McKinsey on Finance

Number 32, 2 5 11
Summer 2009 What next? Reducing risk in Valuing social
Ten questions for your manufacturing responsibility
Perspectives on CFOs footprint programs
Corporate Finance
and Strategy
19
When to divest
support services
McKinsey on Finance is a quarterly
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corporate finance practice. This
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 1

McKinsey on Finance
Number 32, Summer 2009

2 5 11 19
What next? Reducing risk in Valuing social When to divest
Ten questions your manufacturing responsibility support services
for CFOs footprint programs
Some companies can
As companies shift Flexibility within and Most companies see reduce the cost of support
their attention from among locations can help corporate social services, improve their
fighting the crisis companies respond responsibility programs quality, and raise
to getting the most from to changing conditions. as a way to fulfill the cash to invest elsewhere.
the recovery, CFOs contract between business Here’s how to tell if
must keep executives and society. But do they your company is one
focused. create financial value? of them.
2
What next?
Ten questions for CFOs
As companies shift their attention from fighting the crisis to getting the most from
the recovery, CFOs must keep executives focused.
David Cogman, The credit crisis and its shocks to the real economy
Richard Dobbs, and have put chief financial officers on the front
Massimo Giordano
lines, as they implement emergency measures to
help companies survive the recession. Now, as
an eventual recovery begins to seem more likely,
the CFO’s task may become still more complex.
Even for those whose companies avoided the most
severe effects of the crisis, uncertainty about
the future is abundant, and credit remains tight.
Capital and management time are available for
only a few relatively big moves, and a new appre-
ciation of risk accompanies each opportunity.
So the CFO’s judgment will be critical to push the
management team’s thinking on the opportunities
and to cast a dispassionate eye over the costs,
benefits, and risks of pursuing them. Here are
ten questions we think all CFOs should be asking
themselves and their executive colleagues as the
recovery approaches. Read the questions, then visit
mckinseyquarterly.com and tell us what you think
a CFO’s priorities should be coming out of the crisis.
1. W
 hat shape will a recovery take? Even if the
worst is over—though we make no assurances
that it is—much uncertainty remains about the
recovery’s nature and pace. A steady recovery
over 12 to 18 months would pose challenges very
different from those of a tepid one over, say,
five years or even a slip back into recession. What
weight are you giving to the possibility of wage
and price inflation, high unemployment, lower

1 See Richard Dobbs,
Massimo Giordano, and Felix
Wenger, “The CFO’s role
in navigating the downturn,”
mckinseyquarterly.com,
February 2009; and Ian Davis,
“The new normal,”
mckinseyquarterly.com,
March 2009.
2 See Richard Dobbs and
Timothy M. Koller, “The
crisis: Timing strategic
moves,” mckinseyquarterly
.com, April 2009.
international trade, or dramatic swings in
currency values? What’s more, if excess leverage
inflated demand and profitability in the years
leading up to the crash, CFOs must help managers
to understand what they should expect as
normal after the crisis has fully passed and to
set appropriate performance targets.1
2. Have you restructured enough? A weak economy
makes it easier to implement unpopular opera-
tional changes and divestitures: companies have
more leverage over suppliers, unions and
regulators are more cooperative, and employees
understand the need for change. When the
economy strengthens, these advantages will
quickly vanish. CFOs should challenge their
colleagues to examine how much more restruc-
turing might be undertaken to secure a
company’s cost position for the medium term.
3. Is your supply chain sufficiently flexible? In
2008, the key question was what would happen
if the downturn was worse than expected.
In 2009, it’s worth considering what happens
if the surprise comes on the upside. An intense
focus on reducing costs and working capital will
leave many companies incapable of responding
to a rapid pick-up in demand. Can they respond
without either bringing back high costs or
cutting the quality of their products? If not, CFOs
should take time now to consider whether their
companies may have stretched the supply chain
a little too thin.
4. D
 o you have a short list of acquisition targets
ready? This crisis, so far, seems to echo the expe-
rience of previous ones: equity market valu-
ations are recovering a lot faster than economic
fundamentals.2 Acquisition-minded companies
that wait for clear evidence of recovery before
moving on attractive deals may well find
3
themselves preempted by better-prepared
competitors and miss the opportunity entirely
as valuations bounce back.
5. Should you restart conversations with potential
alliance partners? Last year, many companies put
discussions about strategic alliances and
joint ventures on hold. This year, if the under-
lying logic of those deals remains sound, many
potential partners are finding themselves
under greater pressure to close them. Moreover,
businesses that may emerge from the recession
at a competitive disadvantage could find a quick
and effective solution in joint ventures with
companies in a similar predicament.
6. Are you ready to divest newly underperforming
businesses? There’s no room for sentimentality
in portfolio planning. The downturn changed
many industries fundamentally, and once-
strong businesses may emerge from the crisis
in a weaker competitive position. Divesting
them now may be better than spending the next
economic cycle trying to fix them. Buyers
will emerge as the market recovers—and com-
panies can free up cash for better oppor-
tunities elsewhere.
7. Do you have the financial resources needed for
an upturn? Growth requires capital. Companies
may require more working capital or have to
finance the development of additional products,
distribution channels, and marketing programs
or the acquisition of new businesses. Credit and
equity have become scarce resources, and new
financing may not be timely enough to support
the market’s full recovery. To finance growth,
CFOs should prepare a battle plan—including
ways to line up new equity, as well as bonds
and new debt—that can be activated if necessary.
CFOs in countries where the volatility and
 4 McKinsey on Finance Number 32, Summer 2009

Read what other people are saying

at mckinseyquarterly.com, then join
the conversation.

8. Have you taken advantage of the buyers’ market
9. Do you know what risks a recovery might bring?
3 See Richard F. Dobbs, Tomas
Karakolev, and Francis Malige,
“Learning to love recessions,”
mckinseyquarterly.com,
June 2002.
uncertainty of the crisis have pressured the 10. Can you sell your recovery plan to investors?
currency should understand how a recovery will Too many companies were unprepared for the
affect the ability to raise capital. downturn, lacking clear plans to communicate
with investors or good answers to difficult
questions from analysts. Don’t be caught with-
for talent and other resources? In a recession, out a response when someone asks you
most companies focus on cutting costs—head what you’re doing to capitalize on the upturn.
counts, discretionary marketing expenditures,
R&D, product development, and capital spending.
But all of these now cost less than they have in
a decade, especially hiring new finance profes- A few big ideas that become realities will be worth
sionals. Research on previous downturns3 much more than a dozen that don’t quite
shows that the future winners made dispropor- get off the launch pad. Thoughtful CFOs will ask
tionate investments in talent, marketing, themselves which handful of bets could have
R&D, and capital spending at exactly this point. the biggest payoffs and then mobilize the bulk of
their time, capital, and resources to make those
bets succeed.
Risk management and contingency planning
are typically better at highlighting day-to-day
issues than at anticipating major shifts. Yet
an economic turnaround could bring a number of
structural changes, some relatively predict-
able and with far-reaching effects. How well, for
example, do you understand your company’s
exposure to major currency or commodity price
movements? Do you know whether the health
of channels, customers, or suppliers might create
substantial structural change or whether
your company is prepared to deal with high levels
of volatility that may continue even as a
recovery builds?

David Cogman (David_Cogman@McKinsey.com) is a partner in McKinsey’s Shanghai office, Richard Dobbs

(Richard_Dobbs@McKinsey.com) is a partner in the Seoul office, and Massimo Giordano (Massimo_Giordano@
McKinsey.com) is a partner in the Milan office. Copyright © 2009 McKinsey & Company. All rights reserved.

Reducing risk in your
manufacturing footprint
Flexibility within and among locations can help companies respond to
changing conditions.
Eric Lamarre, Manufacturers of all types seek the same holy grail:
Martin Pergler, and the strategy that delivers products at the lowest
Gregory Vainberg
possible total landed cost. In search of that goal,
over the past few years companies all over the
world have relocated facilities, outsourced produc-
tion to low-cost countries, invested in automation,
consolidated plants, or fundamentally redefined
relationships with suppliers.
Establishing the cheapest manufacturing footprint
becomes infinitely more elusive when basic
assumptions change fast and furiously, as they have
in the past year. Redesigning the footprint can
be the biggest and most important transformation
a manufacturer can undertake. Yet too many
managers choose the footprint by using only a single
5
set of future cost and demand assumptions. Any
manufacturing footprint exposes companies to
risks, such as changes in local and global demand,
currency exchange rates, labor and transpor-
tation costs, or even trade regulation. A wrong bet
can transform what should be a competitive
advantage into a mess of underutilized or high-
cost assets.
In our experience, the missing ingredient in many
manufacturing-strategy decisions is a careful
consideration of the value of flexibility. Companies
that build it into their manufacturing presence
can respond more nimbly to changing conditions
and outperform competitors with less flexible
footprints. As the current economic turmoil illus-
6 McKinsey on Finance Number 32, Summer 2009
Many manufacturers fail to assess the flexibility and
resilience to risk of their manufacturing-footprint options
trates, the greater the level of uncertainty, the
greater the value of flexibility. This is not surprising;
real-options theory (see sidebar, “What are
real options?”) maintains that flexibility is more
important when volatility is more intense. To
capture this value and gain the best position for
responding to future economic changes, all
companies should integrate flexibility into their
manufacturing-footprint or sourcing decisions.
Sources of flexibility
Some sectors understand the importance of flex-
ibility. Peak-demand power plants, for example,
are inherently quite costly but play an important
role in the market because they can quickly be
brought online for short periods when high energy
demand drives up electricity prices. Petroleum
refineries can alter their product mix weekly (or
even daily), basing these changes on the relative
prices of different distillates, product inventories,
and the price and availability of crude oil.
Industrial examples are less common. Honda’s East
Liberty, Ohio, plant can switch in minutes from
producing the Civic, an economical passenger car,
to the crossover sport utility CR-V. The Southeast
Asian plant of a construction-equipment manufac-
turer was designed to make two different prod-
ucts on the same assembly line. Every month, the
plant can switch production schedules to meet
Chinese, Southeast Asian, and Indian demand for
either product.
Many manufacturers, however, fail to assess the
flexibility and resilience to risk of their
manufacturing-footprint options, much less invest in
flexibility to make themselves more responsive.
Flexibility in a company’s manufacturing footprint
may take a number of forms: for instance, the
ability to adjust overall production volumes up
or down efficiently, depending on demand and
profitability; to change the production mix among
different products or models; or to adapt the
timing of production by shortening lead times or
committing the company to production volumes
later than competitors do. A flexible footprint can
also manifest itself in a company’s dispatch
optimization—its ability to adjust the country or
facility from which products or parts are sourced
in order to minimize the total landed cost at the
desired destination, given actual market conditions.
When companies build in these sources of strategic
flexibility, they can respond tactically to risks
such as changes in local demand, currency levels,
labor rates, tariffs, taxes, and transportation
costs. Toyota Motor, for instance, has increasingly
placed its manufacturing plants around the
world for maximum responsiveness to local market
conditions—starting with its NUMMI joint
venture with GM in California during the 1980s.
By 2004, Toyota realized that these efforts had
significantly reduced its overall risk exposure
(currency risk, in particular) by matching the
currencies of local costs and revenues.
Valuing and liberating flexibility
We find it useful to distinguish between two types
of flexibility. The first is flexibility within the
four walls of any given manufacturing facility. Plant
 Reducing risk in your manufacturing footprint
flexibility might be manifested, for example, when
a manufacturing manager decides whether to
change production levels at a given factory or a
purchasing manager decides which supplier to
use. While the decision itself is simple, increasing
an individual plant’s flexibility is often fairly
expensive: for example, it can mean adding capacity,
adopting more expensive tooling to facilitate
mix changes, or negotiating more flexible labor or
supplier agreements.
The second type of flexibility, at the level of a
company’s network of plants, calls for integrating
information from around the enterprise to make
networkwide optimization decisions. One US manu-
facturer, for example, expected to serve customers
in North America from plants in North and Central
America and customers in Europe from European
plants. When demand increased in the United States,
however, falling shipping costs, a stronger US
dollar, and capacity constraints made it worthwhile
for the company to ramp up European production
What are real options?
Real-options theory has its roots in the model developed for
financial options by Fischer Black and Myron Scholes and
later modified by Robert Merton. A company can use similar
models to value business or capital decisions that give it
the right, but not the obligation, to undertake a specific action
later, depending on how circumstances evolve. These
real options include expanding or shutting down a factory or
selling or acquiring an asset.
7
as much as possible and to ship products across
the Atlantic. The specific balance of production
and transportation costs in each of the three plants
required a holistic view of the whole network (and,
in this case, a new shipping flow).
While the decisions (and the information require-
ments) for this second kind of flexibility are
more complex, increasing it may be less expensive
than building flexibility within an individual
plant. Indeed, the more complex the footprint, the
more likely that some sort of hidden network
flexibility is readily available. A company with a
multinational footprint, for example, might have
significant potential flexibility to adjust production
levels and shipping flows between different
regions in response to changing local economic
conditions. It could realize this possibility
only if it had sufficiently transparent sources of
information and made managers responsible
for exploiting them.
The idea of real options is very intuitive—a small investment
now “just in case” can pay off significantly, especially if
the level of uncertainty is large. Managers often treat standard
real-options calculations with suspicion, however, since
the mathematical analysis requires simplifying assumptions
about exactly how flexibility would be captured. Our
approach to managing a company’s manufacturing footprint
is an application of the real-options idea but grounded in
very concrete analysis of the operational decisions managers
must make to capture flexibility.
8 McKinsey on Finance Number 32, Summer 2009

MoF 31 2009
Footprint
Exhibit 1 of 1
Glance: Evaluating the flexibility of various potential manufacturing footprints can help companies choose
among their options.
Exhibit title: Considering flexibility

Exhibit Unit cost by footprint options; index: expected value of existing footprint = 100 80% confidence
Expected value
interval
Considering
flexibility 130

Evaluating the flexibility of 110 103

98 96 Expected value of
various potential manufacturing 91 existing footprint
footprints can help companies 90 88 85 82 84
choose among their options.
70 75 72 73 72

50

0
Option A Option B Option A Option B
Before flexibility After flexibility
analysis analysis

Net present value 100 120 150 125

Consider the example of a heavy-equipment manu-
facturer exploring potential new footprints to
reduce its cost base and maintain its competitive
position against low-cost entrants. The leading
new footprint option—to build new plants in devel-
oping countries and to reallocate the product
mix and capacity of existing plants—was clearly
more cost-effective given the expected evolution
of demand and costs. Nonetheless, increased cur-
rency exposure and transportation flows would
significantly raise the company’s overall level of
risk. Once managers incorporated flexibility
into their analysis, however, the new footprint
option became significantly more attractive.
They then realized that a more geographically diver-
sified footprint would enable them to respond
more easily to unexpected changes in costs or
demand—an ability that lowered both the
expected unit cash cost and the uncertainty. In
effect, the new footprint provided very concrete
and valuable real options. Capturing them required
an incremental increase in investment, but the
lower unit costs and greater flexibility were clearly
worthwhile.
In this instance, flexibility improved the case
for what was already a worthwhile new footprint
investment. But suppose that had been one
of two possible new footprint options. Basing the
decision between them solely on expected
costs, without considering flexibility—as many
companies do—would probably have made
the company choose the costlier option (exhibit).
What should companies do?
The example above shows that if companies take
risk and flexibility into account when they make
manufacturing-footprint decisions, they can make
better ones, particularly under high uncertainty.
To capitalize on that opportunity, companies must
take several steps.
Phase 1: Modeling landed costs
The starting point for exploring manufacturing-
footprint options is a detailed landed-cost
model for all options under consideration. To under-
stand the cost of manufacturing and delivering a
unit of each product to each destination, managers
must also understand the marginal costs of
Reducing risk in your manufacturing footprint
producing and shipping more or fewer units.
This is trickier than it seems, since the financial
systems of many companies tend to track the
required factor cost items only on a plant-by-plant
level. Cutting the numbers with sufficient gran-
ularity will require a combined effort involving the
finance function and the shop floor, as well as
the design team for the options being considered.
Phase 2: Exploring risk and flexibility
In this phase, managers need to assess the risks
affecting costs and demand. Some risks can
be assessed fairly easily: for example, local GDP
growth may influence local industry demand
directly, and the evolution of local labor rates may
feed straight into factor costs. Others risks are
a bit more challenging, since they affect more than
one element of the cost base. Energy prices, for
instance, typically appear not only as a direct manu-
facturing cost but also as a contributor to trans-
portation costs—both in shipping products to end-
user markets and in shipping modules or parts
from factories or suppliers to assembly. Currency
risk, which can be particularly difficult to assess
accurately, is often a critically important consid-
eration as well.
Besides understanding the risks, managers need
to understand the sources of flexibility in each
footprint option. Which combinations of produc-
tion volume, mix, dispatch, and timing are
available for each? How is flexibility constrained—
for example, by maximum production capacity
or transportation bottlenecks? What can be done
within the four walls of an individual plant and
at the level of the plant network? The heavy-
equipment manufacturer discussed above built
its model for over 60 products, a dozen geographic
regions, and 50 partially correlated risk factors.
In our experience, the principal difficulty in this
phase is tracking the impact of different risk
9
factors and flexibility decisions through all of the
line items. Effects can be hidden—for instance,
increases in the price of energy affect costs not
only for manufacturing but also for transpor-
tation, as well as supplier costs that may be passed
on through escalation clauses.
Phase 3: Quantifying the trade-offs
To make the cost and flexibility trade-offs for
different footprint options, companies must
combine the risks and sources of flexibility with
base-case demand predictions and landed-
cost models. A variety of analytical techniques are
available. If just a handful of largely independent
uncertainties really matter, managers may need
only a simple computation of the economics of
each footprint option in a small set of scenarios.
When the number of variables is larger and their
relationships are more complicated, probabilistic
modeling often makes more sense, as it did for
the heavy-equipment manufacturer. In such cases,
it’s essential to program the model with rules
for the managerial flexibility each footprint option
allows—rules such as “if demand exceeds capacity,
start a third shift” or “ship units from Mexico if
they turn out to be cheaper than units from
Indonesia.” The heavy-equipment manufacturer
ran several thousand Monte Carlo scenarios
on its model, recalculating capacity and dispatch
flows according to economic conditions.
Both scenario analysis and probabilistic modeling
are only as good as the quality of a company’s
understanding of its key assumptions. What’s needed
is a combination of what-if analysis, external
data, expert predictions, stress testing, and extrap-
olation from the available historical data.
Phase 4: Making the choice and
improving value
The calculations described above often clarify
which footprint choice is best under a broad
10 McKinsey on Finance Number 32, Summer 2009

range of situations. Some options might provide the Finally, it’s worth stressing that the work doesn’t
lowest landed costs even in the face of broad stop with adjusting the network. Managers face
swings in economic conditions. In other cases, one a constant stream of decisions, such as investing
option beats out others only because greater in modernization, adding new capacity, and
flexibility helps a company adapt more successfully introducing new products. That’s in addition to more
to certain kinds of change, such as increased day-to-day decisions in production planning to
competition or regional fluctuations in demand. capture the value of—and preserve—the network’s
A footprint that seems more expensive or that flexibility. Making such decisions typically
requires a higher level of investment might be worth- requires the use of ongoing coordination mech-
while for the extra flexibility. anisms across plants, appropriate steps to
measure and plan capacity, and the adjustment of
Debating these possibilities will probably gen- metrics that emphasize the value of the whole
erate additional ideas to enhance a company’s flexi- enterprise, as opposed to individual plants. Such
bility. Managers of a liquid-natural-gas (LNG) activities, worthwhile in themselves, are doubly
supplier, for instance, were considering whether important if network flexibility is a key part of a
efforts to acquire or develop a number of gas new footprint’s value.
fields, pipelines, and LNG terminals would provide
greater flexibility in responding to regional
imbalances in demand. Analysis confirmed that
they would do so but also showed that the
company could capture extra value by improving
its dispatch capabilities to change network
flows in its whole portfolio of assets. The company
believed that this additional network flexibility,
requiring only new managerial skills and infor-
mation systems but no physical modifications,
would have an economic value easily exceeding the
additional investment.

The authors would like to thank Vijai Raghavan for his contributions to this article.

Eric Lamarre (Eric_Lamarre@McKinsey.com) is a partner in McKinsey’s Montréal office, where Martin Pergler
(Martin_Pergler@McKinsey.com) and Gregory Vainberg (Gregory_Vainberg@McKinsey.com) are consultants.
Copyright © 2009 McKinsey & Company. All rights reserved.
 11

Valuing social responsibility

programs
Most companies see corporate social responsibility programs as a way to fulfill the
contract between business and society. But do they create financial value?

Sheila Bonini,
Timothy M. Koller, and
Philip H. Mirvis
1 We have chosen to use the
Companies face increasing pressure from govern-
ments, competitors, and employees to play a
leading role in addressing a wide array of environ-
mental, social, and governance issues—ranging
from climate change to obesity to human rights—
in a company’s supply chain. Over the past
30 years, most of them have responded by devel-
holder value. Some companies have made great
progress tracking operational metrics (such as tons
of carbon emitted) or social indicators (say, the
number of students enrolled in programs) but often
have difficulty linking such metrics and indicators
to a real financial impact. Others insist that the
effects of such programs are either too indirect

term “environmental, social,

and governance” because
more common terms, such as
“corporate social respon-
sibility” and “sustainability,”
have a narrower connota-
tion. The term environmental,
social, and governance
is also increasingly used by
investors to refer to a broader
set of programs that we
observed in the companies
mentioned in this report.
oping corporate social responsibility or sus-
tainability initiatives to fulfill their contract with
society by addressing such issues.1
Gathering the data needed to justify sustained,
strategic investments in such programs can be
difficult, but without this information executives
and investors often see programs as separate from a
company’s core business or unrelated to its share-
to value or too deeply embedded in the core business
to be measured meaningfully: for example, it
can be very hard to separate the financial impact of
offering healthier products from the impact of
other aspects of the brand, such as quality and price.
Yet many companies are creating real value through
their environmental, social, and governance
activities—through increased sales, decreased
 12
Environmental, social, and governance programs can create
value in many other ways that support growth, improve returns
on capital, reduce risk, or improve management quality
2 To better understand the
relationship between
environmental, social, and
governance activities and
value creation, we surveyed
238 CFOs, investment
professionals, and finance
executives from a full range of
industries and regions. The
survey was conducted in
conjunction with a survey of
127 corporate social respon-
sibility and sustainability
professionals and self-
described socially responsible
institutional investors
that were reached through the
Boston College Center for
Corporate Citizenship. Both
surveys were in the field
in December of 2008. To get
a bottom-up view, we also
constructed case studies of
20 companies with leading
environmental, social, and
governance programs
in a number of industries.
3 See “Valuing corporate social
responsibility: McKinsey
Global Survey Results,”
mckinseyquarterly.com,
February 2009.
McKinsey on Finance Number 32, Summer 2009
costs, or reduced risks—and some have developed
hard data to measure even the long-term
and indirect value of environmental, social, and
governance programs.2 It’s not surprising that
the best of them create financial value in ways the
market already assesses—growth, return on
capital, risk management, and quality of manage-
ment (Exhibit 1). Programs that don’t create
value in one of these ways should be reexamined.
How environmental, social, and
governance programs create value
The most widely known way that environmental,
social, and governance programs create value
is by enhancing the reputations of companies—
their stakeholders’ attitudes about their
tangible actions—and respondents to a recent
McKinsey survey agree.3
Moreover, it has long been clear that financially
valuable objectives—such as better regulatory
settlements, price premiums, increased sales, a
reduced risk of boycotts, and higher retention
of talent—may depend, at least in part, on a com-
pany’s reputation for environmental, social,
and governance programs that meet community
needs and go beyond regulatory requirements
or industry norms.
However, environmental, social, and governance
programs can create value in many other ways
that support growth, improve returns on capital,
reduce risk, or improve management quality.
Breaking out the value of these activities enables
companies to communicate it to investors and
financial professionals.
Growth
Our case studies highlighted five areas in
which these programs have a demonstrable impact
on growth.
New markets. IBM has used environmental, social,
and governance programs to establish its
presence in new markets. For example, the company
uses its Small and Medium Enterprise (SME)
Toolkit to develop a track record with local stake-
holders, including government officials and
nongovernmental organizations (NGOs). In part-
nership with the World Bank’s International
Finance Corporation, India’s ICICI Bank, Banco
Real (Brazil), and Dun & Bradstreet Singapore,
IBM is using the service to provide free Web-based
resources on business management to small
and midsize enterprises in developing economies.
Overall, there are 30 SME Toolkit sites, in
16 languages. Helping to build such businesses not
only improves IBM’s reputation and relation-
ships in new markets but also helps it to develop
relationships with companies that could
become future customers.
New products. IBM has also developed green data-
center products, which help the company grow
by offering products that meet customers’ enviro-
nmental concerns. A new collaboration between
IBM and the Nature Conservancy, for example,
is developing 3D imaging technology to help
 Valuing social responsibility programs 13

MoF 32 2009
Valuing ESG
Exhibit 1 of 2
Glance: The best environmental, social, and governance programs create financial value for a
company in ways that the market already assesses.
Exhibit title: Quantifiable value

Exhibit 1 Value in environmental, social, and governance (ESG) programs

Quantifiable value
The best environmental,
social, and governance
programs create financial value
for a company in ways that
the market already assesses.
Growth New markets t Access to new markets through exposure from
ESG programs
New products t Offerings to meet unmet social needs and increase differentiation
New customers/market share t Engagement with consumers, familiarity with their expectations and behavior
Innovation t Cutting-edge technology and innovative products/services
for unmet social or environmental needs; possibility of using these
products/services for business purposes—eg, patents, proprietary knowledge

Reputation/differentiation t Higher brand loyalty, reputation, and goodwill with stakeholders

Returns Operational efficiency t Bottom-line cost savings through environmental operations and practices—
on capital eg, energy and water efficiency, reduced need for raw materials

Workforce efficiency
Reputation/price premium
t Higher employee morale through ESG; lower costs related to turnover or
recruitment
t Better workforce skills and increased productivity through participation
in ESG activities
t Improved reputation that makes customers more willing to pay
price increase or premium

Risk Regulatory risk t Lower level of risk by complying with regulatory requirements, industry
management standards, and demands of nongovernmental organizations

Public support t Ability to conduct operations, enter new markets, reduce local resistance

Supply chain t Ability to secure consistent, long-term, and sustainable access to safe, high-quality
raw materials/products by engaging in community welfare and development

Risk to reputation t Avoidance of negative publicity and boycotts

Management Leadership development t Development of employees’ quality and leadership skills through participation
quality in ESG programs

Adaptability t Ability to adapt to changing political and social situations by engaging local
communities

Long-term strategic view t Long-term strategy encompassing ESG issues

advance efforts to improve water quality. This
project applies IBM’s existing capability in sensors
that can communicate wirelessly with a central
data-management system in order to provide deci-
sion makers with summaries that improve water
management. At the same time, it also addresses
an important environmental need—and creates
a new business opportunity for IBM.
New customers. Telefónica has been developing
new products and services geared to customers
over the age of 60. To help overcome what the
company calls a “knowledge barrier,” it has collab-
orated with associations for older people in an
effort to introduce retired men and women to the
benefits of new technologies—for example,
teaching them to communicate with grandchildren
living abroad. The company meets a social need
by helping this population use modern technologies
and services while building a customer base in
an underpenetrated market.
14 McKinsey on Finance Number 32, Summer 2009
Market share. Coca-Cola has shown how a company
can use enlightened environmental practices
to increase its sales. Its new eKOfreshment coolers,
vending machines, and soda fountains are far
more environmentally friendly than the ones they
replaced: they not only eliminate the use of
hydrofluorocarbons (greenhouse gases) as a refrig-
erant but also have a sophisticated energy-
management device that Coca-Cola developed to
reduce the energy these machines consume.
Together, these innovations increase the equip-
ment’s energy efficiency by up to 35 percent.
The company highlights the benefits to retailers—
especially the financial savings from energy
efficiency—and requests prime space in their out-
lets in return for providing more efficient systems.
Innovation. Dow Chemical has committed
itself to achieving, by 2015, at least three
breakthroughs in four areas: an affordable and
adequate food supply, decent housing,
sustainable water supplies, or improved personal
health and safety. All have a connection to an
existing or planned Dow business. The company
has already made progress in its Breakthroughs
to World Challenges initiative, for example,
by utilizing its understanding of plastics and
water purification to supplement its venture
capital investment and loan guarantee support
to a social entrepreneur in India who has
developed an inexpensive community-based
water filtration system. The initiative’s
ultimate goal is a new business model to sell new
products at reasonable prices, meeting social
needs while contributing to Dow’s bottom line.
Returns on capital
We have seen companies generate returns on capital
from their environmental, social, and governance
programs in several ways—most often through oper-
ational efficiency and workforce efficiency.
Operational efficiency. These programs can help
companies realize substantial savings by meeting
environmental goals—for instance, reducing
energy costs through energy efficiency, reducing
input costs through packaging initiatives, and
improving processes. Such efficiencies often require
upfront capital investments to upgrade tech-
nologies, systems, and products, but returns can
be substantial.
Novo Nordisk’s proactive stance on environmental
issues, for example, has improved its operational
efficiency. In 2006, the company set an ambitious
goal: reducing its carbon dioxide emissions by
10 percent in ten years. In partnership with a local
energy supplier, Novo Nordisk has identified
and realized energy savings at its Danish produc-
tion sites, which account for 85 percent of the
company’s global carbon dioxide emissions. It uses
the savings to pay the supplier’s premium price
for wind power. In three years, the effort has elim-
inated 20,000 tons of carbon dioxide emissions,
and by 2014 green electricity will power all of the
company’s activities in Denmark. In this way,
Novo Nordisk is not only reducing its emissions,
increasing the energy efficiency of its opera-
tions, and cutting its costs but also helping to build
Denmark’s market for renewable energy.
Workforce efficiency. Best Buy has undertaken
a targeted effort to reduce employee turnover, part-
icularly among women. In 2006, it launched the
Women’s Leadership Forum (WoLF), which shows
groups of female employees how they can help
the company to innovate by generating ideas, imple-
menting them, and measuring the results. These
innovations—which largely involve enhancing the
customer experience for women by altering the
look and feel of Best Buy stores and modifying their
product assortment—have significantly boosted
sales to women without decreasing sales to men.

4 See Scott C. Beardsley,
Luis Enriquez, and Robin
Nuttall, “Managing
regulation in a new era,”
mckinseyquarterly.com,
December 2008.
5 SMART 2020: Enabling the
Low Carbon Economy
in the Information Age, The
Climate Group and the Global
eSustainability Initiative
(GeSI), 2008.
Valuing social responsibility programs
Besides fostering innovation, the program helps
women to create their own corporate support
networks and encourages them to build leadership
skills by organizing events that benefit their
communities. In the program’s first two years, turn-
over among women decreased by more than
5 percent annually.
Risk management
Companies often see environmental, social, and
governance issues as potential risks, and many
programs in these areas were originally designed
to mitigate them—particularly risks to a com-
pany’s reputation but also, for example, problems
with regulation, gaining the public support
needed to do business, and ensuring the sustain-
ability of supply chains. Today, companies
manage many of these risks by taking stands on
questions ranging from corruption and fraud
to data security and labor practices. Creating and
complying with such policies is an extremely
important part of risk management, though one
that isn’t likely to be a source of significant
differentiation. But leading companies can dif-
ferentiate themselves by going beyond the
basics and taking a proactive role in managing
environmental, social, and governance risks.
Such an approach can have an important and
positive financial impact, since negative envi-
ronmental, social, and governance events can have
significant potential cost.
Regulation. In most geographies, regulatory policy
shapes the structure and conduct of industries
and can dramatically affect corporate profits, some-
times dwarfing gains from ordinary operational
measures. 4 It is therefore critically important for
companies to manage their regulatory agenda
proactively—ideally, by having a seat at the table
when regulations for their industries are con-
templated and crafted. To build the necessary trust
15
with regulators and to secure a voice in the ongoing
discussion, it helps to have solid relationships with
stakeholders and a reputation for strong
performance on environmental, social, and
governance issues.
Verizon, for instance, very actively manages its
relationships with stakeholders and strives to
establish regular contacts and strong ties with
policy makers. To help formulate sound—and
favorable—energy and climate policies, the company
has also sponsored research on the way infor-
mation communications technology promotes energy
efficiency. They sponsored the research behind
the Smart 20205 report, for example, which report
explains in detail how this technology, together
with broadband Internet connections, can help the
United States to reduce carbon emissions by
22 percent and reliance on foreign oil by 36 per-
cent by no later than 2020.
Public support. To operate in a country or business,
companies need a modicum of public support,
particularly on sensitive issues. Coca-Cola, for
example, has been proactive in identifying the risks
to its business posed by water access, availability, and
quality. In 2003, Coca-Cola began developing
a risk-assessment model to measure water risks
at the plant level, such as supply reliability,
watersheds, social issues, economics, compliance,
and efficiency. The model helped Coca-Cola
to quantify the potential risks and consequently
enabled the company to put sufficient resources
into developing and implementing plans to mitigate
those risks. It now has a global water strategy in
place that includes attention to plant performance,
watershed protection, sustainable water for
communities, and building global awareness. Their
actions help avoid potential backlash over water
usage as well as potential operational issues from
water shortages.
16 McKinsey on Finance Number 32, Summer 2009
Supply chains. Some companies have moved
beyond focusing on the risks from the day-to-
day practices of their suppliers and now consider
the suppliers’ long-term sustainability as well.
Under Nestlé’s Creating Shared Value strategy, for
instance, a business has to make sense for all
its stakeholders. As an example, Nestlé works
directly with the farmers and agricultural
communities that supply about 40 percent of its
milk and 10 percent of its coffee. To ensure its
direct and privileged access to these communities,
Nestlé promotes their development by building
infrastructure, training farmers, and paying fair
market prices directly to producers rather than
middlemen. In return, the company receives higher-
quality agricultural ingredients for its products.
These strong relationships also give Nestlé’s fac-
tories a reliable source of supply, even when the
overall market runs short. When the price of milk
powder soared in 2007, for example, Nestlé’s
direct links to farmers mitigated its supply and
price risks in certain parts of the world and
protected the interests of all stakeholders—from
farmers to consumers.
Management quality
CFOs and professional investors often see high-
performing environmental, social, and governance
programs as a proxy for the effectiveness of
a company’s management. They may be onto some-
thing. In our observation, these programs can
have a strong impact in all three areas that investors
typically consider important: leadership strength
and development, both at the top and through the
ranks; the overall adaptability of a business; and
the balance between short-term priorities and a
long-term strategic view.
Leadership development. IBM’s Corporate Service
Corps sends top-ranked rising leaders to work
pro bono with NGOs, entrepreneurs, and govern-
ment agencies in strategic emerging markets.
The program has already improved the leadership
skills of its participants in a statistically signifi-
cant way; raised their cultural intelligence, global
awareness, and commitment to IBM; and given
the company new knowledge and skills. In a recent
evaluation, nearly all participants indicated
that their involvement with the corps increased the
likelihood that they would stay at IBM.
Adaptability. Companies flexible enough to meet
unforeseen challenges—for instance, by remaining
in countries or communities during times of
crisis or conflict—often reap long-term benefits, such
as strong relationships and credibility with local
communities. Environmental, social, and govern-
ance programs are one way to boost this kind
of resiliency. Cargill, for example, is currently main-
taining its presence and operations in Zimbabwe
under difficult conditions; instead of paying its local
employees in the country’s very unstable cur-
rency, it compensates them with food parcels and
fuel vouchers. The company makes similar long-
term investments in local communities in the other
66 countries where it operates.
 Valuing social responsibility programs 17

A long-term strategic view. Companies that take our research suggests otherwise. Companies
a long-term view use environmental, social, can directly value the financial effects of many such
and governance activities to anticipate risks from programs, even in the short term; the impact
emerging issues and to turn those risks into of environmental programs, for example, can often
opportunities. Novo Nordisk, for instance, manages be measured quickly with traditional business
itself according to principles of a triple bottom metrics such as cost efficiency. Companies that
line—an economically viable, environmentally understand the pathways to value and identify
sound, and socially responsible approach to the short- and long-term effects of environmental,
business. The company, for example, has not only social, and governance programs will succeed
made investments to prevent, diagnose, and in defining a few targeted metrics to assess
treat diabetes and to build up the related health them (Exhibit 2).
care infrastructure but has also used these
investments to strengthen its position in mature One such company, Telefónica, having found that its
markets and to develop its business in new ones. customers’ purchasing decisions and loyalty are
driven in part by perceptions of its environmental,
Assessing
MoF 32 2009value social, and governance activities, decided to inte-
Although many executives and investors believe
Valuing ESG grate the results of an annual reputation survey into
that much
Exhibit 2 ofof2 the impact of environmental, social, its business strategy. Since then, Telefónica has
and governance
Glance: programs
Environmental, is long
social, and term and
governance programs can identified
have direct its
andreputation
indirect shortfalls, aligned its busi-
indirect—and
financial effectsthus nearly impossible to measure—
on companies. ness strategy with efforts to close them, created
Exhibit title: Direct and indirect dividends

Exhibit 2 Example of environmental, social, and governance (ESG) program: Campbell

Soup’s partnership with American Heart Association
Direct and indirect
dividends Business driver Effect of ESG programs on Financial impact
business driver
Direct Indirect
Environmental, social, and
Food and beverage t New products Increased sales
governance programs
innovation
can have direct and indirect
financial effects on companies. Access to and relationships t New sales opportunities with Increased sales
with retailers current retailers
t Stronger relationships with Goodwill
current retailers
t Access to new retailers Increased sales
Brand portfolios and t New customers and stronger Increased sales
brand loyalty consumer loyalty
t Better brand awareness, Goodwill
preference, and image
Relationships with consumers, t New sales opportunities created Goodwill
nongovernmental organizations through trusting partnerships
(NGOs), and other influencers
t Lower risk of attack from vocal Avoidance of risk
representatives of NGOs

Source: Interviews with Campbell Soup executives; McKinsey analysis

18 McKinsey on Finance Number 32, Summer 2009

action plans to improve its reputation (for instance,
by developing new products and services or adapting
existing ones), and monitored any improvement.
This approach has helped the company to improve
its reputation, and the corresponding sales, in
a significant way. An internal study shows that in
2006 and 2007, 11 percent of the change in the
financial performance of the company reflected
changes in its reputation.
UnitedHealth is another company that has assessed
the impact of its environmental, social, and
governance work. Its social responsibility dash-
board includes metrics for workplace engage-
ment, ethics, and integrity; supplier diversity; envi-
ronmental impact; employee–community
involvement; stakeholders’ perspectives on social
responsibility; and community giving. All of
these metrics track the company’s progress in
meeting its social mission: helping people live
healthier lives. Currently, UnitedHealth’s board
and senior executives use the dashboard to
measure the company’s performance and to guide
discussions on future priorities, programs,
resources, and results. In the future, the dash-
board will be made available to customers
and other public audiences to demonstrate the
company’s environmental, social, and governance
commitments and progress.
Companies need broad legitimacy in the societies
where they operate if they are to sustain their long-
term ability to create shareholder value. Equally
important, society depends upon big business to
provide critical economic and other benefits.
This relationship forms the basis of an overarching
contract between business and society. Over
the past few years, responses to the social, environ-
mental, and governance concerns of politicians,
regulators, lawyers, and consumers have reshaped
the core businesses of major companies in many
sectors: agribusiness, chemicals, fast food, mining,
oil, pharmaceuticals, and tobacco, to name just
a few. As the social contract has come under more
and more pressure, companies are realizing that
they just can’t ignore environmental, social, and
governance issues.

The authors wish to thank Noémie Brun, Thomas Herbig, and Michelle Rosenthal for their contributions to
this research.

Sheila Bonini (Sheila_Bonini@McKinsey.com) is a consultant in McKinsey’s Silicon Valley office, and Tim Koller
(Tim_Koller@McKinsey.com) is a partner in the New York office; Philip Mirvis is a senior research fellow
at Boston College’s Center for Corporate Citizenship. Copyright © 2009 McKinsey & Company. All rights reserved.

This article has been adapted from “Valuing corporate social responsibility and sustainability,” a white paper published
by the Boston College Center for Corporate Citizenship, March 2009.

When to divest support services
Some companies can reduce the cost of support services, improve their quality, and
raise cash to invest elsewhere. Here’s how to tell if your company is one of them.
Petter Østbø, Is a hidden gem eluding your portfolio evaluation
Tor Jakob Ramsøy, and process? Most companies periodically scan their
Anders Rasmussen
operations to ensure that they are the best owners
and in the process identify businesses that can
be divested to raise capital for other opportunities.
But these companies typically overlook support
services, viewing them instead as cost centers—
which focus on cost reductions or outsourcing—
rather than as business units ripe for divesting.
The distinction is an important one. In many cases,
it makes sense to outsource individual service
activities, including commoditized corporate func-
tions (such as finance and accounting, HR, and
purchasing), IT functions (the help desk, infrastruc-
ture operations, applications management),
and industry-specific functions (booking and fare
19
management for airlines, payments processing
for banks). Yet when a company aggregates support
services into a single unit, it may constitute an
attractive business that can be sold outright, with
a value greater than that of a five- to eight-year
contract for continued support services. The selling
company reduces its operating costs, raises
capital, and removes assets from its balance sheet.
The purchasing company acquires assets, know-
how, and perhaps an attractive geographic foot-
print, as well as a new support services client.
Nonetheless, even executives who understand
the idea in theory worry that the practical
obstacles to divesting—tight credit and a weak
market for assets—outweigh the benefits or
that the seller will have to pay more for these
services after the divestiture.
 20
1 To obtain these numbers, we
studied press releases of
the transactions, comparing
the information in those
documents with financial
accounts (such as quarterly
reports and investor
presentations) and conducting
interviews with executives
at these companies or with
entities familiar with the
process.
McKinsey on Finance Number 32, Summer 2009
For companies that meet certain prerequisites, how-
ever, the opportunity can be significant, and
there are plenty of eager buyers for shared-services
units that offer real value. In our research into
more than 30 recent transactions, the divesting
companies generated, on average, an immediate
cash injection of 250 percent of book value. There
were also immediate cost savings of up to 40 per-
cent, followed by annual additional reductions of
over 2 percent, and even, in most cases, improve-
ments in quality.1 These numbers match up well with
the latest transaction multiples for similar types
of assets—and divestments of shared-services units
also embody hidden opportunities for value,
so the benefits probably exceed those of open-
market transactions.
Who should divest?
Not all companies should consider divesting
a captive support services center. Before a sale
attracted buyers, many companies would first
need to develop their own capabilities internally
or to improve the organization of their shared-
services units. That is especially true for companies
whose support services are still dispersed among
various business units or only loosely controlled by
a central unit, as well as those whose business
processes aren’t standardized or whose fragmented
IT systems are based largely on legacy applica-
tions and must therefore be cleaned up. Further-
more, companies facing a large, imminent
restructuring (such as the divestiture or acquisition
of a major business) may also find it better to
keep their services internal so that they retain
control over quality, avoid adding complexity
to the difficulties of the transition phase, and reduce
the risk of losing key people.
Obviously, if a unit has unique capabilities or a
company has unusual service requirements, selling
the unit outright would put the company at a
disadvantage when it negotiated subsequent service
agreements with the new owner, which would
have the leverage to demand whatever terms it
wanted. In our experience, however, sellers
usually have enough qualified alternate providers
to make the subsequent negotiations competitive.
We have also found that the companies best posi-
tioned to divest have service centers mature
enough to permit a change of control: such a unit
is a separate entity, with an existing sales and
service culture; has a product catalog with clear
service-level agreements (SLAs) regulating
the type of service the buyer receives, as well as its
quantity and quality; and provides at least
30 percent of the selling company’s needs. Finally,
the unit’s growth shouldn’t be strategically
important to the success of that company, which
must also be willing and able to manage the
resulting service contracts.
Even among companies that meet these prereq-
uisites, divesting a support services unit is
attractive only if the benefits exceed the value that
could be created through a simple outsourcing
contract. For sellers, this means finding a buyer
that can provide quality services at a cost lower
than the current one, offer a service contract suffi-
ciently flexible to adjust for changes in technology
and usage patterns, and pay a premium high enough
to justify the permanent transfer of control and
ownership of all assets. Buyers actually have shown
a willingness to pay such a premium for support
services units that offer value creation opportu-
nities similar to those of any other acquisition
(exhibit). Attractive units must have the ability to
function as businesses on their own, a desirable
geographic footprint (from an operational or a
customer-facing perspective), industry-specific
capabilities that would strengthen a service pro-
vider’s offering, significant growth potential,
or unique intellectual property.

Exhibit
What buyers want
Buyers have been willing
to pay a premium for support-
services units that offer
value creation opportunities
similar to those of any
other acquisition.
When to divest support services
MoF 32 2009
Shared Services
Exhibit 1 of 1
Glance: Buyers have been willing to pay a premium for support-services units that offer value
creation opportunities similar to those of any other acquisition.
Exhibit title: What buyers want
Average premium for acquisition of support services unit, ratio of premium to book value
Source of value
Stand-alone growth potential and low-cost locations
Unique intellectual property
Industry capabilities
Customer acquisition or distressed sale
1Based on >30 deals with average value of $1.9 billion, among all types of companies.
Source: Interviews; company financial statements; McKinsey analysis
Examples of successful sales abound. Take, for
example, WNS, the support services unit of British
Airways. WNS was a wholly owned subsidiary of
BA until April 2002, when the airline sold 70 percent
of its shares to the private-equity firm Warburg
Pincus. Under Warburg Pincus, WNS was able to
expand its offering of finance and accounting,
HR, and benefits-management services to numbers
of new clients. Another example of such a sale
involves the private-equity firms Cinven and BC
Partners, which acquired Amadeus Global Travel
Distribution, the ticketing arm of Scandinavian
Airlines System (SAS), Lufthansa, Iberia, and
Air France, in 2005. Since then, Cinven has success-
fully worked with the company’s management to
enlarge the business and reduce operational costs.
In 2007, Cinven recapitalized Amadeus, earning
1.6 times its original investment. And when the Euro-
pean service provider Capgemini acquired
Unilever’s Indian support center, Indigo, it quickly
became a platform for establishing the company’s
offshore business process outsourcing services.
Not all companies meet the prerequisites, and those
that don’t should wait. One Fortune 200 basic-
materials company first evaluated the idea of selling
its support services center four years ago but
decided that the unit didn’t serve enough of the
company—or offer enough services to the internal
clients it did serve—to attract the right potential
21
330
204
140
60
buyers. Further, the company was divesting a
major division and decided it couldn’t risk losing
direct control over its support services until
the restructuring was complete. Recently, after
addressing those issues, the company divested
its support services center.
Who is the best owner?
In our experience, many companies will be inter-
ested in acquiring a mature support services
center. The trick is to negotiate only with potential
buyers for which it would have real value. The
seller must understand that value for a wide range
of companies—including service providers and
financial buyers, such as private-equity firms—and
develop a short list of no more than five candi-
dates that would be invited to negotiate. A team
that includes the CIO or the head of support
services, the CFO—and, for larger deals, the CEO—
usually conducts this kind of effort.
At the outset, the team should determine whether
its own company is the unit’s best owner by
developing a realistic three- to five-year business
plan based on the assumption that the unit would
be free to serve any customer and that resources
would be available to support its growth. The plan
should account for the unit’s growth opportunities
and for cost and quality improvements that would
take its performance to best-practice levels. If the
22 McKinsey on Finance Number 32, Summer 2009
plan would help the center generate more value
than it is currently expected to create, the team
must decide whether the company has sufficient
resources to make the necessary investments and
add the needed capabilities, taking into account
its hopes for other business units. If the plan would
require a disproportionate focus on the support
services center or would be challenging to execute—
given, for example, the natural constraints
to serving competitors—then there is probably a
better owner, and the company should consider
divesting the unit.
Negotiating the deal
When the time comes for the company to divest, its
executives must manage two competing challenges:
getting the best possible cash payment for the sale
of the business and the best possible terms for
a five- to eight-year service contract. The key to
success is negotiating the service contract and
the sales price at the same time—typically, by invit-
ing a short list of credible buyers (those with
the size, reputation, and ability to provide contrac-
tual quality and service guarantees) to an
auction that sets the price both of the unit and of
the service contract’s most important products
and SLAs. The top one to three bidders should sub-
sequently be invited to participate in detailed
open-book negotiations.
An excessive number of candidates can be
a problem. A large multinational that began the
process with more than 25 bidders found it
impossible to evaluate them, because it couldn’t
properly negotiate both the sale and the service
contract for so many bidders at the same time.
After a six-month auction failed to produce
Petter Østbø (Petter_Ostbo@McKinsey.com) is an associate principal in McKinsey’s Oslo office, where Tor Jakob
Ramsøy (Tor_Jakob_Ramsoy@McKinsey.com) is a partner; Anders Rasmussen (Anders_Rasmussen@McKinsey
.com) is a partner in the Copenhagen office. Copyright © 2009 McKinsey & Company. All rights reserved.
appropriate results, the multinational decided to
enter into detailed negotiations with only
two parties. It reached an attractive agreement
within two months.
Negotiation mechanics for the sale—due diligence,
valuations, and so forth—are the same as those
for any other divestiture, with a notable exception:
the seller must be confident that a buyer will
stand by its long-term contractual obligations and
its guarantees if issues arise with the quality of
service. This type of transaction also differs from a
standard one in that the value transferred depends
on more than the amount of the up-front payment
for the sale; other important considerations
include the size of the initial and ongoing cost reduc-
tions, the length of the service contract, and the
investment needed to transfer hardware, software,
and employees.
The challenges of negotiating the service contract
resemble those of any straightforward outsourcing
contract. Sellers often include specific require-
ments, such as limiting the use of offshore employees
and mandating a presence at certain locations.
(One US financial institution, for example, required
the buyer to keep nearly 100 employees in the
seller’s US offices and to allocate a certain number
of employees in the buyer’s offshore offices to
work solely on the seller’s account.) Once the trans-
action closes, the seller must keep key people
from its former captive to ensure that it has the
contract-management skills it will need and
understands the systems and processes it has sold.
When to divest support services 23
24 McKinsey on Finance Number 32, Summer 2009
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didn’t in past recessions.
Richard Dobbs, Bin Jiang, and
Timothy M. Koller

The CFO’s role in navigating

the downturn
Companies—and their CFOs—may
have to adapt more radically to
the downturn than they now expect.
Richard Dobbs, Massimo Giordano,
and Felix Wenger
July 2009
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