25 Years of ‘Vested’: Crafting Effective Relationships With Supply Chain Partners

Speaker A: The Vested business model for buyer supplier relationships is more than 25 years old. Is this still relevant? Hi, everybody. I'm, um, Bob Bowman, editor in chief of Supply Chain Brain, and this is the Supply Chain Brain podcast. What's in it for me shifts to what's in it for we. That's how Kate Patacic, author, public speaker and member of the faculty at the University of Tennessee, describes the basic idea behind the concept of vested a theory of crafting supply chain relationships that moves beyond the transactional to focus on mutual advantage. In 2010, in collaboration with co authors Mike Ledyard and Carl B. Mandrot, she published Vested five Rules that Will Transform Outsourcing. Based in part on a research study by the University of Tennessee with the United States Air Force, the book uncovered the many flaws that hamper traditional outsourcing relationships and proposed new rules for curing them. Now Vatassic has published her ninth book on the subject, the Vested five Rules for Achieving the Impossible. She returns to the Supply Chain Brain podcast to talk about how the concept has evolved over the decades and why it's more relevant than ever. Here's our conversation. Kate Fatassic, welcome back to the show after so many years.

Speaker B: Well, fantastic. Thanks for having me. It has been a while since we've been connected on some of the other podcasts.

Speaker A: Yes, it's certainly fun to be back on. Absolutely. And congratulations on the publication of your ninth and newest book, the Vested five Rules for Achieving the Impossible. But before we delve into that, I'd like you to take us back to the basic concept behind vested. What does it mean from the standpoint of buyer supplier relations?

Speaker B: Well, Bob, uh, I think the word vested says it all, really. It's I'm vested in your success, you're vested in my success. So many times we say the word strategic partnership and then you turn around and write these contracts that are very transactional. For example, oh, you're such a strategic partner. And I still have a 60 day termination for convenience. Just joking on that strategic partner thing. And so it really is a system, it's a methodology to get people to do what they want. They intend to have these great partnerships, they just don't know how to do them.

Speaker A: What was the inspiration for the concept in the first place? What was the lightning bolt that struck you that this was the thing to build a whole theoretical and career, uh, on, so to speak?

Speaker B: Well, actually, before being at the University of Tennessee, I was a practitioner. I worked for Microsoft, and I outsourced some of their largest outsourcing Deals. And then I was on the supplier side as well as the consulting side. So I've been on all sides of deal making and you can sense the frustration. Everybody's working really hard, but they're often working in silos. And if we have company silos, put that up between different organizations and the actual money. The metrics are fighting against each other. As a supplier I want to make more profit and as a buyer you want lower price. Well, we're head to head, uh, with a conflict of interest right out of the gate in a transactional model. But kind of the epiphany or the aha for coming up with this was when I got a call from Alex Miller, then associate dean for graduate and executive education and he had some funded research by the Air Force and they wanted us to study performance based contracts and why some of these really big deals that they intended to be strategic with weren't working, while a few of them were wildly successful. What made the difference? And so I now had the opportunity to go in and study what makes the difference between a successful big outsourcing deal and ones that are just so so and ones that crash and burn.

Speaker A: A little bit counterintuitive as you say, these transactional relationships. It's the same with any buyer and seller trying to get the best price, trying to get the highest, trying to get the best quality at the lowest price. And so I could see how that would like manifest itself in buyer supply relations, but I can also see how that could be a real drag on a true relationship. So that's interesting. But Kate, there's been a lot of change in this world in supply chains and buyer supply relations in the last 25 years that you've done this research. How has that evolved your concept of vested, if indeed it has?

Speaker B: Well it actually has for sure because one of the anchor points of a vested agreement is a flexible contracting framework. Now we knew that going back to our original research. Why do these deals not succeed? Well even 25 years ago, businesses dynamic, there were changes, just not as many as there are today and huh, not as large. And so these deals were falling apart because they had a transaction at a price at a certain point in time. Yet these strategic relationships are designed to be longer term in nature and they don't know how to handle when I say when business happens per se. And so you need to create a flexible contract framework that embraces changes. So that's one of the hallmarks of a vested agreement. And not only are we creating a flexible contract framework, we're following some rules that help us to achieve continual alignment of interest. So we get alignment of interest in this win win way from day one. We have a framework that's going to help us maintain that. And we have some simple rules and mechanisms that when we put in place, we do a far better job of staying in alignment.

Speaker A: But it sounds like the seeds of this idea were planted at the very start. Is there any way in which the whole vested concept has matured or evolved that's different from when you first conceived of it 25 years ago?

Speaker B: Yes, in that regard. Now the foundational component of vested, the formal relational contract, flexible contract framework, the five rules, they're still just uh, the same way they were then. However, what has changed is we get questions from people in the field who are trying to put these rules together. Example, how is vested different than a performance based contract? How can I bring in and negotiate an agreement right up front so I don't have an existing supplier to work with? How would I do that? That was actually one of the concepts from the Canadian government. They wanted to do a vested agreement for environmental services and they needed to by law do a bid process. So how can I follow these rules and in a bid process? So we created a whole body of work around what we call the RF partner. And so over the years I like to think of it as a starfish. So the head of the starfish is kind of the fundamental constructs and then it keeps growing little legs. For example, my eighth book was published by the American Bar association and we had lawyers that became very interested in our work and why some of these deals were really successful and weren't seeing disputes and weren't failing. And they asked us to think about how would this relate to alternative dispute resolution and how we could train neutrals, mediators, arbitrators to go in up, um, front and actually lay the foundation for some of these more collaborative approaches that we talked about. And so that became the book Preventing the Dispute before It Begins.

Speaker A: I can see how that could really upend the whole thinking behind contract negotiations. This idea that it's very open ended. I mean you have a contract, right, and you're not trying to escape the aspects of the contract. When something happens, it's somehow built into without being a 3,000 page document that takes into account every eventuality that would change the situation. So interesting. But let's talk about this new book though. Five Rules for Achieving the Impossible. What do you mean? What is impossible in your mind? Because clearly you don't think it's Impossible. But you use the word. What do you mean by impossible in this context?

Speaker B: Well, Bob, it's whatever your impossible is or whoever's reading the book, it could be making an outsourcing deal wildly successful, right? It could be if you were in a community and you're trying to solve a community problem. One of our graduates of our program is in Brazil, she's an attorney and they had a huge flood and, and people weren't collaborating well. So you can take these rules, what we designed for big businesses and big deals and there's almost radical common sense, but we don't apply them. And so we have folks like Ana Luisa in Brazil who take the rules and they're saying, you know what, I can apply these in community problems. I've had so many of my graduates come back and say, you know what, I applied these rules in my home life and it was awesome. Because one of the rules is focus on the what, not the how. And we forget and we begin to micromanage. If you're in a home life, micromanaging your spouse probably isn't fun, right? And so we forget that that's a simple rule that probably we shouldn't do, not only in business relationships, but personal relationships. And so what we wanted to do with this particular book is take the foundational components of Vested the five rules and show how they applied not just to big businesses, but to different types of situations where you need collaboration to work. So what's impossible? It could be saving for a home that you never thought you could. It could be, how do I get people to collaborate when the country is in crisis with a flood? And so the impossible is really your impossible. Now I, uh, thread through the book the analogy of Mount Everest. Allison Levine is actually the, was the team captain of the American women's Everest expedition. So she was one of the first people. Well, she was the, the first person to lead an all women expedition to Mount Everest that had never been done before.

Speaker A: When was that, Kate?

Speaker B: I think that was a solid 10 or 12 years ago. So that's been a while. And so that was her impossible. And the whole point of the book, when I use Mount Everest as an analogy, you can't get to the top of Mount Everest by yourself. You need a serpa. There's people behind that are supporting that. And so go find your serpa and if that's in the business world and it's an outsourcing partner, or if it's in your home life and that's your spouse to be, find your serpa. Uh, and follow the rules.

Speaker A: Okay, so you appear to be a business writer, but you're really a self help author in disguise.

Speaker B: Well, it's interesting because, you know, I've had 20, almost 25 years. I started my work at the University of Tennessee in 2003. So almost 25 years. We have over 160 organizations that have applied vested. And it's working. We know it's working. So why don't we take this proven research and kind of let it out in the world and, uh, maybe you want to call it a self help kind of thing. But I think of it as a breakout book. So for example, you've probably read Stephen Levitt's work Freakonomics. Super Freakonomics. Behavioral economics was something geeky economists, uh, did. And so then Stephen Levitt writes this book, Freakonomics, and he follows it up with Super Freakonomics. And all of a sudden behavioral economics is cool. And that's what I want to do with this book. I'm thinking about it as being kind of the breakout book for Vested. Why do we have to have vested only be for big businesses with big deals?

Speaker A: Well, if you ask me, Kate, you were always cool from the start, but, um, that's another story altogether. You may have already started on this. What I want to ask you next, and that is to walk us through those five rules. Can you give us a brief summary of what they are?

Speaker B: Absolutely. Before I get into the rules though, there's an important thing to realize is that not everyone can be a best friend. Right? Think about that. We go out and we say we want a strategic partner. P and G has 80,000 suppliers. They can't all be strategic.

Speaker A: Same with customers. Say that segmentation notion exists at both ends of the supply chain.

Speaker B: Exactly. So find your best friend. If I need you to be a strategic supplier, then am I your strategic customer? So stop and ask yourself who your best friends are in business, in communities, in your personal life. And so once you've said, this is a good fit for being my serpa, then you can begin to follow the five rules.

Speaker A: That wasn't even one of the five rules. That was a pro preload to the five rules. Okay?

Speaker B: It's a predecessor and I think we get it wrong because we go out, we say strategic partner and you're just joking, right? Really? You're not joking?

Speaker A: With that in mind, let's, let's, let's get into it then what?

Speaker B: All right, so rule number one, Focus on outcomes. M not transactions. So what is your Mount Everest? So one of the lessons that we teach, one of the tools that we teach is to create a statement of intent. So a statement of intent is your shared vision, your high level desired outcomes, three to five things that you're trying to achieve with this partner. Right. And your guiding principles for that relationship. So it will get snowy on Mount Everest. That tent is pretty cold and pretty small. And so what are the guiding principles on how you're going to behave? Right. And these are social norms. So create that statement of intent. That's rule one. What's your outcomes and your intentions for the relationship? Rule number two is focus on the what, not the how. Right. Anytime you enter into a collaborative relationship, you have skills, your partner has skills. It's really annoying to micromanage a partner whose skills are better than yours. Let go. Right? Let go. So there's tons of research, academic research, on autonomy, and that's what we're trying to do here, is get people to think about what you do well and what your partner does well, and marry up so that 1 +1 equals 11 with regards to your skill sets instead of being annoying to your partner.

Speaker A: Okay.

Speaker B: So rule number three is clearly defined and measurable desired outcomes. If I'm going to go to Mount Everest, I need to measure how I'm going to get there, right? I'll just say I'm going to get there and then I don't do anything that's going to show my progress. So we have to track our progress on these big, hairy, audacious goals. If we're not tracking our progress, how do we even know if we're going in the right direction? What are the metrics? And all too often we say we want a business outcome or a personal outcome, but we're not measuring the right things. So it's like putting a square peg in a round hole. You're never going to get there because you're measuring things that are tactical instead of strategic.

Speaker A: Mhm.

Speaker B: So rule number four is really around the economics now in the in an outsourcing type of or strategic sourcing, big business type of a partnership, the rule is a pricing model with incentives. But because so many people were saying these rules apply outside of big business, we changed the rule to be focused on the gains, not the games. Oftentimes when you're thinking about money, there's gamesmanship. I'm trying to win at your expense. And so we want people to think about growing the pie, sharing the pie in different situations. And how would you do that? So focusing on the gains that you get from that partnership and not gaming it so that you're winning at the other party's expense. Okay, uh, now our last rule is insight versus oversight governance. Right. Staying, uh, simply staying aligned. So many times. And this gets back to the beginning of our discussion, we have a deal or we have a relationship, we've founded something and we kind of have this agreement at a point in time. But business happens. We don't put the effort and energy in to come back, reevaluate it and stay in alignment. And so you need to have that governance aspect. And so there are certain design principles that we see are proven best practices. Many of those can actually poured over to personal or community type relationships, uh, partnerships as well. And so we want people to not just say, okay, we're going to go do this, we've got a deal. And that could be a contract or just an informal handshake agreement that we're doing right. But we want you to recognize business happens, life happens. Fill in the blank, something happens and you've got to stay in alignment.

Speaker A: Okay, five great steps. But I want to ask you say not everyone's your best friend. So you got to pick and choose those partners with that are most important to you. But in the real world, sometimes even if you have partners that are important to one another, they might vary greatly in terms of power, size, purchasing power, heft, and in that case they're unequal on paper. Are they still able to engage in these rules? Are they still able to engage in a truly vested relationship when they're not on the same level in terms of so called negotiating power and clout?

Speaker B: Well actually absolutely. And this is part of our work in showing that these rules work. When you create that statement of intent and you follow the rules, you're checking your power at the door. So for example, in rule 2, it is focus on the what, not the how. That's where in a traditional buyer supplier relationship, you would have the statement of work. I'm the buyer, supplier shall. And it would be full of do this and do this. And it's pretty prescriptive. We take a step back and you should have a taxonomy and a workload allocation instead of a statement of work. It's end to end, all the things that need to be happen. Here's what the supplier does, here's what you, the buyer have to do. You are equally committed to my success. So we're going to have a bilateral statement of work. Interesting. And we're going to take away this dictatorial supplier shall tell you exactly how to do the work and go. After all, if you're my partner, you're the expert, right? I hired you because you were smarter than me. That's why we're strategic partners. If I just wanted you to show up and do some labor, A, uh, labor arbitrage deal, yeah, that's a transactional deal. But in a true strategic partnership, I have to recognize I need to check my power at the door. It's bilateral in nature that threads all the way through the metrics, it threads all the way through the money. It threads all the way through the governance. And so the process of how people follow the rules is the magic. It's not the rules themselves itself. I mean, they are kind of sort of. But I think Dell said was one of the first companies that applied Vested to one of their strategic partnerships. They said it's radical common sense. How come we don't do it? So the process gets people to take a step back and you used a word, negotiate. I'm going to be a little evocative, uh, here. In a true strategic partnership, we're not negotiating. We've recognized. I've recognized. I need you. I can't climb Mount Everest without my serpa. You're my serpa. You are the expert. I've checked all my power and ego and money at the door because I've got the power and ego and money because I'm the climber, I'm the buyer. But you have the skills to get me to my Mount Everest.

Speaker A: That's great. And maybe that, uh, power could, to a certain extent, is illusory. I mean, you may be dealing with a supplier who is much smaller than you in terms of their resources, but that thing that they're selling you is absolutely essential to what you're making. And so there's power on both sides there, or else both sides have to kind of put their power down, I guess, in order to do that. You know, Kate, I also would imagine that this whole concept of vested would be quite helpful in tackling one of the biggest problems in supply chains today. And that is ethical supply chains, that is human rights, that is sustainability. If you have these relationships with other suppliers, does this not in fact help you in the whole esg, environmental, social, governance area?

Speaker B: Absolutely. Uh, so remember, in rule one, we create a shared vision. And three to five, normally it's about four or five high level desired outcomes. What we're seeing, especially in Europe, especially almost always one of those Mount Everest goals is around sustainability. They can't do it themselves. They need to work that through their supply chain. And so one of those big, hairy, audacious Mount Everest sustainability. Absolutely. Now, here in the US we tend to put sustainability on the back burner. Will that change? Will the wind blow in three to five years and it's now back in vogue? I don't know. But the good news is Vested is a flexible contracting framework. So if your priorities change, you can use what we call in rule three a, uh, requirements roadmap. You go in and you can realign on what those priorities are. So if sustainability is important today and it's not tomorrow, I can take that off the list and re channel your energies.

Speaker A: Well, since so many supply chains are global in nature, just because there's supposedly a lesser emphasis here in the United States on it doesn't mean that a US company can sit back and relax with regard to that. Because if they're selling to Europe, for

Speaker B: instance, they're going to run into it absolutely spot on. Any global company can't bury their head in the sand with regards to esg because those are law, their laws in Europe and, and they're becoming stricter and stricter laws. And those are hard. Those are Mount Everest type goals in many of these things.

Speaker A: Really hard to cut short this conversation, Kate, because there's so much to talk about, but I just love having you back on the show telling us about your new book, the Vested Way 5 Rules for Achieving the Impossible. We will link to that in the show, notes to this episode and great speaking to you and hope we can talk again in future. Thank you very much for your time.

Speaker B: Thanks for having me. Always fun.

Speaker A: That was my conversation with author and educator Kate Fotacek talking about the invested concept for crafting supply chain relationships. We're online at www.supplychainbrain.com where we post a new episode of this podcast we're streaming or downloading every Friday. You can also read our Think Tank blog, watch thousands of videos and access all of our other content, including the digital edition of our magazine. Look for us on Facebook and LinkedIn, follow us on XCBrain and watch videos on our YouTube channel. You can also download or subscribe to the podcast on Apple Podcasts and listen to us on Spotify. If you've got any comments or suggestions on this or any episode, email me at rbomanupplychainbrain.com stay well and see you next time.