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Logistics Quarterly Magazine - Volume 16, Issue 2, 2010

LQ’s Recommended Reading

Playing to Win

Build stronger relationships and gain greater value from your outsourcing relationships by getting vested.

By Kate Vitasek and Mike Ledyard

Peter Drucker and Tom Peters have both been quoted as saying, “Do what you do best, and outsource the rest.” Both are highly credible experts. But what they don’t say is how to go about doing it the best way. The result? Today companies outsource more than $6-trillion worth of services; some are clear winners, some are clear losers, and most fall somewhere in between.

So how do the very best companies win at the game of outsourcing? That is the question that the University of Tennessee has been studying as part of a research project funded by the United States Air Force. The findings? Companies with the very best outsourcing agreements all followed five unspoken rules for building strong relationships and contracts with their service providers. We codified our learnings in our book Vested Outsourcing: Five Rules that will Transform Outsourcing. This book serves as a handbook for practitioners to build stronger relationships and gain greater value through their outsourcing agreements.

The Definition of Winning – WIIFWe versus WIIFMe
A key component to winning in the outsourcing game is to change the definition of winning. While many organizations tout they have “partnerships,” our experience and research found that most organizations have an internal desire to optimize their own self-interests and this comes across loud and clear in the contract terms and language of today’s outsourcing agreements. Unfortunately, this self-interested, “what's in it for me” (WIIFMe) approach leads to sub optimization, higher transaction costs, and what we identify as 10 common ailments of outsourcing, which we outline in chapter three of our book.

Our research revealed that the most successful outsourcing agreements changed the definition of winning — creating a true win-win relationship — with both the company and the service provider each obtaining greater value from the relationship by working together. The best companies moved beyond WIIFMe thinking to a “what’s in it for we” (WIIFWe) philosophy with the goal to strive to increase the size of the entire pie (unlock a greater opportunity than is currently realized by either party) versus maximizing the size for any one player (e.g., lower costs at the expense of the outsource provider's profits).

Rules of the Game
The most successful companies not only changed the definition of winning to win-win, they also adopted the following five unspoken rules to help them craft solid contracts that supported their relationships:

  • Outcome-based versus transaction-based business model
  • Focuses on the “what,” not the “how”
  • Clearly defined and measurable desired outcomes
  • Pricing model incentives optimized for cost/service trade-offs
  • Insight, versus oversight governance structure

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In Vested Outsourcing, agreements are based on achieving results — not on the service provider performing tasks and getting paid for transactions. The organizations work together upon a foundation of trust, with mutual accountability for achieving the outcomes. The emphasis moves from measuring detailed service level agreements towards mutual accountability for outcomes. The service provider is challenged to put skin in the game to bring innovative solutions that yield improved performance and lower total cost of ownership. When the service provider achieves the results they are rewarded with additional profits. This is all managed under a carefully thought out governance structure based on insight rather than having a conventional vendor account management team micromanage the service provider.

Investing in Vested Outsourcing

For the service providers, vested outsourcing is an opportunity to exercise greater flexibility in deciding how support is provided, to ensure cash flow stability through long-term contracts, and to increase revenue by rewarding the service provider’s investment in improving processes. For the company that is outsourcing, it is a chance to obtain improved performance while decreasing costs and assets by partnering with a highly competent and properly motivated firm.

For those wishing to explore vested outsourcing further, we offer four resources:

  • Our book, Vested Outsourcing: Five Rules that will Transform Outsourcing, has been published by Palgrave Macmillan and offers a comprehensive guide for developing successful vested outsourcing partnerships. It is available at Amazon.com.
  • The University of Tennessee offers a three-day open enrollment class at its Center for Executive Education, “Vested Outsourcing: Buying Results, Not Activities!”: http://VO.utk.edu. You can contact Bric Wheeler at the University of Tennessee to learn more at BWheeler@utk.edu.
  • Visit our blog at http://www.vestedoutsourcing.com and receive additional resources, tools, and insights offered by the authors.
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