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.

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Simon Woodcock, Sales and Solution Manager at Xchanging Procurement Services

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.

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Simon Woodcock, Sales and Solution Manager at Xchanging Procurement Services