By Clifford F. Lynch
Peter Drucker, considered by many to be the father of modern management, once
said that outsourcing is not so much about cost cutting as it is about improving
the quality of work that others can do better than you can.
Kate Vitasek and her team at the consultancy Supply Chain Visions and the
University of Tennessee have a slightly different take on the subject: They say
outsourcing is not so much about cost cutting as it is about both partiesí
interests being perfectly aligned. And it is on this foundation that they have
built a new philosophy of outsourcing: Vested Outsourcing, or VO. Vested
Outsourcing represents a totally new, collaborative method of outsourcing based
on pay for performance.
In the outsourcing world, a genuinely new concept comes along only once in 10
years or so. But I have a feeling this is one of them.
To understand how VO promises to change the game, it helps to know a little
about the history of outsourcing. Outsourcing has been with us since the 14th
century, when the merchants of Europe and Asia stored their goods in warehouses
at the port of Venice for later shipment to the New World. The concept was quick
to catch on, and soon companies all over the world were contracting out
warehousing and transportation. But for the most part, these early arrangements
were strictly "one off" transactions. It wasnít until the 1960s that we saw our
first real breakthrough with multiyear warehouse contracts.
During the 1970s, an era that saw U.S. manufacturers putting heavy emphasis
on cost reduction and productivity, longer-term relationships became more
common, particularly in the warehousing arena. Outsourcing got a big boost in
1980, when a relaxation in regulation made it possible for carriers and others
to enter into truly innovative long-term relationships with customers.
The most common criticism of the typical outsourcing contract was that it
offered no incentives for productivity improvement or superior performance, and
the late 1990s saw an expanded use of gain-sharing agreements. Unfortunately,
however, many of these arrangements lacked a crucial element: While they
rewarded providers for enhanced performance, they neglected to include penalties
for poor service or substandard productivity.
Vested Outsourcing changes all that. VO meets gain sharing head on. While
somewhat similar to gain sharing, VO stipulates that the outsourcer pays
strictly for performance Ė i.e., the successful fulfillment of those activities
the two parties have agreed are necessary. A party to a VO contract does not pay
for transactions. It pays for results, or in the language of VO, "desired
outcomes." The agreement clearly spells out both the financial rewards for
exceeding the agreed-upon "desired outcomes" and the penalties for falling
At first blush, VO may sound complicated, but actually itís beautiful in its
simplicity. And it promises to bring collaboration to a new level, although it
will require a significant change in mindset for those logistics service
providers that still cling to the transaction-based business model. It requires
not only a meeting of the minds or alignment of interests, but also a clear
understanding of what is expected. Most important, the provider must be willing
to accept the risk-reward aspect.
Perhaps the most important lesson to be learned from the 2000s is that the
complacent, reactive logistics service provider is becoming obsolete. Both
providers and users must be proactive, flexible, and clearly focused. I believe
the sophisticated providers will understand this, as will the more enlightened
outsourcers. Particularly in this economy, VO represents a wonderful opportunity
for both parties to profit from a true results-oriented collaboration.
For more information, visit www.vestedoutsourcing.com. Youíll find itís time