The case for outsourcing is dated. The debate has shifted to maximizing relationships to gain more value. Customers are increasingly beginning to ask the question: How can we tap the supplier’s knowledge base and gain continuously from the relationship.

But there are no clear-cut answers...only possible strategies. One such strategy is to engage the service provider by giving it a strategic stake in the customer’s business. The provider gets to partake a bigger pie of the benefit that is accrued in the form of gain share, revenue share or joint ventures. For its part, the provider increases its stake in the partnership through financial investments or resources that enable innovation.

Gain sharing has generated the maximum interest compared to revenue sharing or joint ventures, because it is a pure incentivizing tool and exists within the realms of ordinary outsourcing. The others have an element of commercialization.

Gain sharing

In gain sharing (sometimes known as incentive sharing), the customer incentivizes the service provider by promising financial gain, if the predefined metrics and targets are achieved. A well-publicized case of gain sharing is between the City of Chicago and EDS, where EDS re-engineered the city’s method of parking enforcement, by building a system for collecting parking-ticket payments. The city had a backlog of $40 million of uncollected parking tickets, and since the problem tickets were well defined, gain sharing worked successfully.

The imperative for gain sharing is obvious. Experienced customers find that providers become complacent once contracts are well underway. Thirty-one percent of participants of a Deloitte Consulting survey cite complacency as a reason for the failure of outsourcing initiatives.

Despite the benefits being obvious, few companies adopt gain sharing as a model. Of the 500 IT deals that TPI has helped broker, only 15 have an element of gain share, according to Chris Kalnik, Partner, TPI. “There is a lot more talk about gain sharing in IT services than real action on the ground. But it is a healthy discussion, it is on the right track and will result in some positive action,” says Kalnik.

The roadblock to the arrangement is the absence of clear-cut measurables and the customer’s lack of trust in the provider’s ability to deliver services that impact its business.

Lack of measurables. Service providers can hope to have an impact on business processes only when corporations align their outsourcing goals with their strategies and clearly define the measurables. “It is unlikely that contractual metrics that focus a provider on cost minimization will lead to the development of innovative new systems and applications. Implementing new systems demands management mechanisms that encourage and reward the provider for undertaking the risks inherent to innovation,” says a report titled Strategic Intent for Outsourcing by Anthony DiRomualdo, CSC Research Service and Vijay Gurbaxani, Director, Center for Research on IT and Organizations, University of California.

While a lack of measurables is a reason for the slow adoption of this model in IT services, it is precisely the capability to define metrics in the case of CRM outsourcing that has made gain sharing comparatively more successful in BPO.

Lack of trust. Those that practice gain sharing are mature customers with many years of outsourcing experience. A Fortune 500 company that had been outsourcing for over 10 years, adopted the gain-sharing model only five years ago. According to the IT Director of the company, the reason was that the company wanted to understand where the provider’s margins were, to be able to assess the gains.

“Often suppliers are able to streamline processes and park huge margins after initial investments. Besides, there is a diminishing cost of technology, all of which the supplier parks as his margin,” he says.

In the case of this particular customer, the provider did not pass on the benefits of offshoring till they forced a re-negotiation. For the same reason, this IT Director advises customers to make it mandatory for suppliers to take permission before subcontracting work.

Building a rapport is very important because the customer must believe in the supplier’s ability to implement new business processes that will impact the business. Conversely, the provider must also believe that the customer’s management is receptive to new ways of working. Incentives should always come from the customer’s side, believes MindTree Consulting, which has a gain-sharing arrangement with a few customers. “We have several gain-sharing initiatives, and all of them are with old customers — they have been with us and trust us. Usually they are the ones to initiate discussions on gain sharing,” says Joseph King, SVP, Marketing, MindTree Consulting. “And that is the way it should be. Unless customers trust you completely and think that you can deliver, gain sharing will not work.” King emphasizes the significance of the senior management’s involvement from the customer’s side in gain sharing. “The push for gain sharing should come from the top,” he says.

On the part of the customer, the trick to succeed is to leave enough margin on the table for the provider to have a healthy business.

PARTNERING FOR MUTUAL GAIN