Markets are undergoing dramatic changes caused by technological revolution. Companies are able to deliver products at the same time better, cheaper and more attractive, comparing to other market players. As a result entire product lines and markets could emerge or disappear in one moment.

1. "How should supply chain adapts
with changing times and the future"

2. 2
Universe Begin with Big-Bang

3. 3
„Big-bang Disruption – Strategy in the Age of
Devastating Innovation”
• Markets are undergoing dramatical
changes caused by technological
revolution
• Companies are able to deliver products at
the same time better, cheaper and more
attractive, comparing to other market
players
• As a result entire product lines and markets
could emerge or disappear in one moment:
– Skype, iTunes, Facebook, Twitter, Google maps,
Angry Birds

4. • Big-bang disruptions are usually
unplanned and unintentional
• They emerge as a result of continuous
market experiments
• They work against conventional thinking
about strategy, marketing and innovation,
establishing new market rules, (e.g.
iTunes, Spotify – sales of access not
products)
4
Almost Everything We Think We Know About
Strategy and Innovation – IS NTO TRUE

5. Started as small …
… than grow, sometimes fast…
… achieved peak…
… and didn’t grow anymore
• Development and collapse were
characterised by:
– … stady growth
– … than accelerated
– … achieved peak
– … and crisis
5
Yesterday Most Companies Went Through
Traditional Lifecycles
S-curve

6. The Shark Fin (P. F. Nunes, T. Breene,
Jumping the S-Curve, 2011)
• Fast, vertical growth …
• … than almost immediately fall or disruption
• Only two market segments: trial users and
everybody else
6
Nowadays Every Sector Can Be Hit By New
Technologies And Has To Cope With Changes
vs. vs.
vs.vs.

7. Shark Fin Model Is Valid For Technological Innovation,
Especially For Disruptive New Technologies
• Market adoption can be extremelly dramatic, which is called catastrophic
success
• Tapering off is much faster comparing to the old bell curve model
• We have to deal wi`th getting into the market and getting out of the market
more quickly as well as we have to deal with scale-up and scale-down not to be
caught with a lot of inventory, overhead and infrastructure

8. Failure Of „Excellence”?
• „In search of Excellence” – most of presented „perfect” companies don’t
exist anymore or face serious problems
• 70%-80% of reengineering projects fail (M.Hammer, author of the
concept)
• Success and failure of Six Sigma / Lean Management:
• 30-years history
• Implemented in 58 companies from Fortune 500
• Long-term result: killed creativity
• 91% companies are no longer Fortune 500

9. Maybe We Concentrate On Wrong Things?
• When big, smart companies have problems, this is not, because they
are doing something wrong, but because they are doing great
• Traditional businesses concentrate on rigid innovations, making things
bigger, better, with better functionality, more efficient
Excessive optimization and standardization
give illusion of secure comfort:
„Don’t worry! Everything is under controll!”
Yeah?

10. Maybe We Concentrate On Wrong Things?
Excessive optimization and standardization
give illusion of secure comfort:
„Don’t worry! Everything is under controll!”
Yeah?
• Finally we end-up doing better, cheaper and faster things, which we
should not be doing anymore?

11. Best Practices And Benchmarking Are Foolish?
• Companies defined and copied so many „best practices”, that they are
now just identical!
• „Society of excess” has accees to the excess of:
• identical companies,
• employing identical employees,
• with similar education,
• having similar ideas,
• manufacturing similar products,
• sold for the comparable price
• and with the comparable quality (K.Nordström, J.Ridderstråle, Funky Business)
• Benchmarking means to identify a market leader, than develop a 5-year
plan to copy the leader to ensure, that we are in 5 years the same
Company, as he was 5 years ago?
• You cannot be unique copying somebody, who is unique
So, how are we going to compete?

12. 12
„In Search Of … PREDICTABILITY”
• Aiming for excellence and „zero-mistakes” strategy are caused by
our desire for predictability
• „Mistakes are causing losses, can delay projects, negatively impact
cooperation and destroy market image”
• Reduction of mistakes is easier, than generate creativity
• … it requires only discipline, standards, procedures, and following
the best practices …
• … but this is not leaving time for people to be creative, and causing,
that people just follow the regulations …
• THAT’S WHY WE ARE NOT INNOVATIVE ENOUGH!!!

13. • „… supply chain is defined as set of three or more entities (organizations
or individuals) directly involved in the upstream flow of products, services,
finances, and/or information from a source to customer …” – Mentzer
• „… supply chain is an instrinsically collaborative form of an „alliance
constellation”, where multiple partner firms compete against a single firm
or group of firms…” - Fawcet
• „… supply chain is made up by suppliers, manufacturing centers,
warehouses, distribution centers, and retail outlets, as well as raw
matertial, work-in-progress inventory, and finished products that flow
between the facilities…” – Semchi-Levi
13
Supply Chain Management

14. Conventional Approach
• Specify Buy
Quantities /
Manage demand
• Pay for each on a
Unit Price or
Transaction basis
• Assume all risk for:
‒ right product
‒ right locations
‒ right time
‒ right quantities
‒ Customer
satisfaction
‒ System uptime
14
CONTRACT MFG
CALL CENTER
WAREHOUSE PROVIDER
IT SERVICE PROVIDER
COMPANY
OUTSOURCE
MANAGER
LOW RISK
The more we sell,
The more profit we make!HIGH RISK
There Is An Inherent Flaw In The Business Model

15. Dr. Oliver Williamson’s research on Transaction Cost Economics won a
Nobel Prize in 2009.
Style Matters: Not Playing Nicely Can Cost You!
“Muscular buyers not only
use their suppliers, but
they often ‘use up’ their
suppliers and discard
them.
The muscular approach to
outsourcing of goods and
services is myopic and
inefficient.”
15

16. The New Math Of Relationships
“All complex contracts
will be incomplete –
there will be gaps,
errors, omissions and
the like.”
Williamson was awarded
the Nobel Prize in 2009
16
Transaction Cost Economics

17. 1. Outsourcing is a continuum, not a destination
2. Develop contracts that create “mutuality of advantage”
3. Understand the transaction attributes and their impact on risk and
price
4. The greater the bilateral dependencies, the greater the need for
preserving continuity
5. Use a contract as a framework – not a legal weapon
6. Develop safeguards to prevent defection
7. Predicted alignments can minimize transaction costs
8. The style of contracting matters; be credible
9. Build trust; leave money on the table
10. Keep it simple
Unpacking Oliver
Ten Lessons of Outsourcing Relationships
Williamson’s astute insight into outsourcing relationships are
transformative…

18. 18
Cooperative Games Win
Axelrod’s Book is
Recommended Reading

19. • Steven D. Levitt’s Freakonomics and
Superfreakonomics
– Modern-day rebel in economics for his work
exploring “the hidden side of everything”
– Levitt points out, “One of the most powerful laws of
the universe is the law of unintended consequences”
• Lesson for outsourcing firms:
– In outsourcing, it’s important to take Levitt’s advice:
“Morality is what people should do. Economics is
what people do.” For those that structure an
outsourcing deal, you always get what you pay for
– Consider a business model that pays providers for
their brainpower to add value, solve real problems
and help achieve your Desired Outcome
The Economics of Outsourcing
It’s All About Incentives
Levitt has two New York Times bestsellers

20. 23
15
13
11
11
8
5
3
0 10 20 30
Unclear expectations
Misaligned interest over time
Poor governance
Poor communication
Not mutually beneficial
Poor performance
Poor cultural fit
Buyers multi-supplier
environment
Source: Outsourcing Center Survey. Outsourcing Center
Percent of Respondents
Note: 11% in “Other”
20
Why Conventional Approach Fails?

21. 21
Focusing Solely on Price…

22. We Need a Different MINDSET
What’s In It For
We
(WIIFWe)
22

23. Vested Approach
The less I use,
the more profit
I make!
• Specify Performance
Outcomes
• Prioritize internal efforts
23
• Develop Solutions
• Motivated to improve
processes and decrease costs
The more
innovative I
am, the more
profit I
make!
Both Parties Are Vested In Each Others Success
SHARED
RISK/REWARD
SHARED
RISK/REWARD

24. 24
Results?
0
1
2
3
4
5
6
1 2 3 4 5
Start of
new
contract
Time
Outcome-based
Traditional
Vested
75% deterioration
within first 18 months
Value

25. 25
3PL Services Deliver Measureable Benefits
Results 2013 Study 2014 Study
Logistics Cost Reduction 15% 11%
Inventory Cost Reduction 8% 6%
Logistics Fixed Assets
Reduction
26% 23%
Order Fill Rate Changed from 58% to 65% Changed from 66% to 68%
Order Accuracy Changed from 67% to 72% Changed from 68% to 69%
2014 18th Annual Third-Party Logistics Study

26. 26
What Shippers Outsource?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Domestic Transportation
International Transportation
Warehousing
Freight Forwarding
Customs Brokerage
Reverse Logistics
Cross - Docking
Freight Bill Auditing and Payment
Product Labeling. Packaging, Assembly, Kitting
Transportation Planning and Management
SC Consultancy Services Provided by 3PL
IT Services
Order Management and Fulfillment
Inventory Management
Fleet Management
4PL Services
Customer Service
Service Parts Logistics
Sustainability
Operational & Repetitive Activities
- which are no longer „commodity” services
2014 18th Annual Third-Party Logistics Study
Strategic & IT-Intensive Services
Value-Added Services

27. PERFORMANCE
PARTNERSHIPS
THAT OPTIMIZES
FOR MUTUAL
DESIRED
OUTCOMES
GOAL
Why Vested Works
WIIFWe Drives Innovation
• 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
• Incentives balance risk/reward,
encourages innovation when value is
created
I WIN
with higher
service levels
Business/
Customer
Supplier
I WIN
with higher
profits
Procure-
ment
I WIN
with lowest
possible costs
27

28. PERFORMANCE
PARTNERSHIPS
THAT OPTIMIZES
FOR MUTUAL
DESIRED
OUTCOMES
GOAL
The Baseline “Deal” is in Blue
28
An Example of How it Works
$10M costs
10% Margin
95%
Service
Levels
I want 98%
I want $9m
I’ll be motivated
to find a
solution if I can
EARN 30%
Margin!
I’ll be motivated to
invest in that
solution if I know the
work is sticking
around!

29. Sr. Leadership has to drive the paradigm shift!
29
Breaking the Paradigm Thinking
It’s OK for a service
provider to earn 30%
margins…if they
achieve things we
would not get with
traditional approaches
It’s OK to have a
long term
contract when it
makes sense to
incentivize for
investments
It’s OK for the service provider to play some
of the “management” role if they are better at
it that we are

30. • At the operational level, Vested does not change the basic elements
– A process still needs resources to perform tasks (order management,
facilities management, fulfillment, call centers, invoice processing, lines
of code, servers provided, etc.)
• Vested does change the way in which companies acquire or
purchase outsourced services
– We specify “WHAT” level of performance we need
– We MOVE the responsibility for determining the “HOW” (quantity,
schedule, location) to a Outsource Provider
30
Vested Doesn’t Change the Basics…
But it Does Change the Way Services are Purchased
Vested is a clean break from
conventional outsourcing approaches

31. DELL – GENCO ATC
Case Study

32. The Dell Story
32
Profiled in Chapter 12 in the Vested Outsourcing Book

34. • In 2005 Dell awarded GENCO the return and repairs processes
– Due to intense competition and cost pressures decided to take more strategic
approach
– Started looking to consolidate sites into single refurbishment center
• In 2009, Dell selected GENCO again. This time to acquire the
refurbishment center
– This included assets, buildings, and people
– The contract was for three years
– While a “strategic” approach, Dell continued using an “every dollar, every year”
procurement strategy
• The contract, known as Nighthawk, had 19 billable line items
and more than a hundred SLAs
34
GENCO-ATC – A Potential Candidate?

35. Case Study - Dell & Genco ATC
35

36. • Within one year both parties were dissatisfied – they have taken
approach „make it or break it”
• In 2010, Dell sent two senior managers to UT’s 3 Day Vested
Outsourcing Executive Education class
• In 2011 they moved forward to convert their existing strategic
supplier to a Vested Outsourcing structure – using the Vested
Outsourcing courseware, methodology and faculty coaching to
restructure their deal
36
GENCO-ATC – A Potential Candidate?

37. Andrew Downard & Karl Manrodt
Do You Remember Last Year Presentation?
The 10 Ailments of Outsourcing
No Ailment Description
1. Penny Wise and Pound Foolish: Occurs when a company outsources based purely on costs.
2. The Outsourcing Paradox: Happens when a buyer hires an “expert” service provider then proceeds to
tell them precisely how to do the work
3. Activity Trap: The more transactions performed the more money the service provider
makes, = no incentive for improvement
4. The Junkyard Dog Factor: Retained ‘internal’ experts ‘micro-manage’ the contract
5. The Honeymoon Effect: The provider initially goes overboard to perform but drops back over time as
other clients come on board.
6. Sandbagging: To prevent the Honeymoon Effect, some companies adopt measures to
encourage service providers to perform, can lead to minimalist results.
7. The Zero-Sum Game: This is one of the most common ailments. Companies believe, mistakenly,
that if something is good for the service provider, then it is automatically bad
for them.
8. Driving Blind Disease: Occurs when there is no formal governance process to monitor the
performance of the relationship.
9. Measurement Minutiae: Too much of a good thing can be bad for you. This applies to Fast Food and
to measuring service providers.
10 The Power of Not Doing: The saddest of all the ailments, having performance measures but not using
them.

38. Case Study - Dell - Genco ATC
38

39. 39
Robert McIntosh
Executive Director Global
Reverse Supply Chain
Dell, Inc.
A Better Way Was Needed
“We knew GENCO was a
best-of-breed supplier. If
we moved to another
supplier, we would have
exorbitant transition costs
and added risks of a
supplier who might not
perform as well as GENCO
ATC.”

40. Vested for Success Case Study
DELL & GENCO – Reinvent Their Relationship
40

41. Vested for Success Case Study
DELL & GENCO – Reinvent Their Relationship
41

42. Vested for Success Case Study
DELL & GENCO – Reinvent Their Relationship
42

43. Vested for Success Case Study
DELL & GENCO – Reinvent Their Relationship
43

44. 44
Tom Perry
President of Reverse
Logistics
GENCO ATC
Building A Relationship = Building Trust
“The atmosphere inside
the room is 180 degrees
different from the past.
There is recognition of
the importance of
relationships and, most
importantly, trust.”

45. Darrin Browder
Getting The Pricing Model Right
“The pricing model
became the place where
win-win would move from
theory to
economics. After all,
pricing is where the
rubber meets the road.”
Strategist and Supplier
Relationship Manager
Dell, Inc.

46. Bill Hutchison
Vice President of Global
Logistics and Fulfillment
Dell, Inc.
Positive Payout After First Quarter
“The ROI on our time and
cost to implement the
Vested agreement is
amazing. We had a
positive ROI in the first
quarter.”

47. Vested for Success Case Study
DELL & GENCO – Reinvent their relationship
47

48. 48
A Methodology

49. Vested Is A Methodology
49
Five Rules 10 Contract Elements

50. The 5 Rules Of Vested
50

51. 51
The 10 Elements Of A Vested Agreement

52. A Vested Agreement Has Structure
A Vested agreement is structured as follows: A Master agreement is
combined with subordinated schedules or exhibits that individually
outline each of the 5 Rules and 10 elements of Vested.
Vested Agreement
Structure
© 2013 Vested®
Service Provider
Owned
Element 1
Element 2
Element 3 Element 4
Element 5
Element 6
Element 7
Element 8
Element 9
Element 10
MASTER
SERVICES
AGREEMENT
(MSA)
RULE 1
BUSINESS MODEL
SHARED VISION
STATEMENT OF
INTENT
• Non-disclosure
• Non-compete
• Limitation of Liability
• Termination /Renewal
• Other
RELATIONSHIP
MANAGEMENT
FRAMEWORK
PRICING MODEL
PERFORMANCE
MANAGEMENT
PLAN
DESIRED
OUTCOMES
STATEMENT OF
OBJECTIVES
(WHAT)
WORK SCOPE &
ALLOCATION
(HOW)
TRANSFORMATION
MANAGEMENT
FRAMEWORK
EXIT
MANAGEMENT
PLAN
GUARDRAILS
&
ASSUMPTIONS
OPERATIONAL
PERFORMANCE
REPORTING
QA PLAN
RISK
ASSESSMENT
MARGIN
MATCHING
INCENTIVES
RULE 2 RULE 3 RULE 4 RULE 5
SPECIAL
CONCERNS &
REQUIREMENTS
SPECIAL
CONCERNS &
REQUIREMENTS
SPECIAL
CONCERNS &
REQUIREMENTS
GOVERNANCE
STRUCTURE

53. The material contained in this presentation is copyrighted.
©2012 Vested Outsourcing Inc. – All Rights Reserved.
VESTED
®
, Vested Outsourcing® and the Vested concepts and related intellectual property originally evolved from a
research project conducted by the University of Tennessee Center for Executive Education. The service marks, trade
names, trade dress and related intellectual property are the property of Vested Outsourcing, Inc.
Piotr Polak
Chartered Institute of Cooperation
piotr.polak@cioc.pl