Companies Try Vested Approach to Outsourcing

Ann All

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.

 

Slide Show

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.



Add Comment      Leave a comment on this blog post
Jun 5, 2010 11:47 AM Peter Peter  says:

This is definitely a very informative article. I've been looking for this for some time.

Reply
Jun 7, 2010 11:52 AM Sshah Sshah  says:

I always hold this belief that trust and quality are the two most important thing for anyone wanting to outsource, and it has never failed me since.  I don't mind paying a bit more to get the quality I want.  In the end, it is all about creating value for my business, and my end-users.  I think that outsourcing became a bad apple because of the hunt for the lowest paid worker - regardless of paying the price.  For this reason, Senator Schumer drafted a bill that aims to stop customer dissatisfaction ( and perhaps, put a dent on many outsourced business out there ) - which could have been prevented if quality is not sacrificed for the name of cutting down costs.

Reply
Jun 13, 2010 11:49 AM BPO Manila BPO Manila  says:

Thanks for the article. I think that vested outsourcing is a great way to get the best out of outsourcing as it encourages both the client and the services provider to work equally hard to reach their goal. If both parties know that their success is riding on one another's performance, they will explore all avenues in order to help reach their full potential.

Reply
Jun 22, 2010 2:17 AM VIRTUAL OFFICE SOLUTIONS VIRTUAL OFFICE SOLUTIONS  says:

This is a very good article and it gives us a strategy which we can use if we get involved with outsourcing. The things is, business should always be a mutual understanding between those who need the service and those who give the service.

Reply
Sep 14, 2010 4:11 AM IT outsourcing IT outsourcing  says:

I strongly believe that trust and constant communication is key to a successful outsourcing project. Both the client and the catering outsourcing firm should have mutual understanding in setting and implementing their goals to alleviate doubts, mishaps and pitfalls that may come along the way.

Reply
Sep 15, 2010 2:39 AM Karen Cayamanda Karen Cayamanda  says: in response to IT outsourcing

If it builds more trusting relationships between the client and the service provider, then it's a good development. Outsourcing companies should be given leeway to be able to generate profit from incremental value. They are, after all, accountable to the employees who do outsourcing work and need to sustain their operations.

Reply
Sep 18, 2010 7:59 AM Telemarketing Telemarketing  says:

Vested outsourcing is a great way to establish a great business relationship between a company and the outsourcing provider. Like any other business relationship, trust is important. It is also important that both understand what the end goal is and what should be done to reach the target. Sacrificing cost to get quality seems like a good deal to me.

Reply
Oct 16, 2010 5:12 AM suvarna suvarna  says:

my business, and my end-users.  I think that outsourcing became a bad apple because of the hunt for the lowest paid worker - regardless of paying the price.  For this reason, Senator Schumer drafted a bill that aims to stop customer dissatisfaction ( and perhaps, put a dent on many outsourced business out there ) - which could have been prevented if quality is not sacrificed for the name of cutting down costs.

Reply
Oct 26, 2010 11:10 AM Cleo Cleo  says: in response to Peter

My name is Cleo and I work for Staff India. We specialize in outsourcing almost any job type to the Indian sub-continent for employers looking to spend less for full-time, degree-level educated employees. If you are starting up your own business and cannot afford to employ new workers or alternatively want to expand you workforce, we can offer you a 1 week free work trial with any of our dedicated workforce! Find out more at http://staff-india.com/job-types-outsourcing-jobs-le-s.html

Reply
Oct 26, 2010 11:13 AM Cleo Cleo  says: in response to VIRTUAL OFFICE SOLUTIONS

My name is Cleo and I work for Staff India. We specialize in outsourcing almost any job type to the Indian sub-continent for employers looking to spend less for full-time, degree-level educated employees. If you are starting up your own business and cannot afford to employ new workers or alternatively want to expand you workforce, we can offer you a 1 week free work trial with any of our dedicated workforce! Find out more at http://staff-india.com/job-types-outsourcing-jobs-le-s.html

Reply
Oct 26, 2010 11:15 AM Cleo Cleo  says: in response to VIRTUAL OFFICE SOLUTIONS

My name is Cleo and I work for Staff India. We specialize in outsourcing almost any job type to the Indian sub-continent for employers looking to spend less for full-time, degree-level educated employees. If you are starting up your own business and cannot afford to employ new workers or alternatively want to expand you workforce, we can offer you a 1 week free work trial with any of our dedicated workforce! Find out more at http://staff-india.com/job-types-outsourcing-jobs-le-s.html

Reply
Nov 16, 2010 8:00 AM Healthcare BPO Healthcare BPO  says: in response to Sshah

OutSourcing has two varieties to it as we all know - BPO & KPO. Quality should be of utmost importance in the case of BPO OutSourcing only. As long as outsourcing is saving you time, some rework to meet standards makes sense. What do the others say?

Reply
Aug 30, 2011 6:06 AM BPO Outsourcing India BPO Outsourcing India  says:

ya definitely good post  very informative

Reply

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