We use cookies to provide you with a better experience. By continuing to browse the site you are agreeing to our use of cookies in accordance with our Cookie Policy.
  • INDUSTRY PRESS ROOM
  • ABOUT
  • CONTACT
  • MEDIA FILE
  • Create Account
  • Sign In
  • Sign Out
  • My Account
Free Newsletters
  • MAGAZINE
    • Current Issue
    • Archives
    • Digital Edition
    • Subscribe
    • Newsletters
    • Mobile Apps
  • TRANSPORTATION
  • MATERIAL HANDLING
  • TECHNOLOGY
  • LIFT TRUCKS
  • PODCAST ETC
    • Podcast
    • Webcasts
    • Blogs
      • One-Off Sound Off
      • Global Logistics and Risk
      • Empowering Your Performance Edge
      • Analytics & Big Data
      • Submit your blog post
    • Events
    • White Papers
    • Industry Press Room
      • Upload Your News
    • New Products
      • Upload Your Product News
    • Conference Guides
    • Conference Reports
    • Newsletters
    • Mobile Apps
  • DCV-TV
    • DCV-TV 1: News
    • DCV-TV 2: Case Studies
    • DCV-TV 3: Webcasts
    • DCV-TV 4: Viewer Contributed
    • DCV-TV 5: Solution Profiles
    • MODEX 2022
    • Upload Your Video
  • MAGAZINE
    • Current Issue
    • Archives
    • Digital Edition
    • Subscribe
    • Newsletters
    • Mobile Apps
  • TRANSPORTATION
  • MATERIAL HANDLING
  • TECHNOLOGY
  • LIFT TRUCKS
  • PODCAST ETC
    • Podcast
    • Webcasts
    • Blogs
      • One-Off Sound Off
      • Global Logistics and Risk
      • Empowering Your Performance Edge
      • Analytics & Big Data
      • Submit your blog post
    • Events
    • White Papers
    • Industry Press Room
      • Upload Your News
    • New Products
      • Upload Your Product News
    • Conference Guides
    • Conference Reports
    • Newsletters
    • Mobile Apps
  • DCV-TV
    • DCV-TV 1: News
    • DCV-TV 2: Case Studies
    • DCV-TV 3: Webcasts
    • DCV-TV 4: Viewer Contributed
    • DCV-TV 5: Solution Profiles
    • MODEX 2022
    • Upload Your Video
Home » vested interests
fastlane

vested interests

August 1, 2009
Clifford F. Lynch
No Comments

Peter Drucker, considered by many to be the father of modern management, once said that outsourcing is not so much about cost cutting as it is about improving the quality of work that others can do better than you can.

Kate Vitasek and her team at the consultancy Supply Chain Visions and the University of Tennessee have a slightly different take on the subject: They say outsourcing is not so much about cost cutting as it is about both parties' interests being perfectly aligned. And it is on this foundation that they have built a new philosophy of outsourcing: Vested Outsourcing, or VO. Vested Outsourcing represents a totally new, collaborative method of outsourcing based on pay for performance.

In the outsourcing world, a genuinely new concept comes along only once in 10 years or so. But I have a feeling this is one of them.

To understand how VO promises to change the game, it helps to know a little about the history of outsourcing. Outsourcing has been with us since the 14th century, when the merchants of Europe and Asia stored their goods in warehouses at the port of Venice for later shipment to the New World. The concept was quick to catch on, and soon companies all over the world were contracting out warehousing and transportation. But for the most part, these early arrangements were strictly "one off" transactions. It wasn't until the 1960s that we saw our first real breakthrough with multiyear warehouse contracts.

During the 1970s, an era that saw U.S. manufacturers putting heavy emphasis on cost reduction and productivity, longer-term relationships became more common, particularly in the warehousing arena. Outsourcing got a big boost in 1980, when a relaxation in regulation made it possible for carriers and others to enter into truly innovative long-term relationships with customers.

The most common criticism of the typical outsourcing contract was that it offered no incentives for productivity improvement or superior performance, and the late 1990s saw an expanded use of gain-sharing agreements. Unfortunately, however, many of these arrangements lacked a crucial element: While they rewarded providers for enhanced performance, they neglected to include penalties for poor service or substandard productivity.

Vested Outsourcing changes all that. VO meets gain sharing head on. While somewhat similar to gain sharing, VO stipulates that the outsourcer pays strictly for performance—i.e., the successful fulfillment of those activities the two parties have agreed are necessary. A party to a VO contract does not pay for transactions. It pays for results, or in the language of VO, "desired outcomes." The agreement clearly spells out both the financial rewards for exceeding the agreed-upon "desired outcomes" and the penalties for falling short.

At first blush, VO may sound complicated, but actually it's beautiful in its simplicity. And it promises to bring collaboration to a new level, although it will require a significant change in mindset for those logistics service providers that still cling to the transaction-based business model. It requires not only a meeting of the minds or alignment of interests, but also a clear understanding of what is expected. Most important, the provider must be willing to accept the risk-reward aspect.

Perhaps the most important lesson to be learned from the 2000s is that the complacent, reactive logistics service provider is becoming obsolete. Both providers and users must be proactive, flexible, and clearly focused. I believe the sophisticated providers will understand this, as will the more enlightened outsourcers. Particularly in this economy, VO represents a wonderful opportunity for both parties to profit from a true results-oriented collaboration.

For more information, visit www.vestedoutsourcing.com. You'll find it's time well spent.

KEYWORDS Supply Chain Visions University of Tennessee
  • Related Articles

    Vested outsourcing only works for a few companies, says consultant

    How to write a Vested Outsourcing contract

    New book features "Vested" success stories

Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider of logistics management advisory services, and author of Logistics Outsourcing ? A Management Guide and co-author of The Role of Transportation in the Supply Chain. He can be reached at cliff@cflynch.com.

Recent Articles by Clifford Lynch

A New Solution for Some Old Problems

The time has come

The continuing saga of driver shortages

You must login or register in order to post a comment.

Report Abusive Comment

Most Popular Articles

  • FedEx agrees to buy 10% stake in Berkshire Grey

  • The robots are here. Now what?

  • No vacancy at the warehouse

  • Shippers, battling escalating packaging costs, look for answers

  • Investment group pays $5.2 billion to buy Amazon air freight contractor Atlas Air

Now Playing on DCV-TV

5dd7b388 1f0e 40fc 9e78 2670e0e55fd2

What happens to your supply chain when chaos meets confusion?

DCV-TV 4: Viewer Contributed
Over the last several months, I’ve given many presentations about the events and potential changes impacting supply chains. After one of them, an individual approached me with a very interesting observation: “It’s not just that these things occurred, it's that we were blindsided by them. We never saw it coming.”...

FEATURED WHITE PAPERS

  • Choose the Best Auto ID Technology for Tracking RTIs

  • 8 ways your facility can benefit from Hyster Reaction

  • Why Use RFID to Track RTIs

  • THE NEW WAY TO WAREHOUSE: 4 Innovations in Automation & Robotics to Boost Warehouse Productivity

View More

Subscribe to DC Velocity Magazine

GET YOUR FREE SUBSCRIPTION
  • SUBSCRIBE
  • NEWSLETTERS
  • ADVERTISING
  • CUSTOMER CARE
  • CONTACT
  • ABOUT
  • STAFF
  • PRIVACY POLICY

Copyright ©2022. All Rights ReservedDesign, CMS, Hosting & Web Development :: ePublishing