Despite its potential to drive efficiency and productivity improvements, gain sharing — the model of on-going incentives for providers as well as customers to identify and invest in continuous improvements — is not being largely implemented in Finance and Accounting Outsourcing (FAO) contracts. 

 

There are many factors that actually skew up the implementation of gain sharing in FAO contracts. The common reasons being: Lack of trust in providers’ abilities; mismatched expectations; and the lack of measure for expectations.

 

“Most of the industry today operates on Full-time Equivalent (FTE) pricing. We have implemented FTE pricing model in contracts with gain sharing. And, we have found it actually difficult to measure the gain sharing,” says Amitabh Chaudhary, CEO, Infosys BPO, which has gain sharing arrangements with many of its customers. “Issues such as volume creep, lack of time and motion studies, lack of benchmarks and lack of well-defined productivity measures make the entire calculation of gain sharing difficult,” he explains.  

 

In the cases of scope and volume creep, it becomes extremely difficult to measure the performance. “When the volume goes up or process goes up, how can you calculate the gain sharing? Because there is no measure to calculate what is right and what is wrong, it ends up going to the customer for free. And customers also act very smart,” adds Infosys BPO’s Chaudhary.

 

The traditional challenge of defining the actual gain is still associated with gain sharing. “Customers have started viewing outsourcing relationship as a strategic relationship. But the actual performance measurement still needs to be defined,” says Pawan Sharma, President, KPIT Cummins Global Business Solutions.

 

Though providers and customers believe in the gain sharing model, the advisors’ community has its doubts. “They feel that regardless of how the concept is worded, the constructs are set up for failure,” according to a recently published report, The Definitive Study of FAO Contract Pricing — Best Practices, Lessons and Challenges for 2008 conducted by FAO Research.

 

“There is no supplier, advisor or buyer that has unlocked the code as to how FAO contracts can benefit across the board via gain sharing,” according to the report.

Despite this concern, the study says that this model can prove to be effective in partnership deals wherein services, prices, governance, etc. do not stress the relationship. “Gain sharing should be included in FAO contracts because it goes beyond cost arbitrage,” according to the study. “Gain sharing not only helps the customer to get a better price due to supplier upside, it also encourages on-going cost reduction through process improvement,” adds the research.    

How to Make Gain Sharing Work for You?

Best Practices to Follow Define performance and innovation Measuring the impact of that innovation Determining the actual financial rewards Both parties must agree upon the process of measuring the affects of gain sharing Implement gain sharing on a project basis If you are a matured player in this field, then you can go beyond a project base and tie improvement metrics to actual transformation There must be an effective system in place to support communication Building trust.