Wednesday, July 31, 2013

Examining the Top 5 Misconceptions Surrounding the Gainshare Commercial Model in Procurement Outsourcing: Part 2 by guest blogger Simon Woodcock

In Part I of my analysis of the top misconceptions around the gainshare model in procurement outsourcing, I discussed the stereotype that gainshare agreements are high risk and don’t deliver significant, in-depth savings.  Both of those statements were shown to be misconceived.  In this post, I’ll look at the misconceptions related to alleged high fees, collaboration and contract length.
Assumption 3: Providers can “get lucky”: If the provider implements large savings on a very easy project, the customer ends up paying a disproportionately large sum of money as fees

Facts: With a fee-for-service model, the reverse of this is true. An organization can pay for a project the delivers low savings and end up paying a disproportionately large relative fee. The key here is to ensure robust SLAs are in place. This discussion relates only to project-based consumption. With a managed services model, the provider will take the rough with the smooth; some projects will deliver more value to the customer and provider, and some will deliver less. Over the course of a three-to-five year contract managing all spend across all categories, those peaks and troughs will level out.

Assumption 4: Gainshare restricts collaboration: Successful results come from collaboration and this will be minimized if both parties are constantly ascribing a ‘who did what and when? ‘ or ‘whose idea was that?’ mentality.

Facts: This would appear to be an argument more in favor of the gainshare model. With a fee-for-service model there is risk that the provider charges for an artificially high amount of effort or that scope-creep occurs if the statement of work turns out to be less than comprehensive. The beauty of a gainshare arrangement is the collaboration it fosters. Standard SLAs require a provider address the majority of spend and a road map of projects to achieve that will be created mutually within a governance structure. From then on in, both parties have a vested interest in successful delivery.

Assumption 5: Gainshare encourages ‘short-termism’: Organizations require long-term and sustainable strategic guidance but gainshare encourages first year savings in lieu of long-term service.

Facts: This first half of this point is certainly correct; organizations need a long-term and strategic approach but the misconception occurs in the second half because gainshare can absolutely be fundamental to a long-term strategy. Gainshare is best used as part of a managed service model that ensures every category is addressed more than once in a deliberate, planned and phased manner so that it can bring in long-term behavioral changes in the management of each category. The ad hoc, ‘point-and-shoot’ approach of a fee-for-service model is more likely to lack a long-term or holistic outlook. Any fully managed service proposal should plan to address 100% of spend at least once over a three-year contract, which is anything but ‘short-termist ‘.

To conclude, there is no ‘right’ or ‘wrong’ commercial model in procurement outsourcing. Different circumstances require different solutions and gainshare is clearly an option with merit.  When implemented correctly, gainshare can bear many benefits for customer and provider as risk, reward, and the incentive to create value are mutual.
Simon Woodcock, Sales and Solution Manager at Xchanging Procurement Services

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