I talked to Kate about the book and her goals for the spread of Vested Outsourcing as a way forward from the win/lose decade we just emerged from.
To vest or vesting means “to bestow a power on somebody or something.”So Vested Outsourcing makes for a good term. If I have outsourced my IT services, call center, HR, Accounting and Payroll, manufacturing, service and maintenance, Marketing series, educational programs, records management, diagnostics services, or the many other services across the globe, I have certainly transitioned my responsibility or power to my partners – who now are vested with the responsibility to take care of my customer, my brand, my accounting, etc.
This book comes along at the right time for two reasons:
Number one, we have a growing service market – not shrinking – with more businesses that can manage your work coming on the market every day.
And secondly, the experiences people have had in many cases are suboptimal. They are not getting the results they could out of these relationships.
AG: Kate, I loved the book, but first I have to ask you, do you think this concept will really take off? We are talking about values and trust here.
Kate:A lot of people are fed up with the lack of a relationship. They are fed up with the culture of hard-heartedness. They want to be ‘fair’ with their partners, but they also want to be ‘smart.’ They are fed up with cultures like McKinsey at Enron and other examples and the lack of an ethics framework. People are learning that greed is bad and trust and transparency are good. Now companies are ready, especially private companies, since they have more patience and don’t have to perform quarterly for Wall Street.
AG: But even companies like Microsoft and Whirlpool, very visible public companies, are trying Vested Outsourcing.
Kate:Companies know they have ailments (you can see Kate talk about these ailments in this video) and they want a way out. They talk collaboration and win/win but look at your contract! You wrote that like you were buying pencils, counting every little thing. The agreements are filled with protection clauses and rather than the results they seek.Cost only solutions use words like ‘best value’ or ‘lowest possible price,’ rather than desired outcomes such as end customer service, innovation and working together for the best outcome over time. Most of the time is spent on contracts vs. the management of the business and what that will really be like.That sets up the relationship for the poor results and relationships that companies have today.
AG: But don’t we need to scope and control these relations in order to assure accountability with our suppliers?
Kate:Yes, but there is a different way to go about it.Your service provider may see many ways to improve your business, but in the old model they are not going to propose it, since it will lead to their revenue reduction.You want your service providers to find the Pony – a great idea that can transform the work and get better results – for you, rather than perverse incentives that produce rats.
AG: The rats, yes. There were great examples you used in the book of measuring the wrong thing and getting the unintended consequences.But don’t we need a framework?
Kate:You have to take time and understand the economics of the business and how to get the alignment right, such as setting up the proper incentives. One example: one of my customers gets very low margin on the transactions, but a high percentage of the savings.Both parties are getting much better results.
If you are seeking services, seeking the lowest cost option is what you will get, with no money left from the service provider to invest in better processes and solutions.Service providers should be compensated for the investments and innovation they put into the business, such as new systems.We say partnership, but we don’t contract for partnership by rewarding investment and innovation.
AG: But in writing contracts…
Kate: The ‘deal is never the deal;’ business is constantly in motion and this has to be part of the agreement with more flexible clauses, incentives, etc. I like what Oliver Williamson said, business needs to be ‘hard-handed and wise.’
AG: But bad things happen, though we may start out with the best of intentions. Ironically ‘trust’ is never part of the proposal to work with a partner, yet companies go through the motion of trust every day with partners and employees.
Kate: I think that Vested Outsourcing is not for everybody. If you don’t have partners who can be trusted, the question is why you are working with those people? Why do you have that employee? People want to work with people who they can trust and with people they want to be successful with… You have to find like-minded companies.
AG: Who takes the initiative, then, the service provider or the customer?
Kate: Both. Many companies have been outsourcing for a long time and they know ‘the problem is me.’ They are on their 3rd contract and it did not get better, the problem did not go away. You know then it is time for another approach with a partner who wants to try. You will find matches. You have to try and you will find it works. Hey, we can make money being nice, instead of being mean. Once you try it and it works, companies want to do more.
AG: So, how to create the revolution?
Kate:We are working on the case studies to create more momentum in many disciplines, the Mavens of Vested Outsourcing.We are not recommending taking a methods course, but rather learning and doing a project. We want to create a network of Vested Outsourcing experts, but for them to take training they have to have a project to do once they leave the course. We want to have people who can point to their training and experience, since this will increase their market value, as well.
AG: My hope is that this becomes the way of business in this decade!
Kate: The naysayer is easy. But a lot of companies will want to try it – they are tired of the ‘hand cuffs’ in contracts and the restrictions that these make.My customers have tried and it worked; now they want to do more of it, and then they make a conscious effort to really learn how to do it.
We see Vested Outsourcing as an open platform which should generate more ideas in many industries. This is not about Supply Chain; it is not something you ‘sell.’This is about creating a relationship, whether partnership or services, from IT services to healthcare.
AG: So read the book. Better yet, transform your way of doing business!
Vested Outsourcing, Five Rules that Will Transform Outsourcing by Kate Vitasek, Mike Ledyard and Karl Manrodt
1 Kate used several examples of transaction-based models such as in China paleontologists were paying peasants for dinosaur fragments, so rather than bringing the bones they smashed them so they could sell more fragments. Or the example in Hanoi in 1902 of trying to reduce the rat populations and paying people to bring in the rat pelts. This led to an increase, instead, with people farming rats and selling them.
2 Kate is referring to Nobel Prize winner Oliver Williamson who did pioneering work in economics and business on transaction costs and make vs. buy decisions http://www.haas.berkeley.edu/groups/pubs/calbusiness/current/cover.html
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