Are you dissatisfied with your outsource
arrangement? Is the "partnership" with your supplier or service provider is
more like a foundering ship? If so then it is time for a change in the way your
outsourcing contracts are negotiated and managed.
But
this raises another vital question: How do you create a collaborative, flexible
and innovative relationship that works effectively for the long-term? Achieving
this kind of win-win partnership is especially paramount in the IT space, where
security, intellectual property and fast-changing technology advances can be
barriers to establishing true partnerships.
In
1968 the legal scholar Ian R. Macneil observed that most contracts are ill-equipped
to address the reality of business needs in his book, Contracts:
Instruments for Social Cooperation.[1] He argued that contracts
are rooted in the classical approach to contract law, and thus crafted to
address transactions and legal protections such as pricing and price changes,
service levels, limitation of liability, indemnification and liquidated
damages.
Not
much has changed in 44 years-until now. University of Tennessee researchers teamed
with the International Association for Contract and Commercial Management to write
The
Vested Outsourcing Manual: A Guide for Creating Successful Business and Outsourcing
Agreements. I believe the Manual will drive the change needed to take modern outsourcing
to the next level.
It
features 10 elements that provide practitioners (and lawyers!) with a clear
path to effective outsourcing agreements:
Element
1: Business Model Map
This
first step is to understand and document an outsourcing business model. It is essential
to document how well the parties are aligned to each other's goals.
Element
2: Shared Vision and Statement of Intent
With
the business model understood and mapped, the parties then work together on a
joint vision that will guide them for the duration of their Vested
relationship. The joint vision will form the basis of a Statement of Intent drafted by the outsourcing teams.
Element
3: Statement of Objectives/Workload Allocation
This element lays the
foundation for the parties in the Vested partnership to do what they do best. Together
the parties develop a Statement of
Objectives (SOO), which is very different from the standard SOW. The SOO
describes intended results, not tasks. Based on the SOO, a service provider
will draft a performance work statement that defines in more detail the workscope
and the expected results.
Element
4: Top-Level Desired Outcomes
Desired Outcomes are the centerpiece
of the agreement because without mutually defined Desired Outcomes in place, a
Vested agreement cannot go forward. Outcomes are expressed in terms of a
limited set of high-level metrics.
Element
5: Performance Management
A sound agreement defines how
the Vested parties will manage overall performance. The metrics and the
associated process for managing performance will help align performance and
strategy.
Element
6: Pricing Model and Incentives
The approach of many
procurement professionals to outsourcing is stuck on one thing: getting the
lowest possible service and labor pricing. The strategic bet-and paradigm
shift-of Vested Outsourcing is that the service provider's profitably is
directly tied to meeting the mutually agreed Desired Outcomes. The more successful the service provider, the
more money it makes.
Element
7: Relationship Management
A relationship management
structure creates joint policies that emphasize the importance of building
collaborative working relationships, attitudes and behaviors. The overarching
principle is for the parties to manage the business-rather than the buyer managing
the service provider.
Element
8: Transformation Management
This is a new relationship
model-personnel and company ecosystems are changing. The parties are doing
things differently and probably not operating in familiar comfort zones.
Managing this transformation, including transitioning from old to new-along
with change management once the new agreement is up and running-is often
difficult and complex to implement. Preserve as much continuity as possible
among personnel and teams as the transition progresses into day-to-day
implementation and operation. The focus here is on end-to-end business metrics,
mutual accountability and the creation of a culture that rewards innovation,
agility and continuous improvement.
Element
9: Exit Management
Sometimes the best plan
simply does not work out or is trumped by unexpected events. Business happens,
and companies should have a plan when assumptions change. An exit management
strategy provides a template to handle future unknowns.
Element
10: Special Concerns and External Requirements
The final element recognizes there
are often special requirements and regulatory protocols. For instance, in
supplier and supply chain relationships involving information technology and
intellectual property, security concerns may necessitate special governance
provisions outside the normal manufacturer-supplier relationship.
In sum, the 10 Elements will
guide you to a collaborative, long-term win-win Vested partnership.
Kate Vitasek is a faculty member at the University of Tennessee's Center for Executive
Education and is author of the popular book Vested
Outsourcing: Five Rules That Will Transform Outsourcing. She teamed with
Jacqui Crawford, Jeanette Nyden and Katherine Kawamoto to write The Vested Outsourcing Manual. Both
books are published by Palgrave Macmillan on June 21st.
[1] Ian R Macneil, Contracts:
Instruments for Social Cooperation (Hackensack, NJ: F. B.
Rothman, 1968).
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