Equity Shares and Vested Outsourcing

Is equity sharing a good strategy to build a long-term, collaboration between companies and vendors? And how well does it fit into the Vested Outsourcing model?

A recent Bloomberg Businessweek article about the electronics company Vizio prompts those questions, and the simple answers are that it depends, but probably not. What seems like a straightforward approach – money talks, nobody walks – actually can get quite complicated, especially when it comes to supply chains.

Equity sharing creates an ownership relationship that goes beyond a simple or even a vested approach.

You’ve probably seen the Vizio brand of flat-screen televisions and monitors at the local Costco, Wal-Mart or other discount retail outlets. According to the article, it has become a brand “to be reckoned with” in a very short period of time. It was founded only seven years ago but the Irvine, CA company recently passed Sony as the second-largest TV brand in the United States and is hard on the heels of Samsung.

William Wang, the Vizio chief executive and founder, started the company with $600,000, no engineers and no factories, but leveraged relationships with Asia manufacturers to get into the U.S. market. His strategy included low-pricing – as much as one-third lower for an HDTV than a Sony or Panasonic set.

The article by Businesweek’s Cliff Edwards says: “Wang says what made his low-price approach work was recognizing that TVs are following the path of PCs, and that he needed to become a Michael Dell-like master of his supply chain. Wang went further than just securing good prices for parts and shipping. He offered two huge Taiwanese contract manufacturers, Foxconn and AmTRAN Technology, equity stakes in his company to ensure their attention. They bit.”

That meant Vizio could deliver loads of inexpensive sets to US retail shelves.

It’s no surprise to me that Vizio’s suppliers rose to the occasion once they were given equity shares. Equity shares are the ultimate way to create a supplier that has a vested, but one-dimensional interest in your success.

However, many companies are struggling with how to motivate suppliers to work on THEIR goals, while not creating a true alliance bound with equity or by creating their own separate entity.

Vested Outsourcing is a solution that can enable a company to still rely on outsourcing while changing the business model and economics to ensure suppliers have a vested interest in the success of the enterprise, such as market share in the case of what Vizio was doing and cost reductions.

It’s a more comprehensive approach. On page 15 of the Vested Outsourcing eBook, I talk about strategic sourcing and the three types of suppliers: Transactional, Preferred Supplier and Strategic Partnership, which flow in a sort of wave from routine-risk transactions to higher risk, more difficult strategic market alliances. Equity-sharing fits into that latter category.

Vested Outsourcing places a new level between preferred suppliers and strategic alliances – Performance Partnerships. This is more focused than a strategic alliance, and does not require as much operational infrastructure while taking the Preferred Supplier relationship to a whole new level.

No two Vested Outsourcing partnerships are alike of course. But the good ones do share certain elements. They achieve a performance partnership based on optimizing for innovation and improved service, reduced costs to the company outsourcing and improved profits to the outsource provider. The heart of a Vested Outsourcing contract is an agreement on desired outcomes that explicitly state the results on which the companies will base their outsource contract.

There’s much more brain power involved, much more need for trust and collaboration throughout the life of the contract than in a straight equity stake deal.

Equity-sharing could be an element perhaps because money does cut to the chase; it’s a powerful incentive to perform. It can also be messy and complicated and it can cut both ways in a risky, competitive and constantly changing market.

Using it to create a low-cost product delivered via a low-cost supply chain worked in the Vizio case, but ultimately it’s a one-dimensional partnership. I believe equity-sharing alone isn’t the best way to engender trust, collaboration and desired outcomes over the long haul.

It might be fine for a start-up trying to muscle some market share, but difficult to replicate or sustain in markets loaded with fierce competition and higher quality products.

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