What are “vested outcomes,” when should companies consider them, and why is such an approach needed? The simplest explanation is that, in a vested model, both customer and supplier have a stake and incentive in achieving a mutually successful result. That is, they are each invested in a positive outcome for both parties!
WHAT IS VESTED? Vested is a new way of thinking about contracts to encourage shared objectives, risk, and reward.
Vested is a shift to:
(1) Accomplishing goals (not work tasks) – If you’ve ever had to take your car back to the mechanic after the 1st “fix” to pay for a 2nd “fix” then you have experienced the opposite of vested. In a vested model you might agree to pay $$ to achieve the goal of a working car. Negotiated this way, mechanics would have incentives to provide a working car in the most efficient way possible. Perhaps they would purchase/use better diagnostic tools. Perhaps they would train their people more rigorously. Unfortunately, today’s relationships are task oriented. It costs this much to change the oil, this much/hour for the mechanic to diagnose the problem, etc.
(2) Defining what to do (not how to do it) – To illustrate, say you (the “customer”) ask your child (the “supplier”) to clean their room. The opposite of vested would be to tell the child exactly where everything should be placed. In a vested model, the supplier is expected to offer expertise. Some kids will push everything into a closer or under a bed. Others will throw the offending clutter into the trash bin. And perhaps others will organize a complex system to achieve cleanliness. That fact that multiple “hows” satisfy the “what” highlights the importance of customers establishing precise “whats.” Once a customer has done that, the supplier is free to use their expertise to reach the objective – even if that means a clean room comes at the expense of an overflowing closet.
(3) Mutual benefits (win/win) – Unlike a vested model, most negotiations (and relationships) are conceived of as win/loss. Typical behavior today includes each party trying to enlarge their piece of the pie at the expense of the other party. Customers coerce suppliers to reduce their pricing and suppliers respond by finding ways to do as little as possible beyond the contract’s scope to preserve profitability. Vested practitioners correctly condemn this zero-sum approach as one in which neither party is focused on growing the size of the pie.
Several years ago I had a retail customer who was displeased with the sheer volume of IT (information technology) work we did for them. They had contracted our company as a help desk and so employees at various store locations called us when they needed assistance. The more they called, the more we worked (and the more we got paid) because that’s what the contract said to do. We were focused on performing the tasks and hadn’t considered the desired outcomes/goals. Thus, we were guilty of pursuing the opposite of a vested approach.
If we’d been on our toes as a supplier, and considered a vested outcome approach, we would have communicated to the customer that we could perform some of the work remotely if the customer invested in new infrastructure which would have resulted in:
- CUSTOMER making a capital investment (which incidentally had a half-year payback)
- CUSTOMER decreasing their ongoing costs (WIN)
- SUPPLIER increasing our margins (WIN) by reducing service delivery costs
- BOTH improving the relationship (WIN)
With the “what” addressed we now turn to “when.”
WHEN SHOULD VESTED OUTCOMES BE PART OF THE CONVERSATION? As soon as possible!
Suppliers should consider vested outcomes as a way to re-frame their value proposition. Too many product management, marketing, and sales teams invest their time in explaining what their products do. And while this is useful, connecting functionality to customer value is key. When suppliers view the world through the customers’ eyes they are better able to understand how their products and services benefit customers. Although I urge all companies to take this approach, few will. Those that do however, have an opportunity to redefine the competitive playing field. Imagine how different a customer’s buying process could be if their success is paramount!
In a similar fashion, customers should use vested outcomes to gain clarity about their objectives. Quite often they will find that their approach has dictated how things must be done instead of what, and leans towards payments for task completion, not goal attainment. In my experience, customers are more apt to take the lead. Perhaps this is because customers realize they are not getting what they want and try to determine ways to address the root cause(s).
Regardless of which party introduces the topic, I guarantee the dialogue will stretch the creativity and imagination of both parties. Relinquishing the safety net of strong contractual language in favor of understanding another perspective is challenging at first. Customers may not articulate their outcomes well and will struggle to “give up” control, even when doing so improves their business. Innovating may be new to suppliers so they may not know how to improve their profits. Have the conversation(s) anyway!
WHY DO WE EVEN NEED VESTED OUTCOMES? Because following a vested approach yields mutually beneficial relationships.
To me, answering why, is the simplest element of vested outcomes. Customers are dissatisfied with suppliers. Suppliers are frustrated and confused by customers. Adopting a vested approach places problem definition squarely with the customer and problem solution with the supplier. Asking each party to play their own role encourages clarity, creativity, innovation, and ultimately outcomes.
Summarizing Vested Outcomes:
- WHAT – a new way of thinking about contracts to encourage shared objectives, risk, and reward
- WHEN – as soon as possible to help each party articulate the value of the goods and services being purchased and sold
- WHY – following a vested approach yields mutually beneficial relationships
The pivot point is that in a vested outcome model, both customer and supplier must have shared motivations for conducting business such that both win. And in a vested model, customers and suppliers share both risk and reward – a true partnership destined to improve the customer experience.