Today’s guest post is from Kate Vitasek, a lead researcher and faculty member of the University of Tennessee’s Center for Executive Education and the founder of boutique consulting firm Supply Chain Visions.

For the past two years, I have had the opportunity to participate in a University of Tennessee research program, funded by the Air Force, to formally study companies that were employing performance-based approaches for outsourcing. The research has uncovered that there is a set of unwritten rules companies can apply to develop mutual symbiotic performance partnerships where both parties in the outsourcing relationship unlock win-win solutions to achieve much higher levels of performance and cost savings.

We have distilled our lessens and approach into what we call Vested Outsourcing — because it is typified by an outsourcing relationship where both parties have a stake in maintaining the arrangement and where both parties work together to create a performance partnership which takes both the company outsourcing and the service provider to new levels of cost, service and profitability not realized by traditional outsourcing models.

While no two Vested Outsourcing partnerships are alike, all good ones achieve a performance partnership based on optimizing for innovation and improved service, reduced cost to the company outsourcing, and improved profits to the outsource provider. This is what we call the performance pyramid. This trend towards performance partnerships has evolved to where outsourcing companies and service providers work together to develop a performance-based solution where both parties’ interests are aligned — and both parties receive tangible benefits (either through tangible or intangible incentives).

The heart of a Vested Outsourcing contract is an agreement on desired outcomes that explicitly states the results on which both companies will base their outsourcing agreement. A Vested Outsourcing agreement clearly defines financial penalties, or rewards, for not meeting, or exceeding, agreed upon desired outcomes. In the agreement, regardless of what is being outsourced, the outsourcing partner has the ability to earn additional financial value (e.g., more profit) by contractually committing to achieve the desired outcomes. Simply stated: if the outsource provider achieves the desired outcomes, they receive a bonus.

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. This is often known as a WIIFMe approach (What’s in it for Me). How could they not when we are ingrained with “winning” from early childhood and most business schools and law schools focus on “winning”.

The very word partner implies that there are two sides. The progression towards a Vested Outsourcing agreement must focus on creating a culture where both parties are working together to ensure the ultimate success of each other. The mentality should shift from an “us vs. them” to a “we” philosophy, or what we call a What’s in it For We (WIIFWe) philosophy. For many companies, a win-win approach is a learned behavior — and they have to unlearn their conventional approaches and ways of thinking. In a Vested Outsourcing relationship, the organizations must work together upon a foundation of trust where there is mutual accountability for achieving the destined outcomes.

Five key rules set the stage of a sound outsourcing partnership.

1. The business model is established based on outcomes versus defining transactions.
2. The company outsourcing needs to feel comfortable describing the “what” and delegating the “how” to the outsource provider — and the outsource provider must be comfortable signing up to take the risk to deliver the “how”. Both organizations must constantly seek to overcome roadblocks in the processes, infrastructure, technology and people that prevent mutual success.
3. Carefully aligned, clear and measurable performance objectives are used to monitor the desired outcomes.
4. A balanced pricing model that includes mutual incentives and rewards, optimized for cost versus service trade off.
5. The relationship is based on insight, versus oversight governance, that empowers both parties to pursue improvements that will deliver better performance, higher profits, and lower total cost of ownership.

The five key rules of a sound outsourcing partnership set the stage for companies to take their outsourcing relationships to the next level — a true vested performance partnership.

In Vested Outsourcing, the organizations work together upon a foundation of trust where there is mutual accountability for achieving the outcomes. Through the careful alignment of performance objectives, accountability, and control, the service provider, while absorbing additional risk, is empowered to pursue improvements that will deliver improved performance, higher profits, and lower total cost of ownership.

Vested Outsourcing uses the power of free market innovation to improve the outsourcing relationship. This can be challenging to achieve, but the Vested Outsourcing journey should always strive to arrive at this idealized end state to achieve the performance pyramid — where both the company outsourcing and the outsource provider are consistently applying a WIIFWe foundation and applying all five of the Vested Outsourcing rules.

Companies with a desire to explore Vested Outsourcing further, can visit the Vested Outsourcing website, hosted by the University of Tennessee, and download an excerpt of the upcoming book being published by Palgrave Macmillan titled Vested Outsourcing: Five Rules that will Transform Outsourcing.

Thanks, Kate.

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Today’s post is from David Clevenger, Vice President of Corporate United.

Having spent most of my professional life in the supply chain field, I have become a fairly outspoken proponent of outsourcing. My commitment to these ideas are based not in the cost saving potential of these arrangements, but rather in what I have always perceived as the value of having someone else invest in competencies not relevant to one’s direct business.

A recent post by the doctor (Why Are You Paying PR Firms to Develop Your Marketing Plans?) led me to leave a comment on his site regarding what I felt were misguided views on strategic outsourcing. In turn, the good doctor has asked me to expound upon my own thoughts in a guest post; an act that has led me to question my own sensibilities.

In sitting down and really thinking through whether outsourcing strategic relationships is a viable path for any business, I have been forced to consider whether or not recommendations I have made to clients for more than a decade have been as sound as I once thought them to be. In considering these interactions, I am reminded of what drives so many organizations in the direction of outsourced solutions: cost savings.

I have long felt, and continue to feel, that outsourced arrangements initiated with the primary objective of cost savings are destined to fail. Instead, it is important to investigate the more relevant cases for identifying a third party to replace in-house resources.

• Competency: In short, the presumption here is that a specialist in a given field will have greater focus on a given area than a member of an organization for whom the function is not a core competency. This is not to say that the employees of companies assigned to roles in IT and HR are not competent in their field, rather that their organizations are not as focused on those functions as IBM and Hewitt, respectively.
• Investment: Because human resources is not the core competency of, say, a manufacturing organization, it makes incrementally less sense for that company to invest in the best people and tools for that function. Instead, the manufacturer is wise to invest their resources in advanced production techniques or distribution models.
• Relevance: An important question to ask when considering an outsourced arrangement is whether or not your customers care. Think of it from a consumer’s perspective; when you are shopping at The Gap does it matter to you that their data centers are managed by IBM or CSC? Identifying what’s relevant to your customers is a good litmus test for deciding whether or not something belongs inside your walls.

Once a company has reached the conclusion that a given function lends itself to outsourcing, and that an appropriate business case can be established, the difficulty begins.

The challenge outlined in the original post is a common one, i.e., what should this provider do?

The example cited in the original post delineated the responsibilities of a public relations firm, specifically between developing a communication and managing communications. In that post it was argued that an outsourced provider was less qualified to do the former and better suited to the latter.

While I may have taken exception to the specific tack taken in that example, there are two excellent questions raised as a result of the discussion:

1. When is an indirect function strategic?

Another common error associated with outsourcing is painting all activities related to a specific function with a broad brush. Let’s use legal services as an example. Activities like immigration law are relatively commoditized and non-strategic, and other specialties like contract, labor, and product liability law have been mastered by niche firms; general counsel is a different animal altogether. This is a role that most [large] companies will absolutely want to have in-house because an intimate level of familiarity with the business is key to their ability to serve effectively in their role. This role may include the identification of outsourced partners to represent the company, but is probably too strategic to outsource.

2. When are elements of a function not appropriate for outsourcing?

The mere fact that an outsourced provider can accommodate a “soup-to-nuts” solution, doesn’t mean that you have to take them up on it. While, as I mentioned, I support outsourcing in many forms, the question of competency must be raised in dissecting the ability of the outsourcers themselves.

The answer to these two questions result in a solution that I call “line-item outsourcing”. This is the practice of selectively outsourcing the pieces of a function that are non-strategic, while maintaining control over those things not done effectively by the outsourced provider. While this practice can be applied across functions, let’s use facilities management as an example. Facility managers are responsible for an enormous amount of activity ranging from financial issues around leasing and capital management, to the oversight of hundreds of vendors performing functions as disparate pest control and elevator maintenance. For nearly every company in the world, performing these tasks does not represent a core competency, and further represents a major administrative burden. As a result, organizations like CB Richard Ellis, Jones Lang LaSalle, Cushman & Wakefield and others have thrived.

These organizations are without peer when it comes to property management, development and operations. As a result, many companies are content in allowing them to take over these and all related functions; but what about buying? Under this outsourced management umbrella there are contracts for janitorial services, HVAC maintenance, security monitoring, food services, landscaping, lot sweeping, snow removal and literally dozens of other functions. Being highly competent at managing properties does not make these providers equally capable of sourcing great contracts for these services.

By taking a “line-item” approach to outsourcing, companies can optimize these relationships by (i) outsourcing only the parts of the functions that can be done more efficiently and effectively by another provider and (ii) maintaining responsibility for the elements of those functions at which the outsourced provider does not excel.

Ultimately, the responsibility to make outsourced relationships blossom falls back on the customer. As a general rule, it’s not in your best interests to employ a call center in India if you have no intentions of getting on a plane once in a while to ensure that it’s being appropriately managed. Furthermore, don’t outsource complete functions when the strategic components of that function should be kept in house. Finally, do not presume to think outsourced providers are any more universally capable than your own organization…no matter the bill of goods they are attempting to sell.

Outsourcing can be a positively game-changing approach for any business, but not unless it’s taken up with the care and vision that decisions of this magnitude warrant.

Thanks, David.

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