Last week I attended Lehigh University's Center for Value Chain Research Fall Symposium.   It was an intimate sold out crowd of 200 supply chain experts from 80 major corporations including: Air Products, Boeing, C&S Wholesale Grocers, Dresser-Rand, Hershey's, HP, IBM, J&J, Mars, Merck, Penske, Sony, and the Global Trade Best Practices Org.  The title of the Symposium was, Ensuring that your Supply Chain Provides a Competitive Advantage.

One of the interesting presentations was given by Kate Vitasek, an experienced professional and founder of Vested Outsourcing, a fundamental business model paradigm shift of how outsourcing is done.  Ms. Vitasek, and the University of Tennessee, received a $25MM research award from the DoD (Department of Defense) to study outsourced weapons systems.  After four years of research and working with over 20 companies on outsourcing, the result is a business process that Ms. Vitasek termed ‘Vested Outsourcing'.

Vested Outsourcing means, "Optimizing for innovation and improved service, reduced cost to company outsourcing, and improved profits to outsource provider."

What was that third part?  Improved profits for the outsourced provider?  Can you imagine going into a meeting at Wal-Mart and telling Mike Duke that you are here today because you would like to improve your outsourcing service profit margin from 20 to 30%.  He would tell you, as he is pushing you out the door that "Wal-Mart's motto is to cut out the middle man, and his profit margin, and go direct.  That is why we don't outsource anything here at Wal-Mart". 

And you would reply, "Not so fast Mike, I got a pony for you and Kate Vitasek says that collaboration is a win-win."

"Security!" would be Mike's reply.

Now I'm writing this tongue in cheek, but what Ms. Vitasek might tell Mike Duke, CEO of Wal-mart, is this:

"Mike I appreciate the mission statement that has brought Wal-Mart to the number one corporate position but expertise exists outside of Wal-Mart, that can handle some of your non-core business processes more efficiently than you can even with a healthy margin.  Furthermore, I can help you structure an agreement, in which your outsourcer puts some skin in the game, so that you will attain a {insert specified business value here} that will make your company more agile and competitive while taking risks out of your supply chain."

Kate Vitasek has her presentation online as a booklet (link below).  She begins with the 10 most common outsourcing mistakes.  Which a couple of these are common and what you would expect to see, like outsourcing for a quick fix or a short term savings.  But most are not as obvious.  As I was reading through the booklet today, I was reminded of many clients and prospects that I have met with for outsourcing services.   I wish this booklet came out a few years earlier. 

Some of the common mistakes include putting together a perfect statement of work on how to do the work.  Another is structuring the deal around the transactional component of the outsourcing agreement rather than the resulting value of efficiencies gained by the outsourced agreement.  Have you ever put an outsourcing agreement in place that does not address how you will monitor the success of the program?  Have you ever put an agreement in place without a clear understanding of the definition of success?  This is an ailment Ms. Vitsek calls Driving Blind Disease.  According to the Aberdeen Group, assuring that negotiated savings are actually realized on the bottom line is one of the biggest challenges in organizations today.  The term "savings leakage" is used to refer to the difference between the savings that were identified, and the actual savings that were achieved.

Kate recommends for companies to utilize new technology that places scorecards and dashboards to "keep score" of how the outsourcer is performing.  I bet the readers of this blog know a couple of scorecard/dashboard services to recommend.

{From the Vested Outsourcing booklet}

The heart of Vested Outsourcing contract is an agreement on desired outcomes, which explicitly state the results on which both companies will base their outsource contract.

A Vested Outsourcing agreement clearly defines financial penalties or rewards for not meeting or exceeding agreed upon desired outcomes.  In an 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 (achieves results), they receive a bonus. It is important to understand Vested Outsourcing is NOT gainsharing. The manner in which Vested Outsourcing agreements work is outlined in more detail later.

At the heart of a Vested Outsourcing agreement is a true win-win mentality between the company outsourcing and it's outsource provider. Deeply wedded to this philosophy are the following five major rules:

1. Outcome-Based vs. Transaction-Based Business Model

2. Focuses on the WHAT not the HOW

3. Clearly Defined and Measurable Desired Outcomes

4. Pricing Model Incentives are Optimized for Cost/Service Tradeoffs

5. Insight, vs. Oversight governance structure

While many organization 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 when we are ingrained with "winning" from early childhood and most business schools and law schools focus on "winning". Procurement and sales professionals are trained in the art of negations to help them "win"

.

The very word partner implies that there are two sides. The progression towards a Vested Outsourcing agreement should focus on creating a culture where 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, as we discussed earlier in avoiding the Zero-Sum Game. This is what we call a What's in it For We (WIIFWe) philosophy.

{End of booklet insert}

In a global business environment, competitive advantage has to do more with the entire supply chain partnership than the unique abilities of one's company.  The GTBP.org blog is focused on supply chain information which includes topics on transparency, key performance metric monitoring, forecasting abilities, and outsourcing business processes.  While reading the Vested Outsourcing booklet, two thoughts came to mind that apply to my EDI/XML supply chain background.  One, why would any company run their own EDI software at the company level?  With so many common business processes, a network level outsourced service provider, who already is performing the same business processes with the added value of built-in performance dashboards, could easily reach ‘The Pony'.  Oh, now what is the Pony?  The pony refers to the value that is derived from the executed vested outsourced model.  The pony would be the center triangle of the image included above.

The second has to do with Rule #3: Clearly Defined and Measurable Desired Outcomes.  Rule three mentions the outsourcing shift from transaction based pricing/service models to value delivered models.  How many companies are still paying their VAN or EDI Outsourcer by the kilocharacter?  Isn't the value of the client outsourcing the service, to enable electronic supply chain relationships with all of their trading partners?  The benefits are more visibility, transparency, and real-time information for a competitive advantage via supply chain information.   The marginal cost to the outsourcer for a kilocharacter of data is nominal in comparison to other business costs.  But has anyone been presented with an offer for a flat-fee all you can eat VAN or EDI/Supply chain information presentation?  Many companies use direct AS2 Internet protocols with high volume trading partners to avoid the KC VAN charges.  The VANs lose this business and the positioning as the one outsourced supply chain hub for the client.  I believe that the VANs (GXS, Sterling and Inovis), need to change their revenue model or someone else might do it for their clients.  Messieurs Segert, Irwin, and Feeney, can we expect this in 2010?

At a time when companies are actively looking to outsource non-core competencies, this is a must read for both the outsourcing company and the outsourcer.  Well, for those who want a competitive edge.  At a minimum it is an interesting read that might inspire new ideas on how you approach outsourcing agreements.

Get Kate's Vested Outsourcing Booklet here

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