Kimball is a long-time specialist in outsourcing, whose latest book, Outsourcing Agreements: A Practical Guide, is a valuable and detailed resource on the ins and outs of outsourcing. Kimball isn’t just any lawyer – but is one of the best-known lawyers in the industry, and he’s represented buyers and service providers. He recently left Baker & McKenzie and joined Hewlett-Packard’s legal team (good call for HP to scoop him up!).

I didn’t even get past the preface before I was hooked on Kimball’s book. Kimball starts off nicely by setting the stage that outsourcing differs from other types of contracts because of “the imperatives of mutual success through collaboration.”  Kimball frequently stresses that “Outsourcing works best when both parties succeed.” In other words, focus on ‘What’s in it for We.’

I particularly like that Kimball challenges how lawyers typically address outsourcing deals.  “Outsourcing contracts can fill large binders, but, although some complexity is unavoidable, bulk is not always necessary or desirable.   Endless complexity may be an interesting intellectual exercise for the specialist, but is more likely to confuse than to fascinate the poor client who must later make sense of what the lawyers leave behind.” He continues by stating “Conventional adversarial thinking (so common by lawyers) often proves counterproductive. Stringent, overarching terms – of the kind still found in too many ostensibly ‘standard’ forms – are rarely acceptable.  Time wasted crab-walking toward sensible middle ground is expensive, not only in legal and consulting fees, but lost goodwill and distractions from more important practical issues.”

I am not the only one singing the praises for Kimball’s book. Outsourcing analyst Phil Fersht, founder and CEO for Horses for Sources, did a nice write up on Kimball’s book as well.  In the piece, Fersht revealed Kimball’s  “top tips” for dealing with outsourcing contracts:

-      Get good advice.

-      Focus on essentials. “Details matter, but spend time and attention where it matters most: on scope, performance standards, pricing and adjustments, transitions, people, governance.”

-      Keep it simple, or at any rate, as simple as reasonably possible.

-      Service levels matter, but do not equal or assure quality.

-      Prepare to manage the contract and relationship. “Weak governance – too few people, without sufficient clout, and accustomed to managing operations, rather than relationships – remain the single most common, avoidable error among customers.”

-      Remember why contracts work. “Good contracts motivate parties to perform through a reasonable equilibrium in the allocation of risks, responsibilities and incentives. Performance yields benefits – savings and service for customers; margins, opportunities and references for suppliers. Failures to perform have consequences sufficient to help keep everyone on the straight and narrow.”  Motivation matters, but fear alone can rarely motivate excellence.

-      Propose reasonable terms. “On both sides, too many start with ‘tough’ terms – the sort that no one in his or her right mind would dream of accepting. Why bother?  Suppliers are unlikely to sign harsh contracts unless they are desperate or inept.”

Thank you George Kimball!   Your gems of wisdom are mined from many years of negotiating successful outsourcing contracts.  I am simply elated that a first rate lawyer’s thinking and approaches to outsourcing mesh so incredibly well with the Vested Outsourcing approach and the Five Rules!

For those picking up George’s book, you will find Vested Outsourcing’s rules and approaches echoed throughout his book. Kimball does a nice job of sharing his thoughts about the need to get away from a focus strictly on transactions in favor of mutually beneficial outcomes (Rule 1), agreeing from the start on defined and measurable outcomes (Rule 3) and governance structures that provide insight not oversight (Rule 5).

“There are no known substitutes for clarity, courtesy, intelligence, integrity, common sense or good judgment. ‘Tough’ methods and terms are not necessarily best. ‘Scorched earth’ tactics singe everybody. In the long run, neither side will succeed unless both succeed.”

That’s all vested wisdom, and from a lawyer no less. How is that possible you ask? Well, he is raising three daughters.

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?

Adopting a Vested Outsourcing business model does not change the nature of the work to be performed. At the operational level, lines of code must be written, bathrooms must be cleaned, orders must be fulfilled, repairs must be completed, calls must be answered, and meals must be cooked. What does change is the way that the outsourcing company purchases the services.
Using Vested Outsourcing, the company outsourcing specifies what it wants, and moves the responsibility of determining how and what gets delivered to the outsource provider. Firms outsource to a supplier because they know the supplier can do a better job, yet write the contract as if they are the experts. In so doing, they become victim of a detrimental phenomenon called the “outsourcing paradox.” A telltale initial “outsourcing paradox” symptom is an attempt to develop the “perfect” set of tasks, frequencies and measures in an attempt to tightly define the expected results. The result is an impressive document containing all the possible details about how the work is to be done.

But such attempts typically are doomed to failure. A too-tightly written statement of work makes outsource providers responsible for the work without giving them authority to exercise their own initiative in carrying out the work. Good companies outsource for a reason: In-house operations are either too expensive, ineffective, or both.
In the most effective Vested Outsourcing partnerships, very little discussion takes place about the processes the service providers will follow to meet the requirements; participants focus instead on system-wide performance expectations. Why dictate procedures in an area where you have decided you are deficient? It is up to the service providers to understand how to put the supporting processes together to achieve the desired outcomes.

Consider information technology outsourcing arrangements. Under a conventional contract, the company outsourcing would specify the hardware to use and possibly even the number and skills of help desk personnel. This scenario diminishes the outsource provider’s role as the expert. The service provider is the one that is constantly in the marketplace and keeping tabs on the latest developments. Its experts certainly will know of the most appropriate hardware for a given task, and they may even know of process or system efficiencies that allow them to do the task with less labor than non-IT firms. Performance partnerships let each firm do what it does best. Unless the company that is outsourcing has the skills and the resources to keep up with the latest innovations in the service it is outsourcing, it should leave the details to the experts.
Depending on the scope of the partnership, the company that is outsourcing assigns the service provider to perform some or all of the activities required to achieve the contract goals. For example, when outsourcing cleaning services, a company could outsource all aspects of restroom facility maintenance, the scope of which might include management of plumbing needs or procurement of supplies.

Collaboration lies at the heart of Vested Outsourcing because, to be successful, a service provider often becomes responsible for more services and has to work with other service providers. In a properly constructed Vested Outsourcing partnership, the service provider no longer has the option to deny responsibility by saying “it’s not my fault!” Rule No. 2 harmonizes closely with rule No. 4, which explains why pricing model incentives should be optimized for cost/service trade-offs. Applied together, these two rules work in conjunction with each other to create mutually beneficial and achievable goals.
Following Vested Outsourcing Rule #2 prevents The Junkyard Dog Factor and The Outsourcing Paradox ailments
Next: Agree on clearly defined and measurable outcomes