And as much of a challenge as the holidays present to all of us, nobody is “on the line” more than the big fella himself – good ol’ Santa. Think about it – he has to be the ultimate outsource authority. As I shop for my six-year old this year, I also think about how Santa’s operation ties in with Vested Outsourcing.

First, he’s definitely got a clearly defined mutual Desired Outcome: Happy Children. That’s Vested’s Rule 3, by the way.

But the jolly old elf couldn’t do it without his outsourced partners. He starts out by creating collaborative relationships with all those that have a vested interest in his success: Web sites, snail mail, Santa clones in shopping malls and television. Collectively, the world makes sure kids know Santa is listening. And then there are the parents who do the actual purchasing. And, of course, companies like UPS just love pitching in to do their part to help out the parents.

Then there’s measurement. We’ve all seen the look on the face of the kid on Christmas morning after getting what he wanted!  It’s the happy child thing again and it’s really easy to measure.

Austin gets The Pony

Of course, incentives (ahem, Rule 4) play a key role as well.

It’s important to note that incentives aren’t always about money. For the kids, there’s the incentive to be good all year. Parents appreciate the help they get with discipline because, “Remember, Johnny, Santa is watching…and checking his list!” He even has a song about that. He’s checking that list twice.

And for Santa?  All he wants is to be loved, keep his prestigious position, and, of course, keep his long term contract intact. There’s something for everyone using the Vested model!

Somehow, the belief that the holidays are filled with the loving spirit of this “jolly old elf” always endures. And, perhaps, that’s where Santa fits best with the Vested approach to outsourcing and lgistics. It works best when folks work together, in an environment of trust and respect. Santa has that one down pat.

In sum, Santa is the big picture guy who works with the entire world for a single purpose – to make kids of all ages happy.

As far as I’m concerned, Santa’s contract can be perpetually renewed. I’m a believer.

Merry Christmas to All!

Skinner, often a controversial and polarizing figure, developed a philosophy of science he called radical behaviorism, and founded his own school of experimental research psychology—the experimental analysis of behavior. His analysis of human behavior culminated in his book, Verbal Behavior.

Skinner (1904-1990) discovered and advanced the rate of response as a dependent variable in psychological research, and he invented the cumulative recorder to measure rate of responding as part of his highly influential work on schedules of reinforcement.

Radical behaviorism attempts to understand behavior as a function of environmental histories and reinforcing consequences. Skinner emphasized reinforcement processes—both positive and negative—and they were seen as primary in the shaping of behavior. Both positive and negative reinforcement strengthen behavior, or increase the probability of a behavior reoccurring; the difference is in whether the reinforcing event is something applied (positive reinforcement) or something removed or avoided (negative reinforcement).

In “A Brief Survey of Operant Behavior,” Skinner wrote, “In general, we are much more strongly inclined to do things if they have had immediate reinforcing consequences than if we have been merely advised to do them.”

Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors to help understand economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns and the resource allocation. Behavioral models typically integrate insights from psychology with economic theory.

So there is a linkage between behavioral psychology and behavioral economics.

We can see both positive and negative behavioral principles at work every time we watch or respond to an ad, go to Las Vegas or play the stock market.

All of which brings me to the role of incentives in Vested Outsourcing. Effective (positive) incentives are the oil that makes the Vested model behave smoothly and successfully. They motivate service providers to make decisions that meet everyone’s goals.

In The Vested Outsourcing Manual, we define incentives as a type of award—either monetary or nonmonetary—for the company or service provider. In a Vested pricing model, for example, incentives ideally are based on achievement of incremental performance—that sounds like positive reinforcement!—of the Desired Outcome.

Also, a Vested agreement will incorporate an incentives framework that measures incremental performance and establishes incentive payments, usually through a mathematical formula.

Vested Outsourcing’s Rule 3 says Vested parties should agree on clearly defined and measurable outcomes, and Rule 4 directs the company and service provider to optimize pricing model incentives.

While Skinner’s influential theories on behaviorism and his innovations around tracking and measuring responses were not specifically aimed at the business and outsourcing world, they have had large implications for it.

In short collaboration is a nice word but it’s only truly effective and real when what you’re collaborating on is difficult, uncomfortable and necessary.

Ron Ashkenas, writing for the HBR Insight Center Making Collaboration Work blog, addresses this dynamic of collaboration in his “Teams That Only Think They Collaborate” post. Ashkenas is a managing partner of Schaffer Consulting and a co-author of The GE Work-Out and The Boundaryless Organization. His latest book is Simply Effective.

“Like death and taxes, one of the inevitable realities of organizational life is the periodic ‘team challenge’”, he writes. Team members suddenly are assigned to accomplish something “beyond what they currently do or have done before.” For example a management group might face a requirement to reduce expenses or headcount by 20 percent. Or increase revenue by 10 percent during the next quarter. Or speed up a product launch by two months.

Those are challenging situations that will strain the mettle of any team, and as Ashkenas says, collaboration is required. Over the years, he continues, he’s seen teams respond in three ways, “only one of which is truly collaborative.” The first is compliance, where each team member responds by taking action in his or her own area—the team “complies with the need to do something, but avoids working together.”

The second response is cooperation, where again each member develops their own plan, but in this case shares the actions with the group. “While there is some amount of joint discussion, the focus is still on individual actions rather than a collective strategy,” says Ashkenas.

A true collaborative approach, which by the way is what happens in a Vested Outsourcing relationship, will lead to a more effective and robust outcome.

“The reality is that true collaboration is difficult,” he concludes. “It requires subordinating individual goals to collective achievement; it means engaging in tough, emotional give-and-take discussions with colleagues about strategies and ideas; and it often leads to working in new ways that may not be comfortable or easy. So given these difficulties, most teams find it easier to talk about collaboration rather than do it.”

Lip service is always easier than reality’s nuts and bolts. It doesn’t have to be as Ashkenas so ably describes. The Vested model creates an ecosystem of collaboration, innovation and trust to define and achieve Desired Outcomes while also accommodating the unexpected “business happens” nature of business and events.

The Vested focus is on delivering mutually agreed outcomes, team-building and continuity across functions from the start of the outsourcing relationship, and a governance framework that centers on insight, not merely oversight and bean-counting.

Yes, true collaboration is hard work, but it’s eminently doable…and necessary.

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.

Filippo Passerini, P&G‘s CIO and president of Global Business Services, is a big proponent of avoiding the either/or mentality.

Under Passerini’s direction P&G has saved more than $600 million since consolidating all back-office functions several years ago, such as finance and accounting, HR, facilities management and IT into one unit—Global Business Services—and then by outsourcing many of the nonstrategic activities involved in providing the services.

Reading recent interviews and articles about him in CIO, Forbes and McKinsey Quarterly I get the distinct impression that he knows quite a lot about transitioning both people and organizational functions in an outsourcing effort.

“Creativity is good,” he says in his interview with CIO magazine, “but innovation is better. And for innovation to work, you really need to understand the business.” That latter point is straight from the Vested model.

“The model we have created for shared services is considered one of the most progressive in the industry,” he adds. “It is not an easy one to approach, but it is very powerful in the way it blends offshore and outsourced services with centralized and consolidated operations and de-duplication of services.”

He says he has observed an attitude that has prevailed for too long among some IT shops: at any one time it is possible only to deliver lower-cost services, or higher-quality services, but not both.

That is “too binary,” Passerini asserts. “It is the unacceptable science of the either/or,” he says. “Business is not like that! We need to deliver high-quality, low-cost services.”

No amount of technology can replace the “power of motivated and energized people,” and that is where innovation comes to life.

“It’s all about innovation—at the operating level in the way GBS is structured and in the design of our work processes, as well as upstream, in the IT-driven solutions that we can offer to support P&G’s brands.”

The two-step process of first establishing GBS and then entering the outsourcing phase was wise: “We had maximized our internal ability to cut costs and improve service quality. By consolidating and standardizing our services, we had paved the way for a smooth transition where we could leverage the greater scale and unique expertise of outsourcing partners and also negotiate attractive and mutually beneficial agreements with them.”

What has made all the difference at P&G and what also makes all the difference in a Vested relationship are firm commitments to collaboration and strategic connections in outsourcing partnerships.

Passerini says P&G wants to reduce costs in its commodity infrastructure operations, on the one hand, but also wants to continue to invest in innovation on the other. “Therefore, we have separated our investments in innovation from the objective of reducing costs in operations, to eliminate the risk that a one-sided focus on costs could undermine the building of business capabilities.”

In the Vested approach that’s done by fashioning a governance a structure with insight, not oversight, one that optimizes pricing model incentives to achieve Desired Outcomes with agility and flexibility.

And that means using the power of and. The power of and takes self-interest out of the equation and eliminates the either/or world of selfish divisiveness.

Credit: Making Collaboration Work

Don’t mistake a transaction, even a friendly and efficient transaction, as true collaboration.

If someone arranges to purchase widgets from a widget-maker that’s the essence of the make-buy decision but it’s not the crowning achievement of a real partnership.

Or as Ben Gomes-Casseres puts it, “a partnership is not a purchase order.” Writing this week in the Harvard Business Review’s Insight Center Making Collaboration Work, Gomes-Casseres has a thoughtful, spot-on response to this recent tweet from Scott McNealy, the ex-CEO of Sun Microsystems: “Most over used phrase in business is ‘strategic partner.’ Favorite partnership for me is a purchase order. Defined charter, beginning, end.”

Gomes-Casseres, who specializes in alliance strategy at Brandeis International Business School and is writing a book for Harvard Business Press, says that mind-set is “precisely why many external partnerships fail.”

True collaboration, he continues, “is much more than a purchase order. Setting up an external partnership as if it were a PO, at best, leaves value on the table. At worst, it leads to conflict and value destruction.”

Gomes-Casseres says McNealy doesn’t quite get the difference between a partner and a vendor. In a 2006 paper, “Vendor or Partner: Know the difference and manage accordingly,” Gomes-Casseres put that issue pretty much to rest.

In the HBR post, he writes, “Most true collaborations cannot be controlled with fixed terms that are defined in advance — they must be managed through relational contracts that allow you to respond flexibly to new information.

“McNealy is right about the need for a charter and time frame for any relationship. But he is wrong in expecting these specs to be as well-defined and as stable as they would be in a typical PO. True collaboration always has open-ended elements — ranging from precisely how new innovations will be implemented, to how products will fare in the market, and even to what priorities partners will pursue in the face of changes in the environment. A true partnership creates ways to manage these uncertainties, and does not default to executing against a predefined contract, as one would with a classic purchase order.

“Sun’s own experience is a case in point. Under McNealy, Sun ran its ‘partnerships’ in the spirit of purchase orders. In its heyday, when Sun sold servers running its proprietary architecture and software, the company bought semiconductors from major vendors, such as Fujitsu in Japan. But for many years it took a hands-off approach to new product development — dictating needs, but letting vendors bid for a slot on the Sun server and sink or swim after that. One of the results of this approach was that vendors failed to invest sufficiently to produce advanced products for Sun. “This kind of approach is common for firms that are in dominant positions in their industries. They tend to play vendors off against each other and shy away from partnerships that require some sharing of power.”

I’ve quoted Gomes-Casseres at length because his thinking so closely aligns with the Vested Outsourcing approach to structuring outsource relationships and the Five Rules, especially the Vested focus on shared value, outcomes, not transactions and laying the foundation for mutual success—the win-win.

The Vested model avoids the purchase order, transaction-based approach to business relationships in favor of long-term outcome-based relationships between companies and service providers based on collaboration and achievement of mutually beneficial outcomes.

A Vested framework is an alliance that still allows for a defined and flexible outsource structure without the trappings and complications of an equity or joint venture type of arrangement.

If you think a simple purchase order is example of collaboration, think again.

Innovation is easier said than done however, and a recent article by Stephanie Overby in CIO magazine underscores this. A survey of European CIOs found that 67 percent of IT leaders rely on outsource providers to turn ideas into new and improved processes, but only one-third of those same CIOs measure the impact of innovation delivered by service providers.

Overby writes, “Two-thirds of the CIOs said they would benefit from a framework for innovation, and half would be willing to pay more for an outsourcer that could help them formalize and maintain a successful innovation process, according to the research conducted by the United Kingdom’s Warwick Business School (WBS) and sponsored by offshore outsourcing provider Cognizant.”

Researchers interviewed 125 CIOs and 125 CFOs for the study and found that less than half of CFOs expected service providers to help turn ideas into new and improved processes and only 39 percent of them would be willing to pay higher rates for an outsourcer that could deliver proven innovation on a regular basis. Another case of getting what you pay for and not necessarily getting what you wish for.

As outsourcing activity picks up, the CIO article continues, moving beyond business-as-usual deals could benefit customers and providers, according to Ilan Oshri, WBS associate fellow and associate professor at Rotterdam School of Management and co-author of the study.

“Many client firms are still occupied with sourcing operations—trying hard to make outsourcing deals work, constantly monitoring SLAs and doing everything possible to avoid failure,” Oshri says.

That doesn’t leave much time or energy to nurture and implement innovative ideas.

While many CIOs hold onto the traditional notion that IT should outsource commodity work in order to focus on higher-value tasks such as innovation internally, Oshri says mature IT leaders approach outsourcing differently. “More sophisticated outsourcing clients seek innovation from their vendors,” he continues, “while newcomers to outsourcing hope that by outsourcing a function they will be able to free up in-house talent to focus on higher value activities.”

Oshri points to Shell as a company that has partnered with outsourcers to build a solid internal innovation function.

Vested Outsourcing’s Rule 5 says the governance structure between company and service provider should provide insight, not merely oversight. Innovation–and its cultivation–is a basic ingredient of a Vested agreement’s governance framework.

The Vested Outsourcing Manual, which Palgrave Macmillan will publish next month, focuses on creating and operating a collaborative ecosystem that rewards innovation and a mutual culture of continuous improvement.

Innovation is more than a wish or suggestion box hung outside the CEO’s office. In the Vested model it’s about nourishing and encouraging ideas and creating the conditions for innovation to flourish.

While there is obviously no standard cost template for contract negotiation services—contracts can vary from the exceedingly short and simple to the immensely long and complex and you won’t find any BOGO contract specials at your local Best Buy—it is legitimate to consider how much it will cost to produce a contract.

The IACCM’s Tim Cummins addressed that question at some length in a recent Commitment Matters blog post. He dug into IACCM’s extensive benchmark database to extract some estimates.

He relates factors that impact the cost question, including:

• Complexity – Is it a simple purchase order or a major outsourcing agreement?
• What constitutes the actual contract – Does it include SOWs, schedules, SLAs?
• Are Master Service Agreements, which represent core terms and conditions, part of the contracting process?
• Time calculation definitions and whose time is part of the cost calculation. Are the parties using elapsed time (i.e. cycle time) or actual time (the number of hours spent on specific contract production activities)?

With respect to a simple purchase order, he says, “The actual production process in efficient organizations has been driven down to a cost of $10 or less.”

Things ratchet up quickly after that under other contract forms.

There are two key cost considerations, Cummins says. “One is the cost of producing and agreeing the contract; the other is the cost of having the wrong contract (inappropriate terms, poorly drafted SoW, unclear service levels).”

The latter point, it seems to me, is crucial. Wasting time, energy and money on poorly drafted, unclear contract terms accomplishes nothing and puts the entire outsourcing relationship at risk. The Vested Outsourcing Manual, which will be published in June by Palgrave Macmillan, provides a pathway to crafting the best possible Vested agreement and avoiding pitfalls.

Cummins notes that contracts can be put in place very quickly and at very low cost; the downside of that approach is that it can “create major risks and downstream costs in so doing,” for example renewing an expired agreement without review.

Another problem is too much rigidity, where procurement teams impose highly standardized agreement forms that are not adjusted for the nature of the goods or services they are acquiring, “for example, distinguishing between production materials, computer hardware or software licenses.”

Assuming companies are operating with an efficient contracting process, Cummins relates the following contract production cost estimates:

1. Simple contracts (some negotiation and review (internal and / or external), low risk, relatively low value or spend commitment): Average cost $5,000 (lowest cost $3,500)
2. Mid-complexity contracts (significant review, some external negotiation, significant – but not major – risk considerations,): Average cost $19,200 (lowest cost $12,000)
3. High complexity contracts (major review and approval, extensive negotiation, high or unique risk factors and value): Lowest cost $40,000, upper cost may be $200,000+

A wide range of costs, but I would note that the upper end of the cost for a complex deal can well exceed Cummins’ estimate in complex outsourcing deals.  I have seen the cost of a retained advisory firm or legal fees amount to well over $500,000 just on the buyers side!

Companies that have excessive rigidity, no overall process discipline, or high levels of non-compliance  “may well produce contracts at much lower cost, but their actions will result in extensive downstream problems – for example, frequent claims and disputes, extensive cost overruns or project delays,” Cummins writes.

My recommendation? Get it right from the start with a Vested Outsourcing collaborative and flexible mind-set at the front end of the contract negotiation, the correct mix of experienced teams, and a clear vision of intent and Desired Outcomes. Following the Five Rules will get you the most bang for your contracting buck.

Axelrod’s computer simulation competition demonstrated what has become known as the  The Prisoner’s Dilemma.  The prisoner’s dilemma scenario is a problem in game theory that examines the advantages and disadvantages of cooperation. Using giant computers that filled rooms back in the early 1960s, Axelrod showed the answer is elegant and simple – it’s better to play nice and cooperate.  Axelrod, the Walgreen Professor for the Study of Human Understanding at the University of Michigan, eventually wrote a book about his findings, The Evolution of Cooperation (1984), which popularized the study of cooperation.

The Radiolab segment also refers to an amazing, if brief, example of cooperation during World War I. In 1914 soldiers for the Allies noticed that a lull in the fighting from the trenches by the Germans usually occurred around breakfast time. A sort of unwritten rule developed that both sides would refrain from battle at that time. Even more amazing this cooperative spirit eventually developed to the extent that along certain areas of the Western Front both sides would  have an unofficial truce on holidays like Christmas and actually celebrate them together in no man’s land. Even in an extreme wartime case both sides found that a timeout to rest, eat and recuperate was mutually beneficial. Of course the generals eventually  put an end to “fraternization with the enemy.”

But the lesson from the war and Axelrod’s work on the prisoner’s dilemma has a valuable lesson for managers — that playing nice can trump the human tendency towards selfish behavior. Axelrod’s pioneering work showed it can pay  to be nice.

Taking the Vested Outsourcing approach to business relationships lays a foundation of collaboration and playing nice by developing a what’s in it for we (WIIFWe) mind-set and a focus on mutual recognition of Desired Outcomes through the application of the Five Rules.

I recommend that you give the “One Good Deed Deserves Another” podcast a listen, it’s 25 well-spent minutes.