Ten Elements of a Successful Supplier Agreement

Not happy with a supplier? Perhaps it’s time to look in the mirror. Or better yet, dig out your contract and examine it from a fresh perspective.

In 1968 the legal scholar, Ian R. Macneil, in Contracts: Instruments for Social Cooperation,1 observed that most contracts are poorly equipped to address what businesses need. He argued that contracts are rooted in the classical approach to contract law, and thus concentrate on transactions and legal protections such as pricing and price changes, service levels, limitation of liability, indemnification and liquidated damages.

Note that Macneil wrote that 45 years ago, but we’re still mired in those classical approaches to contract law.

For example, a common mistake companies make in outsourcing and supplier agreements today is that they develop detailed statements of work (SOWs) and then strictly define the work to be done. This handcuffs their suppliers’ innovation and flexibility.

A flexible approach and agreement framework is needed, one that the Nobel Laureate Oliver E. Williamson suggests is highly adjustable or adaptable, rather than one that prescriptively outlines detailed transactions, rigid terms and conditions, SOWs and working relations.2

University of Tennessee researchers set out to find a better way to develop strategic supplier agreements, and their research led them to study some of the most successful business relationships such as McDonald’s, P&G and Microsoft—all with award-winning supplier relationships.3 This research found that successful agreements operated differently; they moved away from traditional buy/sell arms-length contracts to long-term, win/win relationships based on a “what’s-in-it-for-we” mindset. This approach is called Vested because buyers and sellers collaboratively craft contracts that are steeped in mutual advantage, binding each party to a collaborative, trusting win/win approach. They are Vested in each other’s success.

Vested requires the parties to jointly build a solid, cooperative foundation for sharing value, and to do so under a flexible contract framework that allows them to embrace the dynamic and demanding nature of business in a fair manner. This approach allows the parties to develop a sustainable relationship that promotes investment in innovation.

But how do these successful companies do it? They follow ten elements—each profiled below.

The Ten Elements of a Vested Agreement
What goes into a successful Vested business agreement? University of Tennessee’s Center for Executive Education joined with the International Association for Contract and Commercial Management on The Vested Outsourcing Manual—a step-by-step guide for developing collaborative business-to-business agreements and working rules that facilitate successful and long-lasting business relationships based on mutually desired outcomes.

The Vested Outsourcing Manual outlines ten elements to include when developing an outsource contract. Think of the elements as signposts directing suppliers and service providers along the right road to the desired destination: a successful, long-term Vested business relationship.

The Ten Elements are keyed to implementing Vested’s “Five Rules,” as shown in the following table:

10 elements

Rule #1: Focus on Outcomes, Not Transactions

Element 1: Business Model Map
This first step is to understand and document the supplier or outsourcing business model. It is vital to map potential outcomes in order to see how well the parties are aligned. By jointly mapping a model the parties will pinpoint the transactions of value, leading logically to collaboration, loyalty and mutual satisfaction, market share and sustainable profit. The element also fashions a culture in which the company and the supplier maximize profits by working together more efficiently, no matter who is doing the activity.

Element 2: Shared Vision and Statement of Intent
When the business model is mapped, the parties then work together on a joint vision that will guide them for the duration of the Vested relationship. A cooperative and collaborative mindset opens a conversation between the parties. As a result, they share what is needed, admit to gaps in capability and aim to focus on the benefits that the other party can bring to enhance any gaps in capability. That vision and alignment forms the basis of a statement of intent drafted by the outsourcing teams.

Rule #2: Focus on the What, Not the How

Element 3: Statement of Objectives/Workload Allocation
This lays the foundation for the parties in a Vested partnership to do what they do best. Depending upon the scope of the partnership, the company transfers some or all of the activities needed to accomplish relationship goals to the service provider. Together they develop a statement of objectives (SOO) that describes intended results, not tasks.

Rule #3: Clearly Defined and Measurable Outcomes

Element 4: Top-Level Desired Outcomes
In an effective, successful Vested relationship, the parties work together to define and quantify desired outcomes. This element is a centerpiece of the entire enterprise, because without such mutually-defined goals in place, a Vested agreement cannot proceed. Outcomes are expressed in terms of a limited set of high-level metrics. The parties must engage—jointly and collaboratively—during the agreement transition and particularly during agreement negotiations to define exactly how relationship success is measured. Once the outcomes are in place, the supplier is freed to deliver the required level of performance at a predetermined price.

Element 5: Performance Management
Once desired outcomes, statements of intent and SOOs are in place and the agreement is implemented, the parties then measure performance to determine if the outcomes are achieved. The metrics will help align performance to strategy.

Rule #4: Optimize Pricing Model Incentives

Element 6: Pricing Model and Incentives
In order to achieve the desired outcomes, the parties must have a properly structured pricing model that incorporates incentives for the best cost and service trade-off. The approach of many procurement professionals to outsourcing or supplier agreements is perennially stuck on one thing: getting the lowest possible service and labor pricing. The paradigm shift of Vested is that the supplier’s profitability is directly tied to meeting the mutually agreed outcomes. Inherent in this model is a reward for service providers to invest in process, service or associated product that will generate returns in excess of agreement requirements. Higher profits are not guaranteed—obviously—but this element offers service providers the authority and autonomy to make strategic investments in processes and product reliability that can generate more value and a greater return on investment than a conventional cost-plus or fixed-price-per-transaction agreement might yield.

Incentives are a key component, because service providers are taking on risk to generate larger returns on investment. An incentives package delivers the most commercially efficient method of maintaining equitable margins for all parties for the duration of the relationship through a method known as margin matching.

Rule #5: Insight versus Oversight Governance Structure

Element 7: Relationship Management
A relationship management structure creates joint policies that emphasize the importance of building collaborative working relationships, attitudes and behaviors. The four elements associated with Rule 5 provide the tools for parties to manage and operate the Vested agreement. They monitor the agreement within the framework of a flexible governance structure that provides top-to-bottom insights into what is happening. A Vested agreement is not based on transaction counting!

Element 8: Transformation Management
This is a new relationship model—people and company ecosystems are changing; the parties are doing things differently and probably not operating in familiar comfort zones. Managing this transformation, including transitioning from old to new—along with change management once the new agreement is up and running—is often difficult and complex to implement. It is imperative to preserve as much continuity as possible among personnel and teams as the transition progresses into day-to-day implementation and operation.

Element 9: Exit Management
Sometimes the best plan simply does not work out or is trumped by unexpected events. Business happens, and companies should have a plan when assumptions change. An exit management strategy can provide a template to handle future unknowns.

Element 10: Special Concerns and External Requirements
Governance frameworks are not one-size-fits-all, especially in more technical or complex relationships, such as global supply chains. The final element recognizes that all agreements are different and that many companies and suppliers must understand and adhere to special requirements and regulatory protocols. A governance framework may need to include additional provisions that address specific market, local, regional and national requirements. For instance, in supplier and supply chain relationships involving information technology and intellectual property, security concerns may necessitate special governance provisions outside the normal manufacturer-supplier relationship.

Developing a business or outsourcing agreement using Vested’s Five Rules and the Ten Elements is much more than delivering a higher level of service on a given activity, a raft full of metrics or simply counting transactions or filling seats more cheaply.

Completing the Ten Elements enables progressive companies to change their mindset and challenge old-school approaches by establishing a dynamic, collaborative, modern business-to-business agreement.

Firms evolve their thinking from the adversarial to the truly collaborative. They move beyond simply paying lip-service about “collaboration” and “partnership” to creating a win-win agreement and an atmosphere that drives transformative change.



1. Ian R Macneil, Contracts: Instruments for Social Cooperation (Hackensack, NJ: F. B. Rothman, 1968).

2. Oliver E. Williamson, “Outsourcing: Transaction Cost Economics and Supply Chain Management,” Journal of Supply Chain Management 44, no. 2 (2008): 5–16.

3. See Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships, by Kate Vitasek and Karl Manrodt, with Jeanne Kling (New York, Palgrave MacMillan, 2012).


Kate Vitasek is a faculty member of the University of Tennessee’s Center for Executive Education. She is the principal author of "The Vested Way: How a “What’s in it for We” Mindset Revolutionizes Business Relationships," "Vested Outsourcing: Five Rules That Will Transform Outsourcing," "The Vested Outsourcing Manual" and "Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships." She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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