Outsourcing has been an established commercial practice for a quarter of a century, since the days when Peter Drucker coined the mantra "Do what you do best, and outsource the rest". Although precise definitions are contentious, it has been estimated that outsourcing programmes account for 12 per cent of US Gross Domestic Product. Three out of five companies polled in a recent PricewaterhouseCoopers survey have outsourced at least some business processes and a 2008 Deloitte Consulting Outsourcing Report suggested that "83 per cent of respondents reported that their projects had met their Return on Investment goals of slightly above 25 per cent".

And yet business is littered with stories of outsourcing projects that fail - or perhaps more importantly fail to stay the distance - initial gains, certainly, but followed by a relationship that descends into acrimony. Some partnerships, such as the twenty year alliance between Jaguar and Unipart Logistics, just keep on delivering for both parties; others run into the sand.

This perplexed the United States Air Force, which spends over $60 billion a year with outsourcing partners. Why are some deals, such as that of GE with the US Navy for maintenance of the J404 aircraft engine, so successful, whilst other apparently similar deals disappoint or fail?

USAF asked the University of Tennessee to investigate, and the results are contained in 'Vested Outsourcing - five rules that will transform outsourcing' (K Vitasek, M Ledyard, K Manrodt; published by Palgrave Macmillan).

Lead author Kate Vitasek explains that after studying many outsourcing relationships in logistics and in other business processes, they have identified ten 'ailments' that impede successful outsourcing, and the five rules that will help both sides find 'the pony'.

The 'pony', Vitasek explains, is the difference between today's solution and what the optimised solution could look like, if the parties only knew to look for it. (The derivation comes from the dialogue: "Why are you excavating that pile of horse manure, little boy?" "Why Sir, for this amount of manure there must be a pony in their somewhere"). The point is that, except for the outsourcing of the most commoditised services and processes, real and enduring success for both parties comes from thinking and acting, not about 'What's in it for me?' (WIIFM), but 'What's in it for WE?' (WIIFWE). In other words, says Vitasek, outsourcing partnerships are not to be seen as a zero-sum game: working together, and following the five rules, the game gets bigger for both sides. That's the pony.

There is little surprising there. Most firms go into outsourcing arrangements with at least the vague idea that they will bring inputs and resources together - capital assets, skills, knowledge or whatever - to benefit both sides. So what are these ailments that frustrate such good intentions? It's worth noting, although not explicit in 'Vested Outsourcing', that several of these behaviours are not exclusive to outsourcing. They can be found, for example, in the relationships between different departments of the same organisation if those are working to differing objectives and incentives. Here are the ten key ailments highlighted by Vitasek:

1.Penny wise, pound foolish. A company outsources purely on cost. This can lead to trade-offs in quality and service, 'beating up' the supplier, and a vicious cycle of re-bidding, and transitioning to a new 'cheaper' supplier. Either outsource providers will refuse to work with that firm, or they may bid so low that they go out of business.

2.The 'outsourcing paradox' is Vitasek's term for the situation where the service buyer's 'experts' attempt to define a 'perfect' Statement of Work on how the process is to be performed, down to the last touch. Obviously, there is then no scope for the service provider to bring their own skills, knowledge and abilities to the table.

3.The activity trap. Related to the last point, this is where providers are rewarded on a transaction basis - the more operations they perform, the greater their revenue and profit. Clearly, there is no incentive to reduce the number of non-vale-added transactions, because that would result in loss of revenue.

4.'The junkyard dog factor', as Vitasek terms it, is where, to protect their own jobs or status, employees in the outsourcing firm insist that certain processes simply must stay in house. Often, notes Vitasek, this also means that the 'best' employees, perhaps those who wrote the Statement of Work in ailment 2, are retained in house as largely unnecessary 'supplier managers'.

5.The honeymoon effect. Initially all is positive, as the provider ramps up to meet the customer's expectations. But after a time, the low hanging fruit has been plucked, there is little incentive for the supplier to try harder for the more difficult goals, or to renew investment, and the relationship deteriorates.

6.Sandbagging. To get over the honeymoon effect, a buyer might offer bonuses payable on set performance improvements - perhaps a certain percentage reduction in inventory holding each year. It may in fact be possible to outperform this, especially in the early years, but the provider will be sorely tempted to 'bank' this potential gain against harder times.

7.The zero-sum game. This is self-explanatory - the belief that if something is good for the outsource provider, it is automatically bad for the buying side. Almost everyone in business school has studied game theory, but it seems much harder to think 'win-win' in practice. Vitasek extols 'the power of ANDS' - 'can I have improved service AND lower cost?' Probably, but not if you don't believe in the possibility of 'win-win' to start with.

8.Driving blind is quite simply the failure of the parties to start off with an agreed definition of what success will look like. Often, costs are tracked, but there is little formal governance devoted to the other aspects of the relationship, such as service levels.

9.Measurement minutiae shows up in a plethora of metrics designed to capture every single aspect of the outsource provider's performance - perhaps 50 or 100 metrics, requiring years of person-time, and many of which may be of little practical assistance, if indeed they are ever reviewed at all.

10.'The power of not doing'. The contract may, for example, specify quarterly review meetings around a scorecard of metrics, but if the metrics are not monitored and the meetings not held, sub-optimal performance should hardly come as a surprise.

Those are the common problems that Vitasek and her team have identified in failed or failing outsourcing arrangements. But is there an alternative approach? How have relationships such as that of Jaguar and Unipart Logistics managed to avoid at least the majority of these traps?

First, says Vitasek, [i]"You really have to believe that there is value (the pony) to be had by going down the vested outsourcing route - if not, don't go down that path. The conventional approach treats outsourcing almost as a commodity: I have low skills so I'm going to outsource to an expert, but the process is of low value to me so I'll use Adam Smith market forces to drive down costs. But in even a moderately complex outsourcing model there will be a few suppliers that are really good, that could provide a huge opportunity to unlock value. I'm going to outsource to you because you are smarter than me, you're going to unlock that value and together we are going to share it".[/i]

For success in these sorts of outsourcing partnerships, 'Vested outsourcing' implies the adoption by both sides of five rules.

Rule 1Is to focus on outcome, not transactions. Flip the thinking from what detailed operations the service provider is performing, to desired outcomes - how is the provider improving turnaround or whatever your problem was. Desired outcomes are still quantifiable, but take a different form - they may be targets for availability, reliability, revenue generation, employee or customer satisfaction and the like.

For example, Unipart Logistics and Jaguar have a joint vision 'To support Jaguar Dealers in delivering a Unique Personal Ownership Experience to Jaguar drivers worldwide, ensuring industry leading owner loyalty through partnership and world-class logistics.' This joint vision empowers Unipart Logistics to deliver the logistics solution that enables Jaguar to maintain its leading position and its quality image.