When companies first started thinking about farming out nonstrategic functions—such as payroll, IT maintenance, facilities management, and logistics—their goal was to reduce costs. Today, however, these corporations regularly contemplate outsourcing core operations to third-party specialists in order to improve operational performance. Many such deals are big and strategic enough to qualify as "bet the company" arrangements involving a complex mix of people, processes, and assets. Indeed, almost 100 megadeals (contracts with values of greater than $1 billion) have taken place in the past ten years, with 15 in 2003 alone.¹

Yet few companies have changed the way they make deals. Our research² found that most corporations still rely on a standard procurement approach, with contracts and agreements managed by individual departments—the way they make commodity purchases. This mind-set is underscored by the increasing use of third-party consultancies, which often reduce the bidding process to a commodity comparison of vendors that limits transparency and that uses price as the primary decision-making factor. Neither customers nor vendors are served well: the process limits ways to improve the economic value of a deal for both sides and creates large, unnecessary risks that vendors are expected to bear.

Not surprisingly, up to...