part of that company from the leadership down, within the supply
chain or DC or whatever.
Q: The customer has to be willing to engage in that.
O’Brien: PBO will not work unless both sides are willing to
bare all, warts and everything. PBO can be successful in those companies that have best-practice- or leader-status in supply chain or
technology. It has to be at the top.
Q: In your book, Vested Outsourcing: Five Rules That Will Transform Outsourcing, you say there are several changes that can
improve an outsourcing relationship, not least of which is to stop
paying for each activity. Tell us more.
Vitasek: One of the two biggest problems in outsourcing
is the zero-sum game. In most relationships, we sit across from
our partner instead of beside him. If we realize we’re each in
pursuit of money, we should collaborate more, the company to
reduce cost and improve service, the provider to improve its
margins. The second is the activity trap. We base outsourcing on
transactions rather than results. They get paid every time they
do an activity. That creates a perverse incentive not to reduce
inefficiency.
Q: Do the five rules you write about address this?
Vitasek: Yes, the first is, you have to have an outcome-based
versus transaction-based model. You have to incent the provider to
reduce activities.
Second is to focus on the “what” and not the “ how.” That’s the
outsourcing paradox. We outsource to the experts, yet we tell them
how to do exactly everything.
Three: You have to create a defined and measurable outcome.
Define and measure success, because the payment structure is
based on it.
Four: A pricing model that uses incentives to solve trade-offs.
Many companies approach business as a trade-off: You can reduce
your cost but at the expense of service. Real leaders have solved for
those trade-offs and have achieved trade-ups.
Five: You need a governance structure that allows insight versus
oversight. Stop micromanaging your suppliers.
Q: You use the term “vested.” Is that the same thing as performance-based outsourcing?
Vitasek: It depends. PBO usually gives the connotation that all
you have to do is take a contract, slap on some metrics and a bonus
and voila. That’s not PBO. That’s why I like the word vested. Any
