The Gain Share Challenge
The Profitability of a contract is the main focus for commercial organisations, the price agreed during pre-contract negotiations enables the supplier to identify the expected level of profits the contract can achieve. For many suppliers this is where the opportunity to generate profits cease, leaving potential profits on the table.
“What if the supplier had the opportunity to increase their post-contract award profits further with the customers’ full support?”
Accessing additional post-contract profits is traditionally achieved through the use of a Gain share. Gain shares take many forms but typically outline a business objective the customer would like achieved, in return for additional payment to the supplier.
There are a number of challenges associated with gain shares which include:
- The business objective must be clearly defined, achieving the outcome should be objective not subjective with clear models for accurate measurement
- Gain shares are time consuming to negotiate
- If the supplier payments increase significantly due to (over) achieving the objective, it can cause the buyer to question the integrity of the supplier and damage relationships
- Gain shares are a risk/reward model for the supplier, any form of supplier risk is usually offset with high costs for the buyer
- Gain shares are offered at the discretion of the customer as it involves paying the supplier more than the contract value
- Gain shares are negotiated pre-contract award, the buyer must predict requiring one
- They are contract specific and due to the costs involved to negotiate, are used selectively
- The integrity of gain shares are often questioned, “Why is the supplier having to be paid extra before they assist their customer to save money?”
- Gain shares are less “post-contract innovation” and more “pre-determined outcome”
Encouraging Supplier Innovation:
Using The POD Model we can create an alternative approach to gain shares that involves creating a commercial model that encourages and rewards suppliers for Innovation post-contract. When Supplier Innovation is achieved it delivers increased savings for the buyer and increased profits for the supplier and offers significant benefits to both parties:
- No additional pre-contract negotiation required, the capability is built into the contract as standard
- The supplier is under no obligation to innovate, mitigating supplier risk and exposure
- If the supplier is able to innovate and deliver the contract for less than the contracted value, the supplier achieves higher profits and the buyer’s savings increase
- Supplier Innovation can then be used as a sales USP against competitors
- Achievement of savings from innovation is objective not subjective, payments models are clear and pre-defined
Supplier Innovation is not designed to replace Gain Shares but provide an alternative and scalable model for suppliers to differentiate their value proposition throughout every contract.
Taking the initiative to increase customers’ savings, increases customer satisfaction and the probability of repeat business whilst increasing profits, without increased risk or costs to either party.
Through the use of The POD Model suppliers are able to create a commercial model that benefits both buyer and supplier when post-contract innovation occurs providing a workable alternative to cumbersome Gain Shares.
Go to the POD Procurement Web-site: