The next time you are involved in an outsourcing deal, stop and ask these two simple questions. Do you want an IT procurement deal to simply get a job done? Or do you want a long-term strategic relationship with a service provider you can trust? If you aren’t thinking about why you are outsourcing and your intentions, you will likely find your outsourcing deal is simply getting a job done versus driving better, faster, cheaper solutions with a service provider that will bring creativity and innovation to the table University of Tennessee (UT) researchers are finding that more and more companies are challenging conventional approaches to outsourcing and are opting to build flexible win-win strategic supplier partnerships designed to deliver on the promise of innovation.

One of the key reasons organizations are frustrated with outsourcing deals is that, like it or not, they are getting what they pay for. Why? Contracts are rooted in the classical approach to contract law, and thus focus mainly on transactions and strictly defined legal protections such as pricing and price changes, service levels, limitation of liability, indemnification and liquidated damages. When UT researchers set out to study some of the most successful outsourcing agreements, they found some organizations were challenging conventional contracting to practices. The findings? What UT researchers have coined a Vested business model where the buyer and service provider shift away from “buying” and “selling” to create a win-win contract that creates value based on aligning performance and goals through deep collaboration, trust and cooperative innovation. No, it is not a legal partnership. But the parties do purposefully make the shift to a highly collaborative ‘what’s in it for us’ mindset grounded in a win-win contract. The journey to win-win collaboration starts with joint negotiations based on five “rules” that take organizations from me-first, purely transactional deals to strategic long-term relationships.Bottom line: it means forming relationships that are built to last.

The five rules are:
1. Focus on outcomes, not transactions: A key first step is to 'flip' the thinking from a focus on specific transactions to desired outcomes. Instead of buying transactions, buy outcomes, which can include targets for availability, reliability, revenue generation, employee or customer satisfaction and the like. For many IT outsourcing deals, this will challenge the conventional labor arbitrage and “butts in seats” model that dominates many IT outsourcing deals today.

2. Focus on the what, not the how: If you have outsourced to the expert, then resist the urge to have a detailed Statement of Work that is aimed at telling the service provider how to do the work. Simply put, if you want innovation or efficiencies, you must allow the service provider to challenge the status quo of how the work gets done. It is essential the client focus on the ‘what’ and allow the service provider the flexibility and autonomy to drive efficiencies and innovations that best meet the client’s needs.

Contracts are rooted in the classical approach to contract law, and thus focus mainly on transactions and strictly defined legal protections such as pricing and price changes, service levels, limitation of liability, indemnification and liquidated damages

3. Have clearly defined and measurable outcomes: It is very common for IT outsourcing deals to have a multiplicity of SLAs (service level agreements). But if you measure tasks, you get tasks and not business outcomes. The best outsourcing deals make the shift from measuring transactional activities (inputs) or supplier-controlled outputs to jointly defining and measuring success in terms of a true business outcome.

4. Optimize pricing model incentives: A Vested outsourcing agreement shifts from focusing on ‘price’ to the mutual creation of a pricing model with incentives to optimize the business. When establishing the pricing model, it is important to balance risk and reward for both the buyer and service provider. The agreement should be structured to ensure that the service provider assumes risk only for decisions within its control, but are incentives for helping the buyer achieve business outcomes.

5. Establish an insight, rather than oversight, governance structure: Many outsourcing deals are based on oversight and managing - or micromanaging - the service provider. A Vested relationship seeks to replace oversight with insight by instilling transparency, communication protocols and trust about how operations are developing and improving. Governance should include how to not only manage the business for today (operational effectiveness), but also for managing for tomorrow (innovation/transformation). It is also important to ensure the parties are collaborating on how to best manage compliance and regulatory needs as well outline an exit management plan for how the parties can successfully unwind if the partnership does not deliver on the intentions.

The five rules put an outsourcing deal on the path to create and nurture a true partnership. Does it work? The answer is yes. The book Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships shares the success stories of these companies and more. It provides a step-by-step pathway to implement the changes that are needed to take modern business relationships to the next level.