Share the Value, Share the Wealth
Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and is author of the popular books Vested Outsourcing: Five Rules That Will Transform Outsourcing and The Vested Outsourcing Manual.
Shared value relationships are gaining traction in the outsourcing community as companies and their suppliers increasingly realize they can prosper by working together to create a bigger piece of the pie.
Employing shared value concepts is necessary for collaboration and trust to really take hold in a way that benefits everyone. It’s a much different approach from the traditional “me-first,” “I-win-you-lose” approach to doing business.
Shared value thinking involves entities working together to bring innovations that benefit the parties and the enterprise—with a conscious effort that the parties gain (or share) in the rewards. Two major shared value 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. Porter and Kramer say 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.
University of Tennessee (UT) researchers think of shared value as moving from WWIFMe (what is in it for me) thinking to WIIFWe thinking. It is this highly collaborative win-win spirit that forms the basis for the University’s research and field work on some of the world’s most successful outsourcing deals. The UT worked on the development and implementation of Vested Outsourcing, a collaborative, outcome-based hybrid business model that utilizes shared value principles.
The Vested Outsourcing approach provides companies with the fluidity, give-and-take, and collective behavior that has the power to deliver transformational results.
Vested Outsourcing leverages components of an outcome-based model with the 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 into the concept of relational economics, which proposes that economic value can be expanded through positive relationships (win-win) thinking rather than adversarial relationships (win-lose or lose-lose). Using this concept, entities can work together to expand their reward horizon.
When improvements and cooperation occur, the trust that exists between the parties enables them to unlock far more innovation and value than outdated power-based transactional approaches. But Vested Outsourcing takes outcome-based approaches a significant step further than performance-based agreements: it’s a fundamental shift away from the old transaction-based outsource models.
A Vested Outsourcing agreement is based on specific targeted goals, or desired outcomes, which 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. It is not a task-oriented service-level agreement (SLA) that often is mentioned in a conventional statement of work or performance-based agreements. Rather it is a mutually agreed upon, objective, and measurable deliverable for which the service provider will be rewarded. A desired outcome is generally categorized as an improvement to cost, schedule, market share, revenue, customer service levels, or performance.
The Vested Outsourcing business model is best used when a company wants to move beyond having a service provider perform a set of directed tasks and wants to develop a solution based on mutual advantage to achieve the company’s desired outcomes.
Vested Outsourcing is perfect for progressive companies seeking the benefit of an investment-based model, but without the actual investments. They can leverage the Vested hybrid business model that enables success in an outsourcing environment while still allowing a company to remain a separate entity. These companies achieve mutual advantage and gain by working in a completely integrated and mutually beneficial manner where the parties have a vested interest in each other’s success.
The path to collaboration and shared value is based on five tenets, which I call the Five Rules of Vested Outsourcing. These five key rules provide the foundation for a successful, long-term Vested Agreement.
The Five Rules are:
- Focus on outcomes, not transactions.
- Focus on the what, not the how.
- Agree on clearly defined and measureable outcomes.
- Pricing model and incentives optimizing for cost/service trade-offs.
- Governance structure that provides insight, not merely oversight.
Although these rules originally were developed by the University of Tennessee for outsourcing deals, they are applicable to any business agreement where the parties want to forge a shared value relationship that jointly leverages capabilities to innovate, lower costs, and improve service.
To learn more about the Five Rules, be sure to register for the October 18 Value Chain Exchange Webcast, sponsored by ModusLink Global Solutions.