In our 3 Day Vested Outsourcing course we teach organizations how to do a Business Model Map in order to determine if Vested is the right Sourcing Business Model for their situation. One question that came up was, “Wouldn’t a buyer and a supplier have the same shared vision once they decided to create a relational contract?” The answer is NO. And here is why: there are three types of relational contracts: a Preferred Provider, a Performance-Based Agreement, and a Vested Agreement. While all three should be designed as relational contracts, the economic model is different for each.
A Preferred Provider uses a transactional economic model (pays per unit, per shipment, per call, etc.). A Performance-Based Agreement uses an output-based economic model, typically tying a portion of the supplier’s compensation to performance against supplier-controllable outputs, such as Service Level Agreements. A Vested Agreement uses an outcome-based economic model. There is no price, but there is a pricing model with shared risk and shared reward where the parties agree on mutually defined boundary-spanning business outcomes that are much broader than SLAs and typically cannot be achieved by just the supplier (unlike SLAs).
So, what does the economic model have to do with the shared vision? Everything because the shared vision should be based on the purpose of the relationship, effectively delivering transactions, outputs, or boundary spanning business outcomes. There is little “shared” in the “shared visions” in the preferred and performance-based model. In those models it is more the vision of the client than a truly shared vision. It might be that the service provider shares the same vision, but that would probably be implicit—by agreeing to deliver the service.
Let’s use the example of outsourced facilities management to show the difference for each type of Sourcing Business Model.
Preferred Provider
Purpose: Value-Added Capabilities at Best Value
Example Vision for relationship: The service provider agrees to perform facilities management service under the scope of the relationship. The parties agree to collaborate to identify improvement opportunities to reduce the price of facilities management services and increase service levels.
Key Point: the service provider is still providing work for a fee for transaction, however there is a commitment to create a stronger relationship to generate improvement opportunities
Performance-Based Agreement
Purpose: Performance to SLAs / Process Efficiencies
Example Vision for the relationship: The parties enter into a five-year strategic performance-based agreement with the goal to improve performance and drive process efficiencies across the buyer’s facilities. The service provider commits to achieve pre-agreed service levels and reduce the price paid for facilities management services under their control by 3% each year for the life the contract.
Key Point: The service provider takes on the risk to deliver against supplier controllable outputs.
Vested Agreement
Purpose: Shared Vision with commitment to mutually defined Desired Outcomes and Value Creation
Example Shared Vision for the relationship: The parties work together to provide world class services and business performance to offer a work environment for both employees and guests that continuously delivers memorable experiences, aiming to beat expectations in every detail. Doing so will strengthen the brands of both parties, and contribute positively to attracting, satisfying and retaining employees.
Key Point: The buyer AND service provider share risk and share reward to for boundary spanning business outcomes.
The bottom line? The next time you set out to work with a supplier think about the purpose of the relationship. If you don’t get the vision right for the relationship you may find yourself going down the wrong path.