And that’s why outcomes is a dirty word! (Part I and Part II)

More specifically, it’s about capability, knowledge, the ability to be self-sufficient, and continual improvement.

Our rant focussed on the fact that the entire point of “outcome”-based pricing was to not only lure you away from more affordable products and services (especially if you were willing to do just a little bit more yourself), but take away your self-sufficiency, capability, and even knowledge and ensure your entire existence slowly became 100% dependent on the vendor for key processes. That you’d have no choice but to keep using them because you lost the capability to take the function back in-house. That you’d be the next mark in the grift that keeps on taking.

A big problem with “outcomes”, and another reason that it is a dirty word, is that it’s always focussed on “metrics” that have an impact on “the bottom line” today in a manner that the C-Suite can see on the balance sheet. Since the point of a business is to make profit, all of the “outcome”-pricing vendors argue that it’s the right approach.

While you should get “results”, that’s not the only thing you should be measuring, and it should not be the focus of your measurements. Because when you focus only on “results”, the focus is whatever gets you the best results, and, more exactly, what gets you the best results TODAY. That means you will make decisions that will jeopardize the potential for mid, and definitely long, term results in exchange for better results today that will please the client, your boss, the C-Suite, and/or the shareholders.

A great example of the danger of “outcome”-focus is classic sourcing — and the introduction of e-auctions (which are surging again because people forget the long-term impacts of auction over-use) that kicked our space off!

When awards are reduced to lowest price, and the volumes are large enough that a few contracts can sustain a struggling supplier, especially in tough economic times, suppliers will often sacrifice almost all of their margin just to get an award. This results in a great, immediate, win for the buyer, who can show a huge savings on the balance sheet, but it’s actually a huge risk. If the supplier sacrifices too much margin and costs rise too quickly, their viability is at risk. If they unexpectedly go out of business, the buyer has to find new supply quickly, and if the market becomes tight, this could skyrocket costs or even result in costly stock-outs or, even worse, production line shutdowns. The savings not only disappear over night, but costs increase. And even if the supplier doesn’t go bankrupt, when you go back to market, after a few years, if inflation was low, you might save 1% to 2%, but typically the best case scenario is you find someone who can match the price. However, what typically happens is that the price increases, sometimes by a lot! Why? Because the focus was on getting the best price now, versus coming up with a plan to ensure prices, or at least production costs, continued to decrease over time. Instead of looking for a supplier who would continually invest in better technology, renewable materials and energy, process improvement, etc. to keep costs down, you look for a supplier who’ll cut every corner they can to get a good price now. If you do a strategic engagement and find the first type of supplier, and enter into a long term contract where they know they can continue to invest in improvement, they’ll likely come back with a solution, and a contract, that guarantees a continual cost decrease year-over-year. This would actually benefit you more because not only you would you be able to claim an “outcome” every single year, but you know you have a supplier you can count on to deliver! (And you won’t have to explain the cost increase next time you go to market.)

In order to be a successful business, you don’t have to just profit this year, but you have to profit next year, and the year after that, and the year after that, and so on.

What this really means is that you need to be:

• instituting processes that will allow you to not only be more efficient, but get more efficient (with experience) over time,
• implementing supporting technologies that help you continually increase efficiency, including automation solutions that requires less and less exception management
• increasing your knowledge and capability, so you can always make the best decisions, use the best solutions, and know when a third party can be more efficient or more cost effective (because it’s either a part-time position that’s not worth the hire internally or a function that’s not core to your business and you’d rather it be managed externally until such time as it makes sense to reclaim the function)
• identifying metrics that focus on capturing process improvement, increasing capabilities, capturing knowledge (for future generations of HUMAN employees), and that result in improvement year-over-year

and NOT focussing on destructive one-time outcomes (that will hurt you later, and possibly a lot more than you realize).