Next in this mini-series about the leading economic thought leaders who were seminal in the development and success of modern outsourcing is the mathematician John F. Nash, who took economists a major step beyond Adam Smith with his ideas on Game Theory and Behavioral Economics. Nash’s inspiration was that Adam Smith’s principle that the “best result comes from everyone in a group doing what’s best for themselves” was incomplete and needed revision: The best result comes from everyone in a group doing what’s best for themselves and the group.
More than 50 years ago Robert M. Solow, a professor at MIT and the next in my mini-series of the seminal economic thinkers that have impacted modern outsourcing, showed us that technology is the driving factor behind economic growth. Solow’s growth model was first presented in a 1956 article, A Contribution to the Theory of Economic Growth. His premise was that without “technological progress” growth rates for capital, labor and total production would all remain about the same.
Next in my mini-series on the seminal economic thinkers that have bearing on outsourcing I’d like to look at the more current and less theoretical side of the economics of outsourcing. There’s no better place to start than with Freakonomics and the follow-up mega-bestseller, SuperFreakonomics. Steven D. Levitt and his sidekick and co-writer Stephen J. Dubner, a journalist, offer a less academic, but no less important, view on economic behavior – what they call “the hidden side of everything.”
If you’ve been following the previous posts in my economics of outsourcing series, I hope you agree that the thinking of Williamson, Solow, Nash and their colleagues have much to teach us about improving outcomes for today’s underperforming IT Outsourcing relationships. Recently, outsourcing has been popularized, debated and indeed lionized in the mainstream press by Thomas Friedman. His major bestseller, The World is Flat: A Brief History of the Twenty-First Century (first released in 2005 and updated twice since then) stresses the importance of technology and outsourcing as major elements of modern global economic structure.
Q: WHAT EXACTLY IS VESTEDIT?
A: Vested Outsourcing is a fundamental business model paradigm shift in the ways in which a company that outsource and their service providers do business. What LEAN did for manufacturing that changed the business world in 1990, VESTED will do for outsourcing. Steeped in research conducted jointly by the University of Tennessee and the United States Air Force, Vested Outsourcing identifies the 10 inherent ailments in today’s flawed and old-school outsourcing agreements, and where these ticking time bombs might be lurking within every company. Recent University of Tennessee research unveils five key rules for a successful Vested Outsourcing agreement, setting the stage for companies to take their outsourcing relationships to the next level. Companies applying Vested Outsourcing rules can create a true vested partnership that can yield significant benefits for both parties.
Q: HOW WILL CREATING A VESTED OUTSOURCING RELATIONSHIP INCREASE THE TOP LINE OR MARKET SHARE FOR COMPANIES OF ALL SIZES?
A: Companies should approach a Vested Outsourcing agreement as a symbiotic relationship because only by working together can everyone succeed. A Vested Outsourcing partnership focuses on identifying desired outcomes and then aligns the interests of all players so that all benefit if the desired outcomes are reached. The relationship becomes more collaborative and expands beyond simply meeting the requirements of the original outsourcing agreement. In a Vested Outsourcing relationship participants work together to ensure their mutual success. This combined success creates a bigger win for both parities than if just one party is the victor. Success begets more success.
Q: WHY SHOULD EVERY BUSINESS EXPLORE A VESTED OUTSOURCING RELATIONSHIPS WITH THEIR SUPPLIERS AND VENDORS?
A: Vested Outsourcing combines the four influential business concepts of the 21st Century: outsourcing, collaboration, innovation and measurement. Like Lean, it is about bringing streamlining and eliminating non-value-added activities regardless of who is doing work. But Vested Outsourcing goes well beyond applying lean principles because it pushes the companies involved in an outsource relationship to innovate collaboratively to find the optimized solution, even if it means tradeoffs for one of the parties involved. At its heart, Vested Outsourcing is about all parties in the business arrangement going the whole nine yards to unlock the most efficient and effective solutions to work being performed.
Q: WHAT CORE TENETS DIFFERENTIATE A VESTED OUTSOURCING RELATIONSHIP FROM A CONVENTIONAL ONE?
- Focus on outcomes, not transactions or activities
- Focus on the WHAT, not the HOW
- Agree on clearly defined and measurable outcomes
- Optimize pricing model incentives for cost/service trade-offs
- Governance structure provides insight, not merely oversight
Q: WHICH LARGE COMPANIES ARE USING VESTED OUTSOURCING?
A: From Tim McBride, Chief Procurement Officer for Microsoft:
“As a leader in innovation, Microsoft is always quick to experiment with new approaches. Our first approach with Vested Outsourcing concepts was in the area of facilities management with Grubb & Ellis and we have been quite pleased with the results. In fact, Grubb & Ellis has won both the supplier of the year and the environmental supplier of the year under this approach. We are definitely seeing the benefits of a collaborative, measurement focused relationship that drives both Microsoft and Grubb & Ellis towards the achievement of common goals and objectives. For Microsoft, the next step will be to learn from our lessons and apply Vested Outsourcing philosophies across other areas that we are outsourcing. “The one thing that we have definitely learned is that saying win-win is much easier than acting win-win when it comes to dealing with suppliers. Most procurement professionals are hard-wired to ‘win,’ which means if Microsoft wins the supplier looses. We have learned that applying a Vested Outsourcing philosophy requires a cultural change in how we will need to work with our suppliers. For Microsoft, this means exploring Vested Outsourcing one program and one supplier at a time – working to build trust with our supply base and business units that outsource to understand that there really is a better way.”
Q: HOW MANY COMPANIES OUTSOURCE?
A: Outsourcing has become so commonplace that, more than three out of five companies (63 percent) participating in a recent study by the research and consulting firm PricewaterhouseCoopers have outsourced a business process to a third party. Of the 304 top decision-makers involved in the study, 46 percent said that outsourcing’s importance has increased during the past three years. In addition, 42 percent indicated their company’s use of outsourcing has increased. Almost one-quarter (23 percent) have outsourcing programs in their current business plans.10