adrian gonzalez, arc advisory group & kate vitasek, tennessee’s center for executive education...

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.”



created them.”

3

Is there a better way to outsource? Is there a better way to outsource?


Has Anything Changed in 8 Years? Has Anything Changed in 8 Years?


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.


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?


“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


“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


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.


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


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.


“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


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……


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


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.”


THE GAME

OF OUTSOURCING


Contracting in Complex Deals is Really Just a Bet


The Game of Outsourcing


Win –Win

is

Really

Beautiful!


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….”


Why Do We Act this Way?

“Morality is what people should do.

Economics is what people

do.”


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


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


DEFINING THE RULES

OF THE GAME


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


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 !


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


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


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


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


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….


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


How Healthy is Your

Relationship?

10 Ailments


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


….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….. ”


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!


Getting Started


Vested Outsourcing Implementation Plan


Is there a better way to Contract for Outsourced Services?



created them.”

41

42

For more information…. For more information….

Adrian Gonzalez 781.471.1154

[email protected]

LogisticsViewpoints.com

Kate Vitasek 206-414-8378

[email protected]

VestedOutsourcing.com