“I don’t want you to be more efficient. You’re working on a government contract and billing by the hour.”
That in a nutshell is the Activity Trap. But it’s not just applicable to government contracts. I see this all the time in outsourcing deals.
Many companies that purchase outsourced services use a transaction-based model. The service provider is paid for every transaction—whether it is needed or not. The more transactions performed, the more money they make, and under a strictly transaction-based model there is no incentive for the service provider to reduce the number of non–value-added transactions, because doing that results in lower revenue.
As illustrated in the Dilbert carton, inefficiency is rewarded with more revenue: the more inefficient the entire support process, the more money the service provider can make.
Perverse incentives are also a major factor in the activity trap. In my book Vested Outsourcing: Five Rules That Will Transform Outsourcing, which outlines 10 Ailments that can plague outsourcing agreements, I relate how 19th-century paleontologists traveling to China used to pay peasants for each fragment of dinosaur bone (or dinosaur fossils) that they found. They later discovered that peasants dug up the bones and then smashed them into smaller bits to maximize their payments.
Inherent in the activity trap is a disincentive to try to drive down transactions or to innovate.
A good example of the Activity Trap comes from outsourced manufacturing. A contract manufacturer performed final kitting and assembly pack-out as a value-added service for an original equipment manufacturer customer that designed consumer electronics. The customer had given the contract manufacturer the bill of materials with detailed instructions to use a specific finished goods “pretty box.” This full-color, high-quality box was meant to serve as a kit to hold all of the various components for a particular device, including the manual, cables, charger, and so on. The contractor needed to assemble the box and then insert the parts properly. Building the box required the contractor to have 12 “touches.” The contractor charged a flat fee per touch to assemble the box carton, plus a fee of one touch for each item placed in the kit. The contractor knew that the particular box design was not efficient but simply did what it was told rather than suggesting solutions for an improved box design that might eliminate the unnecessary.
That type of perverse incentive is eliminated in a Vested Outsourcing partnership, which goes beyond SOWs and transaction-counting to a collaborative, innovative and performance-based relationship between company and service provider that’s designed to achieve the most efficient results.
The recently published Vested Outsourcing Manual is a step-by-step guide to crafting and implementing a Vested partnership and trumping the thinking of Dilbert’s pointy-haired boss.