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Smart2013 presentation vested outsourcing audio

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Presentation made at the SMART 2013 Supply Chain Conference on the Subject of Vested Outsourcing - how to deliver improved performance, lower costs and enhanced innovation.

Presentation made at the SMART 2013 Supply Chain Conference on the Subject of Vested Outsourcing - how to deliver improved performance, lower costs and enhanced innovation.

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  • Thank you David ………..Before moving into the presentation itself I just want to clarify the term Outsourcing. From Vested’s point of view we define Outsourcing in the same way that economists would do so. That is Outsourcing is any activity that is carried out by an outside provider on behalf of an organisation. This can mean the provision of services or the supply of components or materials that the organisation may use internally. The same Vested principles can be applied regardless of the nature of the goods or service that is being procured. As we will discuss during the presentation the benefits of a Vested approach increase the more the outsource provider can use their knowledge and expertise to create value for the parties involved.
  • Vested while only coming to Australia now has an excellent pedigree.It is based on research carried out by the University of Tennessee into what made some performance based contracts successful whereas other were a mess.The research was so interesting to the United States Air Force, who spend 50% of their budget on outside services, that they contributed funding to the project.This research has led to a whole series of books that describe the research and its findings. Importantly it has converted the findings and research into a recipe that can be used to create or convert deals to become Vested.
  • So to account for why the research was conducted and why organisations such as the USAF or the International Association of Commercial and Contract Management (IACCM) were keen to be involved there must be a problem ….. Right?
  • SO! How's that Outsourcing going for you?These two surveys capture the essence of the problem for both customers and service providers.A few customers are experiencing significant impacts on their ability to perform and meet their own customers expectations because of outsourced elements of their supply chain aren’t working as they should.While root causes can be many and varied this issue has moved up to third on the list of reasons for supply chain disruptions.Even if you are an outsourcer that has not been impacted in such a major way you may very well be sitting in the 75% of people in the second survey who are thinking “I should be doing better than this” or “I’m not getting the benefits I thought I would from this arrangement”! While only 25% of the dissatisfied will take action to exit the arrangement the level of dissatisfaction is disturbing. There is a lot of unrealised value in outsourcing arrangements.
  • Outsourcing arrangements can also suffer from the ‘watermelon’ scorecard problem. Otherwise known as green scorecards – Red Faces!A service provider conducts business exactly as the customer specifies and measures the results which meet the target. Unfortunately the results at the bottom line for the business fail to show the expected benefits, surely there must be something the service provider is doing wrong! In the end the customer is getting exactly what they contracted and paid for …… it just wasn’t what they needed!
  • The research by the Vested team at the University of Tennessee identified 10 Ailments that afflict outsourcing deals.In some cases the ailment may only cause a slight sniffle or it might be so bad you should be home in bed! . The task for you here today is to think about these ailments and the deals you might be involved with and ask yourself “Do I suffer from this ailment …… and if so how badly?”1.Penny Wise and Pound Foolish:Occurs when a company outsources based purely on costs. In the end you get what you pay for, This ailment has been described as stepping over a dollar to pick up 5 cents. The Nobel Prize winning economist Oliver Williamson pointed out that you SHOULD leave money on the table when doing a deal, it builds trust and commitment and in the end the most expensive deal is the one that FAILS! 2.The Outsourcing Paradox: Happens when a buyer hires an “expert” service provider then proceeds to tell them precisely how to do the work, usually with a massive “Scope of Works” document that you can’t pole vault over and which leaves no freedom for the expert service provider to exercise their knowledge to save you money. We often find that the creators of such large Scope of Works documents know a great deal about the WRONG way to carry out a task!3.Activity Trap: The more transactions performed the more money the service provider makes, =no incentive for improvement. We see this so often in the 3PL industry where the service provider could help reduce the customers inventory but to do so would reduce income from storing pallets.4.The Junkyard Dog Factor: Retained ‘internal’ experts ‘micro-manage’ the contract. All too often the mindset is “we really don’t trust these service providers so we’ll keep Joe on-board to keep them honest” Joe’s job then takes on a council compliance officer flavour in that if he isn’t picking issues he isn’t earning his salary. Joe was also most likely involved in producing the scope of works we talked about earlier.5.The Honeymoon Effect: The provider initially goes overboard to perform but drops back over time as other clients come on board. Even the most upright service provider finds it hard to maintain the focus on a new client when another new client comes on board.6.Sandbagging: To prevent the Honeymoon Effect, some companies adopt measures to encourage service providers to perform, can lead to minimalist results. If you are a service provider who has found a 15% cost saving but you have a hard target of 5% cost reductions per year, do you pass on the full 15% or do you meter it out at 5% per year? Sergey Bubka was paid $50,000 dollars every time he broke the world record for pole vault. In one year he broke it 35 times, by about 1 centimetre each time. Chance of sandbagging?7.The Zero-Sum Game: This is one of the most common ailments.  Companies believe, mistakenly, that if something is good for the service provider, then it is automatically bad for them. They have missed the whole point about the mechanisms that can work to make the pie bigger for both parties.8.Driving Blind Disease:Occurs when there is no formal governance process to monitor the performance of the relationship. Nothing is going to temp a service provider more than the thought that any opportunistic behaviour on their part won’t be detectable by the customer!9.Measurement Minutiae: Too much of a good thing can be bad for you. This applies to Fast Food and to measuring service providers. Two many KPI’s and they form into tiers and how many times will tier two KPI’s be looked at? That right rarely!10The Power of Not Doing: The saddest of all the ailments, having performance measures but not using them. Often linked with the over measurement problem referred to before.
  • So clearly there is a problem worth addressing. We need to take account of the wise words of Albert here. We aren’t going to solve this by doing the same thing as we do now …. But better or harder. It will take a much different approach to resolve the issues and release the pent up value that is hidden away in our Outsourcing Deals!
  • So is there a better way to undertake outsourcing? Can we avoid the 10 Ailments and release the value contained in our Outsourcing arrangements? Luckily there is a solution and its called Vested.
  • Since the original research was published the idea has developed and has been enhanced through a series of books that flow from Why the Vested approach is needed, What is the Vested approach, How you might go about implementing the Vested approach and finally the stories of organisations that have successfully implemented Vested.And the reason this approach is called Vested is that done properly these arrangements result in both parties to the arrangement being Vested in the success of the other.
  • Vested is a hybrid contracting model that aims to occupy a position that has the economic benefits of outsourcing with the relationship benefits of in-house sourcing. It shifts the focus from outsourcing transactions to buying outcomes. Importantly it switches focus from fighting over the pie to growing the pie!At the same time it is not a soft approach it has well defined outcomes and well thought out governance processes. When you implement a Vested agreement you are buying change and the future.
  • At the core of a Vested agreement you have 5 Rules which are all based around a Win/Win – “What's In It For We” approach.Focus on Outcomes, Not Transactions2. Focus on the What, Not the How3. Agree on Clearly Defined and Measurable Outcomes4. Optimize Pricing Model Incentives5. Governance Structure Should Provide Insight, not Merely OversightAnd if you think back to the 10 Ailments we looked at earlier you can see how each of the ailments are addressed by the 5 Rules!
  • In most outsourcing deals people are more comfortable contracting for labour units or physical services and of course the more of these labour inputs or physical activities are carried out the more revenue the service provider gets. Clearly there is no incentive for improvement as Dilberts boss is indicating. Vested outsourcing takes an Outcomes based approach, for example Rolls Royce has Vested leasing arrangements with the airlines where they get payed for the hours that the engine spends in the air flying, not how much maintenance they have to do on the engine. This changes the whole incentive structure to one where breakdowns and lengthy maintenance periods are not attractive (as they would be under a transactions based approach). A similar approach taken by General Electric and the USAF for the F404 engine for the F18 Hornet resulted in a reduction in repair turn around time from 120 to 47 days and reduction in the Total Cost of Ownership for the program of US$79 million.
  • Joy’s Law highlights a reality that your organisation can’t expect to be the expert on every matter, particularly around and area that you are outsourcing because it is non-core to your business. This why overly prescriptive Scope of Works are a bad idea. By leaving the HOW to your service provider you will unleash their creativity on the problem.This is illustrated by the challenge that small convenience stores in Japan had, how to make Watermelon’s fit into their space constrained supply chain and stores as well as their customers small home fridges? By throwing the problem out to their growers the solution “Square Watermelons”!
  • Just because you are contracting for something that is different from the easily measured transactions you might have been used to in the past doesn’t mean that you can’t develop tangible measures for those outcomes. In fact if you don’t do this you might end up like Yogi!!Rule 3 is one of the key areas that shows Vested isn’t a feely touchy soft approach to contracting. But make sure not to go overboard and set yourself up for Ailment 9.It is also important to jointly develop the performance measures between the customer and service provider. Measures that are imposed by one party on the other can have a negative effect on the relationship.
  • Allied to the issue of measurements is the problem with perverse incentives as highlighted in the example of the Hanoi Rat Bounty. This type of problem with colonial administrations was not unusual, the team from “Freakanomics” have a similar story involving India where the British put a bounty on cobra’s which resulted in snake farming and a spike in populations of cobra’s when the bounty was cancelled and the farmed cobra were released. Similar stories are told in the IT industry where programmers are rewarded for each “bug” they find in the programs they are writing. In the end the designers of such reward systems are undone by the law of unintended consequences.
  • The pricing model is the engine room of value creation in a Vested agreement. This where both parties get incentivised to grow the pie! It is also important to make sure that Risk and Reward are balanced. Neither party should take on a risk they are not being compensated for. Traditional contracts are quite bad at this in that they try and dump or shift risk rather than manage it.Solow’s Law comes from a Nobel Prize winning economist who studied the drivers of economic growth. His finding that Labour and Physical capital only make up 13% of economic growth should be of particular interest to those outsourcing transactions …. It means that potentially you are missing out on the gains to be made in the other 87% of the economic growth pie.As mentioned earlier with a Vested deal you are buying change and the future. Getting the pricing model right can be the hardest part of a Vested deal but the impact is well worth the effort.
  • An important part of the Vested approach is the implementation of robust governance structures that both help build and strengthen the relationship while at the same time ensuring the arrangement delivers the value both parties are looking for.The processes range from a series of business reviews which look to the ‘clearly defined outcomes’ from Rule 3 to understand how the “business” is performing to a decision making process that emphasises joint responsibility and decision making.Part of this approach is to put personnel from each party together to manage a particular activity/level of responsibility. This process called “Two in a Box” makes sure that all decisions are made at the right level by the right people. If a ‘two in a box’ can’t solve and issue then they can escalate the issue to the appropriate pair above them until it reaches the Business Review level. Our experience is that most issues get fixed much lower down than this.
  • The 5 Rules have been converted into a recipe that organisations can follow to implement a sound Vested deal. These steps are outlined in this manual but we recommend that you and your partner jointly go through the online course that mirrors these 10 steps.Each step comes with “Homework” that comes together at the end of the process to create your Vested agreement.
  • So when people come to a conference like this and hear about a new approach to business like Vested the first thought is always “yes but does it work”. The Vested team has gone to great lengths to get the people who have adopted this approach to help us write up case studies. While you can get many of these cases from the www.vestedway.com website the long versions have all been collated into this new book. As you will see from the names here the organisations involved range from large multi-national firms to government authorities. There are also smaller organisations who have benefited from the use of Vested.
  • To give you a flavour for the types of benefits we have included an overview of one of the cases. Microsoft and Accenture came together to set up a Vested deal to outsources Microsoft's financial services. It is worth noting that there was no “Scope of Works” or baseline in this deal. Existing systems globally were too fragmented to get a handle on.The results were a win for the business itself with a dramatic improvement in service levels and performance. With results such as a 20% increase in first pass matching meaning less ‘rework’ to be done and the freeing up of staff from tactical to more valuable work that created value for the business user community.The Purchasing and Finance communities within the business won through reductions in expenditure and realised value through innovation. Who wouldn’t be pleased with a 20% reduction in costs. The cost model also makes these saving ‘hard’ rather than soft. And finally the service provider won through contract extensions and increases in the scope of business gained. Everybody won through a ‘What's In It For We’ deal.
  • Its always good when people say nice things about you so here is a range of comments from some key people in the area of deal making.We have been recognised by some of the leading think tanks in the procurement, contracting and outsourcing space as well as by some of our key clients and the business press.
  • It is hard to cover a subject like Vested in such a short time so if you want to know more visit the Vested website where you will find a mountain of material or contact either of the presenters here today.
  • This slide shows some of the services that can be accessed via the websiteIt is also worth mentioning that the Vested approach is not a consultant driven approach, it is something that you have to do yourself along with your partner! While you can purchase the books and get started without any additional help we would recommend that you take the online training courses that can be accessed on the Vested way website. Some of these courses are no charge so well worth doing.The Vested faculty in The USA and Australia can also assist you in your Vested journey by providing independent assessments of your deals and your relationships with outsourcing partners. This could be for a ‘greenfield’ deal or what we call a ‘flip’ where we convert an existing deal so that it becomes Vested. If you look at the case studies on the website or read the longer versions in the book you will see a number of the success stories were deal ‘flips’.
  • Are there any questions?

Transcript

  • 1. Third Party Insourcing/Outsourcing Delivering Better Service, Lower Costs and Increasing Innovation Through „Vested Outsourcing‟ Andrew Downard Karl Manrodt, Ph.D. Managing Director Professor AD Supply Chain Group P/L Georgia Southern University
  • 2. Andrew Downard & Karl Manrodt Introduction Based on Research by And has led to a series of books:
  • 3. Andrew Downard & Karl Manrodt The Problem…..
  • 4. Andrew Downard & Karl Manrodt How‟s That Outsourcing Going For You? • Late in 2012 the Zurich Insurance Group re- issued a survey on Supply Chain Risks – Outsourcing failure is now a significant cause of supply chain disruption. – Outsourcing failures had increased from 17% to 35% – Moving the issue into third place on the list of causes • Research in Europe* indicated: – 75% of respondents expressed dissatisfaction with outsourced services, 25% intended or did insource. *Freytag, P. V., Clarke, A. H. & Evald, M. R., 2012. Reconsidering outsourcing solutions. European Management Journal, Volume 30, pp. 99 - 110.
  • 5. Andrew Downard & Karl Manrodt As outsourcing exploded in the 1990s and 2000s and sourcing became more complex as services grew, companies began to realize they were faced with the “Watermelon Effect” A good supplier might be doing what they were asked and achieving “Green” metrics, but the overall business results are still “Red” Conventional Approaches Encourage the: “Watermelon Scorecard” Are You Suffering from a “Watermelon Scorecard”
  • 6. Andrew Downard & Karl Manrodt The 10 Ailments of Outsourcing No Ailment Description 1. Penny Wise and Pound Foolish: Occurs when a company outsources based purely on costs. 2. The Outsourcing Paradox: Happens when a buyer hires an “expert” service provider then proceeds to tell them precisely how to do the work 3. Activity Trap: The more transactions performed the more money the service provider makes, = no incentive for improvement 4. The Junkyard Dog Factor: Retained ‘internal’ experts ‘micro-manage’ the contract 5. The Honeymoon Effect: The provider initially goes overboard to perform but drops back over time as other clients come on board. 6. Sandbagging: To prevent the Honeymoon Effect, some companies adopt measures to encourage service providers to perform, can lead to minimalist results. 7. The Zero-Sum Game: This is one of the most common ailments. Companies believe, mistakenly, that if something is good for the service provider, then it is automatically bad for them. 8. Driving Blind Disease: Occurs when there is no formal governance process to monitor the performance of the relationship. 9. Measurement Minutiae: Too much of a good thing can be bad for you. This applies to Fast Food and to measuring service providers. 10 The Power of Not Doing: The saddest of all the ailments, having performance measures but not using them.
  • 7. Andrew Downard & Karl Manrodt Is There A Better Way To Outsource? “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” - Albert Einstein
  • 8. Andrew Downard & Karl Manrodt The Solution…..
  • 9. Andrew Downard & Karl Manrodt Based On Research With…… Why What How Tells the real stories of…
  • 10. Andrew Downard & Karl Manrodt • Shifts from a conventional “buy/sell” business model focusing on transactions to an “outcome” based business model focusing on results • Moves beyond saying “strategic supplier” to developing a carefully crafted collaborative agreements • Creates Value through win-win solutions economics (grow the pie, not fight over the pie) Vested Outsourcing is a Hybrid Model
  • 11. Andrew Downard & Karl Manrodt The 5 Rules of Vested Outsourcing
  • 12. Andrew Downard & Karl Manrodt 1. Outcome Based vs. Transaction Based Model • Most outsourcing relationships follow a transaction-based business model • This can be cost plus or a fixed price per transaction where the service provider gets paid a transaction fee for each activity that is performed • Vested Outsourcing moves to an outcome-based business model where the service provider is paid for achieving results, not just for performing tasks or activities
  • 13. Andrew Downard & Karl Manrodt Rules 2 Focus on the WHAT, not the HOW Joy’s Law No matter who you are, most of the bright people don’t work for you
  • 14. Andrew Downard & Karl Manrodt You got to be very careful if you don't know where you're going, because you might not get there. - Yogi Berra Rule 3 Clearly Defined/Measurable Desired Outcomes
  • 15. Andrew Downard & Karl Manrodt • Definition of Perverse Incentives − A classic example occurred in Hanoi when a French program paid people a bounty for each rat pelt handed in. The program was intended to exterminate rats. Instead it led to the farming of rats.1 Be On Guard For Perverse Incentives… 1 Michael G. Vann, "Of Rats, Rice, and Race: The Great Hanoi Rat Massacre, an Episode in French Colonial History," French Colonial History Society, May, 2003 [Def] “A perverse incentive is a term for an incentive that has the opposite effect of that intended. Perverse incentives by definition produce unintended consequences.” The Language of Psychology
  • 16. Andrew Downard & Karl Manrodt Rule 4 Pricing Model with Incentives Optimize for Trade-ups! Solow’s Law: Business Growth is Driven by Innovation 87% of Economic growth is driven by “technical change” which is driven by improvements in business process or technical improvements in products. Labor & physical capital 13% (e.g buildings, machinery) The vast majority of today‟s outsourcing contracts are for labor and physical capital rather than for innovation and problem solving!
  • 17. Andrew Downard & Karl Manrodt Rule 5 Insight vs. Oversight Governance Structure BECOMES • Getting the supplier to meet my needs • It’s in the contract, now it’s the supplier’s problem • Blame and punish the supplier • Unpleasant surprises • Finding a way to meet both our needs • Work together to achieve performance and compensation goals • Communicate the issues, jointly find solutions • Integrated planning and communications ME WE Manage the Business…Not Just the Supplier!
  • 18. Andrew Downard & Karl Manrodt The Recipe: 10 Elements of a Sound Agreement
  • 19. Andrew Downard & Karl Manrodt • P&G (Real Estate/Facilities Mgmt) • Microsoft (BPO) • McDonald‟s (Supply Chain) • U.S. Dept. of Energy (Environmental Services) • State of Minnesota Dept. of Transportation (Construction) • Integrated Management Services (Staffing) • Diversey (IT) • Water for People (non-profit NGO support in developing countries) Success Stories – It Really Does Work!
  • 20. Andrew Downard & Karl Manrodt Procurement / Finance I WIN with lowest possible costs I WIN with higher service levels Business Units / Customer I WIN with higher margins/profitsSupplier 20% reduction in cost of contract, with 35% projections $30m in transformation value realized 7 year contract; added 5 years after first 2 years Book of business expanded from $185 to $330m Higher profitability; share of transformation value in profits Global Process Standardization - 140 to 40 Systems 23% reduction man-hours in “tactical” work - allows for more strategic focus 20% increase in first pass accounts receivable Only 0.43% misses across all Accenture SLAs Internal satisfaction for finance customer increased 90% SOX Compliance from 15 to all 95 subsidiaries Results From Microsoft – Accenture OneFinance In First 2 Years Does it Really Work? WIIFWe
  • 21. Andrew Downard & Karl Manrodt What They Are Saying… Tim Cummins, CEO, International Association for Contract & Commercial Management "Vested Outsourcing offers a robust approach for developing high-performing strategic relationships.” Dawn Tiura Evans – President and CEO, Sourcing Interests Group “Kate has hit the nail on the head. The “rules” while often spoken about have never been so clearly defined as they are here. The journey to a truly collaborative agreement is practically guaranteed if you follow the step-by-step process outlined in this great book.” Peter Sheahan, Founder and CEO, ChangeLabs and Author of the Best Selling Book “Flip” “Vested Outsourcing truly flips conventional outsourcing on its head. Kate has captured what it takes to drive REAL value through your external partnerships. A must read for anyone who wants to do outsourcing.” Frank Casale – CEO, Outsourcing Institute “Vested Outsourcing is a game-changing approach that will quickly become the new gold standard for advanced outsourcing relationships. It is a critical enabler for Outsourcing 2.0” Tim McBride – Chief Procurement Officer, Microsoft “As the Chief Procurement Officer at Microsoft it is my job to help us adopt next generation outsourcing models and Vested Outsourcing is definitely one of the tools we have in our toolkit that we are exploring”. Todd Shire, Global Logistics Sourcing Strategy Manager, Intel "I predict the buzzword for the next decade will be "incentives". Only when our incentives are aligned will we succeed with collaboration. Vested Outsourcing nails how to get collaboration right.“ Brad Mitchell, President of Distribution and Logistics, UPS Listed Vested Outsourcing as one of the top five supply chain trends for 2010, stating, “Companies will take a vested interest in Vested Outsourcing” Wall Street Journal – Six Ways Small Businesses Can Save Money Vested Outsourcing is identified as one of “six ways small businesses can save money.”
  • 22. Andrew Downard & Karl Manrodt • Visit the University of Tennessee’s dedicated Vested Outsourcing website at www.vestedway.com • Andrew Downard • Vested Center of Excellence andrew.downard@adsupplychain.com.au Tel 0419581705 • Karl B. Manrodt, Ph.D. • Georgia Southern University Karl@vestedway.com For More Information
  • 23. Andrew Downard & Karl Manrodt Services to Support a Vested JourneyProducts/Services Courseware • Vested Outsourcing Orientation (four free online modules) Support • Speeches • Half Day and Full Day Workshops Courseware • 3 Day Open Enrollment Support • Deal Review • Compatibility and Trust Assessment • Onsite Facilitated Workshops • Business Case Justification (Pony) Courseware • Online course for Getting to a Vested Agreement • Collaborative Contracting Open Enrollment Support • Onsite Facilitated workshops • Coaching support • Consulting projects Courseware • Certified Deal Architect • Re-certification of Deal Architects Support • Facilitated Governance Management • Deal Certification Resources • Website • Blogs • Books • Articles • Social Media (linkedin group) • Case Studies and White Papers • Limited set of tools free with course • Advanced set of free tools w/online course • Proprietary set of tools w/coaching • Funded Research MasteryImplementationUnderstandingAwareness Orange Text – University of Tennessee course offering Grey Text –provided by UT Faculty and Vested Outsourcing Center of Excellence partners independently
  • 24. Questions