Outcome-Based Sourcing Services
The concept here is often referred to as gain-share or outcome-based or even performance-based. You can take your pick. At the end the day, we are all more-or-less referencing the concept of achieving cost savings via a 3rd party provider at low or zero cost to the organization. Simply put, the provider states that they will save you money by performing sourcing work and they will get paid only on how they perform (aka cost savings achieved).
Gain-share or outcome-based models are by no means new to the sourcing industry. But now, with a greater understanding of these programs and their potential benefits, they have grown again in popularity. We see a resurgence in clients demanding greater innovation and more cost-effective service, particularly in process-driven services such as finance and accounting.
A true outcome-based model requires a considerable amount of strategic planning and collaboration between the client and the services provider.
The are a few critical factors that should be considered if the program is to be a success.
- Perform a detailed spend data and contract analysis
- Develop a mutual definition of cost savings and how it is to be measured
- Consider cultural alignment as it relates to willingness to change (eg. "sacred cows")
- Gain executive buy-on and stakeholder commitment
- Establish client-side independent audit process, preferably through finance
- Establish a mutually aggressive timeline to achieve value as quickly as possible
Benefits of the Outcome-Based Model
LOWER UPFRONT INVESTMENT
SHARED PROGRAM RISK
SPEED TO SAVINGS
With most gain-share or alike concepts, the traditional commercial model emphasizes an approach where the client invests a very low or zero budget at the start of the program. However, these programs tend to be most effective when the client makes a nominal investment.
With the majority of the provider fees being paid based on performance, the provider carries a greater degree of risk when compared to traditional management consulting engagements, thus evening the playing field, resulting in a much higher level of focus and urgency for both parties.
It goes without saying that this model puts significantly more onus on the provider to deliver on the performance targets that are mutually established. This results in the provider deploying a more sophisticated team of proficient experts that are more likely to produce superior results as efficiently as possible.