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Supply Chain News: Getting Outsourcing Contracts Right

 

Shared Goals and Gains Key to a Vested Relationship, University of Tennesse Researcher Says

 

Dec. 3, 2018
SCDigest Editorial Staff

Consultant and University of Tennessee faculty member Kate Vitasek has made a significant name for herself in the supply chain space with the concept of "vested outsourcing" for high value relationships with 3PLs and other third parties.

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While some organizations might say they are moving to more strategic partners, they are almost always still contracting with conventional approaches, Vitasek notes.

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Writing in the Institute for Supply Management's blog page, Vitasek recently updated her thinking on this important topic that nicely summarizes the concept.

When contracting with outsourcing firms, there is often a lot of dissatisfaction with the outcomes, Vitasek says. And that is because companies don't get the contracting part correct.

However, "constructing a successful contract does not have to be the legal equivalent of going to the dentist for a root canal," Vitasek says.

Vitasek says she and other researchers at the University of Tennessee have uncovered a better, more user-friendly way of getting to a sound sourcing agreement. That insight came after studying some of the most successful outsourcing agreements from such companies as Procter & Gamble, Microsoft and McDonald's, in research funded by the US Air Force that lasted almost a decade.

What are the keys to successful outsourcing contracts?

"The most basic finding was that successful sourcing agreements moved from the traditional buy-sell arm's-length mindset for contracts," Vitasek writes. "Instead, they used a relational approach that emphasized how the company and supplier could build a relationship with a goal to achieve business outcomes in a dynamic environment."

Hence the term "vested outsourcing, since "buyers and sellers collaboratively crafted contracts steeped in mutual advantage, binding each party to a win-win approach and creating strong governance structures that enabled the parties to stay aligned long after the initial handshake or contract was signed," Vitasek says, adding "In essence, the parties in the contract were vested in each other's success."

Unfortunately, the research found many companies still use highly conventional approaches to contract law, where the buyers and supplier are at arm's length, using tactics, leverage and power to shift risk. While some organizations might say they are moving to more strategic partners, they are almost always still contracting with conventional approaches, Vitasek notes.


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One of the other things a vested approach can bring is greater flexibility on both sides as unexpected issues or business changes inevitably arise.

Vitasek cites research from Oliver E. Williamson, the 2009 Nobel prize co-winner in economic sciences, which argues that businesses should adopt a highly adjustable or adaptable approach, rather than one that prescriptively outlines detailed transactions, rigid terms and conditions, SOW and working relationships.

Williamson observes that "all complex contracts are incomplete" and lack a flexible framework to deal with "maladaptations."

To this end, Vitasek summarizes the University of Tennessee's five rules for successful outsourcing contracts. They are:

1. Focus on outcomes, not transactions
2. Focus on the what, not the how
3. Have clearly defined and measurable outcomes
4. Implement a pricing model with incentives that optimize the business
5. Establish an insight, rather than oversight, governance structure

These vested rules, Vitasek says, put progressive contracting concepts such as collaboration, shared value and alignment, into modern practice.


Do you agree with Vitasek's views on outsourcing contracts? Why or why not? Let us know your thoughts at the Feedback section below.

 

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