Why You Should Vest with Your Outsourcing Partners, Now!

We hear and read constantly about the critical need for lean, green, transparent, collaborative, efficient and cost-effective supply chains and logistics partners.

But let me ask you this: How have your partnerships fared lately? How have things progressed over the past three or four years? Are your outsourcing and logistics contracts living up to their initial promises (and premises)? Do you often wish your suppliers were “more proactive”? Is a change necessary but at the same time a really scary proposition?

If you don’t like the answers to those questions, perhaps you should look in the mirror and start asking yourself if there is a better way to work with your service providers.

I have been studying outsourcing agreements as part of a research study funded by the United States Air Force and performed by the University of Tennessee. The lesson I’ve learned is a simple yet powerful one: If you aren’t getting satisfying results from your “partners” it’s likely because you are not treating them like a true partner and paying them like they are a true partner. Put more bluntly – our research found that most companies are developing supplier and outsourcing agreements that simply pay for butts in seats – not for innovative partners that help solve real logistics and supply chain problems.

My mama always told me you get what you pay for. More outsourcing professionals should listen to their mamas!

Now don’t get me wrong. I am not advocating for shippers to go out and give their 3PLs, carriers, and service providers a raise and buy all their “value added” services. What I am advocating is for companies to step up and move beyond mere partnership lip service and start to create business models and contracts that support real partnerships aimed at solving real problems – and not just putting a butt in a seat to drive a truck, pick a product, count the inventory, etc. I am an advocate for the kind of partnerships that have the power to deliver transformational results and solve real problems – like reducing cycle time by 50 percent, increase inventory turns by 50 percent, slashing retail compliance charge-backs, and increasing service levels to delight your customers.

If you don’t have suppliers and providers that are helping you transform your supply chains, let me introduce you then to the concept of Vested Outsourcing. Vested Outsourcing is based on proven performance-based philosophies. The goal is to create a true vested partnership whereby the economics of the deal structure drive – and reward – transformational behaviors and results.

Vested Outsourcing takes the concept of partnership to new heights because it digs deep into fixing some of the fundamental flaws associated with how companies purchase outsourced services. It adds order through “rules” and follows a structured process to help companies achieve true partnerships that have the power to deliver transformational results.

Not convinced yet? Sound too much like you are setting yourself up to sing Kumbaya with your suppliers (or customers)? Maybe it’s time to send in the Doctor, or to be more precise, Dr. Oliver Williamson. Dr. Williamson received the 2009 Nobel Prize in economic sciences based on his seminal work on what he calls “transaction cost economics” in the contracting process as it applies to outsourcing and the supply chain. He warns about the “maladaptations” in the contract process that can develop if companies don’t think cooperatively and proactively from the start of the contract relationship. He warns about the pain and cost associated with “unanticipated disturbances” from old school approaches to crafting and negotiating outsourcing contracts. Dr. Williamson also advocates – as I do – that companies use a “credible contracting” philosophy to craft mutually beneficial win-win deals. Vested Outsourcing, I submit, is the credible approach that gives you a roadmap to construct transformational deals.

Still not convinced and need a real world “practitioner” example of how conventional thinking works to create flawed supply chains? Look no further to the dysfunction of trade and logistics on Asia-Pacific trade lanes. Trans-Pacific liner operators lost at least $15 billion last year, and 2008 wasn’t all that hot for them either. Some of the damage was self-inflicted: They scrambled to preserve market share by slashing rates while an influx of huge new containerships they purchased, perhaps a bit unwisely, during the boom times of the economic bubble entered their fleets. Of course when the Great Recession hit, these carriers found themselves chasing too little cargo with too much available capacity at non-compensatory rates.

The carriers, desperate to recoup those losses as quickly as possible, have embarked on a highly muscular, unilateral strategy this year: Raise rates dramatically, cut vessel capacity sharply and, by the way, steam across the ocean at much slower speeds to save on fuel consumption and cut capacity even further. Shippers and freight forwarders, especially in the small-to-medium size range, are in effect being held ransom by the carriers: They must pay more for less space and poorer, i.e. slower, service.

This kind of behavior is all too typical of they way ocean carriers and shippers operate. It’s almost a tradition. Some years the carriers have power, at other times the shippers do – a virtual ping-pong match of who can outsmart and whipsaw the other player.

I believe there’s a better, and as Williamson might say, more rational way. Collaborate on mutually beneficial rate and service outcomes; move from the cutthroat me-first “win” mentality to the “win-win” by vesting in each other’s success through earned trust and loyalty with credible, vested contracts.

It can be done; it’s time for a new tradition.

Kate Vitasek

Oliver Williamson April 2008 article in the Journal of Supply Chain Management (“Outsourcing: Transaction Cost Economics and Supply Chain Management”).

Vested Outsourcing: http://www.vestedoutsourcing.com/

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