A win-win strategy isn’t just nice. It’s the only way to get the most value out of your outsourcer and beat the competition, especially when you’re looking for game-changing innovation. But are customers and providers ready?
Kate Vitasek’s described the “vested outsourcing” (so called because both sides are vested in its success) to more than 100 outsourcing customers and providers at last month’s SIG Leadership Conference in Seattle. Before becoming a faculty member at the University of Tennessee’s Center for Executive Education and a well known author, she says, she tried to “outsmart” vendors working for Microsoft, and later did the same for providers from the other side of the negotiating table.
Her conclusion: Such adversarial deals means both parties focus on fighting over the “pie” (how little can the vendor get away with spending, how much can the customer wring from the vendor without paying more.) In successful deals, she said, customer and provider work together to make the pie bigger by reducing costs or increasing sales, and are open and honest about fairly sharing the rewards.
As proof she cited an accounting outsourcing deal between Microsoft and Accenture that reduced the number of systems Microsoft used to manage its finance operations from 140 to fewer than 40 and delivered a 20% increase in first time pass on accounts payable. The proportion of internal users “dissatisfied” or “strongly dissatisfied” dropped from 33.3 percent to 3.4 percent, and Microsoft has already cut the cost of the contract by 20%. Accenture, for its part, won a contract extension after the first two years, increased the value of the contract from $185 to $330 million and increased its profit margins.
She acknowledged this approach isn’t worth the effort if you’re already getting what you want from an outsourcer, or if what you’re buying is truly a commodity. “For simple transactions with abundant supply and low complexity, a transaction-based business model” is probably best, she and three others wrote in a white paper. But the more complex the deal, the more mutually dependent the customer and provider are, and the more customized asset or processes are involved, the more you should consider vested outsourcing”
If you want to use vested outsourcing to reach “transformational or innovation objectives” she suggests:
- Contracts that describe and provide rewards for desired business outcomes, rather than certain levels of transactions.
- Focusing on the “what” you want to achieve rather than the “how.” Be looser with your statements of work so that the outsourcer has the freedom to deliver some of that innovation you say you want from them.
- Creating governance structures that let you measure, recognize and reward innovation. For example, will your accounting department let you write that big check to the outsourcer if they deliver outstanding results?
- Considering longer deals that give the service provider time and incentive to develop game-changing ideas.
All this sounds sensible – maybe too sensible. Some questions for you customers out there:
- Can you convince your business users and procurement departments to trust an outsourcer enough to be open about your budgets, internal costs and strategies?
- Can you define what is “strategic” vs. “transactional” and thus decide what’s worthy of the “win-win” approach?
- Do you have the internal metrics to create and measure your “desired outcomes?”
And for you providers:
- Can you convince your account teams and product managers to trust a customer enough to be open about your own cost structures?
- Do you have enough “innovation” capabilities to stake part of your compensation on your ability to deliver meaningful change?
- If you’ve built your success delivering transactions at low cost, can you now shift gears and build deals based on delivering innovation?
Anyone who can answer yes to any of these questions let us know so we can prove it can actually be done.