Get Vested!
5 Principles for Successful Outsourcing
In her book “Vested Outsourcing: Five Rules That Will Transform Outsourcing,” author and professor Kate Vitasek redefined how businesses and their outsourcing partners should view their relationships.
The foundational idea is that both customer and vendor should become vested in one another’s success. By doing that, not only will the day-to-day relationship run smoothly and produce good results, but both companies will prosper more in the long-term.
This can be seen as an example of “game theory.” Broadly, game theory predicts that the benefits of working together toward a common solution will outweigh any drawbacks. In other words, the more two sides can work together to promote each other’s success, the better off both will be.
Based on the groundbreaking work in “Vested Outsourcing,” here are five principles for a successful outsourcing partnership:
#1 – Outcomes Matter Most
Truly successful outsourcing partnerships are focused more on outcomes than transactions. Different outsourced labor providers may offer different prices for individual transactions, and it’s obviously tempting to go with the lowest option.
But buyer beware! When you focus exclusively on a transaction-based model, you run the risk of getting exactly what you paid for: lots and lots of transactions. A ton of transactions completed (and billed to you) doesn’t necessarily equal productive outcomes.
When customer and vendor begin from the standpoint of defining the outcomes they would both like to achieve, they’re much more likely to work together to help create mutual success.
#2 – Focus On What, Not How
A crucial ingredient of a healthy relationship is a well-defined set of boundaries and responsibilities. As someone looking for outsourced labor, your major concern should be with what you want to accomplish during an outsourcing relationship. On the other hand, the outsourced labor provider must be focused on (and an expert at) determining how to deliver on what you want.
Put it like this: your labor provider doesn’t understand your business the way that you do. So why would you let them define your objectives? Conversely, your labor partner should be trustworthy and experienced, ready to devise a solution that achieves your desired goals.
By respecting boundaries and taking responsibility for plotting their own course, both the outsourcing business and the labor provider will be more likely to successfully steer that course.
#3 – Clear Definitions, Clear Wins
Related to #1, the focus on outcomes over transactions, this rule should hammer home one utterly vital part of a great outsourcing relationship. Both the labor vendor and the customer must agree on clear definitions of success, how to measure that success, and what happens when that success is achieved.
Ideally, these definitions will be as specific as possible, and will be made explicit in an agreement. That agreement should also lay out the financial rewards for hitting specified benchmarks and goals, as well as the penalties for failing to hit those marks.
If performance targets are pre-determined, agreed upon explicitly, and incentivized, both parties will benefit more.
#4 – Optimize Your Pricing
One trap that often ensnares outsourced labor arrangements is that of being “penny wise, pound foolish.” This happens when the company in need of outsourcing agrees to a pricing model that doesn’t hit the sweet spot of cost/service tradeoff.
An optimized pricing model will incentivize the best cost/service tradeoff level for the company that brings in labor. It will also reward the labor provider for putting in the effort necessary to hit that optimum level.
Pricing models can benefit both customer and vendor in an outsourcing relationship, and they should whenever possible.
#5 – Insight > Oversight
When you watch your outsourcing relationship from on high, looking down and reacting to the activity below, that’s oversight. When you’re actively involved in determining what’s working and what isn’t, helping to improve productivity and profitability, that’s insight.
Insight is much better than oversight. For example, an outsourced labor provider that records useful measurements can redesign workflows to save time and increase output. That kind of insight should be constantly refreshing and refocusing the outsourcing relationship, making it more advantageous for everyone.
The military maxim holds that whoever maintains the initiative will win the war. In an outsourced labor agreement, those partners that continue to improve and optimize their work together are the ones that succeed the most.
Investing In Each Other: nGROUP’s Approach
For nGROUP, the idea of vested partnerships is nothing new. Over the past 20 years, we’ve been forming long-standing relationships with partners in a huge variety of industries. Every time we come into a new distribution center, factory, or packing plant, we set up determining how best our new partnership can produce results that everybody loves.
Far too often, we’ve seen other traditional outsourced labor providers treat their business as if it is a zero-sum game. The exact opposite of game theory, the idea behind a zero-sum game states that no one can “win” without someone else “losing.”
Many times, that zero-sum game manifests in the way that traditional outsourced labor providers structure their agreements. Because they only recognize the need to focus on their own success, they leave their would-be partner scrambling to find benefits in the relationship.
For example, a traditional provider may be more pushy about getting a client to accept a rock-bottom transactional price for their services. They might even pitch this idea as the lowest cost option to make it look sweeter. In reality, though, the labor provider just wants an agreement that allows them to rack up huge numbers of billable transactions. The end result can be some shocking invoices that don’t feel “low cost” at all.
At nGROUP, we believe in Kate Vitasek’s vital truth: the more successful our partners are, the more successful we’ll be. That’s why we work hard to define specific measurements for that success. It’s why we focus on how the job gets done, and constantly seek to optimize performance from our teams. It’s also why we love building fixed-cost (or cost-per-unit) pricing structures that only compensates us for real production — not just “more work.”
Working together, investing in each other, and helping each other to find more ways to win truly is the ultimate recipe for a great outsourced labor partnership. For nGROUP, that’s the only kind of relationship we understand.
