access to resources and competencies Low Low Expected effect of Outsourcing Higher quality of IT Services Page 10 High
Focus on quality (1) Quality issues discussed over a period of time 2008/2009: Network Services (remedy plan executed in 2008/2009) RFS process Discussions on scope of services (alignment of expectations of both Service Provider and Carlsberg) Security / back-up more focus on IT security from Carlsberg Price needs to match Quality?! What to do from a contract management (legal) point of view? Page 11
Focus on quality Network Services example of an article in the Danish Business Journal Carlsberg lider tab efter it-nedbrud (www.borsen.dk) (IT break down ( Network Services )) 14-10-2009 13:11 af Mia Salling Det her er ikke godt nok, og det har store konsekvenser for Carlsberg. Så kontant er meldingen fra Carlsbergs CEO Kenneth Egelund Schmidt, efter at bryggerigigantens IBM-it-systemer i nat gik ned. Visse dele er stadig ikke oppe at køre. Borsen.dk erfarer, at Carlsberg har en aftale med IBM om, at der i tilfælde af it-nedbrud er et backup-system, som skal overtage med det samme, men at dette ikke er sket efter nattens nedbrud. "It er et meget kritisk område for os. Vores leveringsapparat har været fuldstændig ramt, og vi bruger mange kræfter manuelt for at kompensere for det. Det vil betyde et driftstab," siger Kenneth Egelund Schmidt til borsen.dk. Hvor stort et tab det løber op i, vil direktøren dog ikke give et bud på. "Jeg vil afvente og se regnskabet, når vi har gjort op, hvad tabet får af økonomiske konsekvenser". Ifølge Borsen.dk's oplysninger er det er Carlsbergs SAP-økonomisystem og mail, der har været ramt, men nu kører igen. Dataanalyse- og kundestyringssystemerne kører efter sigende stadig ikke. It-nedbruddet var forårsaget af en strømafbrydelse hos leverandøren IBM, som også lammede dankortsystemerne samt Mærsk og Danske Bank. Muligt leverandørskift ( Potential change of Service Provider ) Et lignende it-nedbrud fra IBM skete sidste år, hvor Carlsberg også var ramt, men Kenneth Egelund Smith vil ikke komme ind på, om man hos Carlsberg har tænkt sig at skifte leverandør. Han afviser dog ikke helt tanken. "Selvfølgelig er det noget, man overvejer, når man har en leverandør, der ikke lever op til aftalen, men nu vil vi afvente dialogen med IBM. Det er en meget kompliceret ting at skifte leverandør, så det er ikke noget, man bare lige gør." Kræver kompensation ( Compensation ) IBM skal ifølge Kenneth Egelund Schmidt dog ikke slippe alt for billigt. "Da vi får driftstab ved det her, vil vi kræve kompensation." Han understreger, at IBM siden sidste års nedbrud har forsøgt at råde bod på skaderne, men at der stadig er plads til forbedringer. "De krav, som vi har stillet til stabile systemer, er ikke indfriet endnu. Resultaterne er ikke kommet i den hast, som Carlsberg har ønsket sig, og det taler vi fortsat med IBM om," siger CEO'en. Page 12
Change in pricing structure / focus on savings The need for a simpler and more transparent pricing structure (fixed and variable prices) What services do the fixed prices cover? Resource Units ( RU ) more detailed descriptions of the services included in specific prices (SAP / Server Capacity / Housing) Request for Services ( RFS ) process more detailed described onetime-charges, IMACs (changes/support) and Technical Catalogue Requests ( TCR ). More centralized invoicing to apply to centrally delivered services, including specification of invoice base for a specific month and described process to ensure correct invoicing SAVINGS! Page 13
Change in future scope of the Outsourcing Agreement Business Standardisation Programme (BSP) One Tap Different Flavours ( Faster, Smarter, Leaner ) Processes (end-to-end process) IT (common IT systems (SAP etc.)) Organisation Governance BSP is being rolled out over the next 3 years in Western Europe, Nordic and South Eastern Europe BSP is setting the future with a common IT platform (strategic importance to both a Service Provider and Carlsberg) It s a huge project! Scottish & Newcastle acquisition: New countries in Western Europe, Brasseries Kronenbourg (France) & Mythos Brewery, (Greece) New countries in Eastern Europe (potential future scope), Baltika (Russia), Slavutitch (Ukraine), Derbes (Kazakhstan), Carlsberg Uzbekistan. Page 14
Carlsberg s European IT outsourcing strategy internal changes Carlsberg IT has initiated a consolidation project named "One-CIT". This project covers most European countries (17): The overall objectives are: Enable and support the "GloCalisation" of IT. Improve competitiveness and earnings in Northern and Western Regions in Europe. To use full potential of IT resources in Europe. To be able to support the future European Carlsberg business model. To create transparency of IT costs across Europe. To get the most of out the money spend on IT. Page 15
Carlsberg s European IT outsourcing strategy changes These objectives drive a need for changes to the future IT outsourcing strategy for the Carlsberg Group: Single / multi sourcing Country / region specific? Specific on type of services? Larger scope Etc. Page 16
What triggered the wish for renegotiation / retendering? The key triggers for Carlsberg: Savings; Quality; Scope; and One-CIT Timing is essential! The timing has to be planned in details from both a technical and legal perspective Which tools are available in the Outsourcing Agreement? Default situations; Proactive Remedies, Trigger Events Benchmarking Price negotiation triggers Carlsberg had with the 2005 Outsourcing Agreement good tools and a good basis for the negotiation of a strengthened new agreement! Ole Horsfeldt, Gorrissen Federspiel, acts as external IT-lawyer for Carlsberg Page 17
Renegotiation the timeline and process 2008 quality issues the parties are in legal mode 2009 Benchmarking the importance of having an useable benchmarking mechanism in place Mid 2009 price negotiations phase 1: Try to set the scene and try to take the driver s seat as customer Set out clear goals Set a tight timeline Structured process! End 2009 / beginning 2010 price negotiations phase 2: Change from pure price negotiations to; Change of scope Extension of Term Change of sourcing strategy (Multi sourcing) More Service Providers being brought into the process on equal terms and conditions (BSP / other countries) Possible to make price comparisons on specific services Pressure on prices with more bidders Sanity check! Page 18
Carlsberg worked during 2008/2009 with the Service Provider to identify where to focus Page 19
and Carlsberg made adjustments internally (to organisation and strategy) Page 20
The result the new Outsourcing Agreement What did the Service Provider get : Extended Term until end 2016 4 more years Extended scope BSP (future platform) Transparency in pricing structure and more detailed definitions, RUs etc. (to the benefit of both parties) What did Carlsberg get : Better prices Change of scope all Network Services (except of internal data centre network) taken out of the scope as of end 2010 (planned). Carlsberg is in a tender process to find a new service provider at the moment More legal / commercial tools to drive better quality some are: Strengthened Proactive Remedies Updated Fast Track Dispute Resolution Clearer calculation of Termination Charges / Hardware Residual fees in case of termination for convenience Strengthened provisions on cooperation obligations btw. difference service providers (multi sourcing (new Network provider)) Improved technology and innovation provisions (Service Provider to be more proactive) RFS governance and process Strengthened benchmarking provision (made more clear and useable) Strengthened audit provisions (Carlsberg Internal Audit) Improved penalty system based on objective KPIs and SLAs Page 21
Carlsberg chooses IBM again despite NW break downs Page 22
The result learnings from a legal perspective Don t underestimate the need for extensive preparation of the process and the need for allocation of right resources (internal / external) Don t hesitate to go in legal mode the tools already negotiated are there to be used!! The Legal function should be part of the contract management team and participate in relevant meetings (be part of the governance structure) Plan to renegotiate (i) after transformation/transition and (ii) every app. 2-3 years think in the creation of negotiation leverage in every legal step you take! Negotiate the standard terms in the main agreement as soon as possible in the process Be part of as many work streams as possible during the process including in the work streams negotiating and drafting the main commercial/technical documents (schedules) It is the experience that commercial/technical resources do not always use the correct definitions in e.g. technical RUs which can lead to misunderstandings and disputes.. Set up a document handling system (sharepoint or similar) so that all involved parties negotiate and work on the correct document versions!! Other Page 23
Questions, or..! Page 24
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