The catch occurs when service providers meet contractual obligations but find themselves limited in their ability to invest in the kinds of innovations that would make their customers loyal for the long haul. In addition, they fear those customers will latch onto their ideas and then bid out the work to others, leaving the service provider(s) high and dry.

This might be acceptable perhaps if buyers were making the investments, but buyers counter that they shouldn’t make investments in non-core areas. That’s why they are outsourcing.

Catch 22 right?

The root of the problem resides in the conventional, transaction-based business model and old school procurement practices that inhibit real collaboration, innovation and value sharing. Under the transaction-based model, service providers—and this is not just prevalent in the IT arena—are stuck in an activity trap: more activity means more revenue and thus more profit. There’s no real incentive to add value if it means less revenue.

There are flaws also on the customer/buyer side. Many IT executives for example insist they need a strategic partner—that’s a good thought that gets lost once the reality of the pocketbook and old-style procurement processes enter the picture.

The Vested solution to this conundrum is to move away from transaction-based models, especially for complex business relationships. A better approach is to treat the service provider as a strategic partner, basically as an extension of the company.

Sounds good, but is this possible?

Look no further than Dell and GENCO ATC, the largest reverse logistics provider in the U.S. The companies transformed a long-term transaction-based outsourcing relationship that was in danger of failing into a Vested partnership based on continuous innovation, collaboration and trust.

The Dell-GENCO ATC story is featured in the upcoming revised and expanded second edition of Vested Outsourcing: Five Rules That Will Transform Outsourcing.

There is lots to say about how the Dell-GENCO ATC transformation happened but I’ll close by noting that within six months of entering into a Vested agreement 15 months ago, the companies have derived more than $5 million in tangible benefits.

That’s a great way for companies to resolve the transaction-based Catch 22—together.

Image: Catch 22 by Evil August via Flickr CC

Online article published on June 3, 2013 by GSC President Diana d’Ambra.

The Global Sourcing Council’s board strongly believes in continuing support and education of our 3S Awards winners.  As part of this effort, through the generosity of the University of Tennessee’s Vested Outsourcing program, winners of the awards were offered a three day executive education course on this topic, for which the University of Tennessee is not only a thought leader, but world famous.

This year, a winner of a 3S Award for Empowered Woman, Ajay Chaturvedi, founder of HarVa, attended the three day highly course along with the president of the GSC, Diana d’Ambra…

Here’s the link to the entire piece: http://gscouncil.org/vested/

May column by Kate Vitasek in Outsource Magazine

 This month’s blog honours best-selling author Cynthia Barton Rabe, author of The Innovation Killer. Tragically, Rabe passed away in 2011, killed by a hit and run driver at age 47—just five years after her revolutionary book on innovation was published…

Here’s the link: http://outsourcemagazine.co.uk/cynthia-rabe-innovation-and-zero-gravity-thinkers/

Why? Because the State of Minnesota and then Gov. Tim Pawlenty faced a similar, but much graver crisis after the collapse of the I-35W St. Anthony Falls Bridge, which killed 13 people and injured 145. The entire bridge had to be replaced—quickly—to get a major interstate artery across the Mississippi back up. And like WSDOT, this bridge replacement was an unexpected cost, so cost control was important.

The catastrophic bridge failure resulted in immediate monetary consequences for the state of Minnesota. The Minnesota Department of Transportation (MnDOT) Office of Investment Management estimated the daily cost to motorists at $400,000. The State Department of Economic Development estimated an additional net economic impact of $113,000 daily. And the Minneapolis Chamber of Commerce claimed the daily cost to business exceeded half a million dollars.

Gov. Pawlenty challenged MnDOT to complete a replacement bridge within 18 months. Considering it typically takes that long (or longer) just to identify the scope of a project the size of the I-35W Bridge, MnDOT approached the rebuild in a radically different way. MnDOT decided to employ a rarely used law (Minnesota Statute §161.3410) that granted authority to use a best value approach versus the conventional cost-plus lowest bid approach. This opened the door for MnDOT to follow the Vested business model for the procurement and management of the bridge replacement.

MnDOT selected Flatiron Manson a joint venture between Flatiron Constructors, Inc. and Manson Construction Company, as the contractor and architect Linda Figg of Figg Engineering. (If the name sounds familiar is it because Manson is the same construction provider that is currently doing the 520 bridge rebuild that has been plagued with problems.)

The teams used a framework that fits neatly into Vested’s Five Rules to ensure flexibility, accountability, quality, communication, incentives and safety throughout daily activity.

As it turned out, the Governor was slightly off: it took less than 14 months to rebuild the I-35 span; the 10-lane 504-foot bridge opened to traffic in September, 2008.

Incentives played a key role in getting the project done below both the original monetary and time estimates. Pricing a project the size of the I-35 bridge project can be contentious. MnDOT and Flatiron Manson used a Vested shared risk/shared reward philosophy. As a base, the agreement relied on a firm fixed-price base contract of $233.8 million. The fee represented MnDOT’s maximum cost liability and the only guaranteed payment for the contractor.

A key incentive for Flatiron Manson was speed because time was money. A “cost” of $200,000 per day was assigned for project duration. If the bridge opened prior to deadline, Flatiron Manson would earn $200,000 for each day saved. If the project exceeded the deadline, $200,000 per day would be deducted from Flatiron’s earnings. Flatiron Manson was willing to accept the risk because it was confident its professional experience would prevail to earn incentives and increase profit. The incentives prompted the firm to work around the clock, which meant good jobs and extra pay for workers. As long as safety and quality remained high, it was a win for everyone.

More opportunities for bonus payments and incentives were available in areas of quality, safety, and exceeding expectations. As Flatiron Manson achieved cost savings, they shared in the savings as long as they came under the agreed upon $234 million.

The result? The job was finished 90 days ahead of schedule, earning a Flatiron Manson $25 million in incentive payments, or 92 percent of the incentive pool.

Now the I-5 Skagit River bridge collapse is nowhere near the scale of what happened in Minnesota. It’s a small bridge in a rural area of Washington, and a small section of it went down after a truck hit a steel beam. Still, an estimated 77,000 vehicles cross the bridge each day and I-5 is the major corridor for north-south traffic in the Pacific Northwest.

Initial estimates reported in the Seattle Times said there were three injuries and that it would take several weeks for a temporary fix, and probably much longer for the permanent repair of the bridge.

“We Washingtonians are going to have to do what we do best, which is to hold together, to show strength of character and a good deal of patience,” Gov. Jay Inslee said in a late-night news conference at the scene.

“We will be involved in a vigorous and diligent effort to get traffic flowing again through the Skagit bridge corridor and I will issue an emergency proclamation to make sure we have the resources to do so as quickly as possible.”

That’s a good start, but I challenge the Governor to take a lesson from the Minnesota experience, and quickly adopt the same Vested approach that was used so successfully in Minnesota.

I urge the Gov. Inslee and WSDOT to read more about the I-35 story as featured in Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships.   

See “Vested For Success: Minnesota Turns 1-35 Bridge Tragedy into Triumph” for an excerpt of the case study. I’ll be happy to share our longer and more formal teaching case study with anyone that is involved with the State of Washington’s bridge rebuild. If anyone knows Governor Inslee – let him know; I’d be delighted to take his call!

Let’s do this!

Image: Skagit River Bridge_5_23_2013 by roswellsgirl via Flickr cc

Online commentary by Kate Vitasek in InformationWeek Global CIO.

Customers and suppliers say they value innovation, but most outsourcing relationships end up becoming a race to the bottom. In “vested” outsourcing deals, both parties are vested in each other’s success.

Here’s the  link to the entire column: http://www.informationweek.com/global-cio/interviews/vested-it-outsourcing-deals-avert-a-catc/240155037

Both Nonacs and the students learned important lessons about Game Theory and the value of cooperation when he decided to, in effect, “flip the test”—in this case a Game Theory exam—away from the conventional win-lose mindset to achieving a win-win for the entire group.

If you are a student of Vested, you probably won’t be surprised to learn that this classroom approach to classic Game Theory once again validated a basic Vested tenet—that collaborating for a true win-win results in the best possible outcome for everyone involved.

Nonacs recounted his experiment in an article in Zocalo Public Square, “Why I Let My Students Cheat on Their Exam.” It was also republished in Popular Science.

Briefly, here’s what happened, as recounted by Nonacs: “A week before the test, I told my class that the Game Theory exam would be insanely hard—far harder than any that had established my rep as a hard prof. But as recompense, for this one time only, students could cheat.” They could do anything they wanted short of violating state or federal law to get the correct answer.

Nonacs continues: “Once the shock wore off, they got sophisticated. In [the] discussion section, they speculated, organized, and plotted.” They wondered about the test’s payoff matrix and whether cooperation would be rewarded or counter-productive. What size group would work better, and how much reciprocity would be required in order to share benefits?

“In short, the students spent the entire week living Game Theory. It transformed a class where many did not even speak to each other into a coherent whole focused on a single task—beating their crazy professor’s nefarious scheme.”

Ah yes, my take is that Nonacs is definitely not crazy, but rather sly like a fox.

There was single question for the students to answer on the day of the hour-long test: “If evolution through natural selection is a game, what are the players, teams, rules, objectives, and outcomes?” Wow, a real toughie!

But what happened next was remarkable—in Vested parlance the vast majority of the class got organized, divided tasks and…pulled together on the same end of the rope. Eventually the majority decided to share one set of answers; individuals took turns writing paragraphs, and they all signed an author sheet to share the common grade. Only three of the 27 students opted out.

“In the end, the students learned what social insects like ants and termites have known for hundreds of millions of years,” Nonacs said. “To win at some games, cooperation is better than competition. Unity that arises through a diversity of opinion is stronger than any solitary competitor.”

But that was not the end of the lesson, though it could have been. Nonacs added this sly twist: two days after the test was graded but not as yet returned, he gave the students two options. “Option A: They could get the test back and have it count toward their final grade. Option B: I would—sight unseen—shred the entire test. Poof, the grade would disappear as if it had never happened. But Option B meant they would never see their results; they would never know if their answers were correct.”

The students had to make their decision immediately—they chose unanimously to keep the test. “Once again, the unity that arose through a diversity of opinion was right.”

Nonacs says the shared grade for the majority was 20 percent higher than the averages on his previous, more normal, midterms. Among the three who opted out of this game, one scored higher than the majority, one about the same, and one scored lower.

So is the takeaway here that cheating is good? Well, no; by conventional test-taking standards they did cheat, but is it really “cheating” if the professor says you can?

What really happened was that the students changed their mindset from getting a better grade than their classmates (win-lose transaction) to working together to get the best answer (win-win outcome).

They lived Game Theory and Vested for a week but learned a life-long lesson: the value of what’s-in-it-for-we!

Image: UCLA byDonnaGrayson via Flickr CC

Christensen talks about this new dilemma in a recent interview in Wired by Jeff Howe, in a Huffington Post article by Diane Francis and in a video presentation he gave earlier this year at the University of Virginia School of Law.

As with the invention of the PC or the Internet or mini steel mill, current economic conditions are transformative and require recalibration and re-framing of strategies, policies and political judgment. Christensen calls this the “capitalist’s dilemma” and says that the relatively jobless economic recovery in the U.S. and elsewhere is the new normal, and thus presents serious political and social consequences.

The Innovator’s Dilemma pointed to a fatal flaw in business logic. Companies focus on things that have made them successful because that is where the money is. They are often blind or resistant to new ideas and innovations because it disrupts the status quo. That of course is a major problem in the outsource arena and same idea applies for capitalism and the global economy.

The Capitalist’s Dilemma looks at what Christensen describes as the current economic paradox: economic metrics that appear healthy, especially company balance sheets—but why aren’t things going better? Why is the global economic recovery going so slowly and perhaps in danger of falling back into recession? Is it a severe and massive case of failing to agree on clearly defined and measurable outcomes (Rule #3) while focusing too much on transactions (Rule #1)? Maybe so.

Christensen says, “There just is something fundamental that has gone wrong with our economy.” There’s too much focus on creating and building capital and not nearly enough on using—maybe risking is the better word—that capital to empower innovation. (The UVa video is more than 50 minutes long but I heartily recommend it—it is fascinating and well worth the time investment.)

He explained it this way in the Wired interview: “It looks like the economy is emerging from the recession in an exciting way, but we’re not creating more jobs or income for the average person. And in all humility, I think I have articulated a simple model that explains why. The bad actors are business school professors like me who have been teaching people what I call the Doctrine of New Finance. We’ve encouraged managers to measure profitability based on a return on net assets, or return on capital employed.

“That encourages companies to liberate their capital, so they invest in efficiency innovations, which means they can make more money with fewer resources.”

There are three types of “innovation capital,” he says: Disruptive or empowering innovations; sustaining innovations; and efficiency innovations. The first, empowerment innovation, is transformative and creates new jobs. The second—sustaining innovations—doesn’t “create new jobs, they make good products better,” and the third, efficiency innovations, make products more affordable while at the same time reducing employment.

“What the economy ultimately needs are empowering innovations—like the Model T, the transistor radio,” he says. “Empowering innovations require long-term investments, which tie up capital for years and years. [Instead] companies are using capital to create more capital, and consequently the world is awash in capital but the innovations we need to advance aren’t there.” And even if there is robust growth, “there won’t be job creation.”

This is really exciting—the idea of empowering innovation and putting capital investment to work for innovation, rather than simply creating more capital to line business’ coffers is right in the Vested sweet spot.

That’s because Vested ultimately is about disruption of the old ways, business transformation and collaborative innovation that takes a calculated risk to empower everyone.

Image: Sixth Americas Competitiveness Forum by OEA-OAS via Flickr CC

The subtitle of the book is revealing: When New Technologies Cause Great Firms to Fail. His book was a bestseller in 1997 and received the Global Business Book Award for the best business book of the year. I’ve been a fan of Christensen for some time and his innovative ideas about innovation are an important element of Vested. What is prompting me to write about him now is a recent interview with Christensen in Wired by Jeff Howe.

Christensen explains in the interview that big companies often fail not because they do something wrong, but because they do everything right. Maybe a bit too right, and a bit too cautious. Yes, it is counterintuitive, but The article explains companies are “trained to focus on what he calls sustaining innovations—innovations at the profitable, high end of the market, making things incrementally bigger, more powerful, and more efficient. The problem is that this leaves companies vulnerable to the disruptive innovations that emerge in the murky, low-margin bottom of the market. And this is where the true revolutions occur, creating new markets and wreaking havoc within industries.”

The Innovator’s Dilemma points to a fatal flaw in business logic. Companies focus on things that have made them successful because that is where the money resides. They are often blind or resistant to new ideas and innovations because it disrupts the status quo.

I think it is important for companies and service providers to realize that it’s only a matter of time before disruptive innovation takes hold in the world of outsourcing. The outsource business model is ripe for a major transformation in innovation, and in the way we think about long-term thinking and innovative investment.

I’ve been preaching—and teaching!—for some time now that the outsourcing business is model is broke: when gainsharing is the first thing that companies think about when the subject of innovation comes up, that’s a huge problem. And when companies can’t dig themselves out of the old transaction-based mindset and model—which stifles both efficiency and innovation—that’s another huge problem!

The Vested model embraces the Chrstensen’s idea of disruptive innovation because of collaboration and results based on sharing vale and achieving outcomes; it relegates bean-counted transactions to the dustbin. Simply put Vested, is well, a disruption that is well-overdue in the outsourcing industry.

And that’s why I’m excited to see what Christensen has say to in his upcoming book, The Capitalist’s Dilemma, which will look at what he calls the “current economic paradox”: economic metrics that look fine, especially company balance sheets, while the economy remains mired in the doldrums for small companies and the average worker.

I’ll explore Christensen’s new book a little further next time.

Kate Vitasek’s latest Outsource Magazine column published April 18, 2013.

Here’s the link: http://outsourcemagazine.co.uk/michael-porter-the-shared-value-path/