Strategic CIO // IT Strategy
Commentary
5/16/2013
11:56 AM
Kate Vitasek
Kate Vitasek
Commentary
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Vested IT Outsourcing Deals Avert A Catch-22

Customers and suppliers say they value innovation, but most outsourcing relationships end up becoming a race to the bottom. In "vested" outsourcing deals, both parties are vested in each other's success.

In 2005, Dell chose GENCO ATC to help expedite its returns and repairs processes. Having performed well, GENCO in 2009 acquired Dell's buildings, assets and people related to those processes under a three-year outsourcing contract called Nighthawk.

The transaction-based arrangement created challenges for GENCO because it had to assume the risk of meeting price-per-activity while maintaining high service levels. It worked for a time, but Dell's leaders continued to demand cost reductions based on the company's "every dollar, every year" model, even though the two parties had agreed that GENCO would take on the bulk of the enterprise risk at a set price.

Complications ensued and the Dell-GENCO relationship was in danger of falling apart. With the contract about to expire, the parties turned to the vested approach.

"The Dell-GENCO ATC relationship had legacy issues, with issues on both sides," says Raj Subramonian, general manager of Global Dell Outlet. "GENCO was rewarded for getting the most money it could. Dell was rewarded for getting the lowest costs. Dell's and GENCO's interests needed to be aligned. If we had created the same contract structure with a new supplier, we would have had the same issues. I felt strongly we had to consciously challenge years of historical precedent and make changes in contract penalties and incentives."

Within six months of entering into a vested agreement 15 months ago, the companies have derived more than $5 million in tangible benefits, the companies say. In a presentation at the Council of Supply Chain Management Professionals last October, Dell's Subramonian and GENCO CEO Herb Shear reported a 32% reduction in manufacturing cost per computer device; a 57% reduction in scrap when GENCO implemented recycling and refurbishment capabilities for Dell; and a record profit margin for Dell's reverse logistics business.

The complete Dell-GENCO case study is available in the second edition of my book Vested Outsourcing: Five Rules That Will Transform Outsourcing.

So here's my challenge: Is your company willing to get off the transaction treadmill and give the vested model a try? I've talked with outsourcing customers who say: "Suppliers just don't get it," and suppliers who claim: "Buyers are too old school -- they can't get it."

The IT outsourcing industry can escape that Catch-22 the way GENCO and Dell did. Any players out there? Or is the industry destined to stay on this merry-go-round?

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