Outsourcing isn't what it used to be. When executives began outsourcing substantial portions of their operations more than a decade ago, they did it to off-load noncore activities that distracted them from their real strategic agenda. To people inside the organization, "outsourcing" became a dirty word.

That has all changed. Business leaders are now using outsourcing in dramatic new ways for bold new purposes: to facilitate rapid organizational change, to launch new strategies, and to reshape corporate boundaries. This is transformational outsourcing. With it, managers aim to dramatically improve a company's current performance and future competitive agility.

To engage in transformational outsourcing, executives must forget the conventional wisdom about outsourcing and develop innovative approaches to manage risky -- but high-impact -- intimate partnerships. They must also forget the conventional wisdom about deep organizational change.

What progressive executives gain by thinking outside the box is an option that's likely to deliver benefits quickly. The early results are stunning. For example, National Savings & Investments (NS&I) executed a remarkable and highly effective business transformation through outsourcing, making the organization "massively more competitive," in the words of its sourcing director. This U.K. public-sector organization helps finance the government by selling savings products to individuals. It competes with aggressive private-sector firms like banks; financial services companies; and, increasingly, food retailers, which are offering customers convenient banking services in supermarkets.

Five years ago, NS&I brought in a new CEO with a mandate for change. He recognized that a steady diet of cost-cutting had not benefited the organization's operating infrastructure, to say the least. To bring the business quickly up to strength, he and his management team crafted an innovative outsourcing arrangement. They articulated a business model that would be self-funding. This was essential, as new capital from the U.K. Treasury was scarce. At the heart of the model was a private financing initiative, a structure that used public fee-for-service payments to compensate NS&I's private-sector outsourcing partner for capital investments.

To make this model work, the government agency needed to find a service provider that had the expertise to quickly revamp its technology and operating infrastructure. More important, executives wanted a strategic partner that could work flexibly with them as business conditions changed over time. To align their interests, they chose an outsourcing firm that was as committed to the long-term success of the initiative as they were. NS&I outsourced operations, customer service, finance, IT, and procurement, and 90 percent of its employees moved to the private-sector firm. The company retained responsibility for its strategy and product design and for the management of its relationships with key partners. In less than four years, this initiative paid off handsomely. In fiscal 2002, the organization delivered £176 million value added, which it calculates by comparing its cost of raising funds with the cost of raising money through gilt, the U.K.'s treasury bill. That figure was almost 50 percent higher than the goal of £120 million.

Through its transformational outsourcing relationship, NS&I introduced the first ever equity-linked investment product, and it changed from an isolationist, civil-service culture to a market-led culture. In the words of one executive, "We are now capable of delivering products quickly and changing them cheaply. We have a slick, low-cost operation and much more flexibility." NS&I has overtaken its traditional competitors -- the retail banks and building societies -- and stands ready to take on aggressive new entrants into the U.K.'s retail finance mar- ket, such as supermarket giant Tesco and big-brand conglomerate Virgin.