This week’s featured event was sponsored by Supply & Demand Chain Exec: Vested Outsourcing: Five Rules that will Transform Outsourcing. The main speaker was Kate Vitasek from the University of Tennessee’s Center for Executive Education. She is also the Founder of Supply Chain Visions – a Top 10 Boutique Consulting firm specializing in Supply Chain Management and the author of a new book, Vested Outsourcing: Five Rules that will Transform Outsourcing.
‘Vested’ outsourcing represents a mind shift change in outsourcing contracts and the management of those supplier relationships. The idea is for both buyers AND SUPPLIERS to have a vested interest in the outsourcing contract. Buyers and suppliers work together in trying to achieve business success.
The central message that I heard during the event was: You get what you pay for, so pay for what you want.
Many outsourcing deals are based on transferring the responsibility for tasks or transactions from the company to an outsourcer. Even though providers are hitting SLA metrics, they are not meeting business level metrics and objectives are not being realized.
The “Five Rules that Will Transform Outsourcing” are:
- Outcome based v transactional: In a transactional deal, there is no inherent incentive for the supplier to become more efficient. Anything based on volume is inefficient. In a volume cost situation, if suppliers want to make more money (which they do) they will find ways to do more work for you, not less (such as might be accomplished if they were incented to increase their efficiency).
- Focus on What not How: Buyers should focus on presenting a business issue and the supplier comes back with their solution. If the buyer gets tangled in the process of defining the solution, many of the cost benefits may be lost.
- Have clearly defined measureable outcomes: If you pay a supplier to fix a problem, they will want to fix your problem. If you pay them to increase the volume of transactions or lower the cost per transaction, you will get more lower cost transactions that may or may not get you any closer to a solution.
- Pricing model incentives should be optimized for cost model tradeoffs: 87% of economic growth is driven by innovation, process and product improvements. Only 13% is based on labor and physical capital. So don’t outsource the work, outsource the issue to an innovative supplier. Your outsourced pricing model should not be based on your old processes.
- Leverage an insight versus oversight contract structure: Move the outsourcing relationship towards mutually beneficial planning, through clear communication and shared goals.
In general, we refer to our outsourced suppliers as ‘strategic’ but we still manage them and their services in a traditional transaction-based way. Buyers and suppliers should be sitting on the same side of the table looking across at the business problem together. Buyers and suppliers need to have a strategy to reach a win-win situation based on the economics of the contract. (See our Wiki-Wednesday topic: Game Theory and our blog post on ‘Incenting Outsourcing Suppliers to Achieve Desired Outcomes.’
In Vested outsourcing, both the benefits and the risk should be shared equally by the buyer and supplier, and the relationship should be based on trust. Start by putting your cards on the table, defining what you want out of the relationship, then identify mutually desired outcomes and match those with incentive payouts. This will improve service levels and costs, while also allowing the supplier to earn incentives – rather than transactional profit.
Interested in reading more? Click below to download more articles from Supply Chain Visions.
- Vested Outsourcing: A Better Way to Outsource by Kate Vitasek, Mike Ledyard, Supply Chain Management Review Sept. 2009
- Supply Chain "Game Changers" Supply Chain Digest Oct. 2009
- Vested Outsourcing –The Next Generation of Outsourcing Ackerman Warehousing Forum, July 2009