Memorandumto:Mr.AiBaoJun,GeneralManagerMr.ZhaoZhouLi,ViceGeneralManagerMr.Zhou…GeneralManagerAssistantMr.LiQingYu,DirectorofESIMr.PangYuanLing,GeneralManagerofHRCWeareveryencouragedbyandappreciatethepositivefeedbackonthediagnosticresultsandproposedpilotapproach.WetrulybelievethatBaoSteeltopmanagementarereadytoembarkonthischallengingtransformationjourneytoaworldclasssteelcompany.WehavehadaveryopenandcandiddiscussiononthepilotarrangementwithMr.Liyesterday.WefullyunderstandyourconcernaboutourproposedfeelevelandalsoexplainedindetailtoMr.LihowMcKinseysetitsfeelevelgloballyandinChina,withseveralreferencesprovidedtoMr.Liforverificationpurpose.Inthismemo,wewouldliketotryourbesttolayoutpotentialoptionstoaccommodateyourneeds.Bynow,it’squiteself-evidentthatwesincerelywanttobecomeyourhighimpactpartnerforthelongterm.Wehavemadesubstantialinvestmentatcurrentproposedfeeleveltoshowourcommitment.Wearewillingtomakefurtherinvestmentandproposealternativeoptionsforyourconsideration.Option1:FurtherInvestmentWearewillingtomakeadditional10%investmenttoreducethetotalfeelevelto13.8millionRMBwithoutchangingpilotscopeandourcommittedresources.Option2:AccelaratedPayment(Notanoptioninmyopinion.Idon’tthinkthatwillmakeadifferencehere.That’snotwhattheywant.)ToreducetheupfrontriskofBaoSteel,insteadofflatmonthlypayment,wecouldarrangeescalatedmonthlypayment.Forexample,fortotalfeeofRMB18millionforsixmonths,monthlypaymentofRMB2millionforthefirsttwomonths,monthlypaymentofRMB3millionformonth3&4,monthlypaymentofRMB4millionformonth5&6.BaoSteelcanstopthestudyanytimeifnotsatisfiedwithMcKinsey’sservicethereforereducingtheupfrontriskofunderperformanceofconsultants.Option3:Scopereduction&FurtherInvestmentAnotherdegreeoffreedomtocomeupwithpotentialsolutionsistoreducethepilotscopewithoutcausingsubstantialimpactanddelayonimplementationresultsandmomentumcreatedthroughpiloteffort.WeproposetotakeMaintenanceworkstreamoutfromthepilotasBaoSteelcouldpotentiallypilotmaintenanceonitsownafter3monthswithtrained(structuredproblemsolvingandSMED)peoplefromRollChangesworkstream.Inaddition,forQualityworkstream,weproposetohavetwoMckconsultantsforthefirst3monthsasproposedoriginally,oneresponsibleforsettingupqualityorganization,systemandprocesses,theotheroneresponsibleforfacilitatingthefirstwaveofqualityproblemsolving.Forthesecondphase,weproposetohaveoneconsultanttofacilitatethesecondwaveofqualityproblemsolving.Byadjustingthescopeandcorrespondingresourcesthisway,wecanreduceouroriginalfeelevelby20%,fromRMB18.7milliontoRMB15million.Inaddition,wearewillingtoinvestRMB4.5million(30%discount)toreducethetotalfeelevel(includingbusinesstax)toRMB11million.Wehopeourproposedoptionsorcombinationsofthemcouldaccommodateyourneeds.Weareopentoexplorefurtherwithyoupotentialarrangementthatcouldaccommodatebothofourneeds.Wecouldn’temphasizetoomuchoursincerityandcommitmenttobecomeBaoSteel’slongtermhighimpactpartner.IlookforwardtokickingoffthepilotatHRCsoon.June3,2002
