For organizations seeking a collaborative win-win approach to outsourcing, the Vested sourcing business model is worth consideration. It is the product of nearly 20 years of research at the University of Tennessee, beginning with a deep-dive funded by the United States Air Force on outcome-based outsourcing in 2003.\n\nUT\u2019s ongoing research into the world\u2019s most successful outsourcing relationships, including those from Dell\u2019s and the Canadian government, has uncovered five key rules for establishing win-win strategic partnerships that work collaboratively to achieve business outcomes. When a company and its outsourcing partner follow these rules they become vested in each other\u2019s success: A win for the buying company is a win for the service provider.\n\nThe model offers a significant shift away from the transaction-based model commonly used in IT oursourcing arrangements, and its rules resolve several structural flaws that can emerge in transaction-based and managed servicesagreements.\n\nFor example, a buying organization might want \u201coutcomes,\u201d but the contract spells out dozens or even hundreds of service level agreement metrics instead. The buying organization might also want \u201cinnovation,\u201d but the contract with the supplier has an 800-page Statement of Work with exacting details on how the supplier should perform each of the activities in scope. Or it might want the supplier to implement \u201cefficiencies\u201d while spelling out a transactional pricing scheme that inherently incentivizes the supplier to perform more transactions.\n\nInstead, the Vested sourcing model refocuses business partnerships from a \u201cwhat\u2019s-in-it-for-me\u201d transactional approach to a highly collaborative \u201cwhat\u2019s-in-it-for-we\u201d model that promotes (and rewards) the parties when they collaborate. For example, instead of negotiating who will bear the risk of inflation, the parties embrace the fact that inflation is a reality of business and collaborate to identify and invest in operational efficiencies to mitigate the risk of inflation. \n\nThe following five Vested rules might sound simple, but UT research has found that most companies fail to follow them in an effort to the refocus on the outsourcing relationship on mutual success.\n\n1. Pivot to an outcome-based business model\n\nMost outsourcing arrangements are traditionally built around a transactional model. Under this method, the service provider is paid for every transaction \u2014 regardless of whether it is needed. The more inefficient the entire process, the more money the service provider can make.\n\nManaged services contracts (e.g., painshare\/gainshare contracts often at a fixed scope\/fixed price) have emerged to solve the weaknesses of transactional contracts. While most managed services contracts say they partner for outcomes \u2014 UT research shows they are almost always focused on supplier outputs \u2014 they are not true boundary-spanning business outcomes because the contracts almost always are structured to pit buying organizations and services providers against each other in scope creep battles and hard feelings if performance really deserves a penalty. The more complex and more variable the workscope, the more friction.\n\nThe Vested sourcing model, by contrast, operates under a true outcome-based model. Vested uses a formal relational contract coupled with a win-win outcome-based economic model where the buying organization and service provider align interests to what the buying company actually wants \u2014 success against strategic business outcomes. A win for the company is a win for the service provider \u2014 and vice versa.\n\n2. Focus on what, not how\n\nAdopting a Vested business model does not change the nature of the work to be performed. At the operational level, there is still a need for material to be stored, orders to be managed and fulfilled, calls to be answered, and goods to be delivered. What does change is how the company purchases the outsourced services. Under the Vested model, the buyer specifies \u201cwhat\u201d they want. It is up to the service provider to figure out \u201chow\u201d to put the supporting pieces together to achieve the company\u2019s goals. This gives the service provider the creative room to challenge the status quo and seek the best solutions to do the job.\n\n3. Clearly define measurable desired outcomes\n\nThe third rule of Vested sourcing partnerships is that, to become the beacon for success, desired outcomes must be clearly defined and measured. Desired outcomes are jointly developed by the buyer and supplier and represent boundary-spanning business needs, not simply task-oriented service level measures.\n\nMagnus Kuchler, country managing partner for EY Sweden, explains how organizations make the shift to measuring outcomes under the Vested methodology:\n\n\u201cThe conventional approach to measuring success is to have dozens \u2014 if not hundreds \u2014 of detailed service level measures. But true success is almost defined by more than one process in a networked system. So when you break a process down into small parts, it is easy to fall into measurement minutiae. Real success comes not from \u2018did the supplier get the task done\u2019 but from the end-to-end process succeeding. After all, who cares if your services provider processed an invoice for payment if the invoice sat in an employee\u2019s email inbox for five days waiting for approval? The point is that the end-to-end process failed. What I like about Vested is it eliminates the blame game and uses transparent and collaborative end-to-end root cause analysis where business partners are aligned on a common understanding of success.\u201d\n\n4. Choose a pricing model with incentives that optimize the business\n\nThe fourth rule centers on structuring a pricing model with incentives that reward the service provider for optimizing the business. A key goal of the pricing model is to incentivize the service provider to drive continuous improvement and to invest in innovation linked to the parties\u2019 desired outcomes.\n\nThere are two principles for establishing a pricing model. First, the model must balance risk and reward for both parties. The agreement should be structured to ensure the service provider assumes risk only for decisions within their control. For example, a transportation service provider should never be penalized (or rewarded) for the changing costs of fuel.\n\nSimilarly, a property management service provider should never be penalized for an increase in energy prices. Second, the pricing model needs to link incentives to the desired outcomes. The more effective the service provider is at helping their client achieve desired outcomes, the more incentives (or profits) it can make. A well-structured pricing model creates a true win-win; a win for the supplier is a win for the buyer \u2014 and vice versa.\n\n5. Elect an insight (vs. oversight) governance structure\n\nThe Vested model shifts from a culture of oversight to one of insight. Simply put, the buying organization turns its focus to managing the business with the service provider, not just managing the service provider. Why? If you\u2019ve done a good job of selecting the right partner and aligning their interests by using rules one to four, then the service provider will truly have a vested interest in performing because their success depends on achieving success for the buying organization.\n\nWhile many outsourcing deals rely on governance mechanisms, most do so informally. A key part of creating a Vested agreement is recognizing that you are creating a formal relational contract. This means you must put the relationship front and center and embed formal relationship management and governance constructs into the actual agreement.\n\nContractually obligating outsourcing parties to sound governance mechanisms obligates the parties to take proper governance seriously. UT researchers advocate embedding a governance schedule into the actual contract written in plain language as opposed to legal-ease. \n\nDavid Frydlinger, managing partner at Stockholm-based Cirio Law Firm, explains the rational: \u201cFormally creating a governance schedule in plain language enables the parties to use the schedule more like a \u2018playbook.\u2019 Team members can look at the schedule and clearly see how to govern their partnership.\u201d\n\nFrom research to relevance\n\nToday, more than 100 organizations have applied the Vested methodology in outsourcing deals as diverse as facilities management, reverse logistics, third-party logistics, environmental services, fiber-optic network management, and labor services. UT\u2019s research now includes seven books, 22 white papers, and 20 public case studies that document the success stories of organizations such as Intel (third-party logistics), Dell (reverse logistics), Vancouver Coastal Health (environmental services), and Island Health (labor services\/union contract with doctors), and BP (real estate and facilities management).\n\nThe Vested movement has become a model for best practices in outsourcing globally \u2014 but has yet to get traction for IT outsourcing. In a follow up article we will explore why IT outsourcing has been slow to adopt Vested and how Vested can be a game changer for IT outsourcing. \n\nFor those wanting a deeper dive now, visit the University of Tennessee\u2019s dedicate website and research library at www.vestedway.com.