That’s because I think of Vested Outsourcing as a paradigm shift – it is both evolutionary and revolutionary. Charles Darwin’s seminal volumes on The Origin of Species and The Descent of Man turned the scientific world on its head regarding the nature of humanity and how we developed over millennia. That was truly revolutionary and perhaps the greatest paradigm shift in history.

In the first chapter of The Origin of Species, Darwin writes: “As far as I am able to judge, after long attending to the subject, the conditions of life appear to act in two ways, — directly on the whole organization or on certain parts alone, and indirectly by affecting the reproductive system.”

Of course he wasn’t thinking about business, economics or outsourcing when he penned those words, but his statement seems highly applicable to me today, especially as we adapt to a flattened world of high technology and instant communication that’s continuously changing and well, evolving.

Finding the right organization, the right structure and activities both inside and outside of your organization is where the interaction of 3PLs, logistics providers and outsourcing enter the fray. And Vested Outsourcing’s focus on collaborative contracting, flexibility, and mutually beneficial outcomes takes those dynamics major steps further along the evolutionary scale of the business of outsourcing.

The essence of the Vested Outsourcing model derives its name from its performance-based, collaborative approach, through which companies and their service providers foster a vested interest in each other’s success.

The reason I believe Vested Outsourcing is evolutionary and revolutionary is clear: Evolutionary in that what LEAN did for manufacturing, changing the business world in 1990, VESTED will do for outsourcing today. And it’s revolutionary because it requires a fundamental change in the way we think and plan about business models, a shift in the ways in which a company that decides to outsource and its service providers do business.

Much as Darwin forced the scientists of his day to think differently about the world its inhabitants and the way it all works together, Vested Outsourcing is a different way of thinking, a different methodology, about the business world and the way we interact with each other. Instead of trying to gain the upper hand and “winning” in every situation, the parties in a Vested Outsourcing relationship develop a performance-based partnership in which the parties’ interests are aligned, and each become vested in each others’ success. I call it the foundation of win-win and What’s in it for We.

From the days when companies took their first hesitant steps in partial outsourcing, the prevalence of outsourcing has grown exponentially; the practice of outsourcing much of a company functions has become commonplace.

But advancements in sophistication have not accompanied that growth, which has been largely reckless.

I really believe Darwin would be proud of those companies that are challenging conventional wisdom. The more I think about him the more I understand how important it is to remind ourselves that only the most adaptable species survive.

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.

]]> http://www.vestedoutsourcing.com/the-big-thinkers-%e2%80%93-part-1-ronald-coase-transaction-costs-or-business-is-a-math-problem/feed/ 0 http://www.vestedoutsourcing.com/outsourcing-is-not-offshoring-%e2%80%93-it%e2%80%99s-best-shoring-and-doing-it-right/ http://www.vestedoutsourcing.com/outsourcing-is-not-offshoring-%e2%80%93-it%e2%80%99s-best-shoring-and-doing-it-right/#comments Wed, 27 Jan 2010 21:06:22 +0000 Kate Vitasek http://www.vestedoutsourcing.com/?p=701 It’s unfortunate that mistaken perceptions are often perceived as reality; in a diabolical way the mistake then becomes reality.

When people ask what I do and I explain that I teach people how to do their outsourcing better and smarter, invariably they jump into the conversation with their experience about how their company “outsourced”  their work to some some country where people can’t speak English and took their jobs away.

Outsourcing has been going strong since Peter Drucker and his Harvard Business Review articles in the 1980’s advised, “Do what you do best – and outsource the rest!”

But why do people get outsourcing and offshoring confused? Why is there the perception that outsourcing is offshoring? I spent five years working for a $1 billion global outsource provider and the lion’s share of their work was done in their region. The company outsourced, yes indeed, but the jobs stayed close to home and in that country.

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