A gainshare strategic sourcing program can be the key to enhancing your internal team unlocking more savings, faster. There are a number of pitfalls and challenges to proactively manage when engaging a consultant on a gainshare basis, including:
- Only pay fees for hard-dollar savings
- The consultant implements savings
- The consultant has demonstrated success within the categories assigned
- The consultant respects and nurtures supplier relationships
- An objective measure of savings is defined at the outset of each project
- The consultant is culturally and strategically aligned
- The fee structure, its variables and mechanics, are clear to you
7 Pitfalls in Utilizing a Gainshare Strategic Sourcing Program, and How to Avoid Them
To ensure success on a gainshare strategic sourcing program, it is important to be aware of the pitfalls that can occur during the engagement. By avoiding these pitfalls, you can ensure that you are getting the most out of the program and avoid the risks and challenges that can arise. Savvy procurement leaders always seek new and innovative ways to reduce cost and increase savings.
However, they are often constrained by the limitations of their own team, data, and market insights. One of the most popular ways to enhance internal capabilities is by partnering with a strategic sourcing consultant on a gainshare program. Many companies prefer this engagement structure as the consulting fees are paid based upon savings delivered, so no budget is required to bring the firm onboard. Yet, it’s important to be aware of best practices to managing such a program.
Hard-dollar Savings
Make sure that the fees you pay are only based upon real, demonstrable, hard-dollar savings. The consultant should track and provide savings reporting monthly and work with suppliers to resolve billing issues and stakeholders to drive compliance so the savings you’re paying for are actually hitting your bottom line.
This means working with suppliers to make sure billing reflects what was negotiated in your contract and working with stakeholders to ensure purchases are being made from the right suppliers under the right contracts. Soft savings should not be included in a gainshare calculation, as it’s difficult or impossible to objectively quantify them and they are not always realized.
Implementation of your gainshare Strategic Sourcing program
This ties closely to hard-dollar savings. It means that the firm will execute on agreed to strategies and follow them through until you start seeing the savings outcome in real dollars coming off your invoices from your suppliers. With implementation included, you are not paying for forecast savings or savings that may be unrealistic or unattainable.
Instead, your fees will be based on the strategy that you decide and the outcomes the consultant drives.
Category Risk
It is important to be selective when choosing a consultant. Unfortunately, not all consultants are reputable or experienced in implementing significant savings. They may not be familiar with the optimal strategies and best practices in your industry or within the categories they’re supporting.
These gaps can lead to them causing more harm than good from a process perspective, potentially squeezing suppliers too tightly and/or compromising quality and service requirements to get to the savings results required for them to ensure profitability. Quality consultants will have demonstrated success in the categories that you’re sourcing, strong implementation discipline, and market intelligence and benchmark data to drive savings, no matter the strategy you decide.
Cultivation of Supplier Relationships
A best-fit consultant will have the experience and data to navigate categories swiftly and efficiently. This includes bringing information to the negotiating table that’s fact-based. The ability to do so will allow the consultant to engage and motivate suppliers, navigate and manage the existing relationship, and negotiate through less iterations over a shorter period of time without beating them up towards unachievable pricing, terms and conditions, and service levels.
Objective Baseline
Establishing an objective baseline and savings calculation methodology is key to a successful gainshare strategic sourcing program. If you fail to do this, you risk paying fees for forecast savings, soft savings, or artificially inflated savings. An objective baseline is a defined starting point against which future savings are measured.
This helps to ensure that savings achieved are real and not due to market fluctuations or other outside factors. It’s also important to have a clear savings calculation method in place. This will help to ensure that all parties involved – including the consultant – understand how the savings are being calculated and can verify that they are accurate.
Long-term View
A consultant should operate with long-term view of the relationship including strategic and cultural alignment. This will help them to achieve short-term wins while setting the stage for long-term results. Additionally, it will prevent them from making decisions that may be acceptable in the short-term, but hinder progress or create challenges in the future. This does not mean that you should forego quick wins, which are a critical success factor in any savings program.
Instead, it means ensuring that the analysis and decision making throughout the process needs to account for tomorrow and a long-term time horizon that makes sense for a given category, typically 5+ years. Do not allow yourself to be blinded by short-term results, only to have to face unnecessary impediments in the future, when the consultant may be long gone.
Fee Structure for your gainshare Strategic Sourcing program
If you are looking for pure gainshare, then make sure it is. This means that there are no base fees, minimum fees, or any other charges that are tacked on to the gainshare amounts. Gainshare models can vary significantly, so if you are going to agree to a hybrid structure, make sure that the basis for the non-gainshare fees is sound. Typically, this includes a clear opportunity assessment and roadmap with a savings forecast for each category (if not all of the constituent projects within that category). Without this clarity, you risk overpaying and/or not getting the return on investment you were expecting.
Conclusion
Gainshare sourcing is as popular as ever. Despite this, many have never worked with a consultant under such an arrangement, or make the mistake of assuming all consultants and their commercial models are the same. Being aware of the differences and how to navigate and manage them is vital to a successful program and realization of your savings and spend management objectives.
Are you interested in learning more about how a gainshare Strategic Sourcing program can help you achieve your goals? Feel free to contact us here, or at info@velocityprocurement.com.
