What is wrong with the conventional approach to strategic business relationships?
The University of Tennessee's research revealed the transactional nature of the contracts keep buyers and suppliers at arm’s length. For example, buyers typically want to reduce their price and suppliers typically want to increase their revenue. This results in misaligned interest that leads to common perverse incentives which we call the Ailments.
While conventional contracts work well for simple relationships, they are not conducive to collaboration, innovation and sharing value, especially for complex, multi-dimensional business relationships.
What core tenets differentiate a Vested relationship from a conventional one?
- Focus on outcomes, not transactions
- Focus on the WHAT, not the HOW
- Agree on clearly defined and measurable outcomes
- Pricing model with incentives that optimize the business
- Insight versus oversight structure
The table below provides a comparison of the main differences between a Vested relationship and a conventional relationship.
Uses detailed statements of work, dictating the “how”
Measures success through many Service Level Agreements
Uses “prices,” paying service providers a price per transaction
Focuses on oversight to manage the supplier
Uses flexible Statements of Objectives, enabling the service provider to determine “how”
Measures success through a limited number of Desired Outcomes
Uses a jointly designed pricing model with incentives that optimize the overall business and fairly allocates risk/reward
Focuses on insight, using governance mechanisms to manage the business with the supplier
What is the Vested methodology?
The Vested methodology follows Five Rules and Ten Elements designed to take practitioners through the Vested implementation process in a coherent, coordinated and systematic way. The parties start by identifying the business attributes related to their sourcing business model and then go on to co-create a shared vision and the statement of intentions that will guide the partnership. The parties then co-create all aspects of the relationship which become embedded into their contract. If followed propertly, the parties create a win-win Vested Agreement where the parties have a shared interest in achieving mutually defined Desired Outcomes.
Five Rules/10 Elements of a Vested Agreement
Rule 1: Outcome-Based vs. Transaction-Based Business Model
- Element 1: Sourcing Business Model
- Element 2: Shared Vision / Statement of Intent
Rule 2: Focus on the WHAT, Not the HOW
- Element 3: Statement of Objectives & Workload Allocation (Scope)
Rule 3: Clearly Defined and Measurable Outcomes
- Element 4: Performance Measures
- Element 5: Performance Management
Rule 4: Pricing Model with Incentives That Optimize the Business
- Element 6: Pricing Model with Incentives
Rule 5: Insight vs. Oversight Governance Structure
- Element 7: Relationship Management
- Element 8: Transformation Management
- Element 9: Exit Management
- Element 10: Special Concerns and External Requirements
While The Vested Outsourcing Manual provides guidance for creating a Vested Agreement, we highly recommend enrolling in the Creating a Vested Agreement online course and working with a Vested Center of Excellence – especially for larger and more complex deals. The course provides the same step-by-step guidance as the Manual but includes a comprehensive Vested ToolkitTM and contact template to help organizations create a Vested Agreement. The course also comes with 8 hours of coaching support from a Vested Center of Excellence to help you kickstart your Vested journey. The course is taken by your Deal Architect team, with the team completing deliverables using the Toolkit to create deliverables that become the actual contract.
How does Vested work in practice?
The University of Tennessee’s Creating a Vested Agreement online course is designed to help organizations put the Vested theory into practice through a step-by-step implementation process that applies UT’s RealPlay® learning methodology with a comprehensive Vested Toolkit.TM.
This YouTube video shares how Intel and DHL applied the Vested Five Rules to their reverse logistics relationship. To learn more about how other real-world organizations are putting Vested into practice, visit our case study library. Download this PowerPoint presentation on how to implement Vested to learn more about how to put the Vested theory into practice.
Is Vested really a “new” concept?
University of Tennessee researchers did not "invent" Vested. Rather, the University of Tennessee studied some of the most progressive outsourcing relationships and codified their findings in Vested Outsourcing: Five Rules That Will Transform Outsourcing. Some of these relationships had been in place for over 50 years.
The University of Tennessee’s research is similar to what Jim Womack did in 1990 with Lean. Womack studied the Toyota Production System and other companies adopting the TPS philosophies. It was NOT new. Rather, the value Womack brought to thousands of companies is that he codified the TPS philosophies into layman’s terms that resonated better with practitioners. It was Womack's ability to bring sound concepts to practitioners that made Lean a popular concept. Before Womack's 1990 book, The Machine that Changed the World, very few companies had heard of or were applying the concepts.
The value of UT’s work is that researchers went through the academic rigor to validate best practice with a theoretical foundation. From there the University of Tennessee codified a set of rules and developed tools into a formal structured process (the Vested methodology) to help companies achieve true win-win relationships.
Great business relationships can and do rely on the Five Rules; they are NOT new. The problem is that today most companies ignore the rules or the recommended implementation methodology and as such suffer from many of the Ailments outlined in chapter 3 of Vested Outsourcing: Five Rules That Will Transform Outsourcing. The University of Tennessee offers free self-assessments to help you gauge how well you are applying the Vested Five Rules/10 Elements into your relationship.
Does “win-win” really work?
Unfortunately, many organizations still adhere to the mindset of “Nothing personal, it’s just business” when negotiating a business deal. Other have good intent but fall short of crafting a true win-win relationship that follows the Vested Five Rules. Either way, the parties end up with a zero-sum game with one party winning at the expense of the other. This is almost always compounded by a rigid “us vs them” transactional contract that leads to common Ailments that plague business relationships.
True win-win relationships do exist. The University of Tennessee research sought true unpack the secret sauce of true “win-win” relationships built on highly collaborative and mutually defined outcomes as part of their pioneering research. The book Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships shows that companies can find that elusive “win-win” by creating agreements designed to create and share value.
The partnerships profiled in the book (as well as those in our case study library) achieved not only results, but transformational, game-changing, award-winning results.
But while they seemed radical compared to most business relationships today, we realized these companies were actually leveraging Nobel Prize-winning concepts—from Nash’s equilibrium theory to Williamson’s transaction cost economics.
Following the Vested business model allows organizations to achieve their own elusive win-win through highly collaborative efforts.
Are industry organizations endorsing Vested?
To date we have over 100 endorsements from industry experts ranging from leaders of industry associations, executives from both companies outsourcing and service providers, consultants, analysts and academics. Three note-worthy endorsements come from the following industry pioneers:
Dawn Tiura, President and CEO, Sourcing Industry Group: “Kate has hit the nail on the head. The ‘rules’ while often spoken about have never been so clearly defined as they are here. The journey to a truly collaborative agreement is practically guaranteed if you follow the step-by-step process outlined in this great book.”
Tim Cummins, CEO, International Association for Contract and Commercial Management: “Vested Outsourcing offers a robust approach for developing high-performing strategic relationships.”
James Groton – renowed Arbitrator, Mediator, and Dispute Systems Designer: “As a lawyer who has spent his life having to examine the seamy underbelly of failed business relationships, I applaud the University of Tennessee’s Vested methodology for teaching a process that will help the parties deal constructively with unexpected events and problems – a given in today’s business world. It is a masterpiece of common sense.”
The International Association of Outsource Providers also endorses the Vested approach; the UT three-day Vested Outsourcing course counts towards the IAOP Certified Outsourcing Professional designation.
The University of Tennessee’s Haslam College of Business Administration won the Supply Chain Council’s Academic Advancement Award, which recognizes an organization that contributes applied research that advances the supply chain management body of knowledge.
World Trade Magazine’s cited Vested as a Fabulous 50 + 1 concept impacting global trade.
Is Vested right for me?
It is common for an organization to hear about Vested and wonder if it is right for them. The book Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business for Modern Procurement describes the seven sourcing business models that range along the sourcing continuum from the transactional to outcome to investment-based. You can also download a white paper on the topic.
The book provides step-by-step instructions for completing a Business Model Map exercise to help you determine if Vested is a good fit for your situation. The University of Tennessee and the authors of the Strategic Sourcing in the New Economy book have made a Business Model Mapping toolkit a free open source resource. You can download the Business Model Mapping toolkit here. If you would like help with a Business Model Mapping exercise, please email [email protected]
For those wanting a quick litmus test – ask yourself these three questions:
- Are your processes are already optimized?
- Are you are achieving peak performance at the lowest cost?
- Are you driving the appropriate innovation in what you are doing?
If the answer is yes to all three questions, then you likely need not spend the effort to forge a Vested relationship. Simply put – there is likely no "Pony" in making the shift.
Is Vested only for “outsourcing” relationships?
Vested can be applied to any strategic partnership. For example, Vested has been used for labor union contracts, governmental NGO partnerships, and joint ventures.
How long does it typically take to implement a Vested Agreement?
The answer is, “it depends.” We have seen organizations take as little as two months and as much as two years. Organizations working with a Center of Excellence typically take half the time of those that only use the Creating a Vested Agreement online course.
Let’s use Dell as an example (see chapter 12 in the 2nd edition of Vested Outsourcing: Five Rules that will Transform Outsourcing). Dell took two years to get past Step 1 (Lay the Foundation) where they had to set the stage to get the key stakeholders on board and agree to move forward. Once the key stakeholders were on board, Dell and Genco took four months to complete their Vested Agreement after they started the online Creating a Vested Agreement course and engaged a Center of Excellence.
Once a company has commitment from key stakeholders, it typically takes four to seven months to complete the work needed to get to a Vested Agreement. The general rule of thumb is larger or more complex relationships take longer.
Factors to consider are:
- Limited scope vs. a more integrated scope (e.g., combining real estate and facilities management like P&G has done with Jones Lang LaSalle).
- Global vs. regional focus. Global agreements typically take longer to complete (e.g., Microsoft OneFinance, which is global vs. the MnDOT agreement for the I35 Bridge rebuild).
- One business unit vs. multiple business units in scope. (e.g., a pharmaceutical company with five different business units combined the scope of work under one Vested Agreement).
Are some suppliers a better fit for Vested than others?
Suppliers are just like people: they have their own personalities. Just as in your personal relationship, not all individuals are a good fit for a potential spouse.
In a business relationship, cultural and compatability can be assessessed across five dimensions. The important thing to consider is that both the buyer and supplier are similar in terms of their compatibility and willingness to be a trusted business partner across the five dimensions.
A Compatability and Trust (CaT assessment) evaluates the critical aspects of a potential relationship for ‘fit’ between business partners using well researched and proven components of a business ‘personality’ across each of the five dimensions. The CaT provides a scientifically evaluated model using the two-world view to determine cultural compatability and fit across each of the five dimensions.
To learn more download the CaT FAQ
My company is not very good at collaborating. I think Vested is a “stretch” for us.
The Vested methodology uses an innovative RealPlay® technique pioneered by University of Tennessee researchers to help organizations learn by doing. See what Contract Management magazine has to say regarding how UT is innovating in teaching contracting in this article.
What are the biggest tips you can offer to an organization considering Vested?
The first time an organization sets out to create a Vested Agreement is often the most difficult. We offer three tips:
- Consider it a “pilot.” Many organizations resist change. Calm nerves of skeptics by ensuring them implementing Vested will not change all of their deals. Rather you can start by picking one strategic relationship and treating it as a pilot. The logic is if the pilot does not work out, don’t apply it to other relationships.
- Follow the process. You might think taking a “class” is not helpful. However, Creating a Vested Agreement course offers a proven step-by-step process for helping you stay on track and not skip vital steps, decisions or deliverables. The course is taken together—with both (or all!) partners learning and doing together. If you work through the deliverables together, you will find the process itself has created an environment that fosters collaboration.
- Use a Vested Center of Excellence to support you in your journey, especially if you are following the methodology for the first time. Centers of Excellence are trained to provide neutral, third-party support for “deal teams” as they embark on their Vested journey. They also can provide expert advice and examples they have seen in action if you find yourself getting stuck.
Can I just use The Vested Outsourcing Manual instead of paying for the online course?
You can use the Manual by itself without using the online course. However, the Creating a Vested Agreement online course offers many benefits:
- The Vested Outsourcing Manual was published before the case studies were made publicly available. The online class provides rich examples from the case studies in practice.
- Includes a comprehensive Vested ToolkitTM including a contract template.
- Includes 8 hours of complimentary coaching support from a Vested Center of Excellence.
- Following the online course is a great way to provide structure for your Vested journey. Many companies take one module of the online course per week, which allows the organizations to get in a rhythm for implementation of “learn and do.”
- Last, people learn differently. Some enjoy reading the book, and others prefer the content delivered in smaller bits “just in time” to their project plan.
Do you have to take the Vested courses in a certain order?
You do not have to take the courses in a particular order.
While we do recommend taking the 3-Day Vested Outsourcing Executive Education course before working on a Vested implementation, it is not required.
If you have an agreement you need to work on right away, you and your service provider should take the Creating a Vested Agreement online course. The course is available on-demand and you can start anytime, anywhere in the world. The online course walks you through a step-by-step approach for creating a Vested Agreement. It also contains a comprehensive toolkit that can help guide you through the decisions and deliverables you will need to create as part of your agreement.
We recommend augmenting the Creating a Vested Agreement course by working with a Vested Center of Excellence where a Certified Deal Architect Coach can assist with the project you are working now.
What is your favorite case study from your research?
It is difficult to pick only one. The Department of Energy’s closure and massive environmental cleanup of the Rocky Flats Nuclear Production site clearly shows the art of the possible.
The Department of Energy (DoE) had worked with two previous suppliers under a traditional contracting approach. Crafting an agreement following the Five Rules shows how the DoE overcame seemingly impossible odds: the project was completed 65 years early, almost $30 billion under budget, and with an 800% safety increase. (See the Vested case study: “Vested For Success: How the Dept. of Energy and CH2M-Hill Transformed a Plutonium Site to Prairie Land.”).
Are there some “Quick Facts” to help me describe Vested to others?
- Traditional business relationships are focused on win-lose arrangements where one-party benefits at the other’s expense (a “what’s in it for me” or “WIIFMe” mentality). In contrast, Vested creates a win-win relationship in which the parties are equally vested in each other’s success (a “what’s in it for we” or “WIIFWe” mentality).
- Vested partners are invested in the success of their partner’s overall business. The mutual commitment to long-term common goals fosters an environment of joint innovation and risk mitigation because both parties are in the same boat.
- Vested relationships depend on collaboration, transparency, flexibility and trust. Rather than conventional arrangements where companies buy transactions or services from suppliers, Vested arrangements instead focus on “buying results.”
- Vested leverages “win-win” thinking associated with behavioral economics. Eight Nobel prizes have been awarded to behavioral economists for their work.
- “Win-win” is also known as “solutions concept” and is based on what is often called “game theory.” The most famous of the behavioral economists is Nobel laureate John Nash.
- A Vested Agreement is built on a flexible framework that follows the Five Rules. Having a flexible framework as a contract foundation is essential and referenced by both Oliver Williamson (2009) and Oliver Hart (2016) in their Nobel Prize winning research stating all complex contracts will be incomplete.
- Leverages the first-level meaning of the common word vested and expands its use to embody and convey the principles of Vested®: shared value, behavioral economics, mutual success, and where the “size of the pie” is not predetermined.
- Vested relationships and agreements create value for both parties that did not exist previously. Vested shifts beyond conventional value exchange or power-based value extraction approach.
- Vested helps companies go beyond the usual lip service of “saying” partnership to helping them contract and manage their most strategic business relationships. Vested relationships have the power to achieve transformational results - often results so significant that many thought were impossible, such as that of the Department of Energy’s closure and cleanup of the Rocky Flats Nuclear Production site 65 years early, almost $30 billion under budget, and with an 800% safety improvement. (See the Vested case study: “Vested For Success: How the Dept. of Energy and CH2M-Hill Transformed a Plutonium Site to Prairie Land.”)
Are there consultants or lawyers I can hire to help us with our Vested journey?
Yes. We have teamed with a group of select group of consulting and law firms as licensed Centers of Excellence for Vested (COE)s. These COEs are available to provide guidance and direction to help companies achieve a Vested Agreement.
Contract [email protected] for a recommendation for Vested Center of Excellence.
Do you have specific tips to help me overcome skepticism towards Vested in my organization?
Tip 1: We find that if you get a group of people to read some material—and talk about it as a group —the entire group will talk themselves into Vested. An example of this is when Dell did the book club; they more or less talked themselves into saying it would be a good thing to do a pilot.
Tip 2: Call whatever you do a "pilot." It makes it safe.
Tip 3: Don't force things; let people volunteer for the pilot. Those who "get it" will volunteer while the skeptics will sit back and watch. Getting people to volunteer makes it safe because those who are comfortable will proceed vs. forcing the naysayers to do something they are not comfortable. The goal is to get the naysayers to get out of the way of the "pilot." Microsoft did this with their OneFinance initiative. In their case, they did not include their largest subsidiary in the contract because they were skeptics. Once OneFinance was proven in other areas, the skeptics jumped on board.
Tip 4: Have key stakeholder lead a Q&A on the topic: "Hey you guys, you read the book, now let's discuss it." Get your primary stakeholder to publicly say she or he thinks it would be a good thing to pilot the concept. That simple statement will get people to perk up and want to impress the boss.
Tip 5: Keep getting as smart as you can on the Vested model/methodology. The better you can answer questions, the more easily it will be for them to buy into the concept. If needed, consider having a UT Vested faculty member or a Center of Excellence lead an awareness workshop.
Tip 6: Play up the fact that your company is innovative and needs to proactively drive change to innovate. Play to the "innovation" egos of those who may want to take a chance and don't feel threatened to try something new.
Tip 7: "Dribble" bits and pieces of information along the way. For example, share an article one week and a blog another week. The purpose is to build a dialogue. We find the more people interact with the concept, the more they connect dots, and they eventually talk themselves into doing a project.
I am a consulting firm and want to become a Vested Center of Excellence. What must I do?
Consulting and law firms can qualify as a Vested Center of Excellence. To qualify, a firm must have at least one Certified Deal Architect on staff and commit strictly upholding the methodology. Please contact Kate Vitasek at [email protected]
Do you have a Vested Lite process where I can do certain Elements and skip others?
There is not a “Vested Lite” process. The Vested Five Rules and 10 Elements work together to create a system. Not following the rules will lead to one or more of the Ailments.
We understand organizations sometimes have constraints and cannot adopt all 10 of the Vested Elements. In this case, we recommend you consider your relationship as a Vested “journey.” Adopt the Elements you can do now – and then seek to adopt the other Elements as you have time and constraints are lifted.
For those that want to start their journey, we suggest the Getting to We program, which helps you lay a strong foundation for your relationship. In doing so – you will complete Element 2 (Shared Vision/Statement of Intent) and Element 7 (Relationship Mgmt. Framework) and thus inject good governance into your agreement and relationship. By starting with the Getting to We, you will lay a strong foundation for your relationship and over time you can address each of the 10 Elements of a Vested Agreement on your Vested journey.
You can register for the Getting to We program here.