Project Approval Request

IBM Outsourcing Supplemental Contract

June 05, 2011

Business Sponsor: Global Brands / Global IT Finance Sponsor: GBCS Finance

Executive Summary
Background In January 2010, Hilton Worldwide (HWW) approved a proposal to outsource significant portions of its IT function Outsourcing IT functions would improve technology efficiencies, accelerate innovation and leverage global scale and skills Request for Proposal (RFP) issued for migrating corporate owned data center; board (BOD) approved project scope and outsourcing cost, awarded contract to IBM Outsource of HWW data center; migration of hosting, support and maintenance of distribution applications to IBM owned data center Over five years, legacy cost structure of HWW data center estimated at $204.9M, retained cost at $28.6M and outsourced activities (benefits) at $176.0M IBM provides services to support data center over five years; migration period of 10 months within the first year Vendor cost to provide services estimated at $112.5M over five years; net benefits realized by HWW estimated at $63.6M. Complication The BOD approved proposal was not the version signed between HWW and IBM, signed version consisted of different project scope, outsourced and retained costs Project scope did not include migration of hosting activities and supporting maintenance to IBM owned data center Hardware/software maintenance costs in the signed version higher then the original BOD approved deal, resulting in lower outsourcing costs (benefits) BOD approved proposal outsourced hosting activities to vendor; retained maintenance cost of $11.7M and outsourced activities of $29.5M over five years Signed deal retained maintenance cost of $19.2M and outsourced activities of only $22.4M over five years; $7.5M unfavorability versus BOD approved deal Due to change in scope of project, vendor service cost decreased from $112.5M to $107M over five years; $5.5M favorability versus BOD approved deal Change in project scope and outsourcing costs resulted in a net benefit of $61.6M over five years in the signed version; $2.1M unfavorability to BOD proposal HWW requires approval of supplement contract to pay IBM to complete outsourcing of hosting activities based on the original BOD approved proposal Proposal New supplement contract calls for payment over five years based on a projection of resource units utilized by HWW over the term of the agreement Vendor base charge payments of $21.5M over five year for migrating hosting activities to IBM data center Payments includes all resources (staff, software, network services, etc;) that IBM requires to provide the agreed upon services Resulting net benefit from new contract is $46.1M over 5 years; $15.3M unfavorable to signed deal and $17.8M unfavorable to BOD approved deal Includes the BOD approved retained and benefit cost for maintenance from 2012 onwards, vendor service will remain at the 2011 level based on signed deal Alternatives Continue to have outsourced functions performed under current signed contract and maintain maintenance support for hosting services Recommendation Approve five year supplemental contract costs of $21.5 million to migrate hosting services to IBM data center Project cost comprised of no one-time capital outlay and five year on-going expense of $21.5 million Funding for supplemental contract not included in 2011B; project will drive unfavorability of $3.0M versus 2011B

2011 Hilton Worldwide Confidential & Proprietary

Proposal / Five Year Average Net Benefits

New supplement contract for migrating hosting activities to IBM center, base charge payments of $21.5M over life of contract; five year average of $4.3M The BOD approved proposal was not the version signed between HWW and IBM, consisted of different project scope, outsourced and retained costs Resulting net benefit from new contract is $46.1M or $9.2M average over five years; $3.5M and $3.1M unfavorability to BOD approved and signed deal
IBM Outsourced Project - 5 Year Average Net Benefits Summary
Reported in millions 5-Yr Average Legacy Data Center Cost Structure Legacy Data Center Cost 1 Retained Cost 2 Outsourced Activites (Benefits) Supplier Service Supplier Cost 3 Add'l Base Charges 4 Total Cost to HWW Net Benefit 5
Notes: 1) HWW legacy data center five year cost of $204M; hosting support and maintenance of distrubtion applications 2) Retained costs or functions not sourced to vendor; strategy and architecture 3) Cost of IBM services to source functions to owned data center; Hotel distribtuion system, base data center support, end user support,etc;) 4) Add'l cost paid to IBM for migrating hosting activities to vendor Data Center; total five year cost of $21.5M 5) Total net benefit of sourcing deal to HWW including the cost of IBM services and add'l base charges

5-Yr Average Data Center (Approved) Net Benefit (5.7) 35.3 (22.5) (22.5) $12.7

5-Yr Average Data Center (Signed) Net Benefit (7.5) 33.8 (21.4) (21.4) $12.3

5-Yr Average Data Center (New Deal) Net Benefit (6.0) 35.0 (21.4) (4.3) (25.7) $9.2

Varinace New Deal to Varinace New Deal to Approved Signed (0.3) (0.3) 1.1 (4.3) (3.2) (3.5) 1.4 1.2 0.0 (4.3) (4.3) (3.1)

($41.0) $-

In Millions
$45.0 $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0

IBM Outsourced Project - 5 Year Average Net Benefits Summary

$41.0 $9.2 $4.3

$12.7

$12.3

$22.5

$21.4

$21.4

$5.7
$0.0

$7.5

$6.0

5-Yr Average Legacy Data Center Cost Structure

5-Yr Average Data Center (Approved) Net Benefit

5-Yr Average Data Center (Signed) Net Benefit 5-Yr Average Data Center (New Deal) Net Benefit

2011 Hilton Worldwide Confidential & Proprietary

Executive Summary
In January 2010, Hilton Worldwide (HWW) approved a proposal to outsource significant portions of its IT function
Total Five Year Project Net Benefits Summary - IBM Outsourcing In Thousands Description HWW Legacy Pre-Cost Structure 1 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Cost Structure IBM BOD Approved - Retained Costs 2 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Retained Cost IBM BOD Approved - Assumed Benefits 3 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Assumed Cost IBM BOD Approved - Supplier Cost/Base Charges 4 Price / Operation fees Base Charge Fee Total cost of Outsourcing IBM BOD Approved - Net Annual Benefit/(Cost) 5 IBM Signed - Retained Costs 2 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Retained Cost IBM Signed - Assumed Benefits 3 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Assumed Cost IBM Signed - Supplier Cost/Base Charges 4 Price / Operation fees Base Charge Fee Total cost of Outsourcing IBM Signed - Net Annual Benefit/(Cost) 5 IBM New Deal - Retained Costs 2 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Retained Cost IBM New Deal - Assumed Benefits 3 Labor & Consulting Hardware/Software/Systems Lease Hardware/Software/NetOps Maintenance Depreciation/Other Total Assumed Cost IBM New Deal - Supplier Cost/Base Charges 4 Price / Operation fees Base Charge Fee Total cost of Outsourcing IBM New Deal - Net Annual Benefit/(Cost)
Notes: 1) Repres ents HWW l ega cy cos t s tructure for Da ta Center 2) Reta i ned cos t repres ent functi ona l i ty tha t wi l l res i de wi th HWW a fter outs ource to IBM 3) As s umed Benefi ts repres ent outs ourced functi ona l i ty to IBM 4) Suppl i er Cos t/Ba s e Cha rges a re IBM s ervi ce fees to outs ource HWW Da ta Center to IBM 5) Net Annua l Benefi t/(Cos t) of Outs ource (i ncl us i ve of Suppl i er Cos t/Ba s e Cha rge) to HWW
5

2011 $16,838 14,199 8,564 6,163 45,765 1,674 2,134 2,421 141 6,369 15,164 12,066 6,144 6,022 39,396 25,337 25,337 $14,059

2012 $15,636 11,845 8,037 5,523 41,041 1,554 1,767 2,272 130 5,722 14,082 10,078 5,765 5,393 35,318 22,283 22,283 $13,036

2013 $15,783 10,750 8,197 5,390 40,121 1,569 1,590 2,317 130 5,606 14,215 9,160 5,880 5,260 34,515 21,820 21,820 $12,695

2014 $15,932 9,767 8,361 5,270 39,330 1,584 1,431 2,363 130 5,508 14,348 8,336 5,998 5,140 33,822 21,694 21,694 $12,128

2015 $16,081 8,883 8,529 5,162 38,656 1,598 1,288 2,411 130 5,427 14,483 7,595 6,118 5,032 33,229 21,450 21,450 $11,779

5- Year Total $80,270 55,445 41,689 27,508 204,912 7,978 8,210 11,783 660 28,632 72,292 47,235 29,905 26,847 176,279 112,583 112,583 $63,696

5-Year Average $16,054 11,089 8,338 5,502 40,982 1,596 1,642 2,357 132 5,726 14,458 9,447 5,981 5,369 35,256 22,517 22,517 $12,739

Comments

$43.4M in H/W Lease, $16.5M in S/W Lease and $8.2M in Office System Lease $6.0M in H/W maintenance, $28.1M in S/W maintenance, and $7.6M in NetOps Maintenance $16.5M in Facilities and $6.2M in Deprecation

$8.2M in Office System Lease $11.8M in S/W maintenance

$43.4M in H/W Lease and $3.9M in S/W Lease $6.0M in H/W maintenance, $16.3M in S/W maintenance, and $7.6M in NetOps Maintenance $16.5M in Facilities and $6.2M in Deprecation

1,674 2,134 3,921 141 7,869 15,164 12,066 4,644 6,022 37,896

1,554 2,917 3,772 130 8,372 14,082 8,928 4,265 5,393 32,668

1,569 1,590 3,817 130 7,106 14,215 10,310 4,380 5,260 34,165

1,584 1,431 3,863 130 7,008 14,348 8,336 4,498 5,140 32,322

1,598 1,288 3,911 130 6,927 14,483 7,595 4,618 5,032 31,729

7,978 9,360 19,283 660 37,282 72,292 47,235 22,405 26,847 168,779

1,596 1,872 3,857 132 7,456 14,458 9,447 4,481 5,369 33,756

$8.2M in Office System Lease and $1.2M for HWW to manage residual lease and software cost after IBM migration $11.8M in S/W maintenance and 7.5M to retention of third party software

$43.4M in H/W Lease and $3.9M in S/W Lease $6.0M in H/W maintenance, $8.8M in S/W maintenance, and $7.6M in NetOps Maintenance $16.5M in Facilities and $6.2M in Deprecation

24,694 24,694 $13,201

20,632 20,632 $12,037

20,775 20,775 $13,390

20,611 20,611 $11,711

20,422 20,422 $11,307

107,134 107,134 $61,646

21,427 21,427 $12,329

1,674 2,134 3,921 141 7,869 15,164 12,066 4,644 6,022 37,896

1,554 1,767 2,272 130 5,722 14,082 10,078 5,765 5,393 35,318

1,569 1,590 2,317 130 5,606 14,215 9,160 5,880 5,260 34,515

1,584 1,431 2,363 130 5,508 14,348 8,336 5,998 5,140 33,822

1,598 1,288 2,411 130 5,427 14,483 7,595 6,118 5,032 33,229

7,978 8,210 13,283 660 30,132 72,292 47,235 28,405 26,847 174,779

1,596 1,642 2,657 132 6,026 14,458 9,447 5,681 5,369 34,956

$8.2M in Office System Lease $13.2M in S/W maintenance; $3.9M in 2011 and $11.8M based on S/W maintenance in BOD approved proposal

$43.4M in H/W Lease and $3.9M in S/W Lease $6.0M in H/W maintenance, $14.8M in S/W maintenance, and $7.6M in NetOps Maintenance $16.5M in Facilities and $6.2M in Deprecation

24,694 3,013 27,707 $10,188

20,632 5,931 26,563 $8,755

20,775 4,304 25,079 $9,436

20,611 4,282 24,893 $8,929

20,422 4,017 24,438 $8,790

107,134 21,547 128,680 $46,099

21,427 4,309 25,736 $9,220

Add'l service fees paid by HWW to migrate hosting activities to IBM

2011 Hilton Worldwide Confidential & Proprietary