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The Vested Outsourcing Manual
A Guide for Creating Successful Business and Outsourcing Agreements
By Kate Vitasek, Jacqui Crawford, Jeanette Nyden, Katherine Kawamoto
Palgrave Macmillan Copyright © 2011 Katherine Kawamoto
All rights reserved.
ARE YOU READY?
When an outsourcing relationship goes wrong, it can cost millions of dollars, result in lost market share, and have a disastrous impact on consumer confidence in a company or brand. The University of Tennessee faculty outlined perverse incentives that result in poor outsourcing agreements in their research and first book, Vested Outsourcing: Five Rules that Will Transform Outsourcing.
Although it is safe to say that companies want to improve their outsourcing practices, most are not sure where to begin and how to make systematic changes. The University of Tennessee researched this challenge and incorporated the lessons it learned to outline a systematic model to improve outsourcing as a business practice. This model is called Vested Outsourcing because the core principle is to create an outsourcing relationship where companies and service providers become "vested," or mutually committed to each other's success, creating the true win-win solution that goes beyond the mere feel-good lip service often espoused in the first blush of a new agreement.
The findings of the University of Tennessee's research are embodied in five key rules. When applied to a business outsourcing practice, the Five Rules (reviewed in chapter 2) will transform outsourcing relationships, increase innovation, and improve efficiency. The approach and the thinking are laid out in the first book; this second book is your manual, your detailed guide to implementing a successful, Vested Outsourcing business model and agreement.
We start from the premise that you are using this manual because you are committed to developing a Vested Outsourcing agreement. We assume that you have already finished the necessary deliverables to complete Steps 1 through 3 of the Vested Outsourcing implementation process and are ready to roll up your sleeves and begin crafting a successful business agreement that will motivate the parties to deliver transformational results.
TRANSFORMATIONAL RESULTS ARE WHERE WE START THE STORY
The University of Tennessee has researched outsourcing relationships that use the outcome-based approach for more than five years. Although some outcome-based deals failed miserably, the university researchers found that the majority of the outcome-based relationships they studied performed well, meeting or exceeding performance targets.
Researchers became intrigued with a select group of outcome-based outsourcing agreements that were wildly successful, bringing transformational results to the company that is outsourcing and to the service provider. The United States Air Force was so intrigued with this small group of successful "outliers" that it funded a secondary research project for the university to determine what factors drove the transformational success.
The university's research revealed that the most successful outcome-based relationships had universal similarities that were not obvious to the companies that were studied: they all had created a blended approach of outcome-based thinking and shared value thinking. The University of Tennessee researchers named this new methodology Vested Outsourcing because the term conveyed the essence of these successful relationships: how the companies and service providers were committed to each other's mutual success and worked toward shared outcomes by jointly leveraging their capabilities to innovate, lower costs, and improve service. Based on this research and continuing field study the university created a new standard for successful outsourcing agreements.
NEW METHODOLOGY—NEW BUSINESS MODEL
In chapter 3, we explore three sourcing business models and explain in detail how Vested Outsouring is built on a fourth model: a hybrid business model. Vested Outsourcing is a hybrid sourcing model that combines approaches to yield a greater value proposition than previously known using each business model separately. Vested Outsourcing leverages components of an outcome-based model with the Nobel award-winning concepts of behavioral economics and the principles of shared value.
Behavioral economics is the study of the quantified impact of individual behavior or of the decision-makers within an organization. The study of behavioral economics is evolving more broadly into the concept of relational economics, which proposes that economic value can be expanded through positive relationship (win-win) thinking rather than adversarial relationships (win-lose or lose-lose). Using this concept, entities can work together to expand their reward position.
Shared value principles are concepts of creating economic value in a way that creates such value for all parties involved. In essence, shared value thinking involves entities working together to bring innovations that benefit the parties—with a conscious effort that the parties gain (or share) in the rewards. This shared value thinking is what the University of Tennessee researchers have coined "what's in it for we" (WIIFWe). Shared value principles are starting to gain traction. Two advocates are Harvard Business School's Michael Porter and Mark Kramer, who profiled their "big idea" in the January–February 2011 Harvard Business Review Magazine. The article states that shared value creation will drive the next wave of innovation and productivity growth in the global economy. Porter is renowned for his Five Forces model of competitive advantage. Due to his prominence, it is likely that his take on shared value, although focused on society, likely will cause practitioners to embrace the philosophy of WIIFWe.
The heart of each of these progressive approaches forms the thinking behind the Vested Outsourcing business model, which can provide your company with the fluidity, give-and-take, and collective behavior that can deliver transformational results.
PERFORMANCE PYRAMID: OPTIMIZING FOR RESULTS
By their very nature, no two Vested Outsourcing relationships are alike, nor should they be. However, all good ones achieve mutual success based on optimizing three key goals:
1. Innovation and improved service
2. Reducing cost to the company outsourcing
3. Improving profits to the service provider
Conventional wisdom says that there typically is a trade-off among these three goals. For example, achieving higher service levels often costs more money. Or allowing the service provider to double its profit margin may raise costs for the company that is outsourcing. We call an emphasis that focuses on optimizing—versus trade-offs—the Performance Pyramid (as depicted in Figure 1.2) because it forces a company and its service provider to strategically drive innovation aimed at achieving what appears to be conflicting objectives.
Many progressive companies are reinventing their outsourcing practice by developing collaborative Vested Outsourcing solutions designed to create incentives for service providers that deliver value as they achieve the company's cost and service objectives. Thus, the company and the service provider are vested in each other's success by creating ways to optimize for the three goals, instead of accepting the conventional and one-dimensional trade-off wisdom.
A Vested Outsourcing agreement is based on specific Desired Outcomes that form the basis of the agreement. A Desired Outcome is a measurable business objective that focuses on what will be accomplished as a result of the work performed. Desired Outcomes must have supporting metrics that, as much as possible, objectively indicate whether the outcomes are achieved. A Desired Outcome is not a task-oriented service-level agreement (SLA) that often is mentioned in a conventional statement of work for a service provider. Rather it is a mutually agreed upon, objective, and measurable deliverable for which the service provider will be accountable. It is generally categorized as an improvement to cost, schedule, market share, revenue, customer service levels, or performance.
Desired Outcomes are beacons—the guiding light posts along your path that keep the parties in an agreement moving forward in the same direction as business changes.
ARE YOU REALLY READY?
Although this manual will help you to develop a Vested agreement, we recommend that you challenge your readiness. Doing due diligence at the outset will ensure that you are ready for the journey and that you get to your destination—a completed agreement and governance structure—in the most efficient manner. We recommend that all parties involved in the agreement take the time to complete three readiness tasks, summarized next and then discussed in detail.
1. Complete the deliverables in Steps 1 to 3 of Vested Outsourcing.
2. Complete a readiness assessment.
3. Complete a Vested Outsourcing knowledge base assessment.
First, we recommend a review of Chapters 6 to 8 of Vested Outsourcing: Five Rules that Will Transform Outsourcing. These chapters outline in detail the first three steps for implementing a Vested Outsourcing business model.
Chapter 6, "Lay the Foundation," establishes an essential precondition: You must determine whether the outsource scope of work under consideration is suitable for a Vested relationship or if it is better accomplished under a simpler transactional outsource model. Simply put, you must understand the opportunity. Vested Outsourcing is not easy and can take time to implement, so it should only be done in situations that will have a large payoff or impact on the company. It is important to get buy-in from internal corporate stakeholders and approval to pursue a Vested approach. It is also crucial to understand your company's decision-making framework and any guardrails you may need to adhere to as you develop the Vested agreement.
Chapter 7, "Understand the Business," explains that you must establish a baseline that documents the as-is state of the existing process planned for outsourcing. Doing this will help clarify and establish Desired Outcomes. It is the starting point for making the business case that justifies the pending financial and operational changes that go into the development of the new Vested agreement.
In Chapter 8, "Align Interests," you will transition from due diligence and research to action by jointly planning on ways to create value by implementing the change to the Vested process and realigning workloads. This is basically the first pass at envisioning how the parties will interact to achieve desired results.
If you accomplish the essential work and deliverables from Steps 1 to 3, you are likely ready for Step 4: Establish the Contract. This manual is the perfect resource to help you develop and document the Ten Elements and the master services agreement that together comprise your Vested Outsourcing agreement. If you have not completed some of the suggested deliverables, this manual provides homework assignments for the ten essential elements that must be included in any Vested agreement. For example, in Chapter 7 of Vested Outsourcing, "Understand the Business," we explain the need to create a requirements road-map and share a process and a tool to do this. If you have not yet created the roadmap, you can complete the homework that is an essential component to crafting your agreement.
Our second recommendation is to take a readiness assessment, which ensures that you have laid the proper foundation and are ready to establish a Vested agreement (Step 4). Understanding whether you are ready will greatly reduce the amount of time you need to create and document your formal Vested agreement.
Begin your readiness assessment by evaluating the following key attributes and behaviors of your joint company and service provider team that is chartered to develop the actual Vested agreement.
Vested Outsourcing knowledge base
Vested center of competency
Dynamic mandate or guardrails
Each attribute is discussed in detail, and you can take the readiness self-assessment at the end of the chapter. We advise that everyone complete a Vested readiness assessment before beginning to develop an agreement. A readiness assessment tool is available for download at the Vested Outsourcing website, www.vestedoutsourcing.com/resources/tools. This step will allow you to develop an action plan to close gaps in capabilities and competencies before they become an issue. It is important to address these gaps early.
Vested Outsourcing Knowledge Base
Success starts with knowledge. The participating organizations need to demonstrate competency in Vested concepts across multiple levels of the organizations, not just at the top. Developing a Vested agreement involves many people from different parts of each organization. Companies should ensure that the key people involved in establishing the Vested agreement, as well as all the major stakeholders, understand and embrace the overall concept of Vested Outsourcing. Take the time to educate all participants in the process.
A company is ready to move forward when it can demonstrate competency in Vested Outsourcing concepts across multiple levels of the organization and show that it has gained comprehensive knowledge and experience in Vested concepts and tenets across participating companies.
Vested Center of Competency
In an ideal situation, a company already will have implemented one or more Vested Outsourcing agreements. Individuals can leverage the wisdom and advice from those who have blazed the trail. This is particularly true for progressive service providers that have multiple clients. For example, Jones Lang Lasalle and Grubb &&&; Ellis—both facilities management service providers—each have multiple Vested Outsourcing agreements.
For organizations without prior expertise, there are two ways to ensure that at least one person has significant experience developing and governing Vested Outsourcing agreements. The University of Tennessee offers a comprehensive training program in Vested Outsourcing; participants attend ten days of classroom training and are assigned a faculty member who will provide mentoring guidance and advice as they implement a deal. Upon successfully developing a Vested Outsourcing agreement, individuals are awarded a Certified Deal Architect certification.
The Certified Deal Architect program is much like the Six Sigma Black Belt programs where companies send individuals to train as champions to lead Six Sigma implementations. University of Tennessee acts as the certifying agency for Vested Outsourcing deal architects.
Investing in a Certified Deal Architect is a great option for companies that know they would like to have more than one Vested Outsourcing agreement; it may not be prudent for companies that have small or simpler agreements, or a limited number of Vested agreements. In such cases, we recommend that companies consider working with a neutral third party who is already a Certified Deal Architect to provide field-based coaching to your team. We also recommend that companies consider using a deal architect for deals of more than $10 million. A Certified Deal Architect will act as a sounding board and provide insight and advice on constructing your Vested agreement. A secondary benefit is that deal architects can play a role of win-win coaches and provide neutral feedback to ensure that the parties reach a fair and equitable Vested agreement that has the most likelihood of success.
One of the most critical factors for success in any project is senior leadership commitment to the project. This high-level commitment is even more important in a Vested project because the goal of Vested Outsourcing is a fundamental change of the outsourcing business model. Proceeding without such support is a mistake. Senior leadership from the company and the service provider must engage fully with their respective organizations to drive toward a true win-win Vested business model. Their commitment to the project, support in getting stakeholder buy-in, and willingness to remove roadblocks as they occur is vital for success.
Before starting on the agreement, be sure that champions are in place in each organization and are strong advocates—to the point of evangelism—for the need to change from the existing course of action to a cooperative, what's-in-it-for-we (WIIFWe) approach to the partnership. Champions keep the organizations on track during the ups and downs of the process and keep all participants focused on the expected benefits of a Vested relationship.
A Vested Outsourcing project will impact many individuals; each one has a stake in the project's outcome. It is important to know who the stakeholders are and to have them fully onboard and engaged in the Vested process. Addressing stakeholder concerns is essential to building a strong consensus and participation toward common objectives. Senior leadership involvement in the agreement process will keep stakeholders engaged and also help keep the organizations aligned as they work toward a Vested agreement.
Excerpted from The Vested Outsourcing Manual by Kate Vitasek, Jacqui Crawford, Jeanette Nyden, Katherine Kawamoto. Copyright © 2011 Katherine Kawamoto. Excerpted by permission of Palgrave Macmillan.
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