Thursday, July 11, 2013

Examining the Top 5 Misconceptions Surrounding the Gainshare Commercial Model in Procurement Outsourcing: Part 1 by guest blogger Simon Woodcock

Within the realm of sourcing and procurement services, there are contrasting schools of thought regarding effective commercial models, with gainshare and fee-for-service sitting at either end of the spectrum. Gainshare is a model in which the provider receives payment as a proportion of, and upon successful delivery of, savings to the customer. A fee-for-service model, sees customers pay a fixed fee for a pre-defined piece of work or on a time and expenses basis.

Pure gainsharing in procurement services contracts is still quite rare. Analyst firm Everest Group analyzed 254 contracts for its 2012 research report on the topic and found that only 4% of 254 contracts uphold the model. Proponents of the model feel quite passionate about it but with its’ limited implementation so far, procurement professionals may still not fully understand the benefits it offers.

Both models, gainshare and fee-for-service, have their merits and, depending on the circumstances, each might be the ideal model to implement as part of a sourcing and procurement outsourcing initiative. Everest Group found that gainsharing works well in cases where the desired outcome and accountability can be clearly defined and captured contractually (Gainsharing in Procurement Outsourcing 2012). Using that thinking as our guiding principle, I’d like to analyze common industry assumptions regarding gainshare and the truth behind them, as the gainshare model proves to be an increasingly viable choice in the evolving BPO landscape.

Asssumption 1: Gainshare agreements are high risk: Gainshare agreements foster a culture of high risk and high stakes which may not lead to good or sustainable results for the organization.

Facts: This point focuses on the risk of the provider squeezing suppliers to the point that they are unable to adequately provide the services to which they are contracted, thus creating a business continuity risk. Well what about the risk of contracting with and paying a provider on a fee-basis without any incentive for them to actually deliver true value? In reality, both are extreme hypothetical situations engineered to discredit the other model and the key in both instances is to implement robust SLAs that will ensure risk mitigation. Some of the longest procurement outsourcing contracts in the market are based on a gainshare model – up to fifteen years – quite sustainable in our eyes.

Assumption 2: Quick saving vs. complex projects: Gainshare agreements incentivize the provider to deliver quick and easy savings, not large and complex savings.

Facts: Assume that both the quick and easy project and the lengthy and complex project deliver the same amount of savings but the time and complexity adds cost to deliver for the provider, which, in the case of fee-for-service, will be passed on to the customer. When paying a third-party to manage projects, gainshare will be relatively more expensive than fee-for-service for quick projects and relatively less expensive for complex projects. So if you are addressing both projects then it makes little difference what the commercial model is. If you are allowing the provider to pick from a choice of the two then, theoretically, the gainshare provider is incentivized to deliver the quick projects and the fee-for-service provider to deliver the complex projects. But there is one more factor to consider and that is the time value of money. There is a financial impact of delaying savings, which is why, no matter what commercial agreement is in place, ‘quick and easy ‘ projects should always be pursued first.

In Part II, we’ll examine more misconceptions surrounding the gainshare model and make a fact-based case in favor of the model.
Simon Woodcock, Sales and Solution Manager at Xchanging Procurement Services

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