Though companies are always looking for the proverbial win-win, many of them aren't getting it in their outsourcing agreements. Too often, those agreements are structured so that, for one party to win the other has to lose.
As Kate Vitasek, a faculty member at the University of Tennessee's Center for Executive Education and author of "Vested Outsourcing: Five Rules that will Transform Outsourcing," writes in a Forbes piece:
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. 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.
I've warned before about the risks involved in constantly trying to get a lower price from outsourcing providers. Service can suffer, for one, and rest assured providers will look for ways to recoup deep early discounts over the life of an outsourcing contract.
12 Trends Shaping the Outsourcing Market
Rather than just seeking the lowest prices, buyers are relying on more sophisticated techniques.
Some companies are realizing the inherent flaws in this transaction-based model and are looking at an approach Vitasek calls vested outsourcing. In the Forbes piece, she explains outsourcing providers determine how they can best apply processes, technologies and capabilities that will drive value to their customers. The customers, in turn, agree to allow providers to earn additional profit for achieving this incremental value. Clients also commit to providing a certain level of business for providers.
The example Vitasek offers is Microsoft, which uses the vested outsourcing approach for facilities management and accounting. Tim McBride, Microsoft's chief procurement officer, said it has taken some effort to use this approach, largely because it requires building deeper, trust-based relationships with suppliers. Not only that, but internal business units sometimes need to be convinced the approach makes sense. He said:
We have learned that applying a vested outsourcing philosophy requires a cultural change in how we 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.
This approach sounds a lot like one included in my "12 Trends that Are Shaping the Outsourcing Market" slideshow. Bill Fowler, principal consultant of Compass Management Consulting, told me service providers are being given more leeway to find savings and improvement opportunities within client operations. Though Fowler didn't spell it out, I assume providers are rewarded with additional profit if improvements are attained.