How quickly we get away from the basics as we progress through academia and compete for the best courses, teachers and grades, and then move into the business world. Nowadays it seems that failing to maintain a perfect grade point average through elementary, high school and college is somehow a failure of the self and the system.

Vested Outsourcing and the Five Rules embody the fundamental lessons of fair play, collaboration, playing nice, learning and achieving together as a unit within a definite structure of personal and group goals – and I believe my sister-in-law and hopefully most teachers at this level would appreciate and accept this.

Those concepts get kind of lost as time goes on and the pressure to perform at any cost mounts. They are mostly forgotten or pushed aside as we enter the competitive business world.

Kindergarten teachers, whether consciously or not, employ vested thinking and many of the basic precepts of the Five Rules.

They more than anyone lay the foundation for the academic world their charges will experience for about the next 20 years, and if they don’t employ a What’s in it for We approach in the classroom, chaos will surely reign. (Oddly, WIIFWe will often get transformed into the What’s-in-it-for-me approach for individual achievement but still remains as an overall imperative when it comes to school spirit and pride.)

Kindergarten teachers must also focus on what they want the children as a group and the school to accomplish (Rule 1), on cooperation and collaboration, and on the measurable outcomes (Rule 3) their charges will achieve.

At this level kindergarten teachers must of necessity use a lot of oversight, but if their lesson plans, i.e. governance structure, and general philosophy don’t embody insight (Rule 5) – because each class is different and has its own dynamics – then the class becomes little more than an exercise in structured babysitting.

I don’t want to take the vested approach to kindergarten too far – obviously school is much different from the business world and outsourcing.

But think of it this way – we outsource the education of our children at their most tender and impressionable ages and what happens in these early classrooms will stay with them the rest of their lives.

Then also think about your best and most memorable teachers. Weren’t they the special ones who were the best organized, the most empathetic and insightful about their class’s needs?

Weren’t they the ones who were the most vested in your success – even if you did not realize it at the time?

Being packed into a narrow tube at 35,000 feet is stressful enough even under perfect conditions – and how often have conditions in the air been perfect lately? When was the last time you really enjoyed a flight beyond the quiet desperation level of a riding a bus?

How many of Vested Outsourcing’s principles of collaboration, trust, flexibility and communication do all airlines – not just Jet Blue – practice?

Simply put, airlines have become so bottom-line and transaction-based in their business models – with new charges and fees multiplying seemingly daily – that they have lost sight of the need to treat their employees and their passengers with respect, civility and compassion, not as wage slaves and cattle. They have not vested with their unions or their customers in any meaningful way – and this type of event is what inevitably will happen when a company is stuck on ‘What’s in it for me?’ instead of ‘What’s in it for We?’

Flight attendants are the direct, public face of an airline and its policies and interactions with customers; they are the people who must bear the brunt of passenger frustration, anger and stupidity. They are caught in the middle of a very difficult situation every day, with very little backup and a whole lot of suspicion from every direction. It’s no wonder that the Slater blowup occurred. Actually, it’s surprising that it doesn’t occur more frequently.

The Slater incident also makes me think about one of the truisms embedded into the service economy mindset: Blind adherence to the idea that the customer is always right and must be coddled at every turn. Politeness is always needed and expected, but it should be a two-way street. Sometimes a customer is just plain wrong and if he/she is wrong and boorish about it, they should be told. Getting away with bad behavior quickly becomes normal, or at least quietly accepted, and life in the air or on the shopping line becomes that much more difficult.

Another aspect of this idea is that an airline (or any company) that preaches commitment to customer service as part of its culture , and then creates conditions designed to drive its employees and customers to the edge isn’t really serious and deserves what it gets when people decide they don’t want to play nice.

A New York Times article on the Slater fracas says he is a sort of “bandit hero” and admired “because they (bandit heroes) openly jab a finger in the eye of oppressive authority, whether intrusive government or, in Mr. Slater’s case, an overbearing workplace.” The article continues: “Mr. Slater was trying to strike a blow for civility.”

That could be true in an odd way perhaps, but this is what happens when participants in an endeavor fail to work together to achieve mutual success, and instead work at cross-purposes, both internally and externally.

They haven’t laid the foundation; they haven’t vested in mutual success.

Incentives play a critical role in in Vested Outsourcing, namely in identifying and achieving the win-win and in encouraging continuous innovation and collaboration. It creates conditions for an incentive mindset and ecosystem, but equally as important, the Vested Outsourcing approach will identify and eliminate those impish perverse incentives.

In a conventional transaction-based outsourcing environment, the emphasis is on conforming to contract requirements and adhering to contract terms. Little incentive, leeway, or opportunity is offered for service providers to explore innovative approaches.

In fact, in many cases, there are significant disincentives to innovation and creativity, many resulting in what I call Ailment #3, the Activity Trap. If pay rates are based on each transaction, it follows that the more transactions that are performed, the more money a company will make, whether the transactions are necessary, or whether there is a more efficient way to do them. There’s no incentive for the outsource provider to reduce the number of non–value-added transactions, because such a reduction would result in lower revenue.

The Activity Trap can appear in a variety of transaction-based outsource arrangements. When the contract structure is cost reimbursement, for example, the outsource provider has no incentive to reduce costs because profit is typically a percentage of direct costs. Even if the outsource provider’s profit is a fixed amount, the typical company will be penalized for investing in process efficiencies to drive costs down. In a nutshell, the more inefficient the entire support process, the more money the service provider can make. Inherent in the activity trap is a disincentive to try to reduce the number transactions, and conversely – or perversely – increase them if at all possible.

A good early example of a perverse incentive based on transactions occurred in the nineteenth-century, when paleontologists traveling to China would pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that peasants dug up the bones and then smashed them to maximize their payments.

Fast forward to the present: On a site visit, when we asked the general manager of a 3PL what a large area full of orange-tagged pallets was for, she replied: “That’s some of our customer’s old inventory I need to move to an outside storage facility.” When we dug further, we found out it was product that was well over five years old and at the rate it was moving, it would be in storage for 123 years! When we pressed further, asking why she did not work with the customer to scrap the material, the answer was: “Why? I charge $18 a pallet per month to store it. I’d lose revenue if I did that!”

Too often the emphasis is on knee-jerk compliance, not continuous improvement or innovation. Service providers that try to introduce new ideas may encounter significant obstacles, requiring complex, costly, and often painful contract modifications.

A properly structured vested agreement based on the Five Rules will take the luck – good or bad – out of incentives.

Under Rule 4 pricing model incentives for cost and service trade-offs will be optimized early-on by all of the parties, while Rule 5 says that a proper agreement governance structure will provide insight on the relationship, not merely oversight. Insight will detect and quickly counter perverse incentives and make sure the pricing model incentives are functioning properly.

Most important in avoiding the propensity for perverse incentives is Rule 1: Focus on outcomes, not transactions.

Don’t let the bean-counter mentality take over.

Which lead me of course to muse about what could happen if that kind of synchronization was the rule rather than the exception in outsourcing. The Blue Angels make it look so easy, but obviously it’s not. It’s the ultimate in skill, teamwork and trust among the co-pilots and with the maintenance people on the ground. The Vested Outsourcing vision, message and model is straightforward and simple in many respects, but it is not easy to achieve. It’s really hard and also requires a degree of teamwork, trust and flexibility in achieving successful outsourcing that is often not very evident.

While those thoughts were crossing my mind, I came across a Harvard Business Review blog post by Human Resources expert John W. Boudreau, the author (with Peter M. Ramstead) of Beyond HR: The New Science of Human Capital.

Coincidentally, Boudreau’s post has to do with aircraft and flying right. Or in the case of his “Boeing’s 787 Dreamliner Retools Talent Management,” maybe not so right in every case.

Boeing’s 787 debuted recently at the Farnborough Airshow in England; it’s a highly innovative aircraft that’s also been dogged by supply and production difficulties and delays, which I’ve referred to previously.

Boudreau posits that the Dreamliner story has “implications for the future of HR and talent strategy that are as important as its technical and strategic innovations.” The Dreamliner line rests upon what is often called the world’s most sprawling supply chain, and managing this complicated and often unruly chain is a key to the company’s success.

“But with the strategic decision to shift to the composite technology that necessitated this supply chain came a shift in the company’s talent strategy as well,” Boudreau writes. “The pivot-point of talent management shifted from being entirely within Boeing to the talent and ideas that resided in Boeing’s suppliers. Therefore, like many other HR leaders today, the company had to learn to manage a sprawling global supply chain for talent as well as components.”

In turns out, he continues, that supply chain, inventory and risk optimization, which are front and center in the outsourcing mind, are “good metaphors for the way that HR leaders need to think about their talent pipeline.”

Boeing “manages the supply chain for carpet differently than for wing-frame boxes, striving for reduced risk, higher quality and tighter tolerances in the latter.” Those same principles suggest that the level of acceptable risk, cost, and performance should vary for talent capabilities as well, he continues.

It’s people after all who ultimately deliver on performance and desired goals; it’s people who flip the levers on the processes being implemented and who manage the outsourcing framework.

The Five Rules need people who are skilled, flexible, fearless and collaborative to make the vested relationship soar. People in sync with each other and the mission at hand.

In the case of Boeing it occurs to me that the company needs to have managers with the talent — and the courage — to properly manage its suppliers, but without micromanaging them. It’s a tenuous and often difficult balance to achieve and the storyline from Boeing’s 787 experience indicates there’s work to be done on that component.

In the case of Blue Angels, if the pilots and crew are not on the same page for an instant, disaster can ensue. Not being on the same outsourcing page is not at that level of intense risk, but failure to collaborate, identify talent, work in sync and vest together on mutual goals over the long term will almost surely result in a disastrous outsourcing relationship.

For instance, I’ve questioned whether negotiation is really the right word to use when talking about creating a vested relationship. In a recent post I advised that parties shouldn’t negotiate, they should collaborate for the win-win. For me, terms like ‘negotiate’ and ‘bargain’ – at least as they are commonly and currently understood – just don’t fit into the framework of Vested Outsourcing and the Five Rules.

But until a kinder, gentler substitute becomes more widespread, along with the Vested Outsourcing mindset – believe me when I say stay tuned, there’s more to come on that score! – we’re kind of stuck with grudgingly using negotiation.

An article “Negotiating for Value,” in the May/June issue of Supply & Demand Chain Executive by Martin P. Finkle, CEO of Scotwork, NA Inc., based in Glasgow, Scotland and Parsippany, NJ, is a case in point. It says that learning the total cost of the ownership process “can place you in a better position to negotiate for value.” Scotwork is a negotiation, consulting and training company for individuals and organizations.

“Negotiation is far more than getting the best price,” Finkle writes. “Many procurement specialists, especially in the medical device industry, focus too narrowly on dollars and cents when dealing with suppliers. Whether you’re buying stents, joints or replacement parts or need to fulfill contracts, you need to include the critical variable for any negotiation — value.”

He derives eight lessons from his experience working in that industry that he says also apply across many industries.

Some of the lessons, such as using a “total cost of ownership” (TCO) approach/analysis and getting involved in the procurement process from the beginning are valid. But others make me a bit uncomfortable because they are straight from the muscular, “old-school” playbook of negotiating tactics. It also seems ‘value’ in this instance primarily means the lowest cost or best deal terms possible for the benefit one side only.

For example, the third lesson directs a company to “see who’s got more power.” This is done through a “power balance analysis” that compares a company’s strengths and weaknesses to that of the supplier while listing what “you believe each side wants.” Ouch!

Instead of working together to achieve mutual benefits and desired outcomes, the company is advised to ask the right questions, determine early on which information should be revealed to the supplier, and to use the TCO approach to negotiate more favorable terms.

“Overcome suppliers who say they’ve been stripped to the bone,” Finkle writes. “When you believe the supplier has more power (discovered in the power balance analysis), enter the negotiation armed with a series of proposals. Then drive the process by putting proposals on the table without spending unnecessary time in dialogue. Be ready to ask what needs to be done to a proposal that’s first rejected to make it acceptable. This will keep you on the offensive and stick to the agenda.” For me, that’s another ouch that gives ‘negotiation’ a bad taste.

Working together to create trust and flexibility over the long term, to increase the size of the pie, getting to the win-win and ‘What’s in in it for We,’ and collaborating to create mutual value are conspicuously absent concepts from this particular lesson plan.

I’m not saying you should look at the world and your suppliers through rose-colored glasses, or join hands and sing “Kumbayah” with them. It’s tough and highly competitive out there.

But instead of “negotiating for value,” it’s better to collaborate for value.

In fact the real work at each end of the outsourcing equation is just beginning, particularly in a Vested Outsourcing relationship. Establishing a proper, flexible governance framework, setting systems for monitoring and measuring desired outcomes and keeping the right people in place all take on vital significance.

The latter point applies from the top down.

Once the decision to outsource is made – “Do what you do best and outsource the rest!” – a natural temptation in upper leadership echelons might be to disengage and let the outsource provider worry about it. Guess again!

Some disengagement is healthy and necessary: let the experts exercise their expertise without continuous micromanagement. But there is just as much danger in becoming too disengaged, too complacent, too unaware.

A good case in point was cited in a recent Harvard Business Review blog item by Susan Cramm, “Outsource the Work, Not the Leadership.” Cramm is the founder and president of Valuedance. A former CFO and CIO, she is an expert on IT leadership, and she’s the author of  8 Things We Hate About IT.

In her post Cramm writes about a software company that decided to implement some packaged software to streamline its financing operations, and also decided to outsource that work. The company did “a great job working through a disciplined process to define requirements, solicit bids, evaluate vendors, finalize the scope of work, and negotiate the contract.” It hired a “brand name” consulting company to make it all happen and the project apparently hummed along until it crashed into a wall just as the delivery date approached. It turns out the users disliked the software.

About eight months of delay and tense scrambling ensued; the project was delivered “but not without a significant amount of organizational angst — it exists today and will continue for the foreseeable future,” Cramm writes.

She continues: “The software is late and not accepted by its users. The search for the guilty party settles on the vendor. Everyone agrees they are at fault and resolves to pick a better one next time. Clarify the scope of work and relative responsibilities, they chant. Hold them accountable.”

So is the case closed? Blame properly levied and lessons learned? Well no, not hardly. Maybe the company’s “disciplined process” was not so great after all, and then when things went south there was no process to determine mutual accountability. I’d submit that without a vested partnership that follows the Five Rules this type of thinking and action is almost destined to occur, and recur. Agreeing together on clearly defined and measurable outcomes from the outset, as stated in Rule 3, likely would have avoided the situation that the company found itself in.

I agree with Cramm when she says that this is a typical case of the difficulties inherent in outsourcing, where the work and the leadership of the work are outsourced. “When outsourcing, you can’t manage through the contract, you have to manage through the people. Delegating to a vendor is no different, on a day-by-day basis, than delegating internally.

“You have to stay close in the beginning to ensure that objectives and success measurements are well understood, the approach makes sense, accountabilities and roles are clarified and the team jells.”

This hits the sweet spot of Rule 5, implementing a governance framework that provides insight and flexibility from the start and throughout the term of the outsourcing arrangement, not simply Statement of Work oversight that might not address or catch fundamental problems.

With the proper framework the work will be outsourced properly and credibly without abdicating essential leadership.

I believe the term “negotiation” itself is simply not good enough to describe what happens in the business and political arenas. In fact I’d say that the term negotiation should be banned altogether when you talk strategic outsourcing, and even more so for Vested Outsourcing. What you are really doing – or should be doing in the case of outsourcing agreements – is sitting on the SAME side of the table, working together to create a collaborative contract.

It’s not a contest of wills or positions or trying to one-up your prospective partner. It’s striving to achieve mutually beneficial outcomes over the long haul, in good times and bad.

The good news is that I am not alone in my thinking. There’s been quite a lot of thought leadership on this concept, with much of it traceable back 20 years or so to the influential book Getting to Yes by Roger Fisher and William L. Ury, which I talked about recently in the context of Getting to We.   Today’s thought leaders include Brad Spengler (2003 article “Integrative or Interest-Based Bargaining“) and Jeanette Nyden (Negotation Rules!) – who profess that organizations should collaborate to find a ‘win-win’ solution. Spengler and Nyden both teach that conventional “positional bargaining” – which is based on fixed viewpoints and tends to result in compromise that is often unsatisfactory, or no agreement at all – is old school. Instead both encourage parties to be  “joint problem solvers” with a common goal to achieve a wise decision; who work together; who focus on interests and not positions; who use fair principles; who insist on objective criteria and use reason and who look for the win-win.

Sound familiar? Take those valuable precepts out of the dispute resolution realm and apply them to strategic outsourcing. Integrate them with Vested Outsourcing’s Five Rules of collaboration, trust and ‘What’s in in it for We.’ Mix well with patience, flexibility, measurable outcomes and insight.

Voila! You’re not negotiating or bargaining, you’re collaborating together for the win-win where parties have a vested interest in each others success.

I love the teaching of Spengler and Nyden. The only flaw: I think they should change the name of what they call their teachings. Spengler calls his approach “interest-based bargaining” and Nyden refers to it as “interest-based negotiation rules.”  As stated above, the terms bargaining and negotiations simply don’t connote the proper meaning of their lessons.  A successful collaboration is about baking a bigger pie – not just about negotiation or bargaining over the existing one!

He talked about how a Fortune 500 company could have saved a stack of money in transportation costs by putting its freight out to bid. But the company (which must remain nameless) instead decided to honor its current rates with carriers when it could have easily squeezed them for lower rates.

The question then – and now for that matter – was why a company would willingly choose to risk its bottom line health in this manner? Gonzalez explained the company “knows that capacity will tighten again down the road, and when that day comes, it expects its carriers to maintain their commitments to them and not abandon them for other shippers offering a cent or two more per mile.”

In an update this week of this interesting situation – both from a business and a Vested Outsourcing perspective – Gonzalez notes: “Well, that day has arrived. Capacity is starting to get tight again in certain markets and rates are starting to rise. Did this shipper make the right decision?”

“The jury is still out on whether our strategy has worked or not,” the logistics executive at this company told Gonzalez. “We don’t know yet if we are going to have an advantage [relative to other shippers] or if carriers are going to decide that the temptation for quick outsized profits is just too hard to resist. How the carriers respond will ‘train’ the buyer for the next time this changes.”

What is known is that transportation rates across all logistics modes, but particularly on the part of ocean carriers, are rising dramatically just as the economy is struggling to get back on its feet and just as retailer and manufacturer inventories need to be replenished.

“It’s a struggle to get carriers to think long term,” the company executive told Gonzalez. “I’m willing to discuss different contracting terms and continuous improvement ideas with them, such as putting in price mechanisms that adjust over time and doing things at our end to turn their equipment faster, but when it gets to that second or third meeting, they just don’t know what to do.”

Gonzalez asks whether this means that many carriers lack the management know-how and sophistication to engage in more strategic and collaborative relationships with shippers. If you look at the history of shipper-carrier relations, the answer is yes. But many shippers are just as guilty of this lack of sophistication, a failure to recognize the beauty of a ‘What’s in it for We’ framework and of instead playing the strategic same old what’s-in-it-for-me muscular game.

“This experience illustrates once again how difficult it is to create vested outsourcing relationships,” Gonzalez writes. “As I’ve said before, vested outsourcing (aka performance-based outsourcing) requires a mind shift that will be difficult, if not impossible, for many 3PLs/carriers and customers.”

Difficult? Most definitely. Impossible? No. I believe the day is not too distant when shippers and carriers will realize they can prosper by getting away from treating transportation purely as a commodity (or transaction) and view it instead as part of a mutually beneficial outcome that’s based on collaboration.

One gutsy company is a great start.

Are they no longer trends? Do they go to the trend graveyard? Maybe they remain trends and just get canceled out, recycled or pushed to the back burner. Pretty soon everything, every idea, is labeled a trend because we need to have them around on a regular basis to talk and write about. But if everything is a trend, like everyone’s five minutes of fame or this year’s must-have fashion, then what’s the real deal?

Perhaps a distinction needs to be made between what is trendy and what is a true, real and long-lasting trend that becomes something more than a buzz word or a paragraph in an annual list, something that actually changes thinking and behavior. Sort of like the distinction between a wanna-be and the real thing.

Vested Outsourcing, I submit, is more than just this year’s trendy flavor. Judging from the way the media is paying attention to its win-win, collaborative approach to credible outsourcing, its transformative power is gaining recognition and momentum. Dare I say the trendy phrase ‘paradigm shift?’ Maybe so.

This enthusiasm is also prompted by an article in Supply & Demand Chain Executive magazine this month on the “Six Keys to the Sustainable Supply Chain Advantage,” by Dr. Lowell Yarusso and Ronald J. Sanderson. They examine how to “build an atmosphere of constant improvement in the search for supply chain excellence.” A supply chain, they say, “needs to be viewed as a ‘value chain’ in which all participants are truly integrated and share a common vision of goals, processes and information.” Need I say that’s preaching to the Vested Outsourcing and Five Rules choir, with its special refrains of “What’s in it for We?”

The first key they cite is to “collaborate, don’t compete,” and next one is “remember the goal.”

Just as business processes and people need to be aligned in terms of goals and strategies and operations, “your supply chain partners should be aligned to collaborate and develop ideas for mutual competitive advantage. Suppliers can often be the best source for new ideas on technology, process streamlining, inventory reduction and product design improvements.”

Making this work, they continue, requires different methods of developing incentives and monitoring performance for partners. “Fortunately, there are approaches to joint risk/reward sharing available that can be incorporated into supplier agreements.”

Like agreeing on clearly defined and measurable outcomes, perchance?

Their other four keys also resonate with the vested approach:

• Recognize the complex, manage the simple. (Insight over oversight, anyone?)
• Treat the issue, not the symptom. (Focus on the what)
• Focus on cost drivers and business impacts (Optimize pricing model incentives)
• Don’t waste an at-bat. (Focus on outcomes)

“At the end of the day, the hardest part of achieving a competitive advantage is sustaining it,” they conclude.

I’d say those are wise words and some interesting correlations from Yarusso and Sanderson. Vested Outsourcing is trending up and setting the pace as the tool to help build an “atmosphere of constant improvement” and collaboration with your outsource partners.