vested outsourcing: people behave in the way they are rewarded

Most public sector organizations outsource services, from catering and custodial to consulting expertise, but most share a common problem – a low level of internal client satisfaction. This is primarily due to the historical focus on getting the lowest cost rather than improving the overall service delivery.

Traditional outsourcing RFPs are an inside-out view of services that have previously been provided by in-house personnel. Because the inside-out view is based on this past experience, outsourcing results in the same level of services but through a 3rd party service provider. The basic premise is “we know how to do this – just give us a good price”. Because the evaluation of responses is heavily weighted on pricing, this approach to outsourcing does not move the satisfaction needle towards creating better value for money.

Enter vested outsourcing¹ in approximately 2010. This approach is designed to create a shared responsibility for successful outcomes and ongoing service improvements. It results in a contractual relationship wherein the service provider has a ‘vested interest’ in delivering the results promised.

Vested outsourcing is based on the following five principles:

1. Outcomes – not transactions
2. Focus on the what – not the how
3. Clearly defined and measurable outcomes
4. Pricing model with incentives
5. Insight vs oversight governance

Let’s explore these principles using a facilities management example:

1. Focus on outcomes – not transactions

Vested outsourcing requires the service provider to assist with defining the services and the means to meet clearly articulated expectations. The focus is on the perceived level of satisfaction by the owner. The service provider can see a dirty window, floor or work surface or respond to a request to set up a meeting room – they don’t need a supervisor to tell them what the service priority is. A bundled set of services contributes flexibility for workers to deliver quality results, far from a workplace where “I do floors – not windows.”

2. Focus on the what – not the how

Under a vested model, the service provider is responsible for deciding how the services are to be delivered, including training, scheduling, orientation, uniforms, safety, supplies and compliance with industry quality and safety standards. The scope of work informs what is to be done and the delivery of promised results is the contractor’s responsibility. While pricing is important, service delivery improvement is the goal.

3. Clearly defined and measurable outcomes.

Continuing with our facilities example, performance must meet or exceed the minimum measurable standards for each category specified in the scope of work, and the contractor is required to deploy sufficient qualified staff to maintain this level of stated cleanliness. The contractor knows they will be held accountable for their performance. For the owner, it is relatively easy to measure compliance and deviations from standards. Where there are deficiencies the parties have a shared responsibility to resolve the problem.

4. Pricing model with incentives

Traditional pricing models usually result in a win-lose outcome because a fixed price often induces the contractor to cut corners. They will have an assured profit for meeting minimum service levels so there is no incentive for improvement or being on the lookout for better ways of delivery.

In a vested model, when the standards are exceeded the contractor receives an incremental payment increase as well as a greater probability of contract renewals. People behave in the way they are rewarded. The incentive provisions therefore also extend to the individual workers providing the service, as they too receive an incremental share of any financial incentives. They also have a vested interest that can be tapped into. Meaningful incentives create a greater reluctance to switch suppliers/customers due in part to the measured benefits which accrue and continue to pay dividends to all parties.

5. Insight vs oversight governance

With a vested contract, the service provider is seen as an extension of the owner’s organization. Together the parties look for mutually beneficial ideas to reduce costs and share in measurable savings. The insight provided by the service provider complements the strengths of the owner. Early supplier involvement in planning the service delivery recognizes that they may know the “how to” better than the owner, as they may have years of experience with multiple facilities while the owner’s staff have only a fraction of this knowledge. This governance structure invites innovation in finding solutions and creating efficiencies.

Conclusion

As more organizations face an aging workforce, engaging with suppliers in a way that creates a vested interest in long term successful service delivery makes sense. The innovative advancements gained through working with leading suppliers allows an owner to tap into resources which are not available through the traditional bidding strategies.

Vested outsourcing is aimed at transforming traditional adversarial relationships into collaborative ones based on proven performance. While cost is an important factor in any contracting approach, the vested model illustrates that a laser focus on low cost has limited returns and often contributes to diminishing levels of service.

One key to success with vested outsourcing is to ensure that minimum service level expectations are balanced with financial incentives for improvement. If the target level of satisfaction for a bonus is too high and the minimum level of satisfaction can be easily met, with an acceptable payment, the owner will not receive the expected benefits. People behave in the way they are rewarded.

¹Vested Outsourcing is largely credited to the University of Tennessee’s researcher, Kate Vitasek and professor Karl Manrodt

Larry has been in the supply chain management field as an author, manager, business trainer, academia, and consultant for many years. Larry has worked in both the private and public sectors. Recently he has been co-facilitating NECI Webinars, classroom sessions, and online modules. His new book, Good Planets are Hard to Buy is now available on Amazon.

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Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.

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