Vested Outsourcing (also known as “Vested”) is a hybrid business model in which both parties (company and the service provider) in an outsourcing or business relationship focus on shared values and goals to create an arrangement that is mutually beneficial to each.
The vested outsourcing model argues that traditional outsourcing and businesses relationships are focused on win-lose arrangements where one party benefits at the other’s expense (a “what’s in it for me” or “WIIFMe” mentality). In contrast, vested outsourcing creates a win-win relationship in which both parties are equally invested in each other’s success (a “what’s in it for we” or “WIIFWe” mentality).
That “What’s in it for we” mindset is the basis of a vested outsourcing agreement. The parties must agree upon a “Desired Outcome” that can be objectively measured to determine whether the relationship is successful. This outcome (or outcomes) can include cost reductions, revenue increases, schedule improvements, increased market share and better levels of customer service.
More than simply focusing on the success of the contract relationship, vested outsourcing invests both the company and the service provider in the success of each other’s overall business, which strengthens the sense of partnership and encourages a more lasting relationship. By sharing their expertise and aligning their goals, both parties are able to drive innovation, adapt to changing needs and mitigate risk while working towards mutual success.
Vested outsourcing relationships depend on collaboration, transparency, flexibility and trust. Rather than traditional arrangements where companies buy transactions or services from suppliers, vested outsourcing instead focuses on “buying results.”
Benefits of Vested Outsourcing
There are many benefits realized for companies who use the Vested Outsourcing business model, here are three such benefits:
Benefits of Vested Outsourcing #1: Risk and Revenue Sharing Creates a “Win-Win”
The service provider looks at how it can best apply processes, technologies and capabilities that will drive value to the company that wants to outsource logistics services to the provider. This commitment from the provider to deliver results for the customer, like a commitment to reduce costs, reduce errors, eliminate waste and improve service or increase market share, shifts risk to the outsource provider.
On the flip side the customer outsourcing to the logistics service provider commits to allow the outsource provider to earn additional profit, above and beyond industry average profits for their service area, for achieving this incremental value. In addition the company that is outsourcing commits to providing a certain level of business for the outsource provider.
This is truly a win-win relationship, surely driving more value over time as the companies work together.
Benefits of Vested Outsourcing #2: A Focus on Stated and Expected Results, Not Tactics
When an outsourced provider and a customer engage in a vested outsourcing business model a benefit realized is the increased likelihood of meeting goals and objectives because both parties are focused on results and working together (collaboration) to achieve a shared result. Since that result is stated from the get go, it is more likely to be achieved.
Further, mutually beneficial, shared incentives drive innovation and cost effectiveness as stated in Solow’s Law. In Solow’s Law, business growth is driven by innovation. In Solow’s findings, he saw that 87% of economic growth is driven by “technical change” which is driven by improvements in business process or technical improvements in products. The vast majority of today’s logistics outsourcing contracts are for labor and physical capital rather than innovation and problem solving. When a contract or relationship is focused on results and solutions, the customer AND the logistics service provider wins. Now both parties have a vested interest in other’s success, creating an environment of shared risk and reward.
Benefits of Vested Outsourcing #3: True Collaboration and a Paradigm Shift
In the traditional model of outsourcing, it was the mindset of “What’s in it for ME” and in vested outsourcing, the mindset switches to “What’s in it for WE.”
- The focus goes from getting the service provider to meet my needs to both parties finding a way to meet both of their needs (cost savings and gained revenue).
- Instead of saying it’s in the contract and it’s their problem, the mindset goes to working together to achieve performance and compensation goals.
- Culture and attitude are everything, and in vested outsourcing, instead of a blame and punish environment, or push/pull, there is now an open line of communication, where both parties work together to find solutions.
- Finally, instead of unpleasant surprises, or only communicating when there is a problem, there are now positive integrated plannings and communications.
In order to see the benefits of vested outsourcing can truly be a huge leap of faith for those who have done business with service providers the traditional way. In Vested Outsourcing, you can either create a contract to reflect a true Vested Outsourcing business model, or you can simply be that way in the business relationship. Both can work and have for decades. In fact, what vested outsourcing is at the heart of it, is collaboration. If you are a customer looking to outsource logistics, make sure your logistics service provider, and yourself, truly feel you have a shared focus on results, continuous improvement, and solutions.
- Vitasek, Kate and D. Michael Ledyard. (October 2010). Playing to Win. Outsource Magazine. Retrieved from http://www.outsourcemagazine.co.uk/articles/item/3565-playing-to-win.
- Desired Outcome(s) describe the result(s) a company in an outsourcing relationship strongly wants to achieve. Typically, Desired Outcomes include system-wide, high-level results for items such as lowered cost structures, higher service levels, higher market share, faster speed to market, reduced cycle time and more loyal customers, among others. For a fuller discussion, see The vested outsourcing Manual at Reference No. 11.
- Vitasek, Kate, Art Van Bodegraven and Ken Ackerman. (July 2011). Options in incentive procurement: What are they and when to use them. Warehousing Forum, Vol. 26, No. 8. Retrieved from http://www.vestedoutsourcing.com/wp-content/uploads/2011/08/Warehousing-Forum-v26n8-July2011.pdf.[dead link]
- Logan, Daniel with special contributor Jim Eckler. (August 4, 2011). Vested outsourcing. Slaw.ca. Retrieved from http://www.slaw.ca/2011/08/04/vested-outsourcing/.
- Eckler, Jim. A Better Way to Outsource Business Functions. Retrieved from ecklerassociates.com/uploads/ReinventingOutsourcing.pdf.
- (Quarter 3 2011). Outsourcing for mutual success. CSCMP’s Supply Chain Quarterly. Retrieved from http://www.supplychainquarterly.com/news/201103forward_outsourcing/.
- Vested Outsourcing course page. The University of Tennessee Knoxville. Retrieved from http://thecenter.utk.edu/cms/Vested+Outsourcing/43.html.[dead link]