FROM RESEARCH TO REALIT Y: VESTED IN ACTION
When the UT research first came out, many thought it was an intriguing
theory, but difficult to put into practice. The critique led to the UT
researchers teaming with the International Association for Contract and
Commercial Management (IACCM) to write a second book on Vested
— The Vested Outsourcing Manual — which provides a step-by-step
guidebook for how to turn the five rules into a contract.
CASE STUDY 1: DELL/GENCO
Dell was one of the first companies to pilot the Vested methodology. The
company and its strategic partner GENCO, a reverse logistics provider
that is now part of FedEx, followed the rules with great success.
The relationship was strategic, but the structure of the agreement was
transactional in nature. The contract was a typical transaction-based
contract in which FedEx assumed the risk of meeting a set “price
per activity” while maintaining service levels. The agreement worked
reasonably well for a time, but Dell’s leaders continued to face cost
pressures, insisting on an “every dollar, every year” procurement principle
— despite FedEx assuming much of the risk under the contract terms.
The seeds for a difficult endgame were sown, unless both companies
could transform their relationship through trust and collaboration. A
new partnership could drive innovation and get the parties unstuck
from the conventional buyer-supplier scenario
of sitting across a table negotiating tradeoffs and
contract concessions. Dell and FedEx succeeded
by structuring a win-win strategic commercial
agreement that embedded Vested’s “what’s in it for
we” mind-set and followed the Vested five rules.
Rule 1: Focus on outcomes, not transactions.
Instead of buying transactions, Dell and FedEx
created a joint shared vision and six desired
outcomes to set the relationship focus. This
helped the parties avoid the “activity trap” in which
suppliers are paid for performing a task or activity
— regardless of whether it is needed. Applying this
rule enabled the parties to not only talk about a
strategic partnership, but craft a deal around true
Rule 2: Focus on the “what,” not the “how.” A
conventional buyer-supplier relationship has a
detailed SOW that dictates how the supplier should
perform the work. Dell and FedEx replaced their
detailed SOW with a taxonomy and workload
allocation that clearly showed how the parties
would work together to achieve their shared vision
and desired outcomes.
Rule 3: Agree on clearly defined and measurable
outcomes. Traditional outsourcing agreements
have detailed SLAs. In a Vested agreement, metrics
are clearly aligned to desired outcomes. For Dell
and FedEx, this meant reducing the number of
metrics from more than 100 to 20 clearly defined
metrics that aligned to six desired outcomes.
Rule 4: Pricing-model incentives that optimize
the business. The Vested business model does
not guarantee higher profits for suppliers. Rather,
suppliers take a calculated risk to link profitability
to achievement of mutually agreed desired
outcomes. Dell’s agreement incentivized FedEx
to make strategic investments in processes that
would help reach such outcomes. Using a pricing
model with incentives enabled the parties to “grow
the pie and share the pie” when value was created.
The more effective FedEx was at achieving the
desired outcomes, the more incentives (or profits)
it earned. A true win-win economic model.
Rule 5: Governance structure that provides
insight, not oversight. Dell and FedEx established
a flexible and credible governance framework
that enabled the rules to work in sync. The focus
shifted from managing the supplier to managing
the business — with the supplier. Together, the
parties built a governance structure based on
transparency about how operations are developing
The results were nothing short of transformational.
Dell reduced the cost structure for its repair and
returns business by 32 percent in less than two
At the heart of the Vested methodology is what researchers call a “what’s in it for
we” (WIIFWe) business relationship. Buyers and suppliers structure contracts to
follow these five rules, designing an agreement with mutually desired outcomes,
clearly defined measurements, an incentive-based pricing model and a transparent
Figure 1: Vested Methodology