New market conditions require new sourcing business models
EY in the Nordics has extensive experience from supporting clients with setting up outsourcing contracts, having conducted over 120 outsourcing projects with over 60 clients in the Nordics alone. We have facilitated over 10 Vested® deals and have worked with over 17 different clients during our Vested journeys.
EY was recently appointed as leader within innovation consulting by the Forrester (The Forrester Wave, October 2018) and innovation is built into our offerings which enables us to be in the forefront of the outsourcing market. EY is regarded as the leading consultancy within outsourcing advisory (IAOP rankings) and we are the only big consulting firm appointed as Global Vested Center of Excellence.
EY can support you in determining the most suitable business model for your business
In traditional outsourcing deals, we see that the buyer typically receives:
- Cost savings
- Better control of services and cost
- More standardized services
- Better quality in products and services
While a traditional outsourcing approach can work well for many deals, EY often sees that multiple deals fall short with companies experiencing unsatisfactory results as their agreement fails to deliver:
- Innovation and transformation
- Teamwork between the buyer and supplier
- Focus on value creation beyond only cost savings
Why does this happen?
EY – working in collaboration with the University of Tennessee as part of their field-based research team – has analyzed outsourcing relationships and contracts and found that the primary cause is a fundamental misalignment between the buyer’s and supplier’s expectations and how the actual agreement has been crafted. For example, thinking that the supplier will drive innovation and automation of services when they are being compensated for how many employees are working in the contract is completely misaligned. To optimize the outsourcing relationship, the entire business model including the pricing model, must drive both parties in the right direction by incentivizing right behaviors.
So, what is the fix?
The key is to use the right sourcing business model for your company’s situation. We predict that a growing number of deals will be strategic partnerships by nature; a combination of a relational contract and either an output based or an outcome based economic model. Many organizations today strive for a strategic partnership with their buyer/supplier, but are limited by a contractual agreement that does not reflect the wanted behavior.
EY has extensive experience from performing contract reviews and we are readily available to help and provide insights into your agreement. This is done by shedding light on whether the agreement has worked as intended or not, how the collaboration between the buyer and supplier is working, and what the challenges are and in what way they affect the results of the collaboration. By performing root cause analyses the source of such challenges can be pinpointed. Based on this review of the deal and assessment of the relationship’s maturity, EY provides concrete recommendations for how to proceed with the agreement and the existing relationship.
If the analysis reveals that your organization is ready to proceed towards a more strategic partnership, the next step is to determine the “best fit” sourcing business model. The process of mapping an outsourcing contract into the sourcing business model matrix (see Figure 1), enables you to determine which sourcing business model is most suitable for your situation. The “best fit” sourcing model should support alignment between the relationship and contract content to add true value to the business beyond solely cost savings.
Figure 1. Sourcing Business Model Matrix
Knowing which economic and relationship model that suits your context can however be challenging. You need to ask yourself if you want an arms-length distance in your relationship with a transaction based business model or if you want to have a closer collaboration through a performance based model or a Vested partnership. If you are like many organizations today, you are likely to strive for a strategic partnership, but are limited by a contractual agreement that does not reflect the wanted behavior.
This is where using an advisory firm certified in sourcing business model assessments can help. EY’s outsourcing experts have extensive experience from analyzing which sourcing business model is most suitable for your situation. We use a comprehensive and proven set of tools and parameters to support you in deciding your sourcing strategy. Getting a professional assessment from EY will give you insights on which sourcing business model is best suited for you based on what you want to get out of your agreement. In this aspect, EY can help you rethink the optimal sourcing business model for your situation.
How does an agreement move from a pure cost savings focus to driving innovation and proactivity?
“The reason why companies do not ‘get’ innovation is because they do not buy innovation. There are several fundamental flaws with how existing outsourcing relationships are structured today.” (Kate Vitasek, Founder of Vested, University of Tennessee)
True partnerships that enable a win-win situation and value beyond savings including innovation do exist, but they are rare. Making the shift starts with a mind shift. Vested thinking is different as it often means going against how buyers and suppliers traditionally approach collaboration and contracting.
For starters, Vested is about working alongside your buyer/supplier as business partners, rather than relying on default procurement processes that use transactional power based buy-sell principles. Moreover, it is about moving away from rigid contracts and statements of work, and instead creating flexible business agreements based on trust, transparency, long-term thinking and fairness when business happens.
Vested has been successfully utilized in over 70 deals globally with 19 being publicly referenced as case studies (e.g. Dell; Intel; TD Bank; Telia; Microsoft). EY and Cirio Law firm have, in collaboration since 2015, successfully taken Vested to the European market in general and the Nordic market in particular. In our view, Vested is not just for big companies − it can be applied successfully in all kinds of contexts, both in the private and public sector.
So, what is Vested?
Vested is a mindset, methodology, business model and movement. The Vested methodology is founded on Five Rules, grounded in extensive research from the University of Tennessee and funded by the U.S. Air Force. Multiple outsourcing contracts and relationships, as the likes of P&G with JLL and Microsoft with Accenture, were studied with the purpose of finding common characteristics in the most successful business relationships. Based on this research, a methodology was created, with Five Rules that should be adhered to optimize for a successful outcome based outsourcing agreement.
Figure 2. The Five Rules of Vested
In Vested, the buyer and supplier win together and lose together, therefore both parties strive towards the same goal and are incentivized to reach the partnership’s desired outcomes and create value for both parties. EY helps our client with several different kinds of outsourcing agreements, and Vested is our recommended solution within outsourcing relationships where the goal is to increase the size of the entire pie by unlocking a greater opportunity than currently is realized by either party.
Throughout the Vested journey, EY helps the parties through each Rule where the buyer and supplier participate in a series of workshops, making decisions and creating deliverables together that align with the Five Rules. The deliverables become the foundation of the contract. During this process EY ensures that your Vested agreement drives the right behavior and is optimally structured to realize real value.
What happens when great minds don't think alike?
Going through the Vested journey is a creative process; a premise to truly create a successful business relationship by having both the buyer and supplier jointly creating the foundation of the partnership and the actual agreement. EY’s trusted Certified Deal Architects facilitate the process as a neutral coach, balancing both parties’ interests. Using a neutral coach is imperative to the Vested methodology since it ensures that both parties interests are equally reflected in the foundation of the agreement.
EY also provides expert project management support as you work through each of the Five Rules, ensuring completion of the deliverables in a timely manner. Using a professional project manager typically reduces the time to contract for a Vested agreement by up to 50 %. Once your Vested agreement is signed, EY also functions as Standing Neutral, ensuring that both parties uphold the Vested What’s-In-It-For-We (WIIFWe) mindset. As such, you can lean on EY’s Vested competence continuously throughout the life of the relationship.
We are proud to be a Center of Excellence for Vested, thereby playing an integral part in redefining outsourcing agreements and realizing substantial value for our clients.
Are you interested in learning more about how we can help you find the "best fit" sourcing business model, evaluate your current relationships, or take your sourcing to the next level with Vested, please contact Magnus Kuchler, EY Partner and Global Vested Leader, firstname.lastname@example.org, +46 70 - 318 90 94.