Yesterday in our first post on looking at a Vested Outsourcing business model in logistics outsourcing by explaining what is “Vested Outsourcing”, how it works in logistics outsourcing, and the 8 things you should look out for in a logistics service provider that can effectively engage with you as the customer in a vested outsourcing environment. As a reminder, Vested Outsourcing is a term coined by Kate Visatek and Karl Monradt out of the University of Tennessee. The two essentially started out on a simple research project and ended up writing a series of books to introduce a true hybrid approach to business outsourcing in general, not just logistics.
As a quick summary this new hybrid approach to outsourcing holds the following tenets:
- 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)
Today, we will talk about the main benefits of Vested Outsourcing to the logistics and supply chain realms of your business.
3 Benefits of Vested Outsourcing in Logistics
Benefits of Vested Outsourcing #1: Risk and Revenue Sharing Creates a “Win-Win”
The logistics service provider looks at how it can best apply processes, technologies and capabilities that will drive value to the company that wants to outsource logistics services to the provider. This commitment from the logistics provider to deliver results for the customer, like a commitment to reduce costs, reduce errors, eliminate waste and improve service or increase market share, shifts risk to the outsource provider.
On the flip side the customer outsourcing to the logistics service provider commits to allow the outsource provider to earn additional profit, above and beyond industry average profits for their service area, for achieving this incremental value. In addition the company that is outsourcing commits to providing a certain level of business for the outsource provider.
This is truly a win-win relationship, surely driving more value over time as the companies work together.
Benefits of Vested Outsourcing #2: A Focus on Stated and Expected Results, Not Tactics
When a logistics provider and a customer engage in a vested outsourcing business model a benefit realized is the increased likelihood of meeting goals and objectives because both parties are focused on results and working together (collaboration) to achieve a shared result. Since that result is stated from the get go, it is more likely to be achieved.
Further, mutually beneficial, shared incentives drive innovation and cost effectiveness as stated in Solow’s Law. In Solow’s Law, business growth is driven by innovation. In Solow’s findings, he saw that 87% of economic growth is driven by “technical change” which is driven by improvements in business process or technical improvements in products. The vast majority of today’s logistics outsourcing contracts are for labor and physical capital rather than innovation and problem solving. When a contract or relationship is focused on results and solutions, the customer AND the logistics service provider wins. Now both parties have a vested interest in other’s success, creating an environment of shared risk and reward.
Benefits of Vested Outsourcing #3: True Collaboration and a Paradigm Shift
In the traditional model of outsourcing, it was the mindset of “What’s in it for ME” and in vested outsourcing, the mindset switches to “What’s in it for WE.”
- The focus goes from getting the logistics service provider to meet my needs to both parties finding a way to meet both of their needs (cost savings and gained revenue).
- Instead of saying it’s in the contract and it’s their problem, the mindset goes to working together to achieve performance and compensation goals.
- Culture and attitude are everything, and in vested outsourcing, instead of a blame and punish environment, or push/pull, there is now a open line of communication, where both parties work together to find solutions.
- Finally, instead of unpleasant surprises, or only communicating when there is a problem, there are now positive integrated plannings and communications.
In order to see the benefits of vested outsourcing can truly be a huge leap of faith for those who have done business with service providers the traditional way. In Vested Outsourcing, you can either create a contract to reflect a true Vested Outsourcing business model, or you can simply be that way in the business relationship. Both can work and have for decades. In fact, what vested outsourcing is at the heart of it, is collaboration. If you are a customer looking to outsource logistics, make sure your logistics service provider, and yourself, truly feel you have a shared focus on results, continuous improvement, and solutions.
Tomorrow we will wrap up our vested outsourcing blog series and will talk about some companies who have put this model successfully in place. Have you ever practiced vested outsourcing before? What was your experience? Let us know in the comments below!