5 big questions on innovation

The University of Tennessee has been studying the nature of highly successful business relationships since 2003. Our research was originally funded by the United States Air Force with a goal to provide a pathway to long-term, collaborative success among business partners. We codified our findings into a methodology and business model that researchers coined as “Vested” or “Vested Outsourcing.” Our research first gained notoriety with the publication of Vested Outsourcing: Five Rules That Will Transform Outsourcing in 2010. In a way that book began a movement that got people interested in learning how to work better with their strategic partners. The Vested methodology is based on five “rules” that when followed create a business model that fosters a high collaborative “win-win” relationship that purposely creates and shares value so that everyone achieves the win-win.

The five rules are:

– Focus on outcomes, not transactions: Flip the thinking from a focus on specific transactions to desired outcomes – instead of buying transactions, buy outcomes, which can include targets for availability, reliability, revenue generation, employee or customer satisfaction and the like.

– Focus on the what, not the how: If a partnership is truly outcome-based it can no longer have a multiplicity of Service Level Agreements (SLAs) that the buyer is micromanaging. The outsource provider has won the contract because he is supposed to have the expertise that the buyer lacks. So the buyer has to trust the supplier to solve problems. 

– Agree on clearly defined and measurable outcomes: Make sure everyone is clear and on the same page about their desired outcomes. Ideally, there shouldn’t be more than about five high-level metrics. All parties – which may of course include users and other stakeholders that aren’t directly signing the contract – need to spend time collaboratively, during the outsourcing process and especially during the contract negotiations, to establish explicit definitions for how relationship success will be measured.

– Pricing model with incentives that optimize the business: Vested does not guarantee higher profits for service providers – they are taking a calculated risk. But it does provide them with the tools, autonomy and authority to make strategic investments in processes that can generate a greater ROI and value over time, perhaps more than a conventional cost-plus or fixed price contract might produce over the same period.

– Insight versus oversight governance structure: A flexible and credible governance framework makes all the rules work in sync. The structure governing an outsource agreement or business relationship should instill transparency and trust about how operations are developing and improving. And, of course, of where the next threats and challenges may occur, because business happens.

Simply put, the biggest impediments to innovation are old-school, transaction-based, and risk-averse thinking. I’ve found that waiting for the Aha! Moment when it comes to innovation generally means there will be a long wait…It’s much better to create a transparent, incentivized environment that encourages innovation both from within an organization and in conjunction with an organization’s partners.

This is what P&G’s CEO, A.G. Lafley, did when he set out to reinvent the company’s innovation business model in radical and precedent-setting fashion. Questioning the sustainability of the conventional “in-house-do-it-ourselves” model, Lafley determined that looking beyond P&G’s walls could produce highly profitable innovations. In his book, The Game Changer, Lafley wrote about how P&G used innovation to spur company results. He wrote, “In an innovation-centered company, managers and employees have no fear of innovation since they have developed the know-how to manage its attendant risk; innovation builds their mental muscles, leading them to new core competencies.”  We studied P&G’s highly successful Vested relationship with Jones Lang LaSalle (JLL) for facilities and real estate management as part of our research. JLL has won P&G’s supplier of the year award three times and has won the International Association for Outsourcing Professionals GEO award for innovation in outsourcing for their progressive thinking in how they drive innovation through strategic outsourcing.

This is the million dollar question and why we actually put all of the effort into our research.  A Vested agreement is all about engraining innovation into the very fabric of business relationships. Our deep applied research helped us learn what the best were doing. Then our challenge became codifying our learning into a methodology that any organization could use. We’ve now got five books on the topic and seven courses that individuals and organizations can use to help them as they seek to embed an innovation culture into their business relationships.

I think the major trend will be the increasing realization that collaboration and transparent communication is a necessity in today’s technological and globalized business environment.

Another trend that will continue to gain traction is the move away from transaction-based business models and the old-school emphasis on lowest cost and labor arbitrage. You’ll definitely see a rise in relational contracts that leverage a Vested or even a sound Performance-Based sourcing business model. Instilling collaboration through relational contracts will free everyone to do what they do best without constantly looking over their shoulder at the bean counters. The key is to make sure you craft these agreements properly. Far too many procurement professionals “say” collaboration and are beginning to shift to a relational contract mindset, yet they don’t have a clue what they are doing. We are working hard to make education accessible and have made five courses available as online courses –so they are widely available. This includes are Creating a Vested Agreement and Getting to We online courses, which both come with an excellent toolkit to help individuals not only learn – but “do.” 

I’d refer once again to the P&G example and share some of their case study that’s profiled in the book Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships – which is related in chapter 2. P&G brought its focus on innovation to its facilities management relationship with JLL by challenging JLL to not just take care of its buildings, but to take charge of the buildings. The companies created a commercial agreement that was Vested in nature, meaning that they collaborated to produce win-win results by sharing and creating value through innovative, performance-based goals. Basically they flipped the conventional outsourcing approach on its head: P&G developed a business model around contracting for transformation and results instead of contracting for day-to-day work and transactions.