Vested Outsourcing

An Industry Week article by Kate Vitasek and Mike Ledyard states that successful outsourcing deals play by rules that are fundamentally different than conventional procurement approaches.

Peter Drucker challenged companies to “Do what you do best and outsource the rest!”. Unfortunately, according to the authors, too many companies jumped into outsourcing using the same approaches and methods that they used for procuring commodities and materials to run their operations. The result is that far too many outsourcing deals are less than optimal, leaving most in search of a better way to outsource.

The University of Tennessee studied some of the world’s most successful outsourcing deals as part of a research project funded by the U.S. Air Force. The authors uncovered the fact that successful outsourcing deals had one thing in common; they played by an unwritten set of rules that is fundamentally different than conventional approaches for procurement.

The authors distilled their research into an approach they called “Vested Outsourcing”, because it is typified by an outsourcing relationship where both parties have a stake in maintaining the arrangement and work together to create a performance partnership.

Their Five Rules of Vested Outsourcing:

Rule #1: Focus on Outcomes, Not Transactions

Many conventional outsourcing arrangements are built around a transactional model. Most often this transaction-based model is coupled with a cost-plus or a competitively bid fixed-price-per-transaction pricing model to ensure the company buying the services is getting the lowest cost per transaction. The service provider is paid for every transaction, whether it is needed or not. Thus, the more inefficient the entire process, the more money the service provider can make.

The company that has outsourced gets what it contracted, but perhaps not the best solution. Vested Outsourcing operates under a desired outcome-based model, with the emphasis on having the outsource provider align its interests to what the company really wants: an efficient and low-cost total support solution.

A Vested Outsourcing business model fundamentally shifts how a company buys services to a performance-based approach. Instead of paying an outsource provider for unit transactions for various service activities, the company and its service provider agree on desired outcomes. Desired outcomes are still quantifiable, but take a different form: they can be availability, reliability, cost, revenue generation, employee or customer satisfaction, or even asset investment targets.

In essence, Vested Outsourcing buys desired outcomes, not individual transactions.The service provider is paid based on its ability to achieve the mutually agreed desired outcomes.

Rule #2: Focus on the WHAT, Not the HOW

Rule #3: Agree on Clearly Defined and Measurable Outcomes

Rule #4: Optimize Pricing Model Incentives for Cost/Service Trade-offs

Rule #5: Governance Structure Should Provide Insight, Not Merely Oversight

To see the full Industry Week article on Vested Outsourcing and its five rules, go tothis web page.