Joseph E. Stiglitz, a professor at Columbia University, received the 2001 Nobel Prize (with George A. Akerlof and A. Michael Spence) for his analysis into how markets work with asymmetrical information. Since then, Stiglitz has written and lectured extensively about globalization and markets with this unsettling message: they aren’t working very well, especially in the context of the new realities of the twenty-first century.

Stiglitz expressed concerns about how businesses and organizations approach globalization well before the 2008 global economic and financial meltdown. His books on globalization, including Globalization and Its Discontents (2002) and Making Globalization Work (2006) were highly prescient. His most recent book, Freefall (2010), recounts the events of the 2008 economic collapse and how its effects still persist.

In a 2006 lecture on globalization Stiglitz said, “Something is wrong with the way globalization is turning out. It has not lived up to its promises, and the question is what to do about it.”

Stiglitz pointed to a critical flaw: “The global financial system is not working the way it ought to. Ordinary laws of physics say that water ought to flow downhill. The parallel in economics is that money is supposed to flow from rich countries to poor countries, and risk is supposed to be transferred from the poor, who are least able to bear it, to the rich. But in the world today, things are moving in the opposite direction. To be precise, for the last several years, money has been going from the poor countries to the rich – the net flow of funds is going in the opposite direction of the way it should.”

He continued: “Meanwhile, the poorest countries in the world are left to bear the risks of interest rate and exchange rate volatility. The result of this has been that, in spite of the fact that economists know a lot more about how to manage an economy today than they did fifty years ago, there have been more than a hundred crises in the last three decades.”

That’s a major flaw all right and there is much that outsource practitioners should heed in Stiglitz’s words—especially as they relate to supply chain sustainability. Globalization is not possible without sustainable, efficient supply chains and outsourcing arrangements, and vice-versa.

It’s no surprise that globalization has meant that we have become more integrated and more interdependent. While globalization brings much value, it also poses challenges in how we need to think (and rethink) existing approaches to globalization around intellectual property, trade, global financial markets, natural resources and the environment.

Stiglitz—like my fellow researchers at the University of Tennessee working with me on Vested Outsourcing—says that countries and businesses should move away from the old-school win-lose strategies aimed at rewarding some at the expense of others because it is an inherently unsustainable model.

In Freefall, Stiglitz points out that The Great Recession and its aftermath “is forcing us to rethink cherished views.” He asserts, “The issue is not whether globalization is going to change; globalization will change. The current system simply cannot continue.”

OK, but what is the answer? Stiglitz advocates for more collaboration and win-win approaches. “Greater inter-dependence means that we have to act together; we have, as economists would say, extra responsibilities which mean that we have more need to act cooperatively.”

The most successful outsourcing relationships revolve around collaborative rather than selfish or muscular me-first relationships. You don’t have to be an economic scientist to see that institutions and governments have not set very good examples on cooperation and collaboration. So without a true collaborative mindset from institutions and governments, it is very difficult to instill those qualities as a default top-down mindset in the globalized outsourcing, business and finance arenas.

That’s where the Vested approach can drive the needed change.

I’m confident that the collaborative Vested framework will help lead the way to achieving the win-win relationships that will leverage the skills and expertise inherent in collaborative partnerships and alliances to create a long-term strategic template for success.

That’s because the Vested model leverages the best aspects of human relationships—collaboration, flexibility, honesty, innovation and open communication—into the outsource business relationship. Those are precisely the qualities that will make globalization and capitalism work—or at least work better—for everyone.

With the near collapse of the financial system and the current stagnant state of economic affairs created by the Great Recession, he asks pointed questions about the profit motive, such as when to strive for it and when not to.

“Is profit a ‘good’ thing—or isn’t it?” he asked during the height of the recession in a blog post on the “value that every business needs to create now.”

His point is that there are good and ethical ways to make a profit, which he calls “thick value,” and there are bad and harmful ways to grab for profit, which he terms “thin value.”

“Profit through economic harm to others” results in thin value, he says. “Thin value is an economic illusion: profit that is economically meaningless, because it leaves others worse off, or, at best, no one better off.” Thin value is what the “zombieconomy” creates, he continues. “The healthcare industry profits, but Americans get poor healthcare. Automakers fought tooth and nail against making sustainably powered cars. Manufacturers of all stripes stay mum about environmental costs. Clothing companies can’t break up with sweatshop labor. The clearest example of thin value, is, of course, banks: they invested our national wealth in assets that turned out to be literally worthless.”

Haque says the fundamental challenge then for 21st Century businesses and economies “is learning to create thick value. We’re seeing the endgame of a global economy built to create thin value: collapse. Why? Simple: thin value is a mirage — and like all mirages, it ultimately evaporates.

“In the 21st Century, we’ve got to reconceive value creation.” The company that beats up its suppliers on price every year may make some short term gains, but is it creating long-term value and valued partners?

He’s coined the term Constructive Capitalism. Constructive Capitalists are “disrupting their rivals by creating thicker value” and employing ethical values.

Haque defines thick value as “sustainable, meaningful value — and a new generation of radical innovators is wielding it like a strategic superweapon.

“Are your profits, like mobile operators, built on hidden costs, surcharges, and monopoly power — or on awesome stuff that makes people meaningfully better off?”

A deeper discussion on the economics of thin and thick value was presented by Haque at the BRITE ’09 conference.

Haque is the director of the Havas Media Lab and he founded Bubblegeneration, an advisory boutique that helps shape strategies across media and consumer industries.

Lesson for outsource practitioners: “Not all profit is created equal,” as Haque says, and neither is outsourcing. He  challenges the conventional one-sided profit-at-all-cost attitude of many businesses and their partnerships. In the same vein Vested Outsourcing and the Five Rules challenges traditional transaction-based, cheapest-cost relationships in favor of a collaborative, flexible, mutually beneficial approach in which all share the rewards of working together to create the bigger pie, the thick value.

Economic recovery hinges on values and the proper allocation of capital, he says. How thick is the value you are creating in your outsourcing arrangements? Are you Getting to We, and bringing new thinking and value to life?

His major bestseller, The World is Flat: A Brief History of the Twenty-First Century (first released in 2005 and updated twice since then) stresses the importance of technology and outsourcing as major elements of modern global economic structure.

The book describes 10 “flatteners” that have leveled the global playing field. The rise of outsourcing and related activities such as offshoring and supply chain networks figure prominently on that list.

Friedman says outsourcing has allowed companies to split service and manufacturing activities into components that are subcontracted and performed efficiently on a global scale.

The ease of offshoring today – ahem, if contracted correctly using cooperative, mutually beneficial Vested Outsourcing principles! – means that a company can locate manufacturing and other processes to a foreign locale to take advantage of less-costly labor and operations.

The emergence of sophisticated supply chain networks and the role of technology is another flattener, according to Friedman, because companies can now use the Internet, sophisticated software (including workflow programs and open source software) to coordinate and streamline items such as sales, distribution, shipping and risk management in real time.

Workflow software protocols in particular have become so prevalent in our business lives that they are helping to create the foundation of a new global platform for collaboration, Friedman says. With open source software large communities can upload and collaborate on projects in the “cloud,” so to speak from anywhere in the world with nothing more than computer access and a decent Internet connection.

This blog is a great example, in my opinion, of collaboration to get the Vested Outsourcing’s basic message out there: The necessity to collaborate in an aggressive and cooperative manner so that everyone benefits.

The world is getting flatter all the time and it took someone like Friedman to make us see this reality in its full context. As Friedman shows us, outsourcing has become hugely important in the economic and business scheme of things. So it’s important to do your outsourcing right.

If you haven’t heard, outsourcing can be good for your company’s health; it‘s here to stay. And if you lay a solid foundation by incorporating the Five Rules of Vested Outsourcing, you’ll find that any Vested Outsourcing relationship “flourishes best in a culture in which participants work together to ensure their mutual success.”

Vested Outsourcing’s Five Rules will get you there.

Steven D. Levitt and his sidekick and co-writer Stephen J. Dubner, a journalist, are more like modern day merry pranksters in their books about the role of economics in our daily lives  with their work exploring “the hidden side of everything.”

Levitt points out, “One of the most powerful laws of the universe is the law of unintended consequences.”

Levitt tells lively and highly entertaining stories that describe how unintended consequences drive the behaviors of schoolteachers, realtors, crack dealers, and expectant mothers. I think this law also greatly affects outsourcing deals as well. In fact, an outsourcing deal that is not well thought out will likely suffer from one or more of the 10 Ailments of  Outsourcing spelled out in my book Vested Outsourcing, including the very first ailment, Penny Wise and Pound Foolish. Unintended consequences also flow by falling prey to the Activity Trap (#2), the Honeymoon Effect (#5), and the zero Sum Game (#7).

Maybe the most pertinent ailment when it comes to unintended consequences is VO‘s #8, Driving Blind Disease, or the lack of a formal governance process to monitor the performance of an outsourcing relationship.

Levitt has not won a Nobel Prize (yet), but he does have two New York Times best sellers and his lessons are well worth the read — and much easier to read than his Big Thinker predecessors.

In outsourcing, it’s really important to heed Levitt’s advice: “Morality is what people should do. Economics is what people do.” If you are structuring an outsourcing deal – know that you always get what you pay for, and try to do the best thing for all concerned.

If you want more than a simple butt in a seat to do your work you need to consider an outsourcing business model that pays outsource providers for their brainpower to add value and solve your real problems and help you achieve your desired outcomes. I think Steven Levitt would support the Vested Outsourcing concept that promotes aligning interest through the use of carefully crafted incentives.

Maybe I’ll send him a copy of my book.

Technology and its continuous advances surround us, it’s embedded in our daily lives to a degree that even the most diehard science fiction fans could hardly have imagined even 20 years ago.

Today technology rules, but it wasn’t always that way.

More than 50 years ago Robert M. Solow, a professor at MIT, the next in my mini-series of the seminal economic thinkers that helped spur modern outsourcing, showed us that technology is the driving factor behind economic growth.

Solow’s growth model was first presented in a 1956 article, A Contribution to the Theory of Economic Growth. His premise was that without “technological progress” growth rates for capital, labor and total production would all remain about the same.

In fact, he found that about four-fifths of the growth in U.S. output per worker was attributable to technological progress. In other words, brains matter way more than brawn if you want to spur economic growth.

His work included a mathematical model which showed “technological change” would be the motor for economic growth over the long haul.  Solow’s growth model presented a framework that formed the basis of modern macroeconomic theory.  In fact, Solow won a Nobel Prize for his work in 1987 due to it’s significance.  In his precise and often aphoristic prize lecture, he said:  “Insiders are sometimes the slaves of silly ideas,” which to me is an early take on the value of thinking outside the box.  “You never know if you have gone as far as you can until you try to go further,” he continued.

For today’s outsourcing firms, the lesson I see is that most outsourcing agreements are transaction-based, meaning that a service provider gets paid for every activity – be it a rear-end in a seat to answer a call, two hands for packaging, or fingers for filing.   If economic growth is achieved from “technical change” then companies that outsource should focus their efforts around paying suppliers for their brainpower and not their brawn, or simply to perform an outsourced activity.  After all – if companies outsource because they believe that another company can do the work better, faster or cheaper – why are today’s deals so focused on simply doing activities?

I’m thinking specifically of Vested Outsourcing’s  Rule #1, which says we should should Focus on the What Not the How, and the next two, Rule #2, Focus on Outcomes and Rule #3, Agree on Clearly Defined  and Measurable Outcomes.

Those rules flow into directly into Vested Outsourcing’s basic mission and they address a big problem I describe in Ailment #2, The Outsourcing Paradox, where a company that decides to outsource can’t really let go and feels it has to define requirements and work scope so rigidly that the outsource provider ends up executing the same old inefficient, transaction-based processes.

That’s not progress, technological or economic.

His conclusions are right in the Vested Outsourcing wheelhouse; that is, playing nice and playing cooperatively from the start of a business or contract relationship is good for everyone.

If you’ve seen the movie A Beautiful Mind, which is loosely based on the life of Nash, there’s a brief scene in it that captures in an entertaining nutshell his great breakthrough in the use of games – especially non-cooperative games – as a basis for understanding complicated economic issues.

In the scene Nash, as portrayed by Russell Crowe, has a revelatory moment in a campus bar as he and his mates ponder the best ways to produce optimum results in their approach to and pursuit of a beautiful blonde and her friends.

Nash’s inspiration was that Adam Smith’s principle that the “best result comes from everyone in a group doing what’s best for themselves” was incomplete and needed revision: The best result comes from everyone in a group doing what’s best for themselves and the group.

Whether or not it really played out in exactly that way as shown in the movie, Nash introduced the distinction between cooperative games, in which binding agreements can be made, and non-cooperative games, where binding agreements are not always feasible. He developed an equilibrium concept for non-cooperative games that later came to be called the Nash Equilibrium.

Simply stated, he demonstrated – ahem, by doing the math! – that companies that work together will discover that the sum of the parts can be better when combined effectively than if they work at cross-purposes.

Nash won the Nobel Prize in 1994 for his work and the related work of two others who shared the prize with him that year, John C. Harsanyi and Reinhard Selten. Their work spurred an entire branch of economics that’s now known as Game Theory, or Behavioral Economics.

Game theorists have been studying the economics of playing non-zero sum – or win-win – games for more than 50 years to show that playing nice is indeed good for you. Since Nash’s Nobel Prize – there have been seven more Nobel Prizes awarded to Game Theorists.

Nash’s breakthrough was vital because he showed the value of reaching equilibrium, or win-win solutions and outcomes in difficult scenarios, as the way to achieve successful business and outsourcing partnerships.

And that of course is VO’s foundation: What’s in it for We?

Coase’s groundbreaking work around the institutional structures and practices of companies began in the 1930s.   In simple terms, Coase said that it was not enough to concentrate only on production and transportation as the main costs of doing business. Rather, the University of Chicago professor asserted that businesses needed to also consider the cost of entering into and executing contracts.  His viewpoints came to be commonly be referred to as transaction costs.

Today’s companies expend a considerable portion of their total resources on transaction costs. When all transaction costs are part of the mix of doing business, it turns out that the existence of firms, differing corporate forms, variations in contract arrangements, and even the structure of the financial and legal system can be given relatively simple explanations, according to Coase and a long line of Chicago School economists.  By incorporating the different types of transaction costs, Coase paved the way for a systematic analysis of economic institutions.

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