By: Kate Vitasek, Author, researcher, educator and innovator of the Vested®business model.
The University of Tennessee’s (UT) Vested sourcing business model provides a framework that transforms a “supplier” relationship into a partnership that becomes the bedrock for sustainable sourcing.
Almost ten years ago the University endeavored to research some of the world’s most successful strategic partnerships—including those at P&G, McDonald’s and Microsoft—to see how and why they were so successful. What emerged from the research and field work was the Vested sourcing business model, which is based on five transformative rules designed to spur collaborative and innovative mindsets. (Vested has a library of case studies and whitepapers, including “Unpacking Sourcing Business Models – 21st Century Solutions for Sourcing Services” and “Unpacking Best Value – Understanding and Embracing Value Based Approaches for Procurement” available for download on the Vested site.)
Vested Outsourcing, or Vested, is a hybrid sourcing business model that combines three leading business philosophies.
Vested leverages components of an outcome-based model with the Nobel Prize-winning concepts of behavioral economics and the principles of shared value.
- Behavioral economics is the study of the quantified impact of individual behavior or of the decision-makers within an organization. Behavioral economics is evolving more broadly into the concept of relational economics, which proposes that economic value can be expanded through positive relationship (win-win) thinking rather than adversarial relationships (I-win-you-lose).
- Shared value principles are concepts of creating economic value in a way that creates value for everyone. Entities work together to bring value that benefit all parties—with a conscious effort that the parties gain or share in the rewards. UT researchers coined this a “What’s in it for We” mindset.
- Outcome-based approaches, which have their roots in the aerospace and defense industries, center around paying a supplier or service provider for the realization of a defined set of business outcomes rather than paying for a transaction or activity.
These three approaches combine to create the Vested sourcing model, which stresses the importance of building highly collaborative win-win relationships with suppliers while emphasizing creating and sharing value for everyone involved.
Sustainable Solutions Start with a Mindset Change
Most sourcing efforts rely on a transactional “what’s in it for me” sourcing business model. Simply put, the buyer tries to get the best deal they can for its money: if it can get the same product or service for $1 instead of $2, it’s considered a “win.” Under this scenario, the problem is that often it is the supplier that “loses.”
The Vested approach is centered on establishing a socially responsible “what’s-in-it-for-we” (WIIFWe) mindset where the parties work to jointly create and share value for both the buyer and supplier. When a WIIFWe mindset is embedded and nourished in the relationship, ethical and sustainable things result, such as sharing and increasing value, real innovations and a long-term “win-win” solution that benefits all parties involved.
The good news? Shared value principles are gaining both attention and traction. Two shared value advocates are the Harvard Business School’s Michael Porter and Mark Kramer, who profiled their “big idea” in the January–February 2011 Harvard Business Review Magazine. The article states that shared value creation will drive the next wave of innovation and productivity growth in the global economy.
When cooperation and shared valued principles take hold in relationships, the trust that exists between the parties enables them to unlock far more innovation and value than outdated power-based transactional approaches.
And there’s more good news. This is not mere theorizing. It works! Here’s a great example:
The Vested Sourcing Business Model in Action
P&G has always been in the forefront of innovation. The company took a groundbreaking approach to innovation and collaboration by understanding the power a supplier can bring to the innovation table—especially in areas where P&G does not have a core competency, such as facilities and real estate management. In 2003, P&G developed a highly strategic outsourcing relationship with Jones Lang LaSalle (JLL). The companies created a commercial agreement that flipped the conventional outsourcing approach on its head by contracting for transformation instead of contracting for day-to-day work.
Rather than reward JLL for simply showing up to perform transactions such as janitorial and maintenance operations, P&G tied JLL’s profitability to the latter’s ability to drive success against jointly defined business outcomes. The more successful P&G would be, the more success for JLL.
The highly strategic Vested partnership has consistently delivered results for more than 10 years – with JLL winning P&G’s supplier of the year award three of the last 10 years out of P&G’s 80,000 suppliers and helping P&G increase service levels by 17 points while increasing the capacity to innovate.
Earlier this year the P&G received the International Association of Outsourcing Professionals’ 2014 Global Excellence in Outsourcing Award for Innovation, known as the GEO Award, for driving innovation in outsourcing.
A wonderful example that demonstrates how the companies are collaborating to transform and drive value is with environmental sustainability efforts that aggressively seek to shrink energy use and resource waste throughout the entire supply chain. Both companies committed to make a meaningful difference in the area of environmental sustainability and made it a focal point when they renewed their contract in 2007.
One of the innovations to come out of the P&G Innovation Program is IntelliCommand™ or what some refer to as “Smart Buildings.” A typical facility management protocol includes commissioning a building once every five to 10 years. Commissioning is the process of making sure a facility is operating the way it was designed and built. Re-commissioning is the process of going back over time to ensure the building continues to operate as intended. The idea is to apply low-cost new technologies, Big Data and analytics to create a “smart building” system that provides “continual commissioning,” in which building equipment is constantly adjusted to maintain peak performance.
The result? The IntelliCommand program was launched in 12 buildings across four test sites covering 3.2 million square feet of building operations. Reducing P&G’s energy use and carbon footprint was the most obvious reason to invest in Smart Building solutions, but there are many other benefits. Identification of failing equipment is a huge money-saving function. Analyzing IntelliCommand data optimizes maintenance management by using performance curves for large equipment such as chillers and boilers, and by scheduling preventive maintenance. As a result, equipment damage is reduced and expensive repairs are avoided. The business analytics data also helps determine the best option for correction – equipment retrofit, relocation, capital improvement project, or, even, disposition.
So yes, the Vested sourcing model works in the real world by aligning buyer and supplier interests for the continuing benefit of both—they are truly committed to each other’s success and a partnership is built for the long-term win-win.
What Prevents Companies from Becoming Vested?
So why have businesses been slow to adopt true win-win relationships with their strategic suppliers? Unfortunately, virtually all businesses use a conventional transaction-based approach regardless of how strategic the supplier may be. These transactions focus on per-transaction level pricing, paying either for a business task (cost per warehouse pallet stored, cost per minute of call, or cost per IT server) or on a headcount basis.
But while many businesses rely on the transaction-based business model as tried and true, it is definitely not the only sourcing business model, nor should it be the default if you are looking to create a more stable supplier relationship. Nobel Laureate Oliver E. Williamson challenged the traditional make-buy decision process through his work in the area of Transaction Cost Economics. A key TCE finding is that companies should view outsourcing (and business relationships) as a continuum rather than a simple market-based make versus buy decision.
A Catch-22 comes into play because companies that are using a transactional sourcing business model find that their suppliers or service providers can meet the contractual obligations and service levels — but innovations and efficiencies do not occur at the pace they envision, or need. Suppliers argue that investing in their customer’s business is risky because buyers will simply take their ideas and competitively bid the work. Companies want solutions to close the gaps, but they do not want to make investments in people, processes and technology where they do not have a core competency.
That’s the Catch 22 and the result is that many procurement organizations are finding themselves at a crossroads, with buyers and service providers wanting innovation — but neither leaping to make the necessary investments due to the conventional transaction-based commercial structure of how the companies work together.
The Rules for Success
The UT researchers uncovered more than just an academic link to successful sourcing and some great case studies; they created a sustainable sourcing business they coined Vested® by taking their academic and practical learning and turning it into a methodology that could be repeated. The basis for the methodology lies in “Five Rules” that align with into “10 Elements” that become a buyer’s and supplier’s commercial contract.
Implementing a Vested business model requires following Five Rules. While not required, virtually all companies rely on formal agreements and contracts when doing business. The five rules are:
– Focus on outcomes, not transactions
– Focus on the what, not the how
– Have clearly defined and measurable outcomes
– Optimize pricing model incentives
– Establish an insight, rather than oversight, governance structure
A Vested Agreement aligns 10 essential contractual agreements to the Five Rules. Figures 1 and 2 (at the end of this article) provide a conceptual overview of the Vested methodology, showing the links and interaction between Vested’s Five Rules and the 10 Elements that are essential to create a Vested Agreement.
Dell and its strategic partner, the reverse logistics provider GENCO followed the rules with great success. The Dell/GENCO relationship was longstanding, and was expanded in 2009 when GENCO agreed to acquire Dell’s buildings, assets, and people under a three-year outsourcing contract. The problem was that it was a strategic relationship, but the transactional structure of their agreement was far from strategic: it was a typical transaction-based contract in which GENCO assumed the risk of meeting a set “price per activity” while maintaining service levels. The agreement worked reasonably well for a time, but Dell’s leaders continued to face cost pressures and they insisted on an “every dollar, every year” procurement principle—even though under the contract GENCO assumed much of the risk at the “set price” contract terms.
The seeds were sown for a difficult endgame unless both companies could transform their relationship through trust, collaboration and the Vested WIIFWe mindset. They succeeded by structuring a strategic commercial agreement with true win-win economics.
It was a huge success for Dell’s Global Outlet—reducing its cost structure by 32 percent, increasing revenues to record highs, and becoming more environmentally sustainable by reducing the scrap level of old and damaged hardware by 62 percent. GENCO also benefited with a tripling of its margins.
John Coleman, GENCO’s general manager said the Vested approach was a key reason that enabled GENCO to drive innovation for Dell. “It gave us the freedom to get creative. It’s like we broke open a new innovation piñata. GENCO employees now know that we will share in the reward for good ideas. Now, every quarter we make new priorities that align with our defined mutual outcomes.”
The Dell and GENCO journey proves that the five rules provide an alternative to the relentlessly competitive “I-win-you-lose” mindset by creating commercial structures designed to foster a culture of cooperation, trust and innovation. The buyer and supplier not become Vested in each other’s success.
About the Author: Kate Vitasek is an international authority for her award-winning research and Vested® business model for highly collaborative relationships. Her work has led to five books, including: Vested Outsourcing: Five Rules That Will Transform Outsourcing, and Getting to We: Negotiating Agreements for Highly Collaborative Relationships.
A faculty member at the University of Tennessee, World Trade Magazine named her as one of the “Fabulous 50+1” most influential people impacting global commerce.