Small and medium companies in the UK are generally unnerved at the thought of employing the services of a procurement consultant to assist with maximising savings through effective sourcing strategies. The consensus is that the business will invest thousands on a consultant with an extortionate day rate, only to not achieve a meaningful return on funds invested.
Gainshare, or Contingency based strategic sourcing is a significantly underused methodology which can offer a guaranteed for the services of a sourcing expert. Hopefully through this article you will gain an understanding of how to break the code and unlock the potential savings available.
What is Gainshare or Contingency Based Strategic Sourcing?
Simply put, Gainshare or Contingency sourcing is a method of contracting a sourcing consultant to work on sourcing activities in which the work conducted is performed exclusively through a gain sharing payment structure. Gainshare contracts typically invoice at a percentage of the savings achieved through the project for a defined period of time.
Using a gainshare model for a sourcing activity helps to align both the consultant and engaging company to maximise cost reduction while maintaining the same or improving levels of quality and service in the items procured.
What are the Benefits of Gainshare or Contingency Sourcing?
Many smaller businesses lack the resources required to engage the services of a consultant when conducting sourcing activities. Working with a consultant on an hourly or daily rate provides limited visibility of the overall cost of the service provided versus the actual saving achievable, making it almost impossible to ensure a sufficient return on your investment.
SCB Procurement offers its Strategic Sourcing services on a contingency or gainshare basis, allowing access to specialist knowledge, expertise, and innovative sourcing methods. Working with us on your sourcing requirements allows you to access our expertise on a short term basis with no upfront outlay. Because gainshare costing assigns a percentage of the actual savings made for a period of time, you can be secure in the knowledge that undertaking a sourcing activity with us in this manner guarantees a return on your investment.
Working with a Gainshare or Contingency based arrangement allows the client to bolster their procurement resource with specialist knowledge and experience for a short period concentrating on key strategic sourcing activities which otherwise would not either be possible or produce minimal results.
Payment for this arrangement would not come from pre-existing funds within the business which may have otherwise been allocated to other areas, however would be generated from the savings made from the activity, essentially becoming self-funding and guaranteeing a return on investment.
Are there any downsides to Gainshare or Contingency Sourcing?
As with any outsourced service, there is always scope for exploitation, there are a number of points to consider when choosing a consultant. Gainshare or contingency sourcing isn’t suitable for all scenarios and requires a level of oversight and conrol from the client to ensure the savings achieved are real and sustainable. Below are a few areas to consider:
Quick savings over sustainable development - When operating under a gainshare agreement, the consultants focus is on saving money, sometimes promoting short-term gains in favour of longer-term sustainable growth. It is important for the client to understand the consultant’s ethics and methodologies prior to contracting to ensure the end result is in line with your original goals for the project.
Savings at the cost of quality and service - At the core of a gainshare agreement is the requirement to reduce cost or make savings, this is the only result which will allow the consultant to make a profit from the agreement. The potential is there for less reputable companies to prioritise savings over any other aspect including quality, service, lead time, long term development etc. When considering working with a consultant it is important to build sufficient safeguards into the agreement to ensure any savings wil be actual and sustainable in the long-term.
Damaging to supplier relationships - Consultants are only with your business for a short period of time and may have a distanced understanding of the lasting impact they can have on a business. Some negotiators may achieve strong results using hard techniques which produce good cost savings in the short-term, but have a damaging impact on the relationship with the supplier (sometimes irreparably). It is important to agree a chosen supplier relationship management approach the consultant will utilise prior to any interaction with your key suppliers.
Wrong products chosen to maximise short term savings - In an effort to maximise cost savings and ultimately profit for the consultant, product or service requirements can be profiled or grouped into categories which although offer strong cost savings, may later result in difficulties managing the supply route. To guard against this, prior to any actions being taken by the consultant it is important for the client to have final approval of how the products are categorised. If anything appears incorrect, it is easier to rectify at that point then once contracts have been agreed with suppliers.
How do SCB Procurement Solutions Manage Gainshare Sourcing?
Providing a sustainable and bespoke service is at the heart of every decision we make at SCB Procurement Solutions, we actively promote Gainshare or Contingency sourcing not as a profit making method for us, but as a way of ensuring a return on investment for our clients.
When undertaking a Gainshare or Contingency contract we begin by working with the client to understand what the best solution for them looks like, this then provides the scope and shape of the project and forms the fundamental basis of all actions we take as part of the project. The client is central to the project and is consulted regularly and at key points to ensure they are fully engaged in the process and with the solution provided. We only view the project as a success once the client is completely happy with the results achieved.
Is Gainshare or Contingency sourcing Suitable for your Business?
Gainshare or Contingency is not a suitable option for all types of procurement project and is generally used in outsourced agreements and sourcing projects. To understand if a project would be suitable for gainshare or contingency there are a few questions to answer:
- Is there a clear, current cost or budget cost to use as a baseline?
- Is there a clear scope for the project requirement?
- Are you able to accurately track the cost(s) over a period of time i.e. 12 months?
- Is there an identifiable history of the requirement I.e. 2 - 5 previous years
- Is the future demand relatively stable?
- Is the product or service readily available on the market?
If you are able to answer yes to most of the above questions, the project you are considering could be a potential fit with Gainshare or Contingency.
If you have a requirement you are currently considering please contact us, we would be happy to discuss your requirements and provide guidance and support.