Rule# 1 Focus on Outcomes, Not Transactions

Any Vested relationship flourishes best in a culture in which participants work together to ensure their mutual success. In essence, Vested buys desired outcomes, not individual transactions. The service provider is paid based on its ability to achieve the mutually agreed desired outcomes.

Success in Vested requires engagement of Five Rules. Here we examine the first of those Five Rules: Focus on Outcomes, Not Transactions.

Many conventional outsourcing arrangements are transactional, or transaction-based. Most often this transaction-based model is coupled with a cost-plus or a competitively bid fixed-price-per-transaction pricing model to ensure the company buying the services is getting the lowest cost per transaction unit. The service provider is paid for every transaction whether it is needed or not. This can create a perverse situation: The more inefficient the entire process, the more money the service provider can make.

This model can achieve the lowest cost per transaction for the company outsourcing but often does not address what is really wanted or needed. The company that has outsourced “on the cheap” gets only what it contracted for; perhaps that is not the best solution. Vested operates under a collaborative, desired outcomes-based model, with the emphasis on having the outsource provider align its interests with what the company really wants: an efficient and low-cost total support solution.

A Vested Outsourcing business model fundamentally shifts the way a company buys services to a performance-based approach. The concept of Vested Outsourcing is fairly straightforward: Instead of paying a outsource provider for each service unit transaction, such  as warehousing, transportation, spare parts, repairs, or hours of technical support, the company and its service provider agree on desired outcomes. Desired outcomes are still quantifiable but take a different form; they can encompass availability, reliability, cost, revenue generation, employee or customer satisfaction, or even asset investment targets. In essence, Vested Outsourcing buys desired outcomes, not individual transactions. The service provider is paid based on its ability to achieve the mutually agreed desired outcomes.

Adopting a Vested Outsourcing business model does not change the nature of the work to be performed. At the operational level, lines of code must be written, bathrooms must be cleaned, orders must be fulfilled, repairs must be completed, calls must be answered, and meals must be cooked. What does change is the way that the outsourcing company purchases the services.

We believe there is a need to change dramatically the way companies approach commercial agreements that require more than the most basic transactions.  Because existing contract structures often are not up to the job, companies should do more of the following things before beginning to write commercial agreements.

These include:

  • Alignment of Shared Intentions
  • Relationship Mapping
  • Early Engagement
  • Right View, Right Conduct
  • Interpersonal Competence
  •  Statements of Intent
  • Minimal Tier Leadership

 

Consider information technology outsourcing arrangements. Under a conventional contract, the company outsourcing would specify the hardware to use and possibly even the number and skills of help desk personnel. This scenario diminishes the outsource provider’s role as the expert. The service provider is the one that is constantly in the marketplace and keeping tabs on the latest developments. Its experts certainly will know of the most appropriate hardware for a given task, and they may even know of process or system efficiencies that allow them to do the task with less labor than non-IT firms. Performance partnerships let each firm do what it does best. Unless the company that is outsourcing has the skills and the resources to keep up with the latest innovations in the service it is outsourcing, it should leave the details to the experts.

Collaboration lies at the heart of Vested Outsourcing because, to be successful, a service provider often becomes responsible for more services and has to work with other service providers.

Following Rule #1 prevents The Activity Trap and The Power of Not Doing ailments

Read More! Move on to Rule #2 Focus on the What, Not the How

Comments

  1. Looking for more thoughts around the outsourcing topic

  2. Kate VItasek says:

    Eric,

    thanks for your post. The best resource is actually the Vested Outsourcing website – with articles under Media / In the News and white papers under resources. Definitely read Unpacking Oliver. And if you buy logistics and transportation read Unpacking Transportation Pricing.

    The DOD has some great info – but much of the thinking is tied to coupling performance-based thinking to buying on weapon systems (they call it Performance-Based Logistics in the DOD). Some of the consulting firms have some salesware – but it’s not as educational as the Vested Outsourcing book and white papers we are publishing. I”d love for ANYONE in this group to continue to post articles that are on topic for Vested Outsourcing so we can all share from the wisdom of each other. Of course – feel free to email me directly if you have questions. kvitasek@utk.edu

    Best regards.

    kate

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