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When an outsourcing relationship goes wrong, it can cost millions of dollars, result in lost market share, and have a disastrous impact on consumer confidence in a company or brand. The University of Tennessee faculty outlined perverse incentives that result in poor outsourcing agreements in their research and first book, Vested Outsourcing: Five Rules that Will Transform Outsourcing.

Although it is safe to say that companies want to improve their outsourcing practices, most are not sure where to begin and how to make systematic changes. The University of Tennessee researched this challenge and incorporated the lessons it learned to outline a systematic model to improve outsourcing as a business practice. This model is called Vested Outsourcing because the core principle is to create an outsourcing relationship where companies and service providers become "vested," or mutually committed to each other's success, creating the true win-win solution that goes beyond the mere feel-good lip service often espoused in the first blush of a new agreement.

The findings of the University of Tennessee's research are embodied in five key rules. When applied to a business outsourcing practice, the Five Rules (reviewed in chapter 2) will transform outsourcing relationships, increase innovation, and improve efficiency. The approach and the thinking are laid out in the first book; this second book is your manual, your detailed guide to implementing a successful, Vested Outsourcing business model and agreement.

We start from the premise that you are using this manual because you are committed to developing a Vested Outsourcing agreement. We assume that you have already finished the necessary deliverables to complete Steps 1 through 3 of the Vested Outsourcing implementation process and are ready to roll up your sleeves and begin crafting a successful business agreement that will motivate the parties to deliver transformational results.

TRANSFORMATIONAL RESULTS ARE WHERE WE START THE STORY

The University of Tennessee has researched outsourcing relationships that use the outcome-based approach for more than five years. Although some outcome-based deals failed miserably, the university researchers found that the majority of the outcome-based relationships they studied performed well, meeting or exceeding performance targets.

Researchers became intrigued with a select group of outcome-based outsourcing agreements that were wildly successful, bringing transformational results to the company that is outsourcing and to the service provider. The United States Air Force was so intrigued with this small group of successful "outliers" that it funded a secondary research project for the university to determine what factors drove the transformational success.

The university's research revealed that the most successful outcome-based relationships had universal similarities that were not obvious to the companies that were studied: they all had created a blended approach of outcome-based thinking and shared value thinking. The University of Tennessee researchers named this new methodology Vested Outsourcing because the term conveyed the essence of these successful relationships: how the companies and service providers were committed to each other's mutual success and worked toward shared outcomes by jointly leveraging their capabilities to innovate, lower costs, and improve service. Based on this research and continuing field study the university created a new standard for successful outsourcing agreements.

NEW METHODOLOGY—NEW BUSINESS MODEL

In chapter 3, we explore three sourcing business models and explain in detail how Vested Outsouring is built on a fourth model: a hybrid business model. Vested Outsourcing is a hybrid sourcing model that combines approaches to yield a greater value proposition than previously known using each business model separately. Vested Outsourcing leverages components of an outcome-based model with the Nobel award-winning concepts of behavioral economics and the principles of shared value.

Behavioral economics is the study of the quantified impact of individual behavior or of the decision-makers within an organization. The study of behavioral economics is evolving more broadly into the concept of relational economics, which proposes that economic value can be expanded through positive relationship (win-win) thinking rather than adversarial relationships (win-lose or lose-lose). Using this concept, entities can work together to expand their reward position.

Shared value principles are concepts of creating economic value in a way that creates such value for all parties involved. In essence, shared value thinking involves entities working together to bring innovations that benefit the parties—with a conscious effort that the parties gain (or share) in the rewards. This shared value thinking is what the University of Tennessee researchers have coined "what's in it for we" (WIIFWe). Shared value principles are starting to gain traction. Two advocates are Harvard Business School's Michael Porter and Mark Kramer, who profiled their "big idea" in the January–February 2011 Harvard Business Review Magazine. The article states that shared value creation will drive the next wave of innovation and productivity growth in the global economy. Porter is renowned for his Five Forces model of competitive advantage. Due to his prominence, it is likely that his take on shared value, although focused on society, likely will cause practitioners to embrace the philosophy of WIIFWe.

The heart of each of these progressive approaches forms the thinking behind the Vested Outsourcing business model, which can provide your company with the fluidity, give-and-take, and collective behavior that can deliver transformational results.

PERFORMANCE PYRAMID: OPTIMIZING FOR RESULTS

By their very nature, no two Vested Outsourcing relationships are alike, nor should they be. However, all good ones achieve mutual success based on optimizing three key goals:

1. Innovation and improved service

2. Reducing cost to the company outsourcing

3. Improving profits to the service provider

Conventional wisdom says that there...