For a small business considering contracting the services of an outsourced procurement provider, the most common method is through "fee for service", paying a fee for the number of hours or days worked on a given project. There is a lesser known method "Gainshare Sourcing" can offer better return on investment but is perceived as high risk.
This article will highlight and examine some of the concerns companies have when considering gainshare sourcing and offer some guidance on how to minimise the potential risks.
What is Gainshare?
Gainshare sourcing in its simplest form is "utilising the services of an outsourced provider or consultant to re-source a product or portfolio of products, the fee taken by the provider for this operation is generated from an agreed percentage of the projected saving for a designated period (normally based of a projected 12-month period)."
Gainshare sourcing is generally seen as an adversarial and short-sighted method of sourcing and something for smaller businesses to steer away from. If managed effectively with the right sourcing partner for your business it may open opportunities for strong sustainable cost savings previously not achievable while minimising the potential costs associated with outsource providers.
There are many perceived risks or concerns a business may have when considering Gainshare sourcing. As with any business activity there is an element of risk, the key is to minimise and mitigate the risks posed.
Below are the main risks seen to be associated with gain share sourcing:
1. Promotes short term unstable purchasing
"Gainshare sourcing is all about 'quick wins' with little consideration for the longer-term sustainability of any cost savings made" Most outsourced providers invest great effort in managing a positive profile and securing return customers. The most effective method is to ensure any savings made are realised fully and the customer is satisfied. Creating short term quick wins is counter intuitive to generating future business opportunities.
2. Damages relationships with suppliers
"The cost saving achieved will be the result of aggressive negotiations and changing from trusted suppliers to new untested vendors." To ensure a truly sustainable cost saving is achieved there are a number of best practise methods which can be used. The most important aspect to any sourcing project or negotiation is to ensure transparency and best practise is upheld and that the provider maintains clear dialogue with the client regarding the process and the suggestions for supply. This will help to alleviate concerns which may arise regarding any changes to the chosen route of supply.
3. Gainshare agreements are high risk
"The cost saving achieved will be the result of aggressive negotiations and changing from trusted suppliers to new untested vendors." To ensure a truly sustainable cost saving is achieved there are a number of best practise methods which can be used. The most important aspect to any sourcing project or negotiation is to ensure transparency and best practise is upheld and that the provider maintains clear dialogue with the client regarding the process and the suggestions for supply. This will help to alleviate concerns which may arise regarding any changes to the chosen route of supply.
Although rare in occurrence, there is always the possibility that the provider is able to generate considerable cost savings resulting in a higher than anticipated fee to be paid to the provider. It is important to understand that although potentially unforeseen the fee
payable is generated from thesaving the client will receive from all future purchases of the concerned product(s) so is in essence additional funds into the business. It is also important to agree not only the percentage "fee" for the provider but also contingency based payment terms. This will help to manage any higher than expected payment.
4.Cost is prioritised over quality and service
"Gainshare agreements are geared towards cost with little scope for other important aspects including Service, quality, delivery etc." Generally, the sourcing activity undertaken will not be for a single "one time" purchase but for an ongoing requirement with a contractual period of several years in order to realise strong returns. As part of the agreements made between the provider and the client, Client and the supplier it is important to capture a number of definable KPI's to monitor the success of the agreement.
5. Quick wins over complex projects
"Gainshare agreements are geared towards cost with little scope for other important aspects including Service, quality, delivery etc." Generally, the sourcing activity undertaken will not be for a single "one time" purchase but for an ongoing requirement with a contractual period of several years in order to realise strong returns. As part of the agreements made between the provider and the client, Client and the supplier it is important to capture a number of definable KPI's to monitor the success of the agreement.
6. Failure is invisible
"The client has limited scope to identify targets so will be led by the provider, who is incentivised to target success while ignoring potential risks and failures" Companies utilise the services of an outsourced provider to focus on areas they do not have the resources or ability to manage. Gainshare sourcing has been relatively common place in large business with complex purchasing and commercial teams. The ultimate incentive for any Gainshare provider is to maintain a strong level of future business, this is accomplished by securing repeat and recommended business.
7. Gainshare places stress on company budgets
"Fees paid to providers are taken from savings which may be allocated to a different budget or budget holder placing stress on the company's cash flow." The general purpose for considering sourcing projects suitable for Gainshare is to reduce cost for the business not for specific budget holders. Reducing costs enables a business to become more competitive and potentially increase margin. The fee paid for Gainshare will be a percentage of the projected saving calculated over a fixed period i.e. 12 months. In its simplest form utilising Gainshare sourcing will enable the client to realise potential savings with a minor offset for a short period.
8. Savings based on projected business
"The fee payable to the provider is based on potential future business which may not materialise, resulting in less than anticipated cost savings". When considering any cost saving project both internally and utilising outsourced expertise it is important to generate a robust business case with realistic sales/business level projections. The projections need to contain sufficient safety to allow for a level of contingency in the event of lower than expected business.
9. Gainshare limits supplier collaboration
"The cost saving position of Gainshare sourcing promotes an adversarial approach, limiting more preferable collaborative supplier relationship". Although collaborative relationships are always the desired result with in any supply chain, collaboration also promotes complacency with the supply base. It is a useful exercise to periodically benchmark a business's suppliers to ensure value for money is still being maintained. An effective Gainshare model actually promotes collaboration with the supplier where there is a value to the client. It is important for any provider to build a profile with the client by creating a workable supply chain solution.
10. Promotes unethical performance
"Gainshare sourcing incentivises providers to seek the largest cost saving with little consideration for ethical, environmental or sustainability issues." Ethical sourcing is key to any modern business environment and it is important when initially contracting with any sourcing provider to ensure all key points of the clients CSR policy are adhered to. This concern generally stems from past trading mentality which was not only restricted to purchasing but to all aspects of business. Thankfully current trends are towards more sustainable and ethical methodologies.
Further information on Gainshare
For more information on Gainshare and how Gainshare can benefit your business, please read our next article.
Gainshare or Contingency Sourcing, the mystery of the hidden savings solved.
