Implement end-to-end performance management. After defining a viable joint business model, executives must develop an end-to-end performance management process that supports capable execution. This framework of metrics, incentives, and governance must help them keep their strategic purpose in the center of both partners' crosshairs. It must incorporate the ability to shift gears when necessary. And it must tap the wellsprings of commitment that any organization needs to drive real, lasting change. The right time to develop this framework is before the contract is finalized.

Business transformation requires commitment from all parties because of its bet-the-ranch character. Managing an effective transformational outsourcing relationship means relaxing the linkage between accountability and control. The more far-reaching and aspirational the outsourcing agenda is, the more blurred the lines of accountability and control become (see exhibit 2). Executives use metrics and incentives to keep the two companies' interests tightly aligned and to support deep, continuing commitment to reaching their joint aspirations. This means establishing new enterprise-level metrics, crafting a compelling set of incentives, and using lower-level metrics to manage interim progress.

New metrics. When business transformation is a partnership's goal, the ultimate metric is business value created. Architects of transformational outsourcing initiatives measure enterprise-level outcomes. For example, Family Christian Stores aimed for double-digit growth in revenues and profits. As with any long-term agenda, executives also use intermediate milestones to gauge their progress. However, they use enterprise-level outcomes to sustain their -- and their outsourcing partner's -- focus on what they originally set out to achieve.

New incentives. Transformational outsourcing requires companies to go beyond a tactical set of financial incentives to motivate the provider. Bonuses and penalties, gain sharing and pain sharing have a role to play, but in a radical initiative, the participants need incentives that touch them emotionally. Committed partners put their names on the line. They announce their intentions and stake their reputations publicly on their ability to deliver the results they project. As one CEO quipped to his board, "If this doesn't pay off, I'll never work again in this industry. And neither will our partner."

Committed partners also bet their own money on the outcome. Both companies put resources at risk, and both share the benefits when their strategy pays off. For example, one outsourcer agreed to help a Spanish financial services firm implement its rapid transformation from a small mortgage lender to a full-service bank in less than one year. How did the service provider get paid? It received a percentage of the bank's assets under management. The more successful the bank became, the more benefits accrued to its partner.

Transformational outsourcers ensure that real incentives flow directly into the hands of key individuals. Leaders put the entire weight of both companies behind these initiatives by linking transformational outsourcing performance to bonuses, raises, promotions, and recognition for the individuals involved. For example, an August 2002 Accenture Institute for Strategic Change research report that I co-authored describes how TiVo, a start-up television service provider, needed to develop distinctive customer-support capabilities when it was getting off the ground. The company realized that its unique product had unusual needs; success would depend on helping customers install, understand, and use the device in a way that specifically suited them. Ordinary call center scripts would not suffice. To prepare agents in its outsourced call center for this challenge, TiVo and its service provider worked closely to establish call-handling processes and develop innovative training materials. TiVo also gave agents the product to use in their own homes and gave individuals direct incentives to motivate them to think like a TiVo customer. As a result, TiVo's outsourced call center workers have mastered the open-ended dialogues and investigative problem solving they need to provide real customer solutions.

Metrics for monitoring interim progress. Supporting a transformational outsourcing initiative requires more than new, outcome-oriented metrics and incentives. Partners also use conven- tional measures, but they use them in an entirely new way. The focus must change from hitting baseline targets to turning in the best possible performance. While many companies set stretch targets as well as minimum service levels in conventional outsourcing deals, aspirational goals take center stage in a transformational outsourcing initiative.

Executives need to structure a comprehensive balanced scorecard to measure short-term progress. This performance management framework should include service-level metrics but should also extend to the other performance arenas on which the transformation depends. For example, Thomas Cook UK includes five types of measures in its scorecard: service levels, process improvement, quality and standards, the outsourcing provider's cultural fit, and innovation. Cultural fit assesses whether the outsourcer's people and processes fit smoothly into the overall Thomas Cook work flow. To meet the innovation goal, the outsourcing provider must make a quarterly presentation of valuable and interesting new ideas to the Thomas Cook board. An executive of the travel company explains, "Service levels are almost a given. We expect our provider to meet them. We use the other metrics to make sure we are making progress on the transformational agenda."

Transforming companies do target basic service levels, but they hand off the responsibility for tracking these operational statistics to the outsourcing vendor itself. As part of taking on one telecommunications firm's legacy voice operations, an outsourcer collects detailed statistics in areas like customer satisfaction and dropped calls, assesses its own performance relative to targets, and reports failures and its plans for improvement to its partner. This structure gives operational metrics just the right emphasis -- they're worth measuring but not the central focus of executives' attention. It also underscores the trust that this kind of relationship entails. One relationship manager explained, "People often ask me how I can let [my provider] report the performance statistics to us. What if they omit an error or lie about the data? Well, they report every single failure to me. If they didn't, the relationship would be devastated. I know they wouldn't do anything to spoil the trust we have."

In keeping with this emphasis, money should not change hands for hitting -- or missing -- everyday service level agreements. That would distract both sides from their real agenda. Instead of paying bonuses for reaching project milestones, share the revenue that results. This inspires both partners to take responsibility for making sure the joint product or service fills a market need at a price customers can afford.

Sustain a high-commitment relationship. In the high-stakes transformational outsourcing game, partners sign up for goals they can't guarantee with organizations they don't control, and managers bet their career on the outcome. When executives reflect on the secret to effective outsourcing, they all reach the same conclusion: Trust is vital. However, most executives -- even outsourcing veterans -- build trusting relationships intuitively, with varying levels of success. Transformational outsourcing leaves no room for error in this critical activity.

The conventional wisdom about managing outsourcing relationships points executives in exactly the wrong direction when it comes to transformational partnerships. If leaders focus only on establishing clear accountability, specified service levels, and disciplined change control, they miss the forest for the trees. These concerns have their place; they are important features of a healthy operation. But they fall far short of the tools executives need to manage an intimate partnership (see exhibit 3). If they focus only on contract management tools, corporate leaders are actually encouraging their outsourcing provider to act less like a partner, not more like one.

To achieve the level of flexible, intense guidance that transformational outsourcing demands, business leaders manage relationships deliberately through four types of intense communi- cation: contract negotiations, establishment of a track record of performance, strategic governance, and personal relationships (see exhibit 4 on the following page).

Contract negotiations. In transformational outsourcing, executives use contract negotiations to make sure they have the right conversations. At the beginning of the initiative -- and every time they revisit the model -- they discuss key objectives and measures of success, how to make sure both partners have skin in the game, and how to deal with the big transitions. This process could not be more different from the kind of dickering over contract compliance that conventional outsourcing frequently inspires. Instead, these frank discussions set the tone for an open and honest dialogue going forward. As one government executive remarked, "The relationship started when we agreed up front that our business partner deserved to make a fair margin." Delegating contract negotiations to an aggressive legal team may get you a better price, but it may also lead to a weaker relationship.

Strategic governance. Keeping a transformational outsourcing relationship on course means jointly managing strategic execution as the transformation plays out. The CEO of one major U.K. grocery chain and its outsourcing provider's lead partner have offices on the same floor so they can meet frequently. They jointly report to the grocery chain's board of directors every second week to keep the high-stakes agenda on track. At Family Christian Stores, the outsourcing provider's lead partner functioned as that company's CIO and participated as a full member of the CEO's direct staff.

Effective governance starts at the top of the company and extends through- out the organization. Some outsourcing providers stress the importance of account managers -- point people who coordinate the relationship. For transformational outsourcing, good governance looks "more like a zipper than a funnel," according to Mont Phelps, CEO of Netivity Solutions, an IT outsourcing provider. Individuals at all levels of the relationship actively work together.

Formal communication processes also help structure solid connections. Operating managers should communicate daily to monitor activities and resolve issues. Business-unit executives should meet monthly to assess progress and make course corrections. Senior executives should address strategic direction in quarterly sessions. In an environment where accountability runs high but control is elusive, transformational leaders substitute visibility for ownership. Companies open their books so their outsourcing partners can see their costs and margins. They open their boardrooms so partners can see -- and influence -- their strategies. And it goes the other way too. A company that signs up for transformational outsourcing wants to know that the service provider on which it is utterly dependent is making a fair and reasonable profit for its effort.

Track record of performance. Business partners build credibility through performance. No matter how effectively both parties articulate their vision at the outset, things can get cloudy fast. Both partners need a way to crystallize and communicate the progress they've made as they go along. Some track the cumulative benefits that accrue as a result of the partnership. Others publicize their insights in jointly authored articles and speeches. Still others pause periodically to capture the progress in writing. These narratives not only document the headway firms are making but provide a means of highlighting roadblocks, rallying support for course corrections, and refocusing on the ultimate objective.

It's not just the fact that they have set and met promises but the way they use this information that makes demonstrated performance a lever for relationship management. As one executive remarked, "We periodically remind each other that what we have accomplished has been both difficult and significant. It helps motivate us to press on together."

Personal relationships. "We're not talking about hot tubs and champagne," remarks one senior vice president, "but the personal side of these business partnerships makes all the difference." Executives from both sides may spend social time together, but the real bonds develop as they work shoulder-to-shoulder to transform the company. At its best, this personal chemistry builds at all levels of the business partnership -- from the leadership to the individuals on the front lines of radically changing business processes.

Executives on both sides of outsourcing deals -- even those that set out to develop strong partnerships -- are often surprised by the amount of energy and commitment these initiatives require of them. Many describe a defining moment during which they arrive in frustration at the full realization of the almost overwhelming issues that threaten to undermine their initiative. However, instead of retreating to their corner to blame their counterpart, successful leaders decide that the onus of making the relationship work is on their own shoulders. At that moment, transformational outsourcing can begin.

Dr. Jane C. Linder is a research director with the Accenture Institute for Strategic Change. Her forthcoming book on transformational outsourcing will be published this fall by Amacom.