I think about this when I think about Pat Summitt, the legendary coach of the University of Tennessee’s Lady Vols basketball team. You probably know of my connection to the University of Tennessee, so of course I’m a little biased – but her record speaks for itself.

Summitt has won eight NCAA titles in her 37 seasons as the Lady Vols coach, and her 1,075 victories is the most by any college basketball coach. Over that span her teams have lost a mere 199 games!

The NCAA will honor Summitt with the 2012 Gerald R. Ford Award, which recognizes a person who has been an advocate for college athletics over the course of his or her career. She’ll be honored Jan. 12 at the 2012 NCAA convention in Indianapolis.

Her achievements are almost unbelievable but she knows—as any great leader knows—that they are not individual or personal accomplishments. Her proven, winning system  can’t work without the right people to make it work, as illustrated in this ABC News Person of the Week clip: “You win in life with people. And if you think you can do this alone – you’re wrong.”

I often say that one of the major flaws that emerges in many outsource deals happens when a company that has decided to outsource because it does not have the expertise in a given activity, suddenly feels it is necessary to micromanage the service provider partner that it turned to as the expert in the first place. That’s what I call The Outsourcing Paradox (Ailment 2), and its related ailment, The Activity Trap (No. 3).

Yes, as Summitt says, you can always do better but the best way to maintain consistent excellence is to put the right system in place and then trust your people will do what they do best and make the system soar.

Summitt announced in August that she has been diagnosed with early onset dementia, Alzheimer’s type. She pledged to continue coaching and show others they can live their lives with the disease.

NCAA president Mark Emmert said the Gerald R. Ford award honors Summitt for “the positive example she continues to set.”

And I would add for the lessons, courage and leadership she exhibits every day.

Kahneman, a professor emeritus of Psychology at Princeton University, questioned the assumption of rationality behind the decision-making process and the “cognitive traps” that make it virtually impossible to think clearly about happiness and success.

He received the 2002 Nobel Prize in economic science for integrating insights from his psychological research into economic science, essentially “laying the foundation for a new field of research.” His main findings concern judgment and decision-making under uncertainty, where he showed how human decisions can depart from those predicted by standard economic theory.

He and his colleague Amos Tversky (who died in 1996) countered assumptions of traditional economic theory—that people make rational choices based on their self-interest—by showing that people frequently fail to fully analyze situations where they must make complex judgments. Instead, people often make decisions using rules of thumb rather than rational analysis, and they base those decisions on factors economists traditionally don’t consider, such as fairness, past events and aversion to loss.

For example, they found that people’s decisions can be swayed by how a given situation is framed. When Kahneman and Tversky asked people to hypothetically decide what procedure to take to cure a disease, most preferred a procedure that saved 80 percent of people to one that killed 20 percent.

They developed an economic model—called prospect theory—to better explain analogous economic behavior that’s difficult to account for with traditional models, such as why there are large, seemingly unprovoked fluctuations in the stock market.

Kahneman is especially powerful when he talks about decision-making by organizations. He says organizations should think of decisions like any other product, and apply quality controls. Too often they don’t do this. In a 2008 video interview with McKinsey he asked, “Are the talents of the people that surround the decision-making utilized effectively? In many cases the answer is no.” That’s because there is an “enormous amount of resistance to improving the quality of the decision making process—people feel threatened.”

Vested Outsourcing’s 10 Ailments that can disrupt or destroy an outsource relationship are similar to the “cognitive traps” that Kahneman talks about. Two that quickly come to mind are the Junkyard Dog Factor (Ailment 4) and Sandbagging (Ailment 6).

Outsource decisions in today’s volatile global economic climate are indeed highly complex and uncertain, especially where one side or the other acts with self-interest, inflexibility and/or incomplete knowledge of the business. Irrational or at least ineffective behavior—and outcomes!—is almost guaranteed in those instances.

We have all probably seen irrational behavior and decisions in outsourcing agreements. Kahneman demonstrated to economists that people can and do make irrational, rather than rational, decisions based on self-interest. Thanks to Kahneman’s integration of psychology and economics, we know more about how and why that happens and what it takes to avoid irrationality. One way is the Vested approach.

Business relationships obviously are based on economic assumptions and expectations, but they are also based on the human perceptions and biases we bring to the table. And that’s where we can go wrong.

Daniel Gilbert, a Harvard professor of psychology, is a social psychologist who focuses on the nature of perception, belief, forecasting and cognitive biases on our lives.

Gilbert challenges the common wisdom that people will be miserable if they don’t get what they want. His findings?  People have a “psychological immune system” that lets them feel happy even when things don’t go as planned.

In his  (2006), Gilbert observes that people imagine the future poorly, in particular , they are inaccurate about estimating what will make them happy, or successful or rich or whatever.

He argues that imagination fails in various ways – especially when it comes to predicting the impact of success  or failure. Gilbert calls this concept the “psychological immune system” because it allows us to adjust to events by making bad things feel not as bad as when they were first imagined.

Gilbert humorously gives an analogy of how his concept works with assistant professors that did not get tenure. In his research, Gilbert asked assistant professors who were being evaluated for tenure how they would feel six months after they found out if they had or had not received tenure. Unsurprisingly, the professors predicted that they would be happier if they got tenure than if they did not. Now here is the twist – and the heart of his research. In follow-up surveys six months after the tenure decision professors didn’t report feeling any happier if they had received tenure than if they had been denied tenure. They adjusted and got on with their lives. Thus the professors exhibited a psychological immune system because even what appeared to be a devastating blow to their careers did not have a huge effect on their life satisfaction.

Entertaining and articulate, Gilbert concludes that “happiness can be synthesized.” He suggests that “synthetic happiness is every bit as real and enduring as the kind of happiness you stumble upon when you get exactly what you were aiming for.”

The lesson for the outsourcing arena is twofold.

First, companies should embrace the concept of contracts as flexible frameworks and build relationships with suppliers that can rise to the occasion of looking at adversity squarely and making the best of it in a fair manner. Old school thinking is to shift risk. Today’s businesses should realize that “business happens;” they should focus their energy on adapting to situations as they develop rather than trying to shift blame and risk to the other party just because their lawyers were better than their counterparts at the negotiating table.

Second, suppliers need not be afraid of failure or innovation. There are (and always will be) elements that color and impact success or failure in the business and outsourcing world.

I submit that Vested Outsourcing creates sound governance conditions through collaboration and communication that result in realistic and flexible expectations and Desired Outcomes based on understanding the business and avoiding false perceptions or biases—which by the way are nicely summarized by the 10 Ailments.

Many of the mistakes we make when outsourcing stem from a failure to recognize and account for the psychology that surrounds decision-making. Then businesses compound the problem by using poor judgment when reacting to the results of those decisions.

Psychologist Thomas D. Gilovich (born 1954) is a professor of psychology at Cornell University who has researched decision-making and behavioral economics. He has written popular books on those subjects, including perhaps his most famous, Why Smart People Make Big Money Mistakes.

Gilovich focuses on subjects such as “causal attribution,” prospect theory, judgment and decision making, which are part of the growing body of research based on behavioral economics.  It may seem like a mouthful, but in a nutshell Gilovich’s work provides insights that help individuals and businesses overcome the blind spots that can cloud financial decisions.

It’s said that economics is a science that tries to explain how money behaves if everyone is making rational financial decisions. Behavioral economics is a relatively new science that recognizes we don’t always make rational decisions. It helps explain how people and organizations behave around money, which in turn, can help avoid unwise financial and business moves.

I like Gilovich’s work because some 15 years ago he put his finger on the need for less self-interest and more cooperation in business and financial situations. His lessons are just as relevant today and are directly addressed with Vested Outsourcing.

The aptness of Gilovich’s thinking in terms of collaborative outsourcing is illustrated in an entertaining early article that he wrote with Robert H. Frank and Dennis T. Regan, “Do Economists Make Bad Citizens?” (in the Journal of Economic Perspectives, Vol. 10. No. 1, Winter 1996).  The answer to the question, while not necessarily a slam-dunk, leans to yes.

The article concludes: “Economics training encourages the view that people are motivated primarily by self-interest. Second, there is clear evidence that this view leads people to expect others to defect in social dilemmas…(and) third, there is also clear evidence that when people expect their partners to defect in social dilemmas, they are overwhelmingly likely to defect themselves.

“The logical implications of these three points appear to place a heavy burden of proof on those who insist that economics training does not inhibit cooperation.”

The Vested Outsourcing Manual notes that the study of behavioral economics is evolving more broadly into the concept of relational economics, which says that economic value can expand through positive, collaborative relationship—or win-win—thinking rather than adversarial relationships.

The Vested Outsourcing approach to outsource relationships is firmly grounded in the ideas and research of behavioral economics and Gilovich is a pioneer in the field.  His work is based on making informed, collaborative decisions that avoid what I call the Ten Ailments that drive perverse behaviors and that can disrupt or derail an outsource deal. You can see how psychologically reactive the ailments are and how they are based on bad individual or group decisions, such as “sandbagging,” (Ailment 6), “driving blind,” (Ailment 8) or “the power of not doing” (Ailment 10), to name only three.

This week I had time to dig into the works of Albert Mehrabian.  His work presents a psychologist’s perspective on business relations including verbal and non-verbal communication, the “product-user interface” and “intuitive logic and organization.”

He came to psychology after receiving BS and MS degrees in engineering from MIT. He received his from Clark University and in 1964 began a long career of teaching and research at the University of California, Los Angeles. He is currently Professor Emeritus of Psychology, UCLA.

Mehrabian has written a whopping 20 books—including Silent Messages and Public Places and Private Spaces: The Psychology of Work, Play, and Living Environments.

In Public Places and Private Spaces, Mehrabian outlines a framework for understanding how everyday environments (including homes and workplaces) influence major behavior patterns such as socializing, work, eating, temptations to overeat, use of alcohol and reactions to stress.

Mehrabian is perhaps best known for his pioneering work on non-verbal communication (or body language). His theoretical work and experiments helped identify nonverbal and subtle cues in which people convey likes and dislikes, power and leadership, discomfort and insecurity, social attractiveness, persuasiveness, and ways to detect when others are deceptive in communication.

He found that spoken words account for only 7 percent of what a listener perceives; the remaining 93 percent of what a listener comprehends originates from the speaker’s body language and tone employed in the delivery of the words.

While those percentages have been much-discussed and questioned—for example, aren’t the words “No Smoking!” or “The building is one fire!” 100 percent meaningful?—the importance of the concept remains.

Mehrabian’s findings and the theory resulting from them are particularly useful in explaining the importance of understanding meaning in communications as distinct from words alone.

That applies to contract negotiations and contract governance.

I don’t see how negotiating any contract, much less a Vested agreement, via email, letter or telephone could possibly work. At some point in the process the parties must sit down together, look each other in the eye and take the measure of their seriousness, their aspirations and their intentions. That strikes me as potentially a very emotional and telling moment in the relationship, where recognizing body language and facial expression is essential.

That’s why communication and leadership trainers and political campaign managers have come to rely on Mehrabian’s findings. If you are entrusting a service provider to run part of your operation – it only makes sense you’d want to have a face-to-face personal connection at very senior levels in both the buying and selling organizations.  Unfortunately, I find all too often that large outsourcing deals are delegated to people well below the magnitude of what they are negotiating.

Communication is a hallmark of a Vested governance framework, which calls for regular and frequent team meetings throughout the life of the Vested agreement. The ability to look beyond the numbers on the page or the screen and read the body language of your partners could be the difference between success and failure. This is why I advocate regular meetings throughout the life of the agreement at multiple levels in the organization, both to monitor implementation and day-to-day, progress, and to resolve issues before they become damaging problems. Face-to-face meetings also cement the idea of partnership, camaraderie and unity of purpose.

It occurs to me that Mehrabian’s tenets about body language, simplicity, communication and organization should be required reading for companies and service providers.  His insights are easily adaptable when crafting a Vested partnership – especially his seminal work on human and business communication.

Business relationships do differ from human relationships but businesses are in essence human enterprises and I believe the lessons we learn from the thinkers like Mehrabian on workplace interactions buttress the Vested model significantly.

Vested thinking applies the best qualities of human relationships—collaboration, trust, flexibility, honesty, innovation and open communication—to the outsource relationship. It also puts the worst of human/business interactions “on the couch” by identifying the common ailments that disrupt or derail outsource deals and then resolving them.

Last time

More than 50 years ago Eric Berne’s classic and powerful work on Transactional Analysis, social relationships and the “games people play” touched-off an entire school of thought and analysis on how people relate—and don’t relate—to each other.

More than five million copies later Berne’s classic Games People Play: The Basic Handbook of Transactional Analysis is widely recognized as the most original and influential popular psychology book of our time.

It is based on two notions, first that we have three parts (parent, adult and child) or “ego-states” to our personality, and secondly that these converse with one another in “’transactions” (hence TA).

Berne talks about parents as controlling or nurturing towards their children, who then can adapt, explore or rebel. When people communicate, each exchange is a transaction. Many games—and conflicts—can result from these dynamics.

There’s much more in Berne’s analysis than is possible to explore in this space, but his ideas, it seems to me, are directly translatable to the unhealthy business and outsourcing relationships that often develop, as illustrated in the 10 common ailments that disrupt or derail outsource deals.

Berne says that games are ritualistic transactions or behavior patterns between individuals that can indicate hidden feelings, purposes or emotions. One example of this notion from the ailments is the Activity Trap: Under a transaction-based model, the service provider is paid for every transaction—regardless of whether or not it is needed. The more transactions performed, the more money for the outsource provider. The outsource provider has no incentive to reduce the number of non-value-added transactions, because a reduction of transactions would result in a reduction of revenue. Instead of collaborating through incentives, trust and flexibility for the best outcome as in a Vested Outsourcing model, the company and service provider work at cross-purposes.

I also believe there’s a correlation between Berne’s “games people play” and John Nash’s work on Game Theory, i.e., the best result comes from everyone in a group doing what’s best for themselves and the group.

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, demonstrating that companies that work together—and play nice!—will discover that the sum of the parts are better when combined effectively for the win-win than if they work at cross-purposes.

Berne famously said, “A loser doesn’t know what he’ll do if he loses, but talks about what he’ll do if he wins, and a winner doesn’t talk about what he’ll do if he wins, but knows what he’ll do if he loses.”  Wise words indeed. Too many people and companies shy away from risk to their ultimate detriment by playing not to lose.

While Berne’s focus was on human interactions, given the Supreme Court’s recent controversial ruling that corporations are people, linking his ideas to the business world is perhaps not all that outlandish. Whether you agree with the court’s logic or not it strikes me that many corporations probably could benefit from a few sessions on the couch to re-think and re-vamp their mindsets regarding their transactions, competition, winning and their relationships with their employees and service providers.

“I don’t want you to be more efficient. You’re working on a government contract and billing by the hour.”

That in a nutshell is the Activity Trap. But it’s not just applicable to government contracts. I see this all the time in outsourcing deals.

Many companies that purchase outsourced services use a transaction-based model. The service provider is paid for every transaction—whether it is needed or not. The more transactions performed, the more money they make, and under a strictly transaction-based model there is no incentive for the service provider to reduce the number of non–value-added transactions, because doing that results in lower revenue.

As illustrated in the Dilbert carton, inefficiency is rewarded with more revenue: the more inefficient the entire support process, the more money the service provider can make.

Perverse incentives are also a major factor in the activity trap. In my book Vested Outsourcing: Five Rules That Will Transform Outsourcing, which outlines 10 Ailments that can plague outsourcing agreements, I relate how 19^th-century paleontologists traveling to China used to pay peasants for each fragment of dinosaur bone (or dinosaur fossils) that they found. They later discovered that peasants dug up the bones and then smashed them into smaller bits to maximize their payments.

Inherent in the activity trap is a disincentive to try to drive down transactions or to innovate.

A good example of the Activity Trap comes from outsourced manufacturing. A contract manufacturer performed final kitting and assembly pack-out as a value-added service for an original equipment manufacturer customer that designed consumer electronics. The customer had given the contract manufacturer the bill of materials with detailed instructions to use a specific finished goods “pretty box.” This full-color, high-quality box was meant to serve as a kit to hold all of the various components for a particular device, including the manual, cables, charger, and so on. The contractor needed to assemble the box and then insert the parts properly. Building the box required the contractor to have 12 “touches.” The contractor charged a flat fee per touch to assemble the box carton, plus a fee of one touch for each item placed in the kit. The contractor knew that the particular box design was not efficient but simply did what it was told rather than suggesting solutions for an improved box design that might eliminate the unnecessary.

That type of perverse incentive is eliminated in a Vested Outsourcing partnership, which goes beyond SOWs and transaction-counting to a collaborative, innovative and performance-based relationship between company and service provider that’s designed to achieve the most efficient results.

The recently published Vested Outsourcing Manual is a step-by-step guide to crafting and implementing a Vested partnership and trumping the thinking of Dilbert’s pointy-haired boss.

That’s a natural and normal approach, especially as we develop concepts and systems and the right way to outsource—such as (ahem) the Vested Outsourcing way!

But sometimes looking through the other end of the lens can bring a useful new perspective, which is what Oliver Kirchner, senior legal counsel, global commercial transaction for Nokia Siemens Networks, did recently at the Arab Outsourcing Conference in Dubai. (I referred to Oliver in recent on outsourcing agreement T&Cs.)

In his presentation on “Why Outsourcing Deals Turn Sour,” he talked about what an outsourcing agreement is not:

• It’s not an “insurance policy” because “outsourcing cannot take away all existing risks from a company’s business and shift it to the partner.”
• It’s not a “blank check” because “outsourcing cannot remove financial discipline or need to re-prioritize work and budget from a company.”
• It’s not a “financial cure-all” because “outsourcing is not intended to relieve a company of its existing financial obligations (e.g. asset depreciation, pre-existing third-party liabilities, etc.).”
• It’s not an acquisition of service providers’ assets or intellectual property because “payments are for services, generally not for intellectual property used or developed to provide services.”

I’m sure there are more points that could be added to the “not” list—one that comes to mind is that outsourcing is not a way for companies to beat up service providers on product, service and labor costs to get the cheapest possible pricing.

It’s also not a way to brag about collaboration and innovation without really doing the work with the service provider to create a true collaborative and innovative ecosystem to produce the win-win.

Actually Oliver’s “not” list reminds me of the Ten Ailments that can plague and derail outsource deals. They are the starting point for determining what’s wrong with an outsource deal–basically how not to outsource–and then realizing the need for a change to the better Vested way.

That’s the way to untangle the annoying that comprise the not list!

That’s mainly because task-oriented SLAs generally are too one-sided in favor of the company outsourcing.

There’s growing recognition that SLAs are too one-dimensional and not an optimum way to gauge real outsourcing success. A CIO Magazine article last month by Stephanie Overby notes that business strategy gets short shrift in outsourcing relationships when “outsourcing customers and providers focus excessively on basic service level agreements (SLAs), according to a recent survey conducted by Accenture and the Shared Services and Outsourcing Network.”

Stephanie writes that of 600 survey respondents, 42 percent said they spend too much time “discussing SLAs and not enough time agreeing on business outcomes, while another 25 percent said they devoted a lot of time to SLAs but that it was decreasing.”

She quotes Tom Petit, Accenture’s managing director of North America business process outsourcing, who says that while tight SLAs are critical to IT and BPO deals, they can distract customers and providers from larger transformation opportunities in their relationships.

“SLAs are an important part of any managed service engagement,” Petit says. “They set expectations and necessary service performance targets. However, the overwhelming majority of SLAs are focused on measuring process inputs, rather than business outcomes.”

In other words they are too task-oriented and focused on the specific service metrics that a service provider must meet, rather than the collaborative achievement of Desired Outcomes.

The Vested Outsourcing Manual, which will be published later this month by Palgrave Macmillan, can  solve the problem  Stephanie described by providing a roadmap to crafting sustainable, outcome-based Vested relationships that gets to the win-win.

Among many other things, the manual’s shared value approach enables value-based decisions, and provides tools and instruction on what to include when structuring a Vested agreement, such as a Requirements Roadmap.

In an excellent pre-publication review of the manual, Kathleen Goolsby, senior writer for the Outsourcing Center, says that the book addresses the SLA problem by describing “how to create a performance statement, a three-tiered hierarchy of performance metrics and a Quality Assurance Plan for managing performance (these aren’t the typical KPIs and SLAs in outsourcing).”

(Kathleen is a respected expert on outsourcing and a great friend of Vested—she really gets it—and I thank her for the great review!)

Another takeaway from survey as outlined by Stephanie was that more than half of the respondents said they had “a long way to go” with their outsourcing operating performance and strategy.

A good way to shorten that journey is to move to Vested and beyond the task- and transaction-oriented SLA.

It presents some serious food for thought about the way we and our organizations work, collaborate and grow over time.

Here’s a link to the slide-share presentation of the fable. Take a look, but I’ll summarize the story briefly.

An industrious Ant in the jungle arrived to work early every day, started working immediately and was highly productive, needing no supervision. Ant was also happy with the results of her work. Observing this, Lion, the chief, was surprised. He thought if Ant could do so much work without supervision how much more would she be able to accomplish with a supervisor?

So Lion hired Cockroach, who claimed to be a good supervisor. Cockroach was also very good at preparing reports. Cockroach implemented a time-clock attendance system. Cockroach now needed a secretary to type reports, so he hired Spider to manage document archives and monitor all phone calls.

Lion asked Cockroach to produce graphs, trend reports and analyses, which would be presented in board meetings and used to increase sales. Cockroach bought a computer system and other supporting devices for this, and hired Fly to manage the IT department.

Ant no longer achieved her normal work levels because her time was taken up by paperwork and meetings. She was no longer very happy. Lion felt there was a need for a department head where Ant worked. Lion appointed Cicada as department head. Cicada bought an expensive carpet and ergonomic chair for his office. He also got a computer and an assistant to help with budgeting, reports and optimization plans.

Ant’s department became a sad, unhappy place. Lion eventually saw a report that showed a decline in productivity in Ant’s department. So he brought in Owl, a renowned consultant, to carry out a comprehensive audit. Months later, Owl’s huge study and report concluded the department was overstaffed.

So Lion fired Ant. The reason: Her lack of motivation and a negative approach towards organization processes.

We’ve probably all worked for organizations that demonstrate some or all of these antics. They have love affairs with meetings, processes, reports and management layers. Often in this scenario the idea of, “If it ain’t broke, don’t fix it” quickly goes out the window because executives and managers must justify their existence, their job descriptions and their place on the organization chart.

The beauty and DNA of a Vested Outsourcing arrangement is that people are encouraged to collaborate across companies and functions to do what they do best without the need for constant micromanagement and “measurement minutiae”—two of the 10 Ailments that plague business relations—under a flexible, agile and insightful agreement framework.

Yes, it’s true that if you can’t measure it you can’t manage it, but the balance is often skewed. Too many processes, organizational layers, meetings and benchmarking exercises can be too much of a good thing that perversely becomes a bad thing. As the fable tells us, they can drag down productivity and produce the exact opposite of the intended result, especially in human terms.

The idea should be organizational empowerment, listening and support, not control, red tape and angst.

Many thanks to George Gecowets, founder and former CEO of the Council of Supply Chain Management Professionals, for sharing the fable and his thoughts about it.