Outsourcing engagements should be based on trust and collaboration. Isn’t that obvious? Apparently, it is not. Outsources typically don’t set up their selection process based on that premise. Clients often act like they don’t trust potential vendors. They leverage a competitive process with multiple vendors to get an optimal result. Most time and effort during the selection process is spent in predicting all possible scenarios and writing down in a contract what the vendor should do in that case. The contract is the main tool to enforce any agreements later in the engagement.
Many clients can tell stories where a vendor took advantage of an unclear situation. And once bitten, twice shy or better safe than sorry, right? So they use commercial leverage and the contract as important tools to keep their vendors honest. Because they feel their vendors cannot be trusted, and they will do everything to get back at them. And with a selection process like the one described above, these risks become a self-fulfilling prophecy. If vendors are forced into an engagement, they will likely compensate at some time or even need to do so.
And then something unexpected happens
The implicit assumption with this way of working is that the future is predictable, at least for the contracted scope. And in some commodity types of outsourcing engagements, it is. But more often than not, parties cannot predict the activities within the scope of a contract. We live in a VUCA world, so we cannot, during the selection, predict each and every situation that will happen later on. And at that point, there is no leverage to force the vendor into contractual compliance. In other words, parties will have to trust each other.
I think it is a given that, at some point, you will have to trust your vendors. And since you can count on that situation to occur, you better organize your engagement accordingly and start trusting from the beginning.
The science of it: game theory
Game theory is the scientific approach to this topic. It is the study of strategically interdependent behavior i.e. what I do affects your outcomes, and what you do affects my outcomes. The Prisoner’s Dilemma is the best-known example, but there is much more to say about it. If you are the type of person that wants to go in-depth on the topic, there is plenty of material available. Alternatively, you can watch the movie A Beautiful Mind about the life of John Nash, the pioneer in this field. The management summary of it all: tit-for-tat is a great strategy, especially if you start with a willingness to cooperate. Which is the scientific way of stating that it is good to trust your business partners from the start and invest in collaboration.
Impact on the selection process
So whether you conclude it on personal experience, logic, or science, the outcome is that clients have to trust their vendors and vice-versa. And in a VUCA context, trust may very well be the defining factor of a successful engagement. That being the case, I suggest we rethink the selection process. Rather than a selection based on capabilities and a financial business case, parties should primarily use the selection process to find a partner with whom they establish a basic level of trust. I would refer to this as a minimum viable relationship. When this sounds naive, you should read up on the tit-for-tat strategy.
A minimum viable relationship isn’t about blind faith but about informed trust. It should be grounded in solid contractual principles that make up a minimum viable contract. Which is a topic I will cover in my next contribution in this series applying Agile principles to outsourcing engagements.
About the author
Erik Snijder is a freelance sourcing consultant and program manager. Under the label 2iQ he helps both clients and vendors in setting up and further improve successful engagements. In doing so, he can leverage almost three decades of experience working for both clients and service providers both in the Netherlands as well as internationally.