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5 Steps to improving your 3PL relationships

Members of the University of Tennessee's center for Executive Education share their five steps and a series of tips to improve your outsourcing relationship right from the start.
By Kate Vitasek, Pete Moore, and Bonnie Keith, University of Tennessee Faculty Members
February 24, 2011

Step 3: Align interests
This step entails designing and documenting how a company and the service provider will work together to achieve the desired outcomes.

In basic terms, this is the part of the process where both companies should document, with as much precision as possible, how the outsourcing company and the service provider will work together to achieve the desired outcomes. It’s the first pass at the future vision for how the two companies will communicate, collaborate, and innovate together to achieve the best results.

This brings us to our sixth tip: Identify risks before you transition the work. While it’s not clear if the parties took the time to align interest, we have to assume that the parties—at least the service provider—likely did not do a proper risk assessment.

We hypothesize that if interests were aligned and a proper risk assessment was performed in the relationship, Armstrong would not have stated “it was evident pretty much from the start that it wasn’t going to work.” Obviously the parties got out of the gate on the wrong foot.

Step 4: Establish the agreement
Vested Outsourcing is based on reducing the total cost of ownership (TCO) versus simply the costs of the transactions performed by the service provider. As such, 3PL pricing models should include incentives that will be used to reward the outsource provider when they achieve the desired outcomes and TCO targets.

This brings us to our seventh tip: Establish a pricing model with incentives that encourage service providers to put skin in the game and invest in your business to close the gaps. As mentioned before, the Armstrong case study cited that “the arrangement was not meeting Armstrong’s established costs and service goals.”

One approach they could have taken was what we call a “fee at risk” pricing model. This is when a service provider charges below market rates for service—but then is rewarded with incentives for delivering results against the desired outcomes. The more successful both parties are, the more profit the service provider makes, often two to three times market rates. A true win-win because the companies become vested in each other’s success. The more successful the company is, the more success the service provider is.

About the Author

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Kate Vitasek, Pete Moore, and Bonnie Keith
University of Tennessee Faculty Members

Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and is author of the popular book Vested Outsourcing: Five Rules that will Transform Outsourcing. Pete Moore and Bonnie Keith are Program Faculty members for the University’s Vested Outsourcing and Air Force Strategic Sourcing programs. Moore is also author of LM’s “Moore On Pricing” column.


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