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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