Vested Outsourcing

At Decideware, we're all about optimizing performance and satisfaction in supplier relationships, especially so-called strategic relationships.  

So I was very interested to learn recently about the thinking of Kate Vitasek and her concept “vested relationships” as it applies to outsourcing.  Kate is a Faculty Member at University Tennessee’s Centre For Executive Education and Founder of Supply chain Vision.   She has recently published “Vesting Outsourcing: 5 Rules That Will Transform Outsourcing”.

While Kate’s work is focused on outsourcing relationships it appears to me that her thinking applies equally well to almost any strategic supplier situation.   Her goal is to unlock efficiencies in supplier relationships by creating a culture and behaviors that look at the big picture and leads to rewards for both parties.

Kate highlights that traditional relationships with suppliers tend to be characterised by self-interest and meetings where the supplier sits one side of the table and the customer on the other.   Participants are most concerned about achieving goals in their particular area of interest rather than the overall outcome, and a win for me can be at the cost of a lose for you.  

All this in the context that there are more papers available today about collaboration than ever before, and everyone talks about partnership.   And with outsourcing in particular, a supplier is an extension of the client company.

Some of the causes of self-interest are the following “ailments” identified by Kate:

• Zero sum game:  This is where the client company is happy to achieve a result at the expense of the supplier.   So a win for us must be at the expense of the supplier and vice versa.    But the optimal outcome is to get something where the sum of the parts is greater than the parts.   So rather than arguing about the size of the slice, the parties should be trying to bake a bigger pie

• Penny wise and pound foolish.   This is usually caused by very short term thinking whereby the client organization is driven to realize immediate savings.   However, the supplier being squeezed will obviously act to protect their self-interest resulting in a longer term outcome where the saving today is offset by tomorrow’s bigger long term savings being on the table.  So the total cost long term goes up

• Outsourcing paradox.   This is when a company outsources because they are not good at doing something but they then they dictate to the supplier exactly how it should be done.   Typically it is characterized by a very rigorous Statement of Work which include precise performance targets for all activities.   So having outsourced because the company is not very good at something, the supplier is then told how to do it!

• Sandbagging:   This is where the client company specifies a numeric target for something which the supplier can actually exceed.   However, as the supplier knows there will be another target the following year, they hold back on delivering maximum efficiencies immediately 

• Activity trap:   This is when the basis of remuneration is an activity rather than an outcome.   So there is no incentive for the supplier to reduce the number of activities.   Examples include paying for performance reports that are not actually needed, or with a call center, failing to resolve issues on the first call.  Paying for activities increases costs

• Junkyard dog factor.   This happens when a company or its managers hunker down and protects the territorial turf.  They see new ideas from suppliers as threats.   This is especially so if the manager is seen to be – or thinks they are – the expert.   So even if the improvement is the result of new technology or new processes, they are not implemented.   Where the junkyard dog mentality exists, suppliers stop bringing new ideas

With Kate Vitasek’s vested relationships the outcome is win/win.   But achieving a vested relationship means moving to a new way of doing business.   It is more than just contractual terms.   There needs to be clearly defined and measurable outcomes.  Payment should encourage transformation rather than just compliance.

To move to a vested relationship, companies need to acknowledge that both parties are in it to make money, change the culture and behaviors (especially to become more long term in thinking), and get all stakeholders on board (including the legal team).

The 5 rules to achieve a vested relationship are:

1. Focus on the outcomes and not the transactions. It is not about doing the work but about transformation
2. Focus on the what and not the how. Tell suppliers your desired outcomes, not how to do it. Solve my problem; you're the expert!
3. Clearly define and measure outcomes.
4. Have an optimised pricing model with incentives that balance the cost/service trade-off. There should be incentives for solving the big problems. The pricing should challenge the supplier to solve big problems.
5. Governance structure should provide insight and no merely oversight. Insight means looking at data, analyzing, trying to solve problems. Micro management and oversight will not get the best results from the supplier.

Returning to my earlier comment: don’t these comments and suggestions make sense for all key supplier relationships?   Perhaps the best way to optimise performance and satisfaction is to have both parties enjoying a winning outcome.

Author: Derek Groom, Decideware | Europe.