As long-time readers of Logistics Viewpoints know, I’m a big proponent of Vested Outsourcing (VO), which I believe has the potential to transform the way 3PLs and their customers work together. But whenever I talk about Vested Outsourcing, there’s always at least one person in the audience that quickly jumps to the following conclusion: “Oh, that’s gain sharing, and we tried it before and it didn’t work.”

Equating Vested Outsourcing with gain sharing is an ongoing problem in the industry. Just last week, for example, noted consultants Art van Bodegraven and Kenneth B. Ackerman wrote the following in an article published in DC Velocity:

But metaphoric old girlfriends have a way of showing up in new dresses in our business—once-attractive ideas parading among us, rebranded and repackaged. The latest incarnation of gain sharing is “vested outsourcing,” a concept with roots in the military.

Equating gain sharing with Vested Outsourcing is like equating baseball with cricket. Yes, they share similarities, but they are fundamentally different.

So, what is Vested Outsourcing and how does it differ from gain sharing? For the most detailed answer, I recommend reading my friend Kate Vitasek’s book on this topic or taking the Vested Outsourcing course at the University of Tennessee. But last year, in preparation for our seminar on performance-based outsourcing, I interviewed three senior executives at Unipart Logistics–a logistics service provider that has been on a VO journey for more than two decades with customers such as Jaguar and Vodafone–to obtain their perspectives on the key attributes that define a VO relationship. Based on these interviews, I identified seven critical building blocks that I believe form the foundation and framework for vested outsourcing relationships, and that also re-enforce the “Five Rules” that Kate Vitasek discusses in her book. Here they are:

  • The CEOs as Catalyst and Champions for Change
  • Trust in Each Other’s Expertise
  • Clear “Shared Vision” Statement with End Customer Focus
  • A Contract Structure that Encourages Independent Action
  • Provide Insight, Not Just Oversight
  • Flexibility to Adapt to Change
  • Passion for the Customer Brand

I discussed the first point in a blog posting last year (see “The Missing CEO in Logistics Outsourcing Relationships”). I don’t have the time or space today to address all the other points, but I’ll quickly comment on creating a shared vision statement, using Jaguar and Unipart as an example.

Discussions between the two companies, which began with their CEOs, ultimately led to the creation of the following shared vision statement, which is reviewed at the start of every meeting between the two companies:

”To support Jaguar dealers in delivering a Unique Personal Ownership Experience to Jaguar Drivers worldwide, ensuring industry leading owner loyalty through partnership and world-class logistics.”

This shared vision statement answers two basic questions: Who is the real customer that defines the success of both companies? And how do you measure success? The real customer is every person that drives a Jaguar, and the overriding measures of success are providing “a unique personal ownership experience” and “owner loyalty.”

Determining how to measure “ownership experience” and “owner loyalty” was part of the exercise the two companies went through, along with determining how logistics and other parties in the supply chain impact these measures and what defines world class. But the key takeaway is that this shared vision statement aligned both companies towards a common goal that both unified and transcended the interests of each company. “Our destinies are linked,” explained Paul Brooks, Unipart Logistics Sales Director, during our interview. “If Jaguar’s sales increase, our profits increase, and if their sales go down, we make less money. But we also have the ability to influence sales through the investments we make to innovate and improve our processes.”

This concept of a shared vision statement is also evident, albeit in a different framework, in how Lowe’s and Whirlpool have integrated their CPFR and S&OP processes. Executives from both companies presented their case study at our “Beyond the Perfect Order Metric” seminar in January, and here is an excerpt from their presentation (which was subtitled “Two Companies, One Plan”) that sums up the opportunity nicely:

The environments surrounding the Retailing and Manufacturing industries have evolved to the point that the best way to extract additional value is joint business planning [emphasis mine] in concert with supply chain collaboration.

As the Lowe’s executive noted, “The more successful Whirlpool is, the more successful we are, and vice versa.” It is a recognition, based on mutual trust earned through decades of working together, that their destinies are truly linked. And it’s this firm belief in having a shared destiny (where ‘destiny’ implies a long-term future together) that is often missing from gain sharing agreements. Simply put, most gain sharing agreements are too narrowly focused, both in terms of scope and timeframe, which is why most of them ultimately fall apart.

There are many reasons to dismiss Vested Outsourcing–it requires too much work, it takes two to tango and our customers/suppliers/partners aren’t ready for it–but pointing to a failed gain sharing agreement shouldn’t be one of them.

Vested Outsourcing is not an old girlfriend in a new dress. She’s a different woman, in a league of her own.