Contracting
About Vested®
Vested is a business model, methodology, mindset and movement for creating outcome-based contracts that enable win-win partnerships in which both parties are equally committed to each other’s success.
Vested is based on award-winning research conducted by the University of Tennessee College of Business Administration and funded by the U.S. Air Force. The University of Tennessee’s research revealed that conventional transaction-based contracts have inherent flaws because the economics of the deal structure keeps buyers and suppliers at arm’s length. This type of approach is not conducive to collaboration, innovation or value sharing, especially for complex, multi-dimensional business partnerships.
Following five rules and a structured process built upon ten contractual elements, the Vested framework fosters an environment that drives innovation, resulting in improved service, reduced costs and mutual value that didn’t exist before.
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No player has anything to gain by changing only their own strategy unilaterally.
— Nash Equilibrium
Rule 1: Design for Outcomes
Adopting a Vested business model does not change the nature of the work to be performed. At the operational level, lines of code must be written, orders must be fulfilled, repairs must be completed and calls must be answered. What changes is the way services are purchased.
In essence, Vested buys desired outcomes, not individual transactions. The service provider is paid based on its ability to achieve mutually agreed desired outcomes. Any Vested partnership flourishes best in a culture in which everyone works together to ensure mutual success.
Rule 2: Focus on the What
Prescriptive statements of work make service providers responsible for the work without giving them authority to exercise their own initiative in carrying out the work. Typically, companies outsource for a reason: in-house operations are either too expensive, ineffective, or both.
Why dictate procedures in an area identified as deficient? In outcome-based contracts, companies focus on system-wide performance expectations, while letting service providers determine how to put the right processes together to achieve the desired outcomes.
Rule 3: Define & Measure Success
All parties must be explicit in defining the outcomes they expect from their partnership. These outcomes are expressed in terms of a limited set of high-level metrics. Organizations should spend the time, especially during negotiations, to determine what success really means.
Under the purest form of Vested partnership, the buying organization only pays for results, not transactions. Rather than being paid for the activity performed, service providers are paid for the value delivered by overall solutions fueled by their innovation capabilities.
Rule 4: Optimize Pricing for Value
Adopting a Vested business model does not change the nature of the work to be performed. At the operational level, lines of code must be written, orders must be fulfilled, repairs must be completed and calls must be answered. What changes is the way services are purchased.
In essence, Vested buys desired outcomes, not individual transactions. The service provider is paid based on its ability to achieve mutually agreed desired outcomes. Any Vested partnership flourishes best in a culture in which everyone works together to ensure mutual success.
Rule 5: Lead with Insight
In outcome-based partnerships, a company contracts with service providers that are recognized as real strategic experts. Such alliances should be managed to create a culture of insight, collaboration and flexibility rather than one-way control and oversight.
A properly designed governance provides consistent management, cohesive policies, processes and decision rights that enable the parties to work together effectively and achieve transformational results throughout the life of their agreement.
