Maximizing the Value of3PL-Customer Relationships
Presented by…..          Adrian Gonzalez                             Director                  ARC Advisory Group         ...
Is there a better way to outsource?     “The significant    problems we face cannot be solved at the  same level of thinki...
Has Anything Changed in 8 Years?                                                     4                                   ©...
How to Break Out of Rut?                                                                           “3PLs and customers nee...
Do all relationships need to be strategic? Many (if not most) outsourced relationships do not  need to be strategic. In ...
“3PLs are not proactive enough”       Areas 3PLs are falling short of expectations (multiple answers allowed) “3PLs should...
“Still want to maintain control”Factors inhibiting creation of strategic relationships with 3PLs                          ...
Cost Very/Extremely Important                    Important factors in 3PL selection process   95% of the respondents chara...
Contract structures not strategic               Types of 3PL contracts                       in use                       ...
Creating Alignment: The Missing CEO                     People/Functions in 3PL selection process62% of the web survey res...
“If there was one thing we could change…”   If there is one thing my company could change    to strengthen and expand our...
Summary and Recommendations              Most 3PL-customer relationships are not structured              to be strategic, ...
Based on research by……       © Kate Vitasek 2009   14
Vested Outsourcing is….A game changing approach to outsourcing that  Leverages “win-win” thinking associated with Game The...
Early Endorsements                         Cliff Lynch, DC Velocity Magazine"In the outsourcing world, a genuinely new con...
THE     GAMEOF OUTSOURCING     © Kate Vitasek 2009   17
Contracting in Complex Deals is Really Just a Bet                                 © Kate Vitasek 2009   18
The Game of Outsourcing                  © Kate Vitasek 2009   19
Win –Win    is ReallyBeautiful!             © Kate Vitasek 2009   20
“Adam Smith  was wrong….”Adam Smith said: “The bestresults comes from everyonein the group doing what isbest for themselve...
Why Do We Act this Way?            “Morality is            what people             should do.            Economics is     ...
Identifying the PonyThe Pony is the difference between thevalue of the current solution and thepotential optimized solutio...
WIIFWe:                 The Economics of OptimizationVested Outsourcing isthe creation of a mutualsymbiotic “deal” whereal...
DEFININGTHE RULES    OFTHE GAME   © Kate Vitasek 2009   25
3. Clearly                               Defined and                               Measurable                             ...
1. Outcome Based vs. Transaction Based                ModelMost outsourcing relationships arefollow a transaction-basedbus...
2. Focus on the WHAT, not the HOW Most companies   use detailed   statement of  works (SOWs)and Service Level   Agreements...
Joy’s Law    No matter who you are, most of the     bright people don’t work for you                       “For every P&G ...
Solow’s Law Named for Robert Solow, Nobel Prize Winning Economist 87% of Economic growth is driven by “technical change” w...
3. Clearly Defined / Measurable Desired                Outcomes                      You got to be very                   ...
What is Success? If you ask for thebest slide calculator– you will likely getthe best calculator!Instead ask, “what proble...
4. Pricing Model Incentives Optimize for                  Tradeups!Pricing Models Should….        use incentives to       ...
5. Insight vs. Oversight Governance Structure     Many of today’s       governance  structures are crappy!  Those that do ...
How Healthy   is YourRelationship?10 Ailments     © Kate Vitasek 2009   35
Perverse Incentives….        Definition of Perverse Incentives       [Def] “A perverse incentive is a        term for an i...
….can happen anywhere…..                     “One of the most                   powerful laws of the                    un...
….especially in outsourcing agreements!Not following the Vested Outsourcing rules typically leads           to 10 common O...
GettingStarted © Kate Vitasek 2009   39
Vested Outsourcing Implementation Plan                          © Kate Vitasek 2009   40
“The significant   problems we facecannot be solved at the same level of thinking  we were at when we     created them.”  ...
For more information….                             Adrian Gonzalez                              781.471.1154              ...
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Adrian Gonzalez, ARC Advisory Group & Kate Vitasek, Tennessee’s Center for Executive Education on 'Performance-Based Outsourcing: Maximizing the Value of 3PL-Customer Relationships'

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Adrian Gonzalez, ARC Advisory Group & Kate Vitasek, Tennessee’s Center for Executive Education on 'Performance-Based Outsourcing: Maximizing the Value of 3PL-Customer Relationships'

  1. 1. Maximizing the Value of3PL-Customer Relationships
  2. 2. Presented by….. Adrian Gonzalez Director ARC Advisory Group agonzalez@arcweb.com Kate Vitasek Faculty, Center for Executive Educations University of Tennessee kvitasek@utk.edu 2
  3. 3. 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.” 3 3 © ARC Advisory Group
  4. 4. Has Anything Changed in 8 Years? 4 © ARC Advisory Group
  5. 5. How to Break Out of Rut? “3PLs and customers need to make a clean break from the way they have always worked together. This mind shift will be difficult, if not impossible, for many 3PLs and customers. But those who embark on the journey will certainly gain an edge over the competition.”Based on Think Tanks with 43 logistics and supply chain executives and a web survey completed by more than 100 logistics and supply chain executives. 5 © ARC Advisory Group
  6. 6. Do all relationships need to be strategic? Many (if not most) outsourced relationships do not need to be strategic. In many cases, companies simply want to procure a basic service, like transportation capacity or warehousing space, at a competitive price. But most think tank participants were working with at least one 3PL that played a more significant role in their logistics and supply chain operations. How can we move these relationships up the value curve? 6 © ARC Advisory Group
  7. 7. “3PLs are not proactive enough” Areas 3PLs are falling short of expectations (multiple answers allowed) “3PLs should be more proactive in identifying solutions to concerns we communicate to them. We tend to have to pull them along and think outside the box for them.” - Web survey respondent 7 © ARC Advisory Group
  8. 8. “Still want to maintain control”Factors inhibiting creation of strategic relationships with 3PLs Customers don’t see Procurement’s growing role in the 3PL selection process as a significant factor that prevents creating more strategic relationships… …but many 3PLs view it as a problem, especially when procurement folks who only have experience buying commodity goods are put in charge. 8 © ARC Advisory Group
  9. 9. Cost Very/Extremely Important Important factors in 3PL selection process 95% of the respondents characterized Cost as “Very or Extremely” important in their 3PL selection process. IT Capabilities, Talent, and Quality/Creativity of Proposal also ranked very high. 9 © ARC Advisory Group
  10. 10. Contract structures not strategic Types of 3PL contracts in use Almost 45% of the web survey respondents have transaction-based contracts with their 3PLs. About 26% of the Typical length of contracts are just one 3PL contracts year in length (82% are three years or less) 10 © ARC Advisory Group
  11. 11. Creating Alignment: The Missing CEO People/Functions in 3PL selection process62% of the web survey respondents said their CEO was not involved at all in the 3PL evaluation and selection process, and only 10% said the CEO was very or completely involved. 11 © ARC Advisory Group
  12. 12. “If there was one thing we could change…”  If there is one thing my company could change to strengthen and expand our relationship with 3PLs, it would be...  If there is one thing our 3PL(s) could change to strengthen and expand their relationship with us, it would be... “We would change our culture, they would change their culture [with regards to outsourcing].” - Web survey respondent 12 © ARC Advisory Group
  13. 13. Summary and Recommendations Most 3PL-customer relationships are not structured to be strategic, but most also don’t need to be strategic. The real opportunity is for customers and 3PLs to focus on well-established relationships where additional progress in terms of cost savings, service improvements, or other forms of continuous improvement has slowed or stalled. Critical Building Blocks  The CEOs as a Catalyst and Champions for Change  Trust in Each Other’s Expertise  Develop Clear “Shared Vision” Statement with End Customer Focus  A Contract Structure that Encourages Independent Action  Provide Insight, Not Just Oversight  Flexibility to Adapt to Change  Passion for the Customer Brand 13 © ARC Advisory Group
  14. 14. Based on research by…… © Kate Vitasek 2009 14
  15. 15. Vested Outsourcing is….A game changing approach to outsourcing that Leverages “win-win” thinking associated with Game Theory / Behavioral Economics Is centered around buying results instead of tasks and/or activities with the conscious effort to use incentives to drive process innovation which prevents many perverse incentives of conventional outsourcing Creates a contract that follows “5 Rules” Uses incentives to transform the work to achieve “tradeups” versus conventional cost/service tradeoffsBased on research from the University of Tennessee Follows a structured implementation model to improve implementation Leverages tools and courses created by the University of Tennessee to help companies outsource betterTransformational when applied Supported as the “next generation in outsourcing” by the Outsourcing Institute as a key concept of Outsourcing 2.0 Being associated as the “business concept of the decade” similar to Lean and Six Sigma © Kate Vitasek 2009 15
  16. 16. Early Endorsements Cliff Lynch, DC Velocity Magazine"In the outsourcing world, a genuinely new concept comes along only once every 10 years or so. I have a feeling Vested Outsourcing is one of them." Frank Casale – CEO, Outsourcing Institute “Vested Outsourcing is a game changing approach that will quickly become thenew gold standard for advanced outsourcing relationships. It is a critical enabler for Outsourcing 2.0” Adrian Gonzalez – ARC Advisory Group “I view Vested Outsourcing as a cutting edge approach to structuring and managing service provider-client relationships.” 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“ Ken Ackerman – Warehousing Forum “These fresh ideas about outsourcing could change the way in which logistics services are purchased and managed in the future.” © Kate Vitasek 2009 16
  17. 17. THE GAMEOF OUTSOURCING © Kate Vitasek 2009 17
  18. 18. Contracting in Complex Deals is Really Just a Bet © Kate Vitasek 2009 18
  19. 19. The Game of Outsourcing © Kate Vitasek 2009 19
  20. 20. Win –Win is ReallyBeautiful! © Kate Vitasek 2009 20
  21. 21. “Adam Smith was wrong….”Adam Smith said: “The bestresults comes from everyonein the group doing what isbest for themselves.That is incomplete.The best result will comefrom everyone in the groupdoing what is good for himselfand the group. It is the onlyway we all win.” © Kate Vitasek 2009 21
  22. 22. Why Do We Act this Way? “Morality is what people should do. Economics is what people do.” © Kate Vitasek 2009 22
  23. 23. Identifying the PonyThe Pony is the difference between thevalue of the current solution and thepotential optimized solutionThe Pony represents what the customercould have – but is not able to currently geton their own or with existing outsourcingagreementsKey is to share the value of the Pony withyour providers; the value of the Pony is theresource incentive to fund investment inprocess improvementUse the Pony to derive the appropriateincentive levels for the supplier The bigger the Pony – the bigger the incentives the service provider could earn © Kate Vitasek 2009 23
  24. 24. WIIFWe: The Economics of OptimizationVested Outsourcing isthe creation of a mutualsymbiotic “deal” whereall parties win.All parties becomealigned to the samequantifiable objectivesThe rules of the gameare clearly spelled outthrough the contractContract incentivesbalance risk/reward,encourages supplierinnovation © Kate Vitasek 2009 24
  25. 25. DEFININGTHE RULES OFTHE GAME © Kate Vitasek 2009 25
  26. 26. 3. Clearly  Defined and  Measurable  Desired  4. Pricing Model  2. Focuses on the  Outcomes  Incentives are  WHAT not the  Optimized for  HOW  Cost/Service  Tradeoffs   1. Outcome‐ 5. Insight vs.  Based vs.  Win/Win (WIIFWe)  Oversight  Transaction‐ Relationship  Governance Based Business  Structure  Model  © Kate Vitasek 2009 26
  27. 27. 1. Outcome Based vs. Transaction Based ModelMost outsourcing relationships arefollow a transaction-basedbusiness modelThis can be cost plus or a fixedprice per transaction where theservice provider gets paid atransaction fee for each activitythat is performed $ per minute to answer the phone $ per touch to pick a product $ per        mile to ship a product $ per pallet/box to store a productVested Outsourcing moves to anoutcome-based business modelwhere the service provider is paidfor achieving results, not just forperforming tasks or activities It’s not about spinning your wheels to do the same activities better, faster or cheaper; It’s about transforming the work27 © Kate Vitasek 2009 t hi th d i d lt !
  28. 28. 2. Focus on the WHAT, not the HOW Most companies use detailed statement of works (SOWs)and Service Level Agreements (SLAs) to define how the service provider shouldperform the work Don’t outsourceto the expert and then tell them how to do the © Kate Vitasek 2009 28
  29. 29. Joy’s Law No matter who you are, most of the bright people don’t work for you “For every P&G researcher, there were 200 scientists or engineers elsewhere that were just as good. That meant there was a total of perhaps 1.5 million people whose talents they could potentially use.” © Kate Vitasek 2009 29
  30. 30. Solow’s Law Named for Robert Solow, Nobel Prize Winning Economist 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 Innovatio 13% n& Technical Change 87% Solow’s Findings © Kate Vitasek 2009 30
  31. 31. 3. Clearly Defined / Measurable Desired Outcomes You got to be very careful if you dont know where youre going, because you might not get there. - Yogi Berra © Kate Vitasek 2009 31
  32. 32. What is Success? If you ask for thebest slide calculator– you will likely getthe best calculator!Instead ask, “what problem are you trying to solve?”Then clearly define how to measure success! © Kate Vitasek 2009 32
  33. 33. 4. Pricing Model Incentives Optimize for Tradeups!Pricing Models Should…. use incentives to encourage service providers to optimize for cost/service tradeoffs and reward for achieving “trade-ups” provide the service provider with the hope that if they achieve results – they can be rewarded span a long enough timeframe to provide a ROI for investments made in transforming the business © Kate Vitasek 2009 33
  34. 34. 5. Insight vs. Oversight Governance Structure Many of today’s governance structures are crappy! Those that do have governance structures tend to rely on a culture of oversight vs. insight A good governance structure works to get the “Rhythm of the Business” and used fact based data to help solve problems © Kate Vitasek 2009 34
  35. 35. How Healthy is YourRelationship?10 Ailments © Kate Vitasek 2009 35
  36. 36. Perverse Incentives…. Definition of Perverse Incentives [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 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. 11 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 © Kate Vitasek 2009 36
  37. 37. ….can happen anywhere….. “One of the most powerful laws of the universe is the law of unintended consequences. This applies to schoolteachers, realtors, crack dealers, expectant mothers….. ” © Kate Vitasek 2009 37
  38. 38. ….especially in outsourcing agreements!Not following the Vested Outsourcing rules typically leads to 10 common Outsourcing Ailments 10 Ailments of Conventional Outsourcing Models 3. Clearly  1 Penny Wise and Pound Foolish Defined and  Measurable  Desired  4. Pricing Model  2 The Outsourcing Paradox 2. Focuses on  Outcomes  Incentives are  the WHAT not  the HOW  Optimized for  Cost/Service  3 The Activity Trap Tradeoffs   4 The Junkyard Dog Factor 1. Outcome‐ Based vs.  Transaction‐ Win/Win  (WIIFWe)  5. Insight vs.  Oversight  5 The Honeymoon Effect Governance  Based Business  6 Sandbagging Relationship  Structure  Model  7 The Zero Sum Game 8 Driving Blind Disease 9 Measurement Minutia 10 The Power of Not Doing © Kate Vitasek 2009 38
  39. 39. GettingStarted © Kate Vitasek 2009 39
  40. 40. Vested Outsourcing Implementation Plan © Kate Vitasek 2009 40
  41. 41. “The significant problems we facecannot be solved at the same level of thinking we were at when we created them.” Is there a better way to Contract for Outsourced Services? © Kate Vitasek 2009 41
  42. 42. For more information…. Adrian Gonzalez 781.471.1154 adriang@ARCweb.com LogisticsViewpoints.com Kate Vitasek 206-414-8378 kvitasek@utk.edu VestedOutsourcing.com 42

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