bookexcerpt
BY KATE VITASEK, WITH MIKE LEDYARD AND KARL MANRODT
Vested Outsourcing has the potential to take cost and service performance to new levels, but
it requires rethinking the way you contract with your provider for services. In this excerpt from
their new book, Vested Outsourcing, authors Kate Vitasek, Mike Ledyard, and Karl Manrodt
explain how to draft an agreement that will get the results you’re looking for.
how to write a Vested how to write a Vested
Outsourcing contract Outsourcing contract
Editor’s note: The premise is intriguing: Instead of paying your service provider to perform specific tasks, you pay it to achieve
specific outcomes or results—and then provide generous incentives for exceeding those targets. That, in a nutshell, is Vested
Outsourcing, a revolutionary new approach to outsourcing.
Advocates say Vested Outsourcing can take outsourcing to the next level, sparking innovation, improving service, and reducing costs. But how do you structure such an arrangement? In this article adapted and excerpted from their new book, Vested
Outsourcing: Five Rules That Will Transform Outsourcing, authors Kate Vitasek, Mike Ledyard, and Karl Manrodt look at
the two most common pricing models and explain how to decide which is best for you.
VESTED OUTSOURCING IS A NEW METHODOLOGY
that allows companies to work more effectively with their
outsource service providers. Under this approach, they
develop service agreements that are based on outcomes, not
processes, with added incentives to improve results across a
broad spectrum of business metrics. Because the two parties typically share both risks and rewards, they each have a
stake in finding opportunities for improvement. Or to put
it another way, they become vested in one another’s success.
One of the difficulties in choosing the right pricing
model for a Vested Outsourcing agreement—one that provides incentives for the best cost and service trade-offs—is
that there is often confusion about the different models
used to construct the agreement. This confusion is due to
the lack of consistency in how terms are applied to specific
contract elements.
In this excerpt from our book, we clear the fog around
pricing models by providing a basic vocabulary and set of
definitions that companies can use to determine which
pricing model and incentive types are best for them. In
addition, we provide a framework for helping organizations
understand the key attributes of pricing models and determine which model to apply to which type of contract.
Basic principles of pricing models
It is important to keep in mind two principles when selecting a pricing model:
1. The pricing model must balance risk and reward for
both organizations. The agreement should be structured to
ensure that the provider of the outsourced services (which
we generally refer to as the “outsource provider” or “service
provider”) assumes risk only for decisions that are truly
under its control.
2. The agreement should put pressure on service
providers to provide solutions, not just perform activities. A
properly constructed Vested Outsourcing agreement
encourages the service provider to solve the customer’s
problem. The better the service provider is at solving the
company’s problem, the more incentives, or profits, it can
earn.
It is also important that Vested Outsourcing teams structure their agreements around reducing the total cost of the
process that is being outsourced, not just the costs of the
transactions performed by the outsource provider.
Companies often struggle to select the pricing model that
will best support their business and still provide the appropriate incentives for the service provider. As we will explain,
