COVID-19 exposed and exacerbated supply chain challenges. The pressures on supply chains remain enormous, leaving many supply chain professionals with a key question: Is there a better way to work with suppliers, including critical outsourcing partners such manufacturers and third-party logistics providers?
The answer to that question lives in a “Vested” outsourcing business model. It combines a formal relational contract with an outcome-based business model, creating transparent and highly collaborative “win-win” outsourcing relationships.
The Vested model grew out of research at the University of Tennessee, funded by the United States Air Force. A key part of the research studied some of the world’s most successful supplier relationships to learn why some outsourcing deals were highly successful, while others either failed to live up to promise, or simply failed. The research included successful (and often award-winning) relationships ranging from Procter & Gamble, Microsoft, McDonald’s, and the U.S. Department of Energy.
Researchers saw common threads in the most successful relationships. All had a very different type of business relationship with their suppliers and service providers — relationships that transcended a traditional buy-sell transactional mentality to one marked by a highly collaborative “win-win” approach. The researchers described their observations as a “Vested” mindset because of the true win-win nature of the relationships, based on mutually defined desired outcomes. Simply put, a win for the buyer was a win for the service provider. Ergo, the parties were Vested in one another’s success.
Codification of the Methodology
UT’s next phase of research centered on codifying a repeatable methodology that organizations could follow to improve their outsourcing relationships. It identified five rules for implementing a Vested business model:
- Focus on outcomes, not transactions;
- Focus on the what, not the how;
- Agree on clearly defined and measurable outcomes;
- Adopt pricing model incentives that optimize the business, and
- Embrace a governance structure that provides insight, not oversight.
Figure 1 illustrates how the rules work together to create win-win business relationships.
A brief summary of the five rules follows.
Focus on outcomes, not transactions. Shifting the mindset from a focus on specific transactions to desired outcomes means that instead of buying transactions, companies purchase outcomes, which can include targets for availability, reliability, revenue generation, employee or customer satisfaction and the like.
Focus on the “what,” not the “how.” If a partnership is outcome-based, it will no longer have a multiplicity of service level agreements (SLAs) that the buyer is micromanaging. The outsource provider or supplier has won the contract because it has the expertise that the buyer lacks. Therefore, the buyer must trust the supplier to solve problems.
Agree on clearly defined and measurable outcomes. Make sure all the parties are on the same page about their desired outcomes. Ideally, use no more than about five high-level metrics. The parties need to collaboratively spend time to establish explicit definitions for how relationship success is measured.
Adopt pricing model incentives that optimize the business. The Vested business model does not guarantee higher profits for service providers. Rather it creates a win-win economic model that highly motivates the supplier to invest in innovation and transformation that will benefit the customer. A well-structured Vested pricing model is highly transparent, with a focus on reducing total cost of ownership and measuring return on investment. In addition, the pricing model should be structured to ensure that the service provider assumes risk only for decisions within its control. For example, a transportation service provider shouldn’t be penalized (or rewarded) for the changing costs of fuel, and a distribution provider should never be penalized for product mix shifts leading to a decrease in throughput. Finally, the pricing model should link incentives to the desired outcomes, thus highly motivating a service provider to invest in innovation and transformation initiatives. The more effective the service provider is at achieving desired outcomes, the more incentives (or profits) it will make.
Embrace a governance structure that provides insight, not oversight. A flexible and credible governance framework will enable all the rules to work in sync. The structure governing an outsourcing agreement or business relationship should instill transparency and trust about how operations are developing and improving.
Putting Theory Into Practice
Does following the Vested methodology really work? The short answer is yes. Since UT researchers published their first book on Vested, more than 50 organizations have used the methodology to create outsourcing agreements.
Vancouver’s Island Health Authority has a Vested agreement with South Island Hospitalists, a group of physicians who care for patients with the most complex medical issues at the authority’s two largest hospitals. The parties’ labor services contract is anchored in a formal shared vision: “Together, we are a team that celebrates and advances excellence in care for our patients and ourselves through shared responsibility, collaborative innovation, mutual understanding, and the courage to act in a safe and supportive environment.”
The contract also includes six guiding principles, which obligate the parties to make “what’s in it for both of us” decisions. For example, one on equity states: “We are committed to fairness, which does not always mean equality. We will make decisions based on a balanced assessment of needs, risks, and resources.”
One metric the team uses is relationship health, the number of people who expressed a positive attitude toward the relationship, which increased by 84% in just two years. Administrators and hospitalists who had called their relationship “broken,” “dysfunctional” and “distrustful” prior to making the shift to Vested now describe it as “collaborative,” “trusting” and “supportive.” Kim Kerrone, vice president of support services and chief financial officer, points to financial benefits as well. “For the first time, the administration and our doctors are innovating together to drive efficiencies and optimize patient care with our limited budget,” she says. “We not only came in under budget, but we also increased our revenue by improving our MSP [Medicare secondary paying] billing process. And in a publicly funded healthcare environment, that is exactly what we need to be focusing on.”
The true test came when COVID hit. In March of 2020, the Island Health system suddenly faced a dramatic change in its patient mix. Total patient count dropped 60%, as the health system postponed elective or non-urgent procedures to mitigate the spread of COVID-19. Even though the physicians needed to manage fewer cases, those patients were higher risk on average than the ones handled in normal times. But rather than point fingers and play the blame game, the parties turned to their flexible relational contract and the five rules of Vested to decide how best to optimize a bad situation. The result: front-page headlines in the local newspaper, touting the flexibility and innovations coming from deep collaborative efforts.
Given the uncertainty that lies ahead, it’s more important than ever to rethink how you work with supply chain partners. While the Vested methodology is a verified means of turning adversarial relationships around, it has also proved successful in all types of supplier relationships, including those with new partners.
To date, more than 40 organizations have profiled their success with Vested. Deal types range from third-party logistics, facilities management, labor services, reverse logistics, contract manufacturing and IT services. Most recently, BP used the methodology to conclude a real estate and facilities management outsourcing agreement with JLL. Wendy Cuthbert, BP’s global head of workplace solutions, shared her enthusiasm for Vested in a recent interview with UK-based EP Business in Hospitality: “We had team members who had become experts in the conventional ways of outsourcing,” she said, “and Vested challenged the very hearts and minds of how people were used to working.”
Kate Vitasek is a member of the faculty in Graduate and Executive Education at the University of Tennessee.