Save Money with Vested Outsourcing

"Do what you do best and outsource the rest…"

These words by legendary professor and management consultant Peter Drucker in the late 1980s launched a new business model and started a stampede into the unchartered frontier of outsourcing. Three decades later, more than half (63 percent) of all businesses in North America outsource one or more processes to a third party. Nearly $6 trillion of services are outsourced annually, but much of that is little more than a scramble to "shift the mess for less."

The Wall Street Journal's MarketWatch named Vested Outsourcing as one of six ways small businesses can save money. What exactly is Vested Outsourcing?

Microsoft's Outsourcing Innovation

Back in 2006, Microsoft decided that its major global finance processes and operations needed a major revamp. Why? Its global system had become a patchwork of inefficient and disjointed processes. For example, Microsoft determined that it was using 77,000 active procurement vendors and its finance operations devoted 370,000 hours annually to simply producing reports. It also discovered that its Procurement and Finance Operations didn't have any processes that were considered "best practice."

Senior management at Microsoft, a company distinguished by its innovative culture, determined that outsourcing would help improve quality and cost structures. But Microsoft wanted to find a better model and go beyond the conventional notion of outsourcing. "Microsoft's vision was to shift the focus from transactional accounting to a more strategic approach that would leverage business insight. It also wanted to achieve consistency and standardization worldwide," says Kate Vitasek, an esteemed faculty member at University of Tennessee's Center for Executive Education. Vitasek led an extensive study of outsourcing practices.

Vitasek says that Microsoft's light-bulb moment was to shift the emphasis to business insight rather than lowest price bean counting. "The company determined it needed an unconventional approach that was not simply about outsourcing work, but about outsourcing a transformation of the work by achieving desired outcomes and by changing its definition of winning to create a mutually beneficial win-win mentality. It also needed a partner it would share that vision with over the long term, one with a vested interest in achieving that win-win mindset."

In the end, Microsoft essentially recreated its outsourcing culture and devised a game-changing strategy that garnered numerous industry awards, and saved millions of dollars and hours of duplicity and aggravation. And its outsourcing partner, Accenture, has a future revenue stream as part of a long-term contract that most service providers would envy.

Vested Outsourcing

In studying the Microsoft-Accenture deal and other successful outsourcing partnerships, the UT research team learned that successful deals were governed by an unwritten set of rules that is fundamentally different from conventional outsourcing approaches. "Most of today's outsourcing contracts are still very much transaction-based; that is, payment is exchanged for a unit of activity or a head count," Vitasek says. "If the service provider makes significant improvements in productivity, it is simply bad business, because that progress drives reductions in its own revenue and profit. Microsoft challenged traditional transaction-based thinking and was able to achieve amazing success by crafting a long-term vested relationship where Accenture was highly incentivized to make investments to drive innovations for them."

The result? Both achieved improved economic benefits — a true win-win.

The UT researchers call this innovative approach Vested Outsourcing — the company that's outsourcing and the service provider are vested in one another's success. Together, both parties develop a shared vision and mutually defined Desired Outcomes. Desired Outcomes can come in many forms — reduced costs, improved services or increased market share. Often, service providers make significant investments in processes, technologies and capabilities that will achieve the Desired Outcomes, thus creating value for their client.

In exchange, the company outsourcing commits to allow the outsource provider to earn additional profit — above and beyond industry average profits for their service area — for achieving this incremental value delivered by achieving the Desired Outcomes. Additionally, the company that's outsourcing commits to providing a certain level of business — often in the form of a long-term contract or minimum volume guarantees — for the outsource provider.

Five Rules of Vested Outsourcing

The UT team, funded by one of the country's largest outsourcers, the U.S. Air Force, observed that the most successful companies move beyond WIIFM thinking to a "what's in it for we" (WIIFW) philosophy. The shared goal is to create value together by unlocking a greater opportunity than currently is realized by either party rather than maximizing the size for any one player (e.g., lower costs at the expense of the outsource provider's profits).

Vitasek notes that the rules of Vested Outsourcing are easily applicable to the outsourcing of marketing services, and that many business models are evolving in this direction. Joel Kessel of Kessel Communications, a strategic communications and PR firm, says he considers most of his outsourcing relationships to be more like collaborative partnerships than traditional buyer-supplier associations.

"My business model is somewhat unique," Kessel says. "Companies outsource to me, then I supplement expertise as needed to other PR and communications strategists and professionals that I have relationships with to build my team for each individual project. But everyone involved is aligned and focused on the big picture rather than on individual tactical components."

From their mountain of research, the UT team distilled the following five rules of Vested Outsourcing, essentially a roadmap for innovators like Kessel who want to better navigate this expanding frontier.

1. Focus on outcome, not transactions

Agreements are based on achieving results — not on the service provider performing tasks and getting paid for transactions. "You must first determine what your desired outcome is, and then that determines what specific transactions or activities are necessary," Kessel says. "Otherwise you are spinning your wheels."

2. Focus on what, not how

"Why would you outsource to experts and then tell them how to do the job?" Vitasek asks. "Make sure you focus on the what and don't dictate how the service provider should do the work."

Thad DeVassie of Ratchet Strategy and Communications says it helps if the client approaches their challenge with an open mind. "They are much more open to change if they come to us with a problem and haven't already predetermined the full solution. When clients are open to weighing our expertise and how we can help them achieve success, they begin see us as partners in the work and not just vendors."

3. Clearly define measureable and desirable outcomes

Determine what you are trying to achieve. Focus on your overall goals and objectives rather than individual activities. "When a client comes to me, I ask a lot of questions — what they are trying to accomplish, why are you trying to go this route — and really try and figure out what issues and challenges they are facing," Kessel says. "Then I bring in the right partners to make up a focused team to accomplish the goals that we identify."

4. Optimize pricing model incentives for the best cost/service tradeoffs

Vitasek says the pricing model is one of the hardest things to get right. "Use the incentives to transform the work — sometimes with cost-plus or sometimes fixed-price, but always with an incentive built in. Vested Outsourcing does not guarantee higher profits for service providers —they're taking a calculated risk. But it does provide them with the autonomy and authority to make strategic investments in their processes that can generate a greater ROI for them over time, perhaps more than a conventional cost-plus or fixed-price contract might produce over the same period."

5. Governance structure should provide insight, not merely oversight

Some companies outsource with poorly defined requirements and few, or no, performance metrics or service level agreements. Others go to the other extreme, with small armies micromanaging the outsource providers.

The structure that governs an outsource agreement should provide both parties with real knowledge of how operations are developing and improving and of potential challenges. As Vitasek says, "Contracts may be static, but outsourcing is dynamic."

Finding a Good Outsourcing Partner

Is Vested Outsourcing for everyone? Vitasek says no. "If you are outsourcing something that is truly a commodity, then there is limited potential for a vested deal. There really needs to be an opportunity to create value. And there needs to be compatibility and trust." Vitasek and her colleagues at UT developed a "Compatibility and Trust Assessment" that examines five dimensions to evaluate the potential for a Vested Outsourcing fit.

1. Innovation — Is the service provider just going to show up and do things the way they always have, or are they going to be creative and outcome oriented? Kessel says he nurtures innovation by bringing in team members that have different perspectives and areas of expertise "Through the course of our discussions we come up with some pretty creative and innovative ways to solve problems."

2. Team Orientation — Can the service provider work on behalf of the team and as a member of a team? "You really have to have the client's goals first and foremost and you are going to get there with a team approach," Kessel says. "You are part of that bigger picture." Angela Walton-Nelson, assistant vice president and print production manager at SunTrust Banks, says that cost, quality and product offering are not the single most important factors when selecting vendor partners. "We look for suppliers that will be true extensions of our team. This partnership role allows them to share our vision, drive our message and help us achieve our company goals. When a supplier is treated as a partner, it allows them to provide better customer service, bring ideas and provide solutions versus just selling a product."

3. Communication — Good communication is critical. Kessel says one of the most important things people must understand about outsourcing is that you must have clear communication about goals. "You need to clearly communicate what your goals are and why they are important to both your internal team and your outsource team. That is going to mitigate a lot of challenges."

4. Trust — Is there a foundation of mutual trust and transparency? Kessel advises you must have trust, but that it takes time. "There's a lot of trust that has to be earned and gained to have this level of strategic partnership. Because there is trust among my team members, we are able to have great debates and discussions and ask the tough questions…and that's where we get to the true innovation." Says Vitasek, "Trust does take time to develop, but if the other four dimensions are securely in place, then the trust will come in time."

5. Focus — Is the service provider's focus on short-term gains or long-term goals? It is important for all parties to be in sync, Vitasek says. "The more long-term your thinking is, the more opportunity there is for a vested relationship."

Vitasek's advice for marketing executives looking to outsource to marketing services providers is to first make sure that it is a good fit. She suggests spending more time on your RFP (request for proposal) process and start to build the relationship then. "Invest in the time to get to know your partner on the front end. You will have greater success if you are compatible and philosophically aligned. Hire someone that is a good fit. If they are not a good fit, it doesn't matter how capable they are. If you don't work well together there is less opportunity to create value and innovation."