While many organizations boast that they have solid partnerships in place, the University of Tennessee’s experience and research has found that most organizations really want to enhance and push their own self-interest. This is often known as a what’s-in-it-for-me (WIIFM) approach. Such an attitude is understandable because winning is ingrained from early childhood on; indeed, most institutions of higher education also focus on winning. In fact, many organizations formally train procurement and sales professionals in the art of negotiation to help them win.

The word partner implies that there are not two sides. Progressing toward a Vested Outsourcing agreement should focus on creating a culture where parties are working together to ensure their ultimate success. There is a significant difference between being a supplier and being a partner. The mentality should shift from an us versus them to a we philosophy, as discussed earlier in avoiding the zero-sum game. We will call this a what’s-in-it-for-we (WIIFWe) philosophy. Vested Outsourcing is indeed a true partnership.

Companies should approach a Vested Outsourcing agreement as a symbiotic relationship because only by working together can everyone succeed. A Vested Outsourcing partnership focuses on identifying desired outcomes and then aligns the interests of all players so that all benefit if the desired outcomes are reached. The relationship becomes more collaborative and expands beyond simply meeting the requirements of the original outsourcing agreement.
Vested Outsourcing is not for the faint of heart; it challenges the mind-set of senior executives, middle managers, and especially procurement specialists. It often requires the willpower to walk away from an immediate price savings gained from procurement muscle in order to save more money in the future. Last, it requires committed executive leadership from each organization. The need for senior management support is true for every major business improvement, whether it is total quality management, reengineering, or Lean. Unfortunately, many senior executives have reached that position because of their adherence to a conventional approach to outsourcing, and they may be unwilling to change their business style. Vested Outsourcing demands a willingness to transcend the conventional win-lose approach most companies take in procuring goods and services.
A true win-win requires effort and commitment by all parties. Human relationships are fundamental to successful Vested Outsourcing. Almost by definition, effective partnerships must evolve over time as the parties learn to operate under a win-win philosophy. For many companies, this approach is a learned behavior, and they have to unlearn conventional patterns and ways of thinking. Without mutual trust, any attempt to implement Vested Outsourcing will become mired in terms and conditions.
In our experience, only those organizations that truly challenge the conventional WIIFM mentality are able to achieve true Vested Outsourcing partnerships that deliver outstanding results. The University of Tennessee has unlocked a the secrets of of the most successful outsourcing deals in the following Five Rules of Vested Outsourcing:
1. Focus on outcomes, not transactions.
2. Focus on the WHAT, not the HOW.
3. Agree on clearly defined and measurable outcomes.
4. Optimize pricing model incentives for cost/service trade-offs.
5. Governance structure provides insight, not merely oversight

Adopting a Vested Outsourcing business model does not change the nature of the work to be performed. At the operational level, lines of code must be written, bathrooms must be cleaned, orders must be fulfilled, repairs must be completed, calls must be answered, and meals must be cooked. What does change is the way that the outsourcing company purchases the services.

Using Vested Outsourcing, the company outsourcing specifies what it wants, and moves the responsibility of determining how and what gets delivered to the outsource provider. Firms outsource to a supplier because they know the supplier can do a better job, yet write the contract as if they are the experts. In so doing, they become victim of a detrimental phenomenon called the “outsourcing paradox.” A telltale initial “outsourcing paradox” symptom is an attempt to develop the “perfect” set of tasks, frequencies and measures in an attempt to tightly define the expected results. The result is an impressive document containing all the possible details about how the work is to be done.

But such attempts typically are doomed to failure. A too-tightly written statement of work makes outsource providers responsible for the work without giving them authority to exercise their own initiative in carrying out the work. Good companies outsource for a reason: In-house operations are either too expensive, ineffective, or both.
In the most effective Vested Outsourcing partnerships, very little discussion takes place about the processes the service providers will follow to meet the requirements; participants focus instead on system-wide performance expectations. Why dictate procedures in an area where you have decided you are deficient? It is up to the service providers to understand how to put the supporting processes together to achieve the desired outcomes.

Consider information technology outsourcing arrangements. Under a conventional contract, the company outsourcing would specify the hardware to use and possibly even the number and skills of help desk personnel. This scenario diminishes the outsource provider’s role as the expert. The service provider is the one that is constantly in the marketplace and keeping tabs on the latest developments. Its experts certainly will know of the most appropriate hardware for a given task, and they may even know of process or system efficiencies that allow them to do the task with less labor than non-IT firms. Performance partnerships let each firm do what it does best. Unless the company that is outsourcing has the skills and the resources to keep up with the latest innovations in the service it is outsourcing, it should leave the details to the experts.

Depending on the scope of the partnership, the company that is outsourcing assigns the service provider to perform some or all of the activities required to achieve the contract goals. For example, when outsourcing cleaning services, a company could outsource all aspects of restroom facility maintenance, the scope of which might include management of plumbing needs or procurement of supplies.

Collaboration lies at the heart of Vested Outsourcing because, to be successful, a service provider often becomes responsible for more services and has to work with other service providers. In a properly constructed Vested Outsourcing partnership, the service provider no longer has the option to deny responsibility by saying “it’s not my fault!” Rule No. 2 harmonizes closely with rule No. 4, which explains why pricing model incentives should be optimized for cost/service trade-offs. Applied together, these two rules work in conjunction with each other to create mutually beneficial and achievable goals.

Following Rule #1 prevents The Activity Trap and The Power of Not Doing ailments

Adopting a Vested Outsourcing business model does not change the nature of the work to be performed. At the operational level, lines of code must be written, bathrooms must be cleaned, orders must be fulfilled, repairs must be completed, calls must be answered, and meals must be cooked. What does change is the way that the outsourcing company purchases the services.
Using Vested Outsourcing, the company outsourcing specifies what it wants, and moves the responsibility of determining how and what gets delivered to the outsource provider. Firms outsource to a supplier because they know the supplier can do a better job, yet write the contract as if they are the experts. In so doing, they become victim of a detrimental phenomenon called the “outsourcing paradox.” A telltale initial “outsourcing paradox” symptom is an attempt to develop the “perfect” set of tasks, frequencies and measures in an attempt to tightly define the expected results. The result is an impressive document containing all the possible details about how the work is to be done.

But such attempts typically are doomed to failure. A too-tightly written statement of work makes outsource providers responsible for the work without giving them authority to exercise their own initiative in carrying out the work. Good companies outsource for a reason: In-house operations are either too expensive, ineffective, or both.
In the most effective Vested Outsourcing partnerships, very little discussion takes place about the processes the service providers will follow to meet the requirements; participants focus instead on system-wide performance expectations. Why dictate procedures in an area where you have decided you are deficient? It is up to the service providers to understand how to put the supporting processes together to achieve the desired outcomes.

Consider information technology outsourcing arrangements. Under a conventional contract, the company outsourcing would specify the hardware to use and possibly even the number and skills of help desk personnel. This scenario diminishes the outsource provider’s role as the expert. The service provider is the one that is constantly in the marketplace and keeping tabs on the latest developments. Its experts certainly will know of the most appropriate hardware for a given task, and they may even know of process or system efficiencies that allow them to do the task with less labor than non-IT firms. Performance partnerships let each firm do what it does best. Unless the company that is outsourcing has the skills and the resources to keep up with the latest innovations in the service it is outsourcing, it should leave the details to the experts.
Depending on the scope of the partnership, the company that is outsourcing assigns the service provider to perform some or all of the activities required to achieve the contract goals. For example, when outsourcing cleaning services, a company could outsource all aspects of restroom facility maintenance, the scope of which might include management of plumbing needs or procurement of supplies.

Collaboration lies at the heart of Vested Outsourcing because, to be successful, a service provider often becomes responsible for more services and has to work with other service providers. In a properly constructed Vested Outsourcing partnership, the service provider no longer has the option to deny responsibility by saying “it’s not my fault!” Rule No. 2 harmonizes closely with rule No. 4, which explains why pricing model incentives should be optimized for cost/service trade-offs. Applied together, these two rules work in conjunction with each other to create mutually beneficial and achievable goals.
Following Vested Outsourcing Rule #2 prevents The Junkyard Dog Factor and The Outsourcing Paradox ailments
Next: Agree on clearly defined and measurable outcomes

Success in Vested Outsourcing requires engagement of five rules. Here we examine the third of those five rules: Agree on clearly defined and measurable outcomes.

All parties must be explicit in defining the outcomes they want. These outcomes are expressed in terms of a limited set of — ideally, no more than five — high-level metrics. Organizations should spend the time, collaboratively during the outsourcing process, and especially during contract negotiations, to establish explicit definitions for how relationship success will be measured. Investing time up front in determination of these criteria is a critically important means of ensuring that none of the companies spends time or resources after implementation measuring the wrong things.

Once the desired outcomes are agreed on and explicitly defined, the service provider can propose a solution that will deliver the required level of performance at a predetermined price — often in terms of cost per unit usage. Focusing on outcomes fundamentally shifts the business model, transferring risk from the company that is outsourcing to the service provider(s). Under the purest form of Vested Outsourcing, the company that is outsourcing pays only for results, not transactions; rather than being paid for the activity performed, service providers are paid for the value delivered by their overall solution.

Establishment of the right set of measurement criteria is vitally important. Getting it wrong can result in hundreds of thousands, and possibly millions, of dollars wasted in an outsource solution that is plagued by the ailments described in blogs 1 through 10. The company will have procured a subcontracting assignment that delivers what it asked for, but may not necessarily be what it wants or needs. And, as blog posting #9  advises, use caution to avoid measurement minutiae. Too much of a good thing can yield bad results.

Following Vested Outsourcing Rule #3 prevents the Driving Blind Disease and the Measurement Minutiae ailment

Success in Vested Outsourcing requires engagement of five rules. Here we examine the fourth of those five rules: Optimize pricing model incentives for cost/service trade-offs.

The fourth hallmark of a Vested Outsourcing partnership is a properly structured price model that incorporates incentives for the best cost and service trade-off. A logical pricing structure is essential to avoid ailment No. 1, the “penny wise and pound foolish” syndrome described in Blog No. 1. The pricing model is based on the type of contract — fixed price or cost reimbursement — that will be used to reward the outsource provider.

When establishing the pricing model, businesses should apply two principles:
1. The pricing model must balance risk and reward for the organizations. The agreement should be structured to ensure that the outsource provider assumes risk only for decisions within its control. For example, a transportation service provider never should be penalized for the rising costs of fuel, and a property management service provider never should be penalized for an increase in energy prices.
2. The agreement should specify that the service provider will deliver solutions, not just activities. When properly constructed, Vested Outsourcing will provide incentives to the service provider to solve the customer’s problems. The better the service provider is at solving those problems, the more profits the outsourcing company can make. This solutions-oriented approach encourages outsource providers to develop and institute innovative and cost-effective methods of performing work to drive down total cost while maintaining or improving service. The essence of Vested Outsourcing is a strategic bet by the outsource provider that it will meet the service levels at the set price. Inherent in the business model is a reward for the service provider to make investments in process, service or associated product that will generate returns in excess of contract requirements. Performance partnerships usually are based on fulfillment of the desired trade-off stated by achieving:
• higher service levels at the same cost
• the same service levels at lower costs
• higher service levels and lower cost levels
If the service provider does a good job, it will reap the rewards of greater profitability.
Vested Outsourcing does not guarantee higher profits for service providers; it does, however, provide them with the authority and autonomy to make strategic investments in their processes and product reliability that can generate a return on investment that is greater than a conventional cost-plus or fixed-price-per-transaction contract might yield. Vested Outsourcing also typically seeks to encourage service providers to meet the desired performance levels at a flat or decreasing cost over time. Therefore, the service provider has to leverage its unique skills and capabilities to make the processes more efficient — to the point that it can generate increased profit. By doing so, the outsource provider may earn intangible benefits, such as contract extensions, additional business or locations, expanded services it can offer the partner, or the willingness of the customer to provide references.
Partners in a Vested Outsourcing relationship — the originating company as well as its vendors — should continually seek ways in which to reduce the total cost of the process being outsourced. The interwoven dependencies of outsourcing relationships require an environment that encourages service providers to push outsourcing companies to change internal processes if they are inhibiting the success of Vested Outsourcing. Outsourcing companies also must be open-minded and accountable for driving internal process changes.

The correct pricing model supports the business and provides appropriate embedded incentives. It is important to understand implicitly that the outsource provider is a profit maximizer. This is reasonable, since few businesses are designed to be otherwise. Therefore, companies that outsource contracts to vendors should explore means of encouraging top performance by vendors of outsourcing services, and should reward that performance financially.
Is this approach a risky bet for a company and its service providers? Most thought leaders say no. The profitability potential exceeds possible liabilities. Adrian Gonzalez from ARC Advisory Group, which specializes in supply chain management and third-party logistics, offers this advice: “What differentiates Vested Outsourcing [is] not the risks, which are inherent in any outsourcing relationship, but the potential payoff for both service providers and customers. In other words, the benefits-to-risk ratio is much greater for Vested Outsourcing. And the risk of remaining at the status quo — in terms of lower profits for service providers and continued diminishing returns for customers — trumps them all.”
Organizations can encounter difficulty in attempting to build a dynamic relationship that challenges the status quo in existing processes. But properly structured Vested Outsourcing partnerships can — and do — create paybacks for both parties.
Following Vested Outsourcing Rule #4 prevents the Penny Wise and Pound Foolish and Sandbagging ailments.

Success in Vested Outsourcing requires engagement of five rules. Here we examine the fifth of those five rules: Governance structure should provide insight, not merely oversight.

In the early days of outsourcing, many companies made the mistake of simply throwing the work over the fence to the outsource provider, with poorly defined requirements and often no performance metrics or service-level agreements. As scary as it may seem, we have seen some companies with a high percentage of outsource agreements operating under no formal contract agreements. Fortunately, most companies that jumped into outsourcing have fixed this problem. The downside is that many have gone to the other extreme, as witnessed by companies experiencing “measurement minutiae,” described in Blog No. 9. Today’s outsource providers often have a small army of program managers who micromanage the outsource provider.

In an effective Vested Outsourcing partnership, a company contracts with service providers that are real experts. Such partnerships should be managed to create a culture of insight, not oversight.

Let us look at the meaning of both words to get a better understanding of the difference.
Insight: Power of acute observation and deduction; penetration, discernment, perception.
Oversight: Watchful care; superintendence; general supervision. Escape from an overlooked peril.
If a company has done a good job picking the proper outsource provider, a trusted expert in its field, why does it need a small army to conduct general supervision? Our experience has shown that companies tend to go overboard and micromanage outsource providers as a result of the “junkyard dog factor” (described in Blog No. 4).
A properly designed governance structure should establish good insight, not provide layers of supervisory oversight.
Following Vested Outsourcing Rule #5 prevents the Outsourcing Paradox and the Measurement Minutiae ailments.