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Insight

8 Key Considerations for a Gainshare Sourcing Engagement

Highlights

There are many things to consider when evaluating if a gainshare sourcing engagement is right for your organization

These include:

  1. The amount of unmanaged spend in your organization
  2. Your internal resource availability
  3. Existing subject matter expertise (and gaps)
  4. Internal budget constraints
  5. Your potential and progress towards hitting savings targets
  6. Sourcing’s relationship with stakeholders
  7. The level of executive support procurement has
  8. Operational budget constraints

The 8 Key Considerations for a Gainshare Sourcing Engagement

Reflecting on the past few years, things have certainly changed for procurement professionals around the world.  As enterprises face unprecedented, compounding challenges related to inflation, supply chain disruption, and the great resignation; procurement leaders are looking externally for support to meet their objectives now more than ever.

In doing so, they’re also considering the various commercial options offered by leading firms with gainshare being an old favorite of many.  Gainshare in this context is a risk-reward (or contingency-based) engagement model in which the third party is paid a portion of the savings it produces.  Bearing in mind the aforementioned challenges, many are wondering if gainshare is viable in general, and specifically for them, their organization, and their objectives given the market and supply landscape in 2022.

There are many things to consider -each with their own pros and cons- when deciding if engaging the support of a third party to reach savings targets.  This list will be helpful to anyone who is considering in engaging a third-party team on a gainshare basis.

    1. Unmanaged spend: If you have significant unmanaged spend, the savings opportunity will tend to also be significant, which may mean disproportionate gainshare fees compared to the level of effort exerted by the third-party firm. However, the benefit of realizing those savings and bringing the spend under management with a guaranteed ROI is very often considered by procurement leaders to be worthwhile.
    2. Lean team: If you lack the resources to meet your target, hiring a third party on a gainshare basis is a great way to supplement your internal team and accomplish more together and in parallel than either of you would be able to separately.
    3. Subject matter expertise gap: If your team does not have the experience and expertise to effectively manage certain categories of spend, supplementing your team with the right resources to provide coverage for these gaps in your wave plan will yield better results and allow your team to focus on where they can be most effective.  However, you will still need a plan to close these gaps to sustain results and manage spend into the future.
    4. Lack of budget: When you’ve made the decision that you will need external help, proving the business case and securing the budget for it may cost more time than you have or be fruitless altogether.  A gainshare engagement takes budget out of the business case as your payment is funded by savings.
    5. Savings target: Most procurement organizations have a savings target, amongst other KPIs, to hit. As alluded to above, having the right amount of arms and legs to do the work as well as the right skills, experience, and subject matter expertise, can often make the difference between falling short of your target and hitting it comfortably.
    6. Stakeholder engagement: If procurement has a good relationship with many or most business stakeholders a third party is more likely to be successful in collaborating with those individuals and teams.  If this isn’t the case, beware of extended timelines or even failure to launch projects in some categories as the organization does not have anything to lose by failing to engage and support the initiative since no up-front fees have been paid.
    7. Executive support: Like stakeholder engagement, executive support can also make the difference between a successful gainshare engagement and an unsuccessful one. In addition, executive support can often mitigate risks associated with stakeholder engagement.
    8. Operational budget pressure: In addition to savings targets, many procurement organizations are also under pressure to reduce operational costs related to staff and management.  In those cases, leveraging cost-neutral third-party support can be an effective means to meeting spend management objectives without being capability constraints.

Collaborating with strategic sourcing expertise on a gainshare basis is certainly a viable option for many, even amidst all the change and challenges we continue to face.

In part 2, I’ll provide insights on what to look out for when engaging on a gainshare basis to avoid pitfalls and ensure success.

In the meantime, by evaluating the pros and cons associated with the list above, you may determine a gainshare engagement a great fit for you or you may have questions that you would like to discuss.  Contact us here, or at info@velocityprocurement.com to get in touch and learn more about how you can elevate procurement, realize your annual objectives, and enhance your internal capabilities through collaboration with a leading procurement services provider.