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Part 1: Vested Approach to Outsourcing Creates Long-Term Value
Part 2: Procter & Gamble, TD Bank: Vested Outsourcing Success Stories
By Kate Vitasek
June 2016 -
Outsourcing Article Use Policy
Procter & Gamble has always been at the forefront of innovation. The company took a groundbreaking approach to innovation and collaboration by understanding the power a supplier can bring to the innovation table, especially in areas where P&G lacks a core competency, such as facilities and real estate management. In 2003, P&G developed a highly strategic facility management outsourcing relationship with Jones Lang LaSalle (JLL). The companies created a commercial agreement that flipped the conventional outsourcing approach on its head by contracting for transformation instead of contracting for day-to-day work. JLL took over management of offices and technical centers, including maintenance and security. It was a groundbreaking deal that spanned more than 60 countries and included facility management, project management, and strategic occupancy services.Rather than reward the provider for simply showing up to perform transactions such as janitorial and maintenance operations, P&G tied the service provider’s profitability to the latter’s ability to drive success against jointly defined business outcomes. The more successful P&G was, the more success for the provider. The size and complexity of the deal was a first for both companies, as was the approach for the commercial contract. Simply put, P&G wanted an outsourcing relationship that challenged the service provider to not just take care of its buildings, but to take charge of the buildings.
Their highly strategic partnership has consistently delivered results for more than 10 years — with JLL winning P&G’s supplier of the year award three of the last 10 years, out of P&G’s 80,000 suppliers, and helping P&G increase service levels and capacity to innovate.More recently, TD Bank’s Enterprise Real Estate (ERE) forged a Vested facilities management arrangement that covers 25 million square feet of real estate. TD Bank had been outsourcing its facilities management services to Brookfield Global Integrated Services (BGIS)/CB Richard Ellis (CBRE) since 2009 with good results. The contract was not just renewed, but was entirely restructured to follow the Vested five rules — aligning interests through mutually defined desired outcomes and economics.The process began with a formal review of the existing agreement to identify gaps between the existing outsourcing approach and the Vested model. The companies went on to address how they would incorporate each of the five rules into their contract and day-to-day operations. For example, for Rule 3 — clearly defined and measurable desired outcomes — they identified four key desired outcomes that would become the focal point of how they would measure their success. The desired outcomes include:• Drive economic value to the organization through fair and transparent financials.• Provide holistic, world-class real estate services.• Be an environmental leader.• Be an innovative organization.A big hurdle was following Rule 4 — pricing model with incentives that optimize the business. In a Vested agreement, the pricing model is fully transparent in both organizations and is designed to optimize the business. Transparency of profit did not come easy for the service providers. And paying incentives was a new concept for TD Bank.John De Benedictis of TD Bank explains the approach to the pricing model in the company’s 2016 FMXcellence award submission to this magazine. “If the BGIS/CBRE teams can deliver services that require fewer hand-offs or total cost of ownership to deliver that function, they can receive an incentive that is mutually shared. So while the service provider may increase their expenses to deliver this function, if the total cost of ownership comes in less, both TD and BGIS/CBRE benefit in this win-win example.” The companies inked their deal in the fall of 2014. Kristi Ferguson, TD Bank Group’s vice president, business management, enterprise real estate, and Anthony Cho, North American account director, Brookfield Global Integrated Solutions, shared first-year results at a CoreNet Global conference, reporting great success across each of the desired outcomes. For example, the service providers helped TD clinch a JD Power award by bringing in the top score in the “facility” category in both Canada and the United States with a decisive gap between first and second place. But TD Bank is able to get value for its money: The savings before the end of the contract’s first year was already at $16 million — well above what anyone thought was possible. Transaction-Based Approach Limits ThinkingWhy have businesses been slow to adopt true win-win relationships with their strategic suppliers? Unfortunately, virtually all businesses use a conventional transaction-based approach regardless of how strategic their suppliers may be. Think of it this way: The supplier’s revenue is directly tied to doing the work. The more work, the more revenue.A Catch 22 comes into play because companies that use the transactional-sourcing business model find that their suppliers or service providers can meet the contractual obligations and service levels — but innovations and efficiencies do not necessarily occur at the pace they envision, or need. Suppliers argue that investing in a customer’s business is risky because buyers will simply take their ideas and competitively bid the work. Companies want solutions to close the gaps, but they do not want to make investments in people, processes, and technology where they do not have a core competency.That’s the Catch 22 and the result is that many organizations are finding themselves at a crossroads, with buyers and service providers wanting innovation, but neither willing to make the necessary investments due to the conventional transaction-based commercial structure of how the companies work together.Following the Vested methodology allows organizations to take the theory of win-win and put it into practice by transitioning to a highly collaborative relationship purpose-built to drive innovation against the desired outcomes. The process enables companies to move beyond simply paying lip service to “collaboration” and “partnership,” to actually creating win-win agreements and an atmosphere that drives transformative change. Kate Vitasek is the author of six books on the Vested model and a faculty member at the University of Tennessee. For more than 10 years, the university has been researching some of the world’s most successful strategic outsourcing partnerships—including those at P&G, McDonald’s, and Microsoft—to see how and why they were so successful. She can be reached at email@example.com.Email comments and questions to firstname.lastname@example.org.