Is your outsourcing strategy fit for 2020? Take a fresh look at the Vested® model


Our team: Tim Wright, Michelle Waknine, Joshua Bennett


The award-winning Vested® outsourcing/business model has been around since around the end of the noughties. In case you are not familiar with it, the Vested[1] model and movement grew out of pioneering research and development by a team at the University of Tennessee. Their research looked at companies that worked with business partners and were achieving not just good results, but transformational, game-changing results. They found that the most successful outsourcing relationships heavily leverage incentives in order to motivate service providers. Well-known companies such as Microsoft, McDonald’s and Procter & Gamble have all adopted the Vested® framework to great success, delivering better innovation alongside reduced cost of service for the customer and improved profitability for the service provider.

What is Vested?

Vested is a hybrid sourcing business model – a Vested agreement is a formal relational contract that specifies mutual goals and establishes governance structures to keep the parties’ expectations and interests aligned over the long term. It is a legally enforceable contract that is designed from the outset to foster trust and collaboration, and is especially useful for highly complex relationships in which it is impossible to predict every what-if scenario.

Put simply, the Vested business model encourages companies to focus on desired outcomes and shared values to create an arrangement that is truly mutually beneficial. Whilst the traditional transaction-based outsourcing master services agreement or MSA (which, with tongue only partly in cheek, is often referred to as the master–slave agreement) focusses on what’s in it for me (or WIIFMe), in the Vested model, this is replaced by a what’s in it for we (or WIIFWe) philosophy.

With WIIFWe, winning does not mean that someone else has to lose; procurement is no longer a zero-sum game. Instead, WIIFWe requires both the customer and the service provider to make collaborative decisions on pricing, performance and outcomes that drive win-win. And to strengthen the sense of partnership and encourage a more lasting relationship, each party must be invested in the success of the other’s overall business.

For customers who bemoan the lack of innovation, continuous improvement and collaboration from their service providers, this is instructive. A typical year-on-year cost saving clause simply means that the service provider’s share of the pie is shrinking, whilst it gets progressively harder and harder to deliver the required contractual savings. Outsourcing by definition requires a more thoughtful approach to establishing and maintaining a successful long-term relationship which delivers to both parties’ desired outcomes.

The 5 rules

To achieve WIIFWe, the Vested model is built around five key rules:

  1. Focus on Outcomes, not activities
  2. Focus on the What not the how
  3. Agree Desired Outcomes must are clearly defined and measurable
  4. Pricing Model Incentives should optimise for value, rewarding solutions not just activities and balancing risk and reward for all parties
  5. The Governance model should deliver Insight not merely oversight

The 10 elements

Vested’s 10 Elements work together with the 5 rules to create a system.  Key elements include Element 2 – Shared Vision/Statement of Intent – and Element 7 – Relationship Management Framework.

Key Principles

Underpinning the rules/elements are the principles of Trust, Transparency and Transformation:

“In Vested relationships, people work together on a foundation of trust and transparency where there is mutual accountability for achieving the sought after desired outcomes. Through the careful alignment of desired outcomes and incentives, business partners give their best to each other. Together they bring the needed skills and resources to not just perform activities but to achieve transformational success… To say that Vested represents a departure from traditional business practice seriously understates the case. Vested changes the fundamental business constructs we all learned years ago.”[2]

Adopting this approach will help customers avoid the outsourcing paradox – i.e. selecting service providers who are experts in their field and then telling them how to do the work.

Request for Partner

The Vested model is not just to be used for sole source negotiations or for restructuring existing agreements. The team at the University of Tennessee has developed a robust “Request for Partner”[3] approach to help customers adopt a Vested business model using a competitive bidding method. It includes a Compatibility and Trust® assessment to measure compatibility between the customer and the bidding service providers’ organisations and a requirements roadmap to help development of the desired outcomes.

“Request for Partner” comprises 5 main phases, although there are a number of sub-phases: (1) supplier qualification (2) award (3) due diligence (4) contract development and (5) living into the agreement, designed to enable “buyers to tap into the creativity and innovation of potential service providers while still allowing for a competitive environment… [in which] service providers [can] authentically create better solutions purpose-built to add value and drive innovation.”

Strategic Partnerships need Relational Contracts

When thinking about best practices for structuring and drafting outsourcing agreements, the Vested model is also instructive. Contract language should be kept plain and simple with all legalese banished, visualisation techniques used to explain complex ideas and concepts, and contracts kept so that they can be understood by everyone involved, not just in their formation but also their operation. This often requires a new approach.  Detailed statements of work describing in minute detail not just what but how it should be done, will operate as a straightjacket and curtail innovation and collaboration. Instead responsibilities should be identified with a focus on meeting desired outcomes.

Where parties desire that their outsourcing arrangements move beyond the purely transactional, a relational contract is needed.  “A relational agreement brings added discipline because it codifies the framework for the relationship – the forums, behaviors and mechanisms within which interactions will occur. It recognizes that relationships are not just person to person, but also organization to organization.” [4] It aims to keep the parties’ expectations and interests aligned through a focus on relationship-building elements such as a shared vision, guiding principles and robust governance structures. Establishing the foundation of the relationship first is key. After that, other important items such as responsibilities, pricing, and metrics will have to be worked out but so that they all align with the agreed guiding principles.

However it’s important to note that these guiding principles have teeth. Although the contractual language may be vague, courts are obligated to interpret it should there be a dispute. Consequently, few companies will want to risk an expensive court case for breaching the guiding principles; thus the contract becomes a deterrent against counterproductive behaviour.

Better Governance

By their very nature, outsourcing agreements are incomplete when signed. They are works in progress. They cannot hope to lock down every single business or service-related item nor should they.  For this reason, governance is a critical component of outsourcing relationships. If done properly, governance provides the framework within which the outsourcing arrangements can operate flexibly and adapt over time. If done badly, it can be a key reason for a failing or failed outsourcing relationship.

Vested’s rule #5 provides that good governance should provide insight, not merely oversight. This is governance through learning and understanding, allowing ethical and proactive changes to the arrangement for both parties mutual benefit, adopting a governance framework designed to manage a relationship (not manage a service provider) and which incorporates three key elements: (a) relationship management (b) transformation management and (c) exit management and change.

Getting to Win Win

“Developing a WIIFWe relationship is easier to describe than it is to do. Evolving from a culture of oversight and control to mutual respect is not an easy transition for most companies that outsource. Adversarial relationships often persist, and getting to a true win-win relationship will likely take practice.”[5] True win-win requires firm commitment from both parties. For this reason, the Vested model often works best when a neutral party works alongside as a kind of “win-lose cop” whose job entails stopping the team from slipping back into conventional win-lose thinking. Procurement professionals and lawyers are trained from the outset to “get the best deal” and it can be difficult to break away from this mentality.

[1] https://www.vestedway.com/

[2] The Vested Way by Kate Vitasek and Karl Manrodt 2014

[3] Unpacking Request for Partner by Kate Vitasek, Jeroen van de Rijt and Wiebe Witteveen. University of Tennessee 2017

[4] Unpacking Relational Contracts by David Frydlinger, Tim Cummins, Kate Vitasek and Jim Bergman. University of Tennessee 2019

[5] Vested Outsourcing – A Better Way to Structure Outsourcing Contracts by Kate Vitasek, Mike Ledyard and Tim Cummins. University of Tennessee 2010

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