BY ART VAN BODEGRAVEN AND
KENNETH B. ACKERMAN
basictraining
Gain sharing, pain sharing,
and the games people play
WHAT? GAIN SHARING IS STILL ALIVE?
Um, yes it is—at least in the logistics outsourcing world. There
are still companies out there that share the savings from productivity improvements with their service providers, although interest
in the concept has waxed and waned over the years. Our working
thesis is that this happens with almost any concept that turns out
to: 1) require hard work, and 2) not be a “magic bullet” solution.
Such is our need for instant gratification, as amplified by the
demands and expectations of both management and the investment community.
But metaphoric old girlfriends have a way of
showing up in new dresses in our business—
once-attractive ideas parading among us,
rebranded and repackaged. The latest incarnation of gain sharing is “vested outsourcing,” a
concept with roots in the military.
Our friend Kate Vitasek has done compelling
and masterful work in organizing, extending,
and communicating the power and potential of
vested outsourcing. The basic premise is this:
Instead of paying your service provider to perform specific tasks, you pay it to achieve specific outcomes or results—and then provide generous incentives for exceeding those goals.
Realistically, the concept requires truly committed partners in
genuine business relationships, with a lot at stake. It’s not a casual
drive-by process for picking off easy targets.
Other arrangements include more elaborate
incentive plans, with scaled rewards for various levels of, say, under-budget performance
or performance that exceeds KPI (key performance indicator) targets. Then there’s the
“Olympic medal” model, which allows the
provider to earn additional profit by surpassing KPI objectives, with silver-level performance earning a percentage premium over the
base monthly charge, and gold earning an
even greater premium.
Bronze is a break-even,
with no premium.
A ROSE BY ANY OTHER NAME
Gain sharing has also been known as pay-for-performance, among
other things, and we are confident that the future will bring additional variants. To confuse matters, what’s called gain sharing or
pay-for-performance takes on different shapes in different environments. One size doesn’t remotely come close to fitting all.
At its core, though, the idea is that, as a service provider makes
improvements in cost and/or productivity, some of the gain is
retained by the provider and some is returned to the buyer of the
services.
These agreements can be structured in any number of ways. In
the simplest deals, the two parties just split the cost savings.
AND PAIN SHARING?
In the real world, there’s
got to be another side of
the coin. Gain-sharing programs are no exception. To
put it bluntly, a program
that rewards for success
and fails to penalize for
failure is destined for a
short, unhappy life.
The Olympic medalists who fall short of the
“bronze” pay a penalty to the customer. In
some cases of budget-based rewards, a shortfall results in the provider’s paying the customer the same percentage it would have
gained if the target had been exceeded. This
latter example can get to be excruciating for
the provider, with an ugly divorce to follow
shortly.
WHAT GOES WRONG?
It all sounds so simple and logical (at least on
the surface). Why do these efforts fail, or fall
out of favor? There are several reasons.
As mentioned, the one-sided arrangements
have built-in time bombs, whether it’s the
