The Leader Magazine

MAR 2018

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34 MARCH 2018 t H e le A de R F E A T U R E A R T I C L E the service provider's expertise and best practices. This will usually result in a reorganization of the internal CREFM team as it finds new ways to contrib- ute to the organization in a broader, more strategic way. Third-generation outsourcing is transformational and requires a high level of trust and dependency on the service provider. Typically, the model is structured to include an on-site account-management team, and a contract structure that reflects a strategic partnership: fees and success are tied to performance and, as the client sees wins, the service provider is rewarded. Goals of both client and service provider are aligned. As the CREFM organization moves through the outsourcing continuum, the contract structure becomes increasingly more critical. As shown in Figure 2, there are seven different sourcing models most commonly used in the industry. Organizations typically go through generational stages in the outsourcing process, starting with transaction-based models. As the relationship matures and the need for innovation becomes more critical, the relational and investment models align more closely with business objectives. Transactional • Basic-provider model: This is a transaction- based model. It usu- ally has a set price for individual products and services for which there are a wide range of standard market options. Typically, these products or services are read- ily available, with little differentiation in what is offered. • Approved-provider model: This model also uses a transaction-based approach: goods and services are purchased from prequalified suppliers that meet certain performance or other selection criteria. Frequently, an organization has a limited number of pre-approved suppliers for various spend cat- egories from which buyers or business units can choose. Multiple sup- pliers mean costs are competitive, and one firm can easily be replaced with another if the supplier fails to meet performance standards. Relational • Preferred-provider model: Like the previously mentioned models, a preferred-provider model uses a transaction-based economic model. But a key difference between a preferred provider and the other trans- action-based models is that the buyer has made the choice to move to a supplier relationship where there is an opportunity for the supplier to add differentiated incremental value to the buyer's business to meet strategic objectives. This insertion of the supplier's contribution into the buyer's business processes creates the need for a relational model. Thus, contracts with specifically chosen supplier(s) assume a more collaborative relationship. Repeat business and longer-term and/or renewable contracts are the norm. • Performance-based/managed-services model: This model is generally a formal, longer-term-supplier agreement that combines a relational contracting model with an output/outcome-based eco- nomic model. Under this structure, the service pro- vider is held responsible and compensated based on agreed to key performance indicators (KPIs) and objectives across the buyer portfolio. A performance- based agreement typically creates incentives for hit- ting performance targets (service-level agreements [SLAs] controlled by the service provider, or KPIs), and puts a portion of the service provider's manage- ment fee at risk if the supplier does not meet the agreed-to service levels. • Vested-business model: This model is a hybrid relationship that combines an outcome-based economic model with a relational contracting model, incorporating the Nobel Prize–winning concept of behavioral economics and the principle of shared value. Using these concepts, companies enter into highly collaborative arrangements designed to create and share value for buyers and suppliers above and beyond conventional buy-sell economics of a transaction-based agreement. In short, the parties are equally committed (i.e., vested) to each other's success Figure 2

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