Gainsharing: Is It Really Worth It?

The original lure of outsourcing was as follows: Buyers wanted a partner not only to reduce operating costs, but to share their business risk and invest in non-core areas. The thought was that outsourcing providers would invest in new technologies and processes and leverage them across buyers to reduce costs to all users.

Therefore, buyers signed contracts with suppliers that included vague gainshare clauses, such as pricing-based models designed to provide benefits to both the buyer and the provider through collaborations that drive business results. Now, three, five, 10 years later, many buyers are scratching their heads. Where is the innovation, where is the process improvement? Did we ever get it? Why did efforts to drive enhanced improvements dry up?

Surely – or so the theory goes – gainshare, if executed properly, can generate tangible benefits including cost reductions, incremental revenue, and quality improvements. However, the traditional primary focus, by both buyers and providers, on cost reduction has possibly sabotaged innovation and change. As a result, buyers are less satisfied with the status quo, and they are looking for ways to incentivize their providers to deliver improvements.

In the last 30 days, we have interviewed buyers and providers across different industries and asked them specifically about their gainsharing experience. In every case, the buyer said his/her company had gainshare provisions in the outsourcing contract. However, only 40 percent of them had applied the provision and only 20 percent said they had had a positive gainsharing experience.

In this RAPIDInsight, we look at why gainsharing is not working in many buyer-provider relationships. We will then introduce a set of common best practices that promote successful gainshare programs use.