Vested Outsourcing: The ‘Mind Shift’ is Finally Happening

Back in April 2009, I took a 2.5-day course on Vested Outsourcing (called “Performance-Based Outsourcing” at the time) at the University of Tennessee. Halfway through the course, I shared some of my key takeaways, including this one:

Implementing Vested Outsourcing “the right way” takes a lot of work and discipline, and it requires 3PLs [third party logistics providers] and customers to make a clean break from the way they’ve always done things. It’s a mind shift that will be difficult (if not impossible) for many 3PLs and customers.

After almost four years, it seems like the mind shift is finally happening — and gaining momentum. In the past six months, for example, two different 3PLs have told me that customers have come to them interested in forming a Vested relationship.

(If you are not familiar with Vested Outsourcing, check out the website, as well as some of our writings about it, including “Et tu, Apple?” and “Vested Outsourcing: Gain Sharing in a New Dress?.” Needless to say, I am a big proponent of Vested).

Why the uptick in interest and momentum? Part of the reason, I believe, is that early adopters of Vested are starting to share their stories. Some of the best case studies are included in Vested: How P&G, McDonald’s, and Microsoft are Redefining Winning in Business Relationships by Kate Vitasek and Karl Manrodt (Palgrave Macmillan, September 2012). This is the third book in the series, which takes the Vested Five Rules outlined in the first book and grounds them in real world examples, including both large and small companies, as well as government agencies and nonprofits.

You’ll have to read the book, which I highly recommend, to get all of the details about each of the case studies. But here are some of my takeaways:

The desire for transformation is a key driving force for exploring a Vested business relationship. In other words, the companies and organizations profiled in the book were looking to truly transform the status quo and reach a higher level of performance and results, rather than just transferring a business function to a third party because it wasn’t a “core competency” for them. Here is an excerpt from the Microsoft case study:

Microsoft recognized that it needed an unconventional approach that was not simply about outsourcing the work but about outsourcing the transformation of the work.

Hawkes [Microsoft’s finance operations general manager and controller at the time] explained the strategy. “Microsoft wanted more than simply shifting our ‘mess for less’; we wanted an outsourcing business model where we could ‘lift and shift’ existing operations to a service provider who would then as quickly as possible determine a clear and accurate baseline which they would be expected to improve with Microsoft. The service provider would then be highly compensated for achieving transformational results.”

Understand the difference between a “price” and a “pricing model,” and the importance of building flexibility into an agreement. There’s a lot of detail behind this point, but the bottom line is that in traditional agreements, prices are set based on current realities and underlying assumptions about the future. But we all know that the future never unfolds as expected; things occur in business that are often unexpected or unpredictable, which can shift demand, supply, and costs in the opposite direction of what was originally forecasted. The authors cite the work of Dr. Oliver E. Williamson, the Nobel laureate economist, who wrote that “all complex agreements will be incomplete — there will be gaps, errors, omissions and the like.” Simply put, since it’s impossible to account for every future scenario in an agreement, you need a mechanism to adjust the agreement in response to new realities.

If you don’t invest in governance, everything else is wasted. “Governance may be the last of the Vested Five Rules, but it is perhaps the most important,” write the authors. “Following the first four rules helps you get to a good agreement — but you have to manage it. If you do not manage it well, the consequences are costly.” As the chapter on McDonald’s illustrates, governance is McDonald’s “secret sauce” for its supply chain success.

Are you interested in learning more? Do you have some questions or comments about Vested? Then you’re in luck! I am hosting a live video conversation with Kate Vitasek and Karl Manrodt tomorrow (Thursday, January 10) at 12:00 ET. Bring your questions and comments and join the conversation. Here are some of the topics I plan to discuss with Kate and Karl:

  • What is the difference between a price and a pricing model, and why is understanding the difference important? What are the attributes of a good pricing model?
  • Why does governance slip through the cracks so often? What are the attributes of a good governance framework?
  • How do you know if you’re ready (or have the right mindset and skills) for a Vested partnership? How do you know if an existing (or maybe a new) relationship is a good candidate to take a Vested approach?

I hope to see you tomorrow. If you can’t make it, then post a comment below and share your questions and viewpoints.

[Update: You can watch a replay of Adrian’s conversation with Kate and Karl at Talking Logistics].