CONFIDENTIAL Mc Kinsey Proposal in Support of the

CONFIDENTIAL Mc. Kinsey Proposal in Support of the 2008 -09 Presidential Transition October 20, 2008 This report is solely for the use of client personnel. No part of it may e circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Mc. Kinsey & Company. This material was used by Mc. Kinsey & Company during an oral presentation; it is not a complete record of the discussion.

KEY MESSAGES • We believe that the 2008 -09 Presidential Transition offers a vital opportunity to lay the groundwork for a vast improvement in the productivity and performance of government; this goal is a national imperative given looming budget issues and policy priorities over the next decade • We have identified three ways that Mc. Kinsey can advance the overall performance improvement agenda of the new administration during the transition • We would be honored to serve the transition on a pro bono basis, in keeping with our long-established practice of committing Firm resources in pro bono contexts that offer the opportunity for extraordinary impact 1

• Suggested options for Mc. Kinsey support for the Transition • Next steps • Appendix: Mc. Kinsey overview 2

THREE POTENTIAL AREAS FOR MCKINSEY SUPPORT 1 A. Finding major productivity improvements that are crosscutting and within a subset of mega-agencies as part of the Agency Review process • Full Mc. Kinsey team working as part of the Agency Review process, dedicated to each of a few major agencies • Tasked with identifying specific improvement actions that could result in material budget and/or performance benefits early in the administration • Take a broad/transformative approach to defining opportunities – not just an incremental review of changes from status quo 1 B. Adding professional management expertise to the Agency Review process • Have a Mc. Kinsey team augment the leadership of the Agency Review function with Project Management Office (PMO) • Help with coordination as well as getting Agency Review Teams to surface opportunities in agencies related to management practices, productivity, purchasing, and IT 2. Bringing to life the Performance Improvement agenda (CPO and CTO) • Full Mc. Kinsey team working to develop a detailed definition of how the CPO and CTO functions should be implemented to best achieve the goals for these functions • Focus on cross-government technology and performance management; draw on extensive Mc. Kinsey experience with government and the private sector 3. Developing actionable plans for inter- or intra-agency restructuring priorities • Full Mc. Kinsey team tasked with developing specific implementation plans related to agency restructuring • Focus on specific restructuring moves for the first year, including – Action plans for carrying out moves that can be accomplished by executive order – Analysis/support for moves requiring legislative actions 3

1 A. AGENCY REVIEW PART A: TAPPING THE MEGA-AGENCY PRODUCTIVITY OPPORTUNITY • Focus on 3 -5 agencies: – CMS/HHS – DOD – DHS – Treasury – Transportation Note: we have experienced consultants with top secret security clearances • Full Mc. Kinsey project team against each agency, working in coordination with Agency Review Team, but reporting to the Transition Director – Several partners, full-time project manager, and 2 -3 dedicated consultants for each agency; total of 10 -12 Mc. Kinsey staff • Key activities and deliverables (for each agency): – Prioritized list of major opportunities for productivity/performance improvements at the agency – Opportunity sizing (budget impacts, other metrics) – Implementation roadmaps for each opportunity 4

1. EXAMPLE: IMPROVING THE CONTRACTING FUNCTION AT A LARGE FEDERAL AGENCY Situation • Agency needed to recompete a large business process outsourcing contract signed in 1998 that at the time cost $175 m per year, split between two vendors to reduce operational risk • Agency management and procurement believed strongly that a better deal could be had • Agency maintained two vendor structure and solicited competitive bids • Multiple rounds of negotiations were viewed to be successful – new cost slated to be $165 m per year Approach • Modeled total vendor costs – labor, hardware, facilities, etc. • Modeled two vs. one provider adding hot and cold backup – shifted to one provider due to better costs, easier management, and superior service • Developed tiered per unit pricing structure • Wrote terms and conditions that tied pricing to industry benchmarks • Showed bidders government’s estimates of their costs Impact • Saved $110 m (70%) off first year costs • Annual price decreases of 5 -10% • Supplier had to issue a profit warning with SEC • Two rounds of bids including negotiations with agency head at the table with CEO of bidders 5

1 B. AGENCY REVIEW PART B: ADDING MANAGEMENT EXPERTISE TO AGENCY REVIEW EFFORTS • Support the Agency Review leadership by staffing a central PMO • Deploy a Mc. Kinsey team centrally with the Agency Review process, working alongside the Head of Agency Review to coordinate overall efforts and ensure that teams are working to identify management opportunities at the agencies where we would not be doing a deep dive – Total Mc. Kinsey team of 3 -4 people • Key activities and deliverables: – Project management support for Agency Review work, in consultation with the Head of Agency Review – Develop set of key management and performance improvement issues for Agency Review teams to probe – Deliver integrated assessment of material performance improvement opportunities in priority 1 agencies 6

1 B. ADDING MANAGEMENT EXPERTISE TO AGENCY REVIEW EFFORTS Central management support to the Agency Review Lead and Group Leaders. Ensure that there is adequate coordination among efforts and that each team is surfacing management opportunities Performance Improvement Agency Review Lead and Group Leaders Agency Team Agency Liaison To central functions Congressional affairs Executive assistant Public liaison Core team member Budget 7

2. BRINGING THE PERFORMANCE IMPROVEMENT AGENDA TO LIFE • One large Mc. Kinsey team including several partners with relevant expertise, a senior project manager, and 4 -5 full-time consultants • Key activities & deliverables: – CPO and CTO function definition: • Design structure, operating model, job descriptions, and implementation requirements for the CPO and CTO function. • Highlight the most effective approaches to linking performance to budget processes; defining scorecards and metrics; and using technology to improve accountability and transparency of performance. • Draw on the Mc. Kinsey team work under item 1 A-B (Agency Review) to identify the most relevant performance metrics for specific agencies as framed by the President-elect’s strategic goals and vision. – Cross-cutting performance and technology opportunities: Draw on the Mc. Kinsey team work under item 1 A-B (Agency Review) to develop a cross-cutting list of areas where government-wide processes and/or technology can be used more effectively to reduce cost, improve performance, or increase government transparency and accountability. 8

2. EXAMPLE: UK PRIME MINISTER’S DELIVERY UNIT • Tony Blair set up the Prime Minister’s Delivery Unit, which has been replicated in several countries, states, and cities • The key components include: developing a set of shared priorities across government that are tied to political promises; devising metrics; developing tracking systems; setting up problem solving and performance management processes; providing targeted support where needed; linking policy agenda to performance outcomes Rank (out of 21 PSAs) 20 = 18 21 = 14 5 9

3. CRAFTING ACTION PLANS FOR AGENCY RESTRUCTURING • One Mc. Kinsey team focused on developing specific implementation plans for how best to carry-out agency restructuring decisions – Several partners, one full-time project manager, and 3 -4 full-time consultants • Draw on Mc. Kinsey team work with the Agency Review process to access relevant organizational, budget, and other information for relevant agencies • Key activities and deliverables (contingent on nature of specific restructuring priorities): – Action plans for carrying out executive orders related to restructuring – Development of briefing/support for legislative discussions on restructuring, including quantification of opportunities and development of performance benefits to restructuring moves – Evaluation/recommendations on specific restructuring decisions that have been raised but remain undecided 10

3. EXAMPLE: RE-ARCHITECTING U. K. ’S FINANCIAL SERVICES AUTHORITY Engagement context FSA’s statutory objectives Background of the work for FSA Mc. Kinsey was engaged to carry out a strategic review for the new agency, including in particular: • Translating statutory objectives for the agency into regulatory activities • Developing a new and transparent operating framework and organizational model to guide prioritization and allocation of resources 11

• Suggested options for Mc. Kinsey support for the Transition • Next steps • Appendix: Mc. Kinsey overview 12

OPEN ISSUES AND NEXT STEPS TO MOVE FORWARD • Ethics review / documentation of pro bono practices? • Additional proposal specifics: work plan, deliverables, examples, references? • Presentation to the Transition Board or other senior participants in the transition? • Practical / logistical issues: security clearances, Agency Review names, etc. 13

• Suggested options for Mc. Kinsey support for the Transition • Next steps • Appendix: Mc. Kinsey overview 14

Mc. KINSEY OVERVIEW Established firm Founded in 1926 by James O. Mc. Kinsey and led for 17 years by Marvin Bower. Professional legacy includes: • Professional values and an enduring code of conduct • Top management/integrated problem solving perspective • Tailored approach and custom solutions Broad reach More than 7000 consultants, over 1000 partners, and over 80 offices serving 95% of the 100 largest global companies* Global One-third of client activity is conducted in the United States, two-thirds in Europe, Asia, and Latin America; work is led by consultants who are citizens of more than 106 countries Flexible approach A range of client service options: • Senior management counseling • Broad transformational change programs • Targeted assistance for high impact in critical areas *Source: 2007 Forbes Global 2000 companies list 15

OUR VALUE PROPOSITION • Integrative problem-solving approach geared to top management • Focus on clients’ long-term performance and strategic goals • Advisor to the company CEO or top official on the critical performance issues • World-class problem-solving expertise with customized approach • Proprietary knowledge base in industry and functional areas • Worldwide network of offices and resulting global perspective • Emphasis on joint client-Mc. Kinsey working teams and capability building • Professional approach and values • Practical experience base unparalleled in its depth and range 16

WE HAVE SIGNIFICANT EXPERIENCE IN THE PUBLIC SECTOR Number of studies, January 2001–December 2007 Type of client 100% = 1, 111 studies* Type of project 100% = 1, 111 studies* International Publicgovernmental private organisations partnerships Local government and delivery organisations State/ regional governments * Approximately 3% of all client activity Source: Mc. Kinsey Corporate Marketing Finance IT Operations Strategy National governments Organisation 17

MCKINSEY’S MISSION IN THE PUBLIC SECTOR Mc. Kinsey’s Public Sector Practice strives to serve national and local governments and international public institutions on key issues where Mc. Kinsey has the opportunity to fundamentally improve performance, and where appropriate, support the development of policies that would significantly improve performance of the economy and the value of goods and services delivered to citizens. 18

SELECTED EXAMPLES OF MCKINSEY’S EXPERIENCE IN THE PUBLIC SECTOR BY FUNCTIONAL AREA Change management Strategy • Led project to merge several • Supported a 5 -year strategy review • existing organisations to create a major urban transport authority Worked with senior leadership to develop implementation principles and detailed transition plans and support on-the-ground implementation • for a European government agency Developed key strategic tools and capabilities, including an end-to-end economic model of user flows to help assess the potential impact of interventions IT Performance transformation Organisation design • Helped design IT roadmap for the • Supporting a European Labour • Helped redesign the corporate • • largest payments and collections organisation in the world Worked across IT architecture, organisation and outsourcing Reduced IT costs by 20%, number of IT applications by 75% and claims turnaround times by 50% • Agency with 90, 000 employees on a transformation programme covering operational performance and end-to-end reorganisation Early results include a 50% fall in waiting times and a 100% increase in value-added time with customers • center of a US Government department and reforms to the wider end-to-end delivery landscape Support for the development of an integrated programme plan and supporting quantitative model Procurement Operations • Helping achieve over $200 m a year • Transformed operational • procurement savings for a US state government Work involves transforming core procurement processes, redesigning the procurement organisation and building capabilities • performance of a European post office, through IT-enabling counters, a new customer management model, capability building and a new performance management system Queuing fell by 50%, transactions per operator rose by 30% 19

SELECTED EXAMPLES OF MCKINSEY’S EXPERIENCE IN THE PUBLIC SECTOR BY TYPE OF ORGANISATION Transport and logistics Education • Helped deliver $3 bn cost reductions • Supported education ministries in Defense developed and emerging economies on their national education strategies and on key strategic projects including elearning • Helped support performance improvement for a range of schools and universities Finance and economics Health • Supporting multiple defence • Helped translate statutory • • for a national postal service Transformed organisation and operating performance of a European post office Developed overall transport and logistics strategy for an Asian economy ministries on areas including the transformation of their procurement functions and end-to-end logistics, including support in building new processes and capabilities across civilian and military organisations objectives of a newly created European financial services regulator into a transparent operating framework. Developed and tested technical risk assessment tools, including a riskbased supervision model • Helped a European public health • insurance body transform over 7 years from a monopoly provider to a competitive health insurer Drove operational efficiency in multiple leading hospitals, including A&E waiting times and procurement savings Employment Crime and interior • Supported major change • Helped redesign the corporate centre programmes for labour agencies in Europe and Australia, covering performance transformation, organisation redesign, capability building, performance management and customer and outcome focus • • of a national interior ministry and its interactions with police and prison services Enhanced performance management for a state court system Assessed NYPD capacity to respond to large-scale disaster following 9/11 20