adrian gonzalez, arc advisory group & kate vitasek, tennessee’s center for executive education...
DESCRIPTION
TRANSCRIPT
Maximizing the Value of 3PL-Customer Relationships
Maximizing the Value of 3PL-Customer Relationships
2
Presented by….. Presented by…..
Adrian Gonzalez Director
ARC Advisory Group [email protected]
Kate Vitasek Faculty, Center for Executive Educations
University of Tennessee [email protected]
3 © ARC Advisory Group
“The significant problems we face
cannot be solved at the same level of thinking we were at when we
created them.”
“The significant problems we face
cannot be solved at the same level of thinking we were at when we
created them.”
3
Is there a better way to outsource? Is there a better way to outsource?
4 © ARC Advisory Group
Has Anything Changed in 8 Years? Has Anything Changed in 8 Years?
5 © ARC Advisory Group
How to Break Out of Rut? How to Break Out of Rut?
“3PLs and customers need to make a clean break from the way they
have always worked together. This mind shift will be difficult, if not impossible, for many 3PLs and
customers. But those who embark on the journey will certainly gain an edge over the competition.”
Based on Think Tanks with 43 logistics and supply chain executives and a web survey completed by more than 100 logistics and supply chain executives.
6 © ARC Advisory Group
Do all relationships need to be strategic? Do all relationships need to be strategic?
Many (if not most) outsourced relationships do not need to be strategic.
In many cases, companies simply want to procure a basic service, like transportation capacity or warehousing space, at a competitive price.
But most think tank participants were working with at least one 3PL that played a more significant role in their logistics and supply chain operations.
How can we move these relationships up the value curve?
7 © ARC Advisory Group
“3PLs are not proactive enough” “3PLs are not proactive enough”
Areas 3PLs are falling short of expectations (multiple answers allowed)
“3PLs should be more proactive in identifying solutions to concerns we communicate to them. We tend to have to pull them along and think outside the box for them.” - Web survey respondent
8 © ARC Advisory Group
“Still want to maintain control” “Still want to maintain control”
Customers don’t see Procurement’s growing role in the 3PL selection process as a significant factor that prevents creating more strategic relationships… …but many 3PLs view it as a problem, especially when procurement folks who only have experience buying commodity goods are put in charge.
Factors inhibiting creation of strategic relationships with 3PLs
9 © ARC Advisory Group
Cost Very/Extremely Important Cost Very/Extremely Important
Important factors in 3PL selection process
95% of the respondents characterized Cost as “Very or Extremely” important in their 3PL selection process. IT Capabilities, Talent, and
Quality/Creativity of Proposal also ranked very high.
10 © ARC Advisory Group
Contract structures not strategic Contract structures not strategic
Almost 45% of the web survey respondents have transaction-based contracts with their 3PLs. About 26% of the contracts are just one year in length (82% are three years or less)
Types of 3PL contracts in use
Typical length of 3PL contracts
11 © ARC Advisory Group
Creating Alignment: The Missing CEO Creating Alignment: The Missing CEO
People/Functions in 3PL selection process
62% of the web survey respondents said their CEO was not involved at all in the 3PL evaluation and selection process, and only 10% said the CEO
was very or completely involved.
12 © ARC Advisory Group
“If there was one thing we could change…” “If there was one thing we could change…”
If there is one thing my company could change to strengthen and expand our relationship with 3PLs, it would be...
If there is one thing our 3PL(s) could change to
strengthen and expand their relationship with us, it would be...
“We would change our culture, they would change their culture [with regards to outsourcing].”
- Web survey respondent
13 © ARC Advisory Group
Summary and Recommendations Summary and Recommendations
Critical Building Blocks The CEOs as a Catalyst and Champions
for Change Trust in Each Other’s Expertise Develop 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
Most 3PL-customer relationships are not structured to be strategic, but most also don’t need to be strategic. The real opportunity is for customers and 3PLs to focus on well-established relationships where additional progress in terms of cost savings, service improvements, or other forms of continuous improvement has slowed or stalled.
14 © Kate Vitasek 2009
Based on research by……
15 © Kate Vitasek 2009
Vested Outsourcing is…. A game changing approach to outsourcing that
Leverages “win-win” thinking associated with Game Theory / Behavioral Economics Is centered around buying results instead of tasks and/or activities with the conscious effort to use incentives to drive process innovation which prevents many perverse incentives of conventional outsourcing Creates a contract that follows “5 Rules” Uses incentives to transform the work to achieve “tradeups” versus conventional cost/service tradeoffs
Based on research from the University of Tennessee Follows a structured implementation model to improve implementation Leverages tools and courses created by the University of Tennessee to help companies outsource better
Transformational when applied Supported as the “next generation in outsourcing” by the Outsourcing Institute as a key concept of Outsourcing 2.0 Being associated as the “business concept of the decade” similar to Lean and Six Sigma
16 © Kate Vitasek 2009
Early Endorsements
Cliff Lynch, DC Velocity Magazine "In the outsourcing world, a genuinely new concept comes along only once every
10 years or so. I have a feeling Vested Outsourcing is one of them."
Frank Casale – CEO, Outsourcing Institute “Vested Outsourcing is a game changing approach that will quickly become the
new gold standard for advanced outsourcing relationships. It is a critical enabler for Outsourcing 2.0”
Adrian Gonzalez – ARC Advisory Group “I view Vested Outsourcing as a cutting edge approach to structuring and
managing service provider-client relationships.”
Tim McBride – Chief Procurement Officer, Microsoft “As the Chief Procurement Officer at Microsoft it is my job to help us adopt next generation outsourcing models and Vested Outsourcing is definitely one of the
tools we have in our toolkit that we are exploring”.
Todd Shire, Global Logistics Sourcing Strategy Manager, Intel "I predict the buzzword for the next decade will be "incentives". Only when our
incentives are aligned will we succeed with collaboration. Vested Outsourcing nails how to get collaboration right“
Ken Ackerman – Warehousing Forum “These fresh ideas about outsourcing could change the way in which logistics
services are purchased and managed in the future.”
17 © Kate Vitasek 2009
THE GAME
OF OUTSOURCING
18 © Kate Vitasek 2009
Contracting in Complex Deals is Really Just a Bet
19 © Kate Vitasek 2009
The Game of Outsourcing
20 © Kate Vitasek 2009
Win –Win
is
Really
Beautiful!
21 © Kate Vitasek 2009
Adam Smith said: “The best results comes from everyone in the group doing what is best for themselves. That is incomplete. The best result will come from everyone in the group doing what is good for himself and the group. It is the only way we all win.”
“Adam Smith was wrong….”
22 © Kate Vitasek 2009
Why Do We Act this Way?
“Morality is what people should do.
Economics is what people
do.”
23 © Kate Vitasek 2009
Identifying the Pony
The Pony is the difference between the value of the current solution and the potential optimized solution The Pony represents what the customer could have – but is not able to currently get on their own or with existing outsourcing agreements Key is to share the value of the Pony with your providers; the value of the Pony is the resource incentive to fund investment in process improvement Use the Pony to derive the appropriate incentive levels for the supplier
The bigger the Pony – the bigger the incentives the service provider could earn
24 © Kate Vitasek 2009
WIIFWe: The Economics of Optimization
Vested Outsourcing is the creation of a mutual symbiotic “deal” where all parties win. All parties become aligned to the same quantifiable objectives The rules of the game are clearly spelled out through the contract Contract incentives balance risk/reward, encourages supplier innovation
25 © Kate Vitasek 2009
DEFINING THE RULES
OF THE GAME
26 © Kate Vitasek 2009
Win/Win (WIIFWe) Relationship
1. Outcome‐Based vs.
Transaction‐Based Business
Model
2. Focuses on the WHAT not the
HOW
3. Clearly Defined and Measurable Desired
Outcomes 4. Pricing Model Incentives are Optimized for Cost/Service Tradeoffs
5. Insight vs. Oversight
Governance Structure
27 © Kate Vitasek 2009
1. Outcome Based vs. Transaction Based Model
Most outsourcing relationships are follow a transaction-based business model This can be cost plus or a fixed price per transaction where the service provider gets paid a transaction fee for each activity that is performed
$ per minute to answer the phone $ per touch to pick a product $ per mile to ship a product $ per pallet/box to store a product
Vested Outsourcing moves to an outcome-based business model where the service provider is paid for achieving results, not just for performing tasks or activities
It’s not about spinning your wheels to do the same activities better, faster or
cheaper; It’s about transforming the work t hi th d i d lt !
28 © Kate Vitasek 2009
2. Focus on the WHAT, not the HOW
Most companies use detailed statement of
works (SOWs) and Service Level
Agreements (SLAs) to define how the service provider should
perform the work
Don’t outsource to the expert and
then tell them how to do the
29 © Kate Vitasek 2009
Joy’s Law
“For every P&G
researcher, there were 200 scientists or
engineers elsewhere that were just as good. That meant there was a
total of perhaps 1.5 million people whose
talents they could potentially use.”
No matter who you are, most of the bright people don’t work for you
30 © Kate Vitasek 2009
Solow’s Law
Named for Robert Solow, Nobel Prize Winning Economist 87% of Economic growth is driven by “technical change” which is driven by improvements in business process or technical improvements in products. Labor &
physical capital 13% Innovatio
n & Technical Change
87% Solow’s Findings
31 © Kate Vitasek 2009
You got to be very careful if you don't know where you're going, because you might not get there.
- Yogi Berra
3. Clearly Defined / Measurable Desired Outcomes
32 © Kate Vitasek 2009
If you ask for the
best slide calculator – you will likely get the best calculator!
Instead ask, “what
problem are you trying to solve?”
Then clearly define
how to measure success!
What is Success?
33 © Kate Vitasek 2009 33
4. Pricing Model Incentives Optimize for Tradeups!
use incentives to encourage service
providers to optimize for cost/service tradeoffs and
reward for achieving “trade-ups”
provide the service
provider with the hope that if they achieve results – they can be rewarded
span a long enough
timeframe to provide a ROI for investments made in
transforming the business
Pricing Models Should….
34 © Kate Vitasek 2009
5. Insight vs. Oversight Governance Structure
Many of today’s governance
structures are crappy!
Those that do have governance
structures tend to rely on a culture of
oversight vs. insight
A good governance structure works to get the “Rhythm of the Business” and
used fact based data to help solve
problems
35 © Kate Vitasek 2009
How Healthy is Your
Relationship?
10 Ailments
36 © Kate Vitasek 2009
Perverse Incentives….
1 Michael G. Vann, "Of Rats, Rice, and Race: The Great Hanoi Rat Massacre, an Episode in French Colonial History," French
Colonial History Society, May, 2003
Definition of Perverse Incentives [Def] “A perverse incentive is a
term for an incentive that has the opposite effect of that
intended. Perverse incentives by definition produce
unintended consequences.” The Language of Psychology
A classic example occurred in Hanoi when a French program paid people a bounty for each
rat pelt handed in. The program was intended to exterminate
rats. Instead it led to the farming of rats. 1
37 © Kate Vitasek 2009
….can happen anywhere…..
“One of the most powerful laws of the universe is the law
of unintended consequences. This
applies to schoolteachers, realtors, crack
dealers, expectant mothers….. ”
38 © Kate Vitasek 2009
10 Ailments of Conventional Outsourcing Models
1 Penny Wise and Pound Foolish
2 The Outsourcing Paradox
3 The Activity Trap
4 The Junkyard Dog Factor
5 The Honeymoon Effect
6 Sandbagging
7 The Zero Sum Game
8 Driving Blind Disease
9 Measurement Minutia
10 The Power of Not Doing
Win/Win (WIIFWe)
Relationship
1. Outcome‐Based vs.
Transaction‐Based Business
Model
2. Focuses on the WHAT not the HOW
3. Clearly Defined and Measurable Desired
Outcomes 4. Pricing Model Incentives are Optimized for Cost/Service Tradeoffs
5. Insight vs. Oversight Governance Structure
Not following the Vested Outsourcing rules typically leads to 10 common Outsourcing Ailments
….especially in outsourcing agreements!
39 © Kate Vitasek 2009
Getting Started
40 © Kate Vitasek 2009
Vested Outsourcing Implementation Plan
41 © Kate Vitasek 2009
Is there a better way to Contract for Outsourced Services?
“The significant problems we face
cannot be solved at the same level of thinking we were at when we
created them.”
41
42
For more information…. For more information….
Adrian Gonzalez 781.471.1154
LogisticsViewpoints.com
Kate Vitasek 206-414-8378
VestedOutsourcing.com