There is more to outsourcing and business success than just good governance.
In our research and work at the University of Tennessee’s Center for Executive Education, we have studied highly successful outsourcing arrangements and found 10 essential elements of success. Governance and my previous insight articles covered four of the 10.
For my next series of posts, I’ll address the remaining six elements for achieving successful, more strategic outsourcing agreements that are aimed at transformation and achieving the often elusive "innovation."
While there are never any guarantees in life, business or outsourcing, these elements provide a logical and layered blueprint that will install and implement an effective collaborative outsourcing agreement. Research studying highly successful deals teaches us that these elements have the proven power to help a company shift beyond transaction-based approaches to a more strategic Vested Outsourcing approach.
It is one thing to agree to focus on outcomes, not transactions—as stated in Rule #1 of Vested Outsourcing—but how do you put that focus into, well, boots on the ground, so to speak? Here’s how:
The Sourcing Interest Group, Center for Outsourcing Research and Education, International Association for Contract and Commercial Management and the University of Tennessee have partnered on an excellent white paper (free download here) to show companies the differences in the various sourcing business models.
The first step is to understand and document the outsourcing business model that is best suited for the planned enterprise. A good tool for this is to perform a business model mapping analysis, which will enable an informed decision about the suitability of using a Vested approach. Such an analysis also will help determine if your culture and the relationship with your service provider are good fits.
Without going into extensive detail here, there are various types of sourcing business models: the widely-used transaction-based model; the outcome-based model and the investment-based model. Each have their uses, but the Vested approach is a hybrid outcome-based model that’s nicely positioned between the performance-based and investment-based models.
The vested model gives companies the benefit of an investment-based model, but without the investments, in an outsourcing environment that allows them to remain separate entities. These companies achieve mutual advantage and gain by working in an integrated and mutually beneficial manner where the parties have a vested interest in each other’s success.
It is vital for everyone involved to devote time to map potential outcomes. The vested toolkit has various templates and examples to guide you to a vested agreement, including a business model mapping template. The parties will then see how well they are aligned to each other’s goals.
Continuous improvement results from continuous innovation. But the typical transaction-based business model does not give service providers the ability or incentive to innovate. By focusing attention on outcomes and not transactions, service providers—the experts in their field—have the proper incentives and are motivated to innovate.
Jointly mapping the business or outsourcing model will pinpoint the transactions of value between the parties, leading logically to collaboration, innovation, loyalty and mutual satisfaction, market share and sustainable profit. The model is then used jointly to compare results. This element also fosters a culture and ecosystem in which the company and the service provider maximise profits by thinking and working together more efficiently, no matter who is doing the activity.
Then, when the mapping is completed, the teams are only part-way there. More work is needed to solidify the parties’ alignment by developing a shared vision and statement of intent, another element that I’ll cover next time.
Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and is author of the popular book Vested Outsourcing: Five Rules That Will Transform Outsourcing and The Vested Outsourcing Manual, both published by Palgrave Macmillan.