I remember 2003 and 2004 because that’s when most companies I interviewed about outsourcing arrangements started talking in earnest about “taking a partnering approach” to get more value from outsourcing. Since 2006, many have talked about their successes in partnering. But here’s the reality; they were only partial successes. 

Partnering helped them get through the transition phase easier and helped them try to resolve challenges in a win-win manner; but when the business situation changed and thus impacted the buyer’s savings or the service provider’s margins, most of them still hit a wall despite the partnering approach. 

There were foundational aspects of their deals that just didn’t work. It was as though they were playing the complex strategic game of chess without knowing the rules. 

They didn’t know how to eliminate the following situations: 

• Putting service providers in a box with every change then being out of scope
• Having to make trade-offs between innovation or improved service,  and reducing the buyer’s cost or improving the provider’s profits
• Weighing the angles for each party’s self-interests
• Having a contract that ends up being used as a legal weapon or a protective device
• Compromising in pricing negotiation such that both parties settle for something less than they hoped for
• Getting stuck with a statement of work that’s too tightly defined and not flexible for unanticipated challenges
• Playing the shell game as the provider shifts costs around in an effort to maintain its target margins
• Ending up with the service provider that is unwilling to take on risk by making large investments to generate larger returns for both parties
• Taking the financially short-sighted approach of shifting risk to the other party and thus adding to the hidden costs

However, some companies avoided these deal-collapsing scenarios. In addition, by taking a “shared” approach – which goes beyond “partnership” and “partnering” – they achieved bigger payoffs from their sourcing relationships. Microsoft, for example, experienced great success in its relationship with Accenture for procure-to-pay services. Other outstanding examples include Jaguar moving from #9 to #1 in J. D. Powers customer satisfaction rankings, the U.S. Department of Energy’s work with the Rocky Flats nuclear site environmental clean-up project, and Rolls-Royce’s Power by the Hour solution.

I just finished reading about these relationships in “The Vested Outsourcing Manual: A Guide for creating Successful Business and Outsourcing Agreements,” by Kate Vitasek (to be released June 21,2011) and learned how these companies avoided the situations listed above. I’m not exaggerating when I say this book is an eye-opener; it pinpoints what is missing in most sourcing relationships and provides the roadmap for how to create and sustain highly successful relationships. 

I’ve blogged before in this post, this post, and this post about Vitasek’s first book (“Vested Outsourcing: Five Rules That Will Transform Outsourcing”), which set the stage for the need to craft Vested outsourcing deals (where both parties are vested in each other’s best interests and the best-value outcomes for both). Vitasek teamed with co-authors Jacqui Crawford, Jeanette Nyden and Katherine Kawamoto for “The Vested Outsourcing Manual.” The manual provides step-by-step, easy-to-follow instructions for how to create a Vested sourcing relationship.

The Vested Outsourcing Manual explains 10 key elements that companies must address in a Vested relationship and maps them to the Five Rules from the first book. For each of the 10 elements, the manual provides templates, real-world examples and case studies, a homework section with tips, summary points, and key takeaways, plus checklists along the way to make sure readers stay on the right path as they work through the instructions while creating their relationship. Also included are 72 figures, tables and charts. (There’s also a section up front that provides an overview of the essentials from the first book.) 

This is not like any other book or manual you’ve read about outsourcing deals. 

You’ll recognize that immediately just by the different terminology and by the readiness assessment to help you determine if the Vested model is right for your organization.

What I found most notable is the information in Chapter Six, which presents readers with the Holy Grail – the pricing model that truly fosters a win-win relationship. It’s very different from typical sourcing relationship pricing models. Among other aspects, you’ll read about:

• 12 steps to determine “best value” price (and how to avoid mistakes)
• Margin matching (to ensure fairness and economic alignment as situations change)
• Value sharing (different from gainsharing)
• A five-step process to include risks in the pricing model
• Comparison of compensation models (fixed costs versus cost reimbursement) enabling you to determine which is the best long-term option for your organization’s situation
• Explanation of why it’s necessary for both parties to provide transparency into cost factors (along with walking readers through a framework of steps to make it more comfortable to do this)
• Information about how to avoid “guard rails” that appear in conventional outsourcing arrangements and sabotage the pricing agreement

In other chapters you’ll learn about:

• How to create a shared vision and a joint statement of intent (it’s what enables both parties to transcend their self-interests and keep the focus on how to drive the business forward as markets evolve)
• An approach that enables making value-based decisions
• What to include when structuring the contract
• How to create a performance statement, a three-tiered hierarchy of performance metrics and a Quality Assurance Plan for managing performance (these aren’t the typical KPIs and SLAs in outsourcing)
• Examples of how to use incentives (and examples of fatal flaws) and some dangers in defining process measures

The chapter on developing an effective governance structure includes invaluable information on aspects of managing the relationship, transition, transformation, innovation, joint continuous improvement, and special considerations and regulations. Included are real-world examples of how Whirlpool and other companies used a Vested governance structure (which focuses on insight) to achieve better outcomes than traditional governance structures based on oversight.

Chapter Nine – how to manage the relationship when market changes occur – describes how to collaborate to get back to alignment and includes four collaborative communication techniques.

I suspect that in 2012 and 2013, I’ll be talking with companies that stopped hitting a wall in their sourcing relationships, thanks to following the roadmap in “The Vested Outsourcing Manual.”

“The Vested Outsourcing Manual: A Guide for Creating Successful Business and Outsourcing Agreements” (by Kate Vitasek with Jacqui Crawford, Jeanette Nydon, and Katherine Kawamoto; New York: Palgrave Macmillan, June 2011) and “Vested Outsourcing: Five Rules That Will Transform Outsourcing” (by Kate Vitasek, Mike Ledyard, Karl Manrodt; New York: Palgrave Macmillan, 2010) are available at Amazon.com.  

Since 1998, freelance writer Kathleen Goolsby has studied outsourcing relationships’ successes, failures, trends, and best practices. She has interviewed more than 860 executives at buyer and service provider companies and is the author of “Critical Requirements for Building and Sustaining a Successful Outsourcing Relationship,” a chapter in Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships (December 2006, Gower Publishing). As a freelancer, she also currently serves as the Senior Writer for Outsourcing Center (whose parent company is sourcing advisory firm, Alsbridge) and has authored dozens of articles as well as white papers. In a past role, she was editor of Outsourcing Venture (a former print publication). You can contact Kathleen at ksgoolsby@gmail.com.

Related posts:

1. The Truth about Gain-Sharing in Outsourcing
2. Second Time Around
3. The T-Word in Outsourcing
4. Influencing Success in Outsourcing
5. Jeopardy