Buying the Outcome, Not the Transaction

A cornerstone of the commitment to Vested Outsourcing is the idea of buying outcomes rather than transactions.

If you are only interested in filling some seats as cheaply as possible or in basing a contract only on the number of touches involved in a certain operation, then the vested approach is probably not for you.

But then you may also be overlooking a great opportunity to maximize your investment in outsourcing. Also, if you’re dissatisfied or feel something is lacking in your conventional transaction-based outsource arrangement, then consider a shift in your approach to outsourcing.

Indeed the first rule of Vested Outsourcing instructs us to ‘Focus on Outcomes, Not Transactions’: Under the transaction-based model, the service provider is paid for every transaction, whether needed or not. In and outcomes-based arrangement, there is agreement upfront on desired results. Rule 2, ‘Focus on the What, Not the How’ directly follows on the first rule: It’s not about changing the basic nature of the work to be performed; what does change is the way that the outsourcing company purchases the services. The stress changes to buying desired outcomes, not individual transactions.

This shift in thinking is revolutionary as well as evolutionary, but it’s catching on.

A recent OutsourcingCenter article by Kathleen Goolsby talks about “What Companies Need to Understand about Switching to Outcome-Based Approaches in Outsourcing.” In it Don Schulman, IBM’s General Manager of Finance and Administration was quoted saying that over the next five years the first change that will impact outsourcing will be a focus on outcomes-based pricing models. “Focusing on clients’ end-to-end processes,” he said, “the discussion moves to outcomes pretty fast when considering the advantage of an outsourcer doing a client’s work. Over the next five years, this will become a critical differentiator in the way clients and providers work together.”

Other experts quoted in the article agreed. Mohammed Haque, VP and Head of Enterprise Solutions Service practice at Genpact, said that about 90-95 percent of outsourcing arrangements remain based on time and materials or a fixed fee while only 5 percent are tied to outcome-based pricing. But he predicted that, within the next five years, 40-50 percent of the contracts will be outcome-based.

That sounds like the next big thing to me. But why this big jump? What will enable this shift to get beyond the issues of trust, commitment, and service provider risk assumption that have inhibited the growth of outcome-based outsourcing?

The OutsourcingCenter article says outsourcing “is now evolving beyond savings through labor arbitrage and focusing on new and different ways to create value, including synergies between functions as key drivers of value.” In other words a company with high fixed costs cannot wring significant savings through labor arbitrage. The value that comes from the outcomes-based approach depends on transformation through innovations, i.e., new value creation that a service provider can bring to the table.

That necessarily implies a deeper level of trust, collaboration and partnership between company and service provider, a vested relationship if you will.

So why wait? Change your outlook by changing your focus to the desired outcome.

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