1. Maximizing the Value of
3PL-Customer Relationships

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
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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
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© ARC Advisory Group

4. Has Anything Changed in 8 Years?
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© ARC Advisory Group

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.
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© ARC Advisory Group

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?
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© ARC Advisory Group

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
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© ARC Advisory Group

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.
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© ARC Advisory Group

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.
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© ARC Advisory Group

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)
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© ARC Advisory Group

11. Creating Alignment: The Missing CEO
People/Functions in 3PL selection process
62% 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.
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© ARC Advisory Group

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
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© ARC Advisory Group

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
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© ARC Advisory Group

14. Based on research by……
© Kate Vitasek 2009 14

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 tradeoffs
Based 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 better
Transformational 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. 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 the
new 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. THE
GAME
OF OUTSOURCING
© Kate Vitasek 2009 17

18. Contracting in Complex Deals is Really Just a Bet
© Kate Vitasek 2009 18

19. The Game of Outsourcing
© Kate Vitasek 2009 19

20. Win –Win
is
Really
Beautiful!
© Kate Vitasek 2009 20

21. “Adam Smith
was wrong….”
Adam Smith said: “The best
results comes from everyone
in the group doing what is
best for themselves.
That is incomplete.
The best result will come
from everyone in the group
doing what is good for himself
and the group. It is the only
way we all win.”
© Kate Vitasek 2009 21

22. Why Do We Act this Way?
“Morality is
what people
should do.
Economics is
what people
do.”
© Kate Vitasek 2009 22

23. Identifying the Pony
The Pony is the difference between the
value of the current solution and the
potential optimized solution
The Pony represents what the customer
could have – but is not able to currently get
on their own or with existing outsourcing
agreements
Key is to share the value of the Pony with
your providers; the value of the Pony is the
resource incentive to fund investment in
process improvement
Use the Pony to derive the appropriate
incentive levels for the supplier
The bigger the Pony – the bigger the
incentives the service provider could earn
© Kate Vitasek 2009 23

24. WIIFWe:
The Economics of Optimization
Vested Outsourcing is
the creation of a mutual
symbiotic “deal” where
all parties win.
All parties become
aligned to the same
quantifiable objectives
The rules of the game
are clearly spelled out
through the contract
Contract incentives
balance risk/reward,
encourages supplier
innovation
© Kate Vitasek 2009 24

25. DEFINING
THE RULES
OF
THE GAME
© Kate Vitasek 2009 25

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. 1. Outcome Based vs. Transaction Based
Model
Most outsourcing relationships are
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
$ per minute to answer the phone
$ per touch to pick a product
$ per
mile to ship a product
$ per pallet/box to store a product
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
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. 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 should
perform the work
Don’t outsource
to the expert and
then tell them
how to do the © Kate Vitasek 2009 28

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. 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. 3. Clearly Defined / Measurable Desired
Outcomes
You got to be very
careful if you don't
know where you're
going, because you
might not get there.
- Yogi Berra
© Kate Vitasek 2009 31

32. What is Success?
If you ask for the
best slide calculator
– you will likely get
the best calculator!
Instead ask, “what
problem are you
trying to solve?”
Then clearly define
how to measure
success!
© Kate Vitasek 2009 32

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. 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. How Healthy
is Your
Relationship?
10 Ailments
© Kate Vitasek 2009 35

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. 1
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
© Kate Vitasek 2009 36

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. ….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. Getting
Started
© Kate Vitasek 2009 39

40. Vested Outsourcing Implementation Plan
© Kate Vitasek 2009 40

41. “The significant
problems we face
cannot 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. For more information….
Adrian Gonzalez
781.471.1154
adriang@ARCweb.com
LogisticsViewpoints.com
Kate Vitasek
206-414-8378
kvitasek@utk.edu
VestedOutsourcing.com
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