Gainsharing and outsourcing

Should you or shouldn't you--the topic of gainsharing in an outsourcing context can bring out heated emotions in people, often for very unnecessary reasons. While it's beyond the scope of this blog to cover all the issues related to gainsharing, perhaps we can focus on a few key points to stir up some thinking.

Firstly, why do people consider including gainsharing in their outsourcing arrangements? As a general guide, clients have not been fully satisfied with the level of innovation delivered through their outsourced relationships, and they wonder whether gainsharing is necessary to achieve the levels of innovation and transformation that they are seeking.

In that context, what is gainsharing about? A key relevant principle in outsourcing is that one receives that for which one pays. The corollary to that is that the client pays for everything but works to ensure that they pay only once. With gainsharing, the client is prepared to pay more if it receives more value than that for which it has paid. Of course, to determine whether one should pay more, one must have clarity regarding what has been contracted (services, service levels and price).

That takes us to some of the more challenging questions for clients considering gainsharing. These include:

• What is "innovation" and how will we value its contribution?
• How will we determine the supplier's contribution to that innovation?
• How much are we willing to pay for over-achievement (and is that likely sufficient to generate the behaviours that we are looking for)?
• For how long are we willing to pay for over-achievement?

The answers to these questions require careful thought and negotiations related to gainsharing should not be entered into lightly nor without a strong degree of discussion among client leadership.

Assuming the answers lead to a desire to include gainsharing, guiding principles for constructing a gainsharing methodology include:

• Must provide incentive for long-term mutual benefit rather than "quick wins".
• Must use measurable and verifiable metrics that bring business value to the client.
• Must use objective measures, not subject to manipulation by either party.
• Need to acknowledge that if win/win is possible, so is lose/lose.

So, if you've used gainsharing, how have your experiences correlated with the above points?