Adam Smith Was Wrong -- Thoughts on Selecting an Outsourcing Provider

Thinking back to your Econ 101 class where there were 300 students, you might recall the name Adam Smith. He was heralded as the Father of Modern Economics and postulated the concept of “best result comes from everyone in a group doing what’s best for themselves”. This was part of Smith’s “invisible hand” theory. Many years later, a brilliant man by the name of John Forbes Nash at Princeton University determined that Smith was wrong.

Nash applied Gaming Theory to the study of Behavioral Economics to examine how people and groups’ interactions can affect economic outcomes. The movie A Brilliant Mind about John Nash’s life, starring Russell Crow, has a scene in a bar that does an excellent job of illustrating why Nash thought Adams was incorrect.

Russell Crowe in A Beautiful Mind

Story of John Forbes Nash, Senior Research Mathematician, Princeton University and

co-recipient of 1994 Nobel Memorial Prize in Economic Sciences

Nash’s brilliant insight can guide your selection of an outsource provider.

There is a lot at stake when you are looking to outsource services. If you fail to make the correct selection, your job may be at stake. Where do you start? How do you differentiate? How do you reach a Win/Win solution?

Years in business?

Age?

Experience?

Location?

Financial stability?

Equipment?

Reputation?

The first and most common mistake is to focus on the cheapest offer. This is the easiest metric to use and hence many super busy outsourcing teams defer to it. This puts them into the position of attempting to balance the quality/service tradeoffs. This is an unnecessary waste of one’s time. It is always possible to get the highest level of both but not by selecting the lowest cost provider. Taking the more challenging path of finding the highest level of quality and service will yield much higher long-term value.

So where do you invest most of your time? I maintain that one should do a quick once over to assure the candidate provider(s) has the basic equipment and quality systems. Then drill into the foundational aspects of the relationship. Can you find proof that the provider practices what Nash professes. Do you hear more “I” and “me” than “we” in your conversations? Does the provider talk more than they listen? Does the provider ask questions about your specific business beyond the general transaction? Do they talk about outcomes? Are their questions focused on “what” or “how”? These are all indicators of the foundational principles of the provider.

How do you approach selecting an outsourcing provider? Is it every man for himself or is it as Crow states in the movie clip, “the best result will come from everyone in the group doing what is good for himself and the group. It is the only way we all win”? It takes courage to break from past negotiations training where we were programmed to win (In a Zero-sum game, I Win/You Lose). Moreover, it requires one to be smart about selecting an outsource provider.

Once you make your selection then the real work begins. Kate Vitasek has written two books addressing Vested Outsourcing. The first, Vested Outsourcing: Five Rules That Will Transform Outsourcing, focuses on the theory and the second, The Vested Outsourcing Manual, is a manual for implementation. These are both great books to use for reference as you work smartly towards a Vested Outsourcing relationship.

At MTO we practice the principles espoused by Nash and Vitasek. I have attended courses on Vested Outsourcing at the University of Tennessee and I am writing a series of posts about it in my Working Smart blog. Hope you enjoyed the video, check out the books and stay tuned for more from me.

To encourage you to get interested in Vested Outsourcing we are offering a free signed copy of the book Vested Outsourcing: Five Rules That Will Transform Outsourcing by Kate Vitasek to the first of our readers who correctly answers and responds to the below questionnaire.

When to use outsourcing is a question that can be evaluated using a simple matrix. Two key factors should be considered when making this decision; The internal expertise in the process you are considering outsourcing and the value to your organization. Below is a quadrant chart (adapted from Vested Outsourcing) depicting how these two factors interact in the decision process. Can you assign the following to the correct quadrant?