Outsourcing lessons from a master

It's just a hunch, but I'm going to guess that your summer reading list did not include anything by Oliver Williamson. Williamson, who is professor emeritus of business, economics, and law at the University of California, Berkeley, is an internationally acclaimed economist who specializes in the arcane subject of transaction-cost economics. If his name sounds familiar, it might be because he—with co-recipient Elinor Ostrom—was awarded the Nobel Memorial Prize in economic sciences in October 2009.

What brings Williamson to mind is a note that recently arrived in my inbox from a couple of good friends, Kate Vitasek and Karl Manrodt. (Vitasek is a faculty member at the University of Tennessee's Center for Executive Education, and Manrodt is on the faculty at Georgia Southern University.) They were writing to tell me about their efforts to raise awareness of Williamson's work within the supply chain community. His research, they wrote, "has significant implications for the outsourcing and supply chain management industries, but few professionals outside of academia know of the work and its sweeping implications, if adapted."

There's a simple reason for that. Williamson's work covers very complex issues, in a very, well, complex way. It's not the kind of reading most of us are likely to keep on the nightstand or toss in a bag on our way to the airport.

In hopes of bringing Williamson's research to a wider audience, Vitasek and Manrodt have joined forces with Richard Wilding of the U.K.'s Cranfield School of Management and Tim Cummins, founder and CEO of the International Association for Contract & Commercial Management (IACCM), to produce what essentially amounts to a translation of Williamson's work. The result is Unpacking Oliver: Ten Lessons to Improve Collaborative Outsourcing, a white paper that outlines principles supply chain professionals can apply to their outsourcing relationships.

What makes Williamson's work so compelling is its insight into what makes an outsourcing arrangement succeed, says Vitasek, who is herself the author of a book on the subject, Vested Outsourcing: Five Rules That Will Transform Outsourcing. "Williamson's views about how to contract with suppliers respond to the industrywide need for companies to work smarter with their suppliers," she says. "Companies have been focusing on 'lowest price' versus 'best value,' which creates hidden transaction costs. Williamson's work shows this approach [to be] myopic and inefficient. Instead, companies should be creating business relationships in which both parties have a vested interest in each other's success. It is the only way both the company and its suppliers can create a positive and truly collaborative working relationship."

The white paper's authors have broken down Williamson's work into lessons on topics like how to develop contracts that create "mutuality of advantage," how to fully understand the transaction attributes (and their impact on risk and price), and the importance of using a contract as a framework—not a legal weapon. In addition to the lessons, the paper includes concrete advice for practitioners. The white paper is available (at no charge) with registration at the "Resources" section of www.vestedoutsourcing.com.