Outsourcing: a Win-Win Mindset
Outsourcing isn’t about perfecting the art of buying and selling, rather, outsourcing is about developing strategic relationships that lead to innovation. We sat down with Kate Vitasek to learn more about Vested, an outsourcing approach that fosters an environment which sparks innovation, resulting in improved service, reduced costs and value that didn’t exist before — for both parties.
Faculty and Lead Researcher at the University of Tennessee, Kate Vitasek has been the driving force behind the development of the award-winning Vested® and Vested Outsourcing business model. Kate is a contributor for Bloomberg Radio and regularly writes for Forbes and Outsource Magazine on the art, science and practice of highly collaborative relationships.
Kate’s expertise comes not only from her research but from her depth of experience on both the buy side and the sell side. She has been able to study and consult on supply chain management and outsourcing, giving her a unique angle because she has seen the world of outsourcing from every standpoint.
KV: I am a faculty member at the University of Tennessee in their graduate and executive education program. I have been there since 2003. I joined to lead a very large research project that was funded by the United States Air Force to study large complex outsourcing deals – note that the government doesn’t normally use the term “outsourcing” they use “services acquisitions”. They think of it as buying services, complex services such as weapon system maintenance and support would be a great example. Although they do do a lot of facilities management outsourcing they usually use the term BOS or “base operating services”.
Prior to joining the university, I was a consultant, and prior to that I have been on the buy side and the sell side. In the early 90’s I worked for Microsoft and I had the opportunity to work on and lead some of their large outsourcing initiatives. They were one of the first leaders in outsourcing, they outsourced virtually all of their operations, so their manufacturing, their call centers, some of their marketing programs. I later left Microsoft and joined their largest service provider at the time.
It is super fun to be a researcher and come in and look at it when you’ve been in all the seats. Because you can really kinda look down at the problem and say “how do I work on creating a better way to outsource?”
We asked Kate to tell us more about the Vested business model.
KV: Vested is a sourcing business model. We say that because a business model is kind of like a system, so you work within your system and your business model is how your business works. So, we believe that when you have these complex outsourcing deals you have to treat it as a system or a business model. Because in a complex relationship if you are being a buyer, the better you are at being a buyer and the better the supplier is at being a seller you actually put yourself at odds. So, you are perfecting the art of buying and they are perfecting the art of selling and you have conflicting goals and objectives. And in these complex relationships it is much better to align the interests and have common objectives; therefore, you have to align the economics. We like to think of it as a win-win business model. So instead of treating your supplier as the supplier, they are really more of a business partner. We think of Vested almost as a joint venture without having a joint venture. It is still a supplier relationship but it is a very strategic supplier relationship where the economic interests are aligned through win-win terms and conditions and the way that you work.
It is a business model but it is also a methodology. When we stepped back and we began to study successful outsourcing relationships, we came up with the five rules. We also came up with a methodology to teach people how to implement the Vested model. After all, we are the University of Tennessee and we are teachers, right! We want to educate people and that’s why we wanted to create a methodology to really embrace and share and teach companies a better way to outsource.
A critical component of this model is the Vested five rules of outsourcing. Kate tells us why the rules are important to follow when developing strategic relationships.
KV: If you think about the rules, the rules are the way you get to a Vested model. Every game has a set of rules – you have baseball, you have football, you have soccer – buying and selling has rules. If you are in a typical buy-sell relationship, there are rules. You have an RFP and you have a price as part of that RFP and so Vested is a different game. It is not a buy-sell game, it is a game or a business model for complex outsourcing relationships – so it has different rules.
These rules we get from studying very, very successful relationships like Procter & Gamble and Jones Lang LaSalle or Microsoft and Accenture. We studied very successful relationships and from there witnessed the rules being present in these different ways that companies were looking at outsourcing. We codified our observations into the five rules and a methodology that we now teach.
We asked Kate to tell us more about the “What’s in it for We” philosophy and the key principles managers should keep in mind to achieve an “everyone wins” result.
KV: You know it is a mindset, you can look at the world and think “my glass is half full” or you can look at it and say “my glass is half empty”. So, if you look across business over time, how does business expand? It’s through innovation and innovation is what is in your mind. So why not create these partnerships, these strategic relationships, that expand the pie for everyone through innovation.
There is actually quite a bit of research that has been done by many, many academics around innovation. But I like to quote an economist who has looked at the economics of innovation. And the economist I like to point to is Robert Solow. He showed that 87% of economic value for organizations is created through innovations – he didn’t use the word innovation, he used the word ‘technical improvements’, so product improvements or process improvements. But when we outsource what are we outsourcing for? Processes, right? And so, we get economic value through innovation. Only 13% of economic value is created through what Solow would call ‘labor and capital’. Capital would be things like buildings, labor is the people who do the work. We have to create these relationships based on innovation and that is really our mind that limits us.
One thing that happens in most outsourcing relationships is the buyer turns around and they are trying to be a really good buyer and they’re buying services for today. Well in the best relationships, of one of those we surveyed was the Procter & Gamble and Jones Lang LaSalle relationship, and by the way they bought the future. In the case study, P&G turned to JLL and said: “we’ve never done this and neither have you, but we have the best chance with you.” It is not about, you know, “I want you to have an SLA to clean the toilet”. They are buying a better way to manage the portfolio of their facilities and real estate. You are buying the future, and the only way to get there is through innovation. They don’t have it today. That is what we call desired outcomes. That is actually rule number one, an outcome based versus a transactional business model. You don’t want to buy activities or tasks, what you want to buy is the future or these desired outcomes.
Kate says the mistake she sees managers making most often when building strategic relationships is that they don’t allow their partners to do things differently. Managers outsource in the hopes of working with a strategic partner but then micromanage their work. What Kate calls “the outsourcing paradox”.
KV: That is rule number two and rule number five. Rule number two is focused on the what not the how. Especially the operations people, they are the experts, they have been facilities and real estate management people for 20 or 30 years. So of course, who is better to tell the supplier how to do the work than the people who have been doing the work for 20 to 30 years. The problem is, they have been getting X results. You want innovation and you want Y. You want to go to the future. The way you are doing it today isn’t going to get you to the future.
The reason why we outsource is because someone else has a core competency that we don’t. Think about CBRE, Jones Lang LaSalle, Cushman and Wakefield or ISS and Compass, or whatever companies. That is all they do in life. The service providers that is all they do. Everyday. I think between Compass and ISS, they are in the top 20 employees in the world. You know that’s all they do is show up and perfect the art of what they are doing and so we need to let them be the best they can. Who is better to drive innovation than the people who spend all their life doing it? We have to focus on the what not the how. Otherwise, you handcuff the supplier.
I call it the outsourcing paradox, why outsource to the expert and then tell them how to do the work? The more restrictive your statement of work, the more you tell somebody how to do the work, the less innovation you are going to get. We have to buy the future, the outcomes and we have to resist the urge to tell them how to do the work. Focus on the what not the how – that is rule number two.
Kate’s rule number five goes together with rule number two: focus on insight, not oversight.
KV: Rule number five is insight versus oversight governance structure. And it kind of goes hand-in-hand to some extent with rule number two in that so now we have given you this detailed statement of work and my job as the ex-person who used to run facilities management is to micromanage you, right? We want to use oversight. And that is not true, we want to use insight. The very best relationships don’t have oversight, they have insight.
So instead of managing the supplier they are managing the business with the supplier. You are moving from SRM (supplier relationship management) to more of a strategic relationship management to navigate together to get to that future. We move away from this micromanagement mentality to more of an analytical and supportive role. So, the whole governance structure is very different in a Vested model than it would be in a traditional buyer and seller relationship.
With over 20 years of experience in supply chain management, we asked Kate what was the biggest change she has seen in the supply chain industry over the course of her career.
KV: Consciously trying to break down silos. You know you look at supply chain management and it is trying to get all the various players to work. You have to get your product from point A to point B but it goes through six people to get there. And so how can you optimize? Vested really is about optimizing for the whole. It creates a system. You have to get all the players in the system to work together so the collaboration component really comes out.
Twenty years ago, absolutely it was about making your functional silo the best it could be. But there has been a sliding scale. Every year it has been more and more about forget the functional silo, how can we optimize for the end game? And there is so much inefficiency in the middle of the silos. We have perfected the silos so now we must go and optimize across the silos.
In closing, we asked Kate for her top tips for FMs working with outsource partners.
KV: Have a win-win mindset. Don’t just say ‘strategic supplier’, align your behaviors with your intent. Don’t say strategic supplier and then have a 30-day term of convenience. Don’t say strategic supplier and then bid them out every two years. Are they a commodity? Or are they strategic suppliers? Align intent with behaviors and have that win-win mindset.
Then following the rules. The rules are there for a reason. We like to think if you don’t follow the rules, you are cheating. You don’t want to play half a basketball game and half a football game – it just doesn’t add up. The rules are there for a reason, so religiously follow the rules. That means that your contract has to be written to follow those rules.
Those are kind of high-level. If I was more tactical and trying to give someone in the trenches a tip, I would say, ‘you’ve outsourced for a reason, don’t try to micromanage your supplier.’ Instead, really work with them to build them up, to enable them. The best deals are when the supplier is enabled to do magical things. But you think as a buyer that they are just selling you stuff and so you want to drill down their price. You think you wanted all this value-add but you didn’t buy it. So, there is a big disconnect.
Also, education. Educating yourself about what are good practices out there. This is why we have our self-assessments. We have free self-assessments on our website; you can come and take a self-assessment and get a sense check how you are doing. Always be learning. Go and read books, go and read our case study, see some of our videos. Our whole Vested orientation course is free. It is online, it is five modules. If you don’t like to read, go watch a couple videos. But educate yourself on modern ways to think about outsourcing. Because if you don’t learn you will never do.