news | October 5, 2011

Gain Share Model – New Pricing Model

As IT outsourcing is getting increasingly popular, customers are interested in new cooperation and pricing models, one of which is that based on gain sharing (Also called Benefit-Based). When it comes to the definition, according to Gartner, it “Describes a contract that defines the vendor’s contribution to the customer in terms of specific benefits to the customer’s business. Such a contract also defines the payment the customer will make according to the vendor’s performance in delivering those business benefits” 

Service provider role in models based on gain sharing

Models based on gain sharing work when a “partnership” approach is needed to achieve a mutually-beneficial result, such as reducing purchasing spend. Gain-sharing inspires both the service provider and the client to work together creatively and gives the service provider flexibility in their delivery. However, this type of arrangement very clear baselines and target-setting, can be difficult to manage and may lead to debates about the level of contributions provided.

The fundamental premise of the model is the existence of a parameters materialized (and can be elaborated for different volume levels) in the flexible budgets and standards of each cost center. The model is comprised of four steps.

  1. Elaboration of the original budgets — taking into account the amounts and the values of the resources forecast for each volume level and for each cost center (considering its particular work units).
  2. Revision of the original budgets (or elaboration of the revised budgets) — consisting of a revision of the quantities and values of the resources previously planned for each volume level and for each cost center (considering its particular work units). The revised budgets constitute the base for comparison of expenses incurred and, therefore, the measurement of gain-sharing;
  3. Counting of the expenses incurred — based on the same concepts and criteria adopted in the previous phases.
  4. Comparison of the expenses incurred with the constants in the revised budgets — allowing a measurement of gain-sharing and an evaluation of the contribution of the cost centers (and the diverse elements that make up their costs). The comparison between actual costs and estimated costs allows the measurement of cost savings to be obtained.

Gain sharing and cost savings

As previously noted, the amount of fixed cost stays constant within a determined interval of activity. The measuring of the savings of fixed costs is through a comparison of the forecast total value of expenses (for a given level of activity) with the actual total value of the expenses incurred.

Read also: Build-Operate-Transfer model

Gain share pricing model – summary

In summary, gain sharing model best suits the more complex deal types and most likely a situation where a new (but perhaps more risky) business opportunity exists and where both parties have access to a real upside if they work together to leverage their respective core skills (e.g. the customers brand or product design, and the outsourcing service providers execution/processing capabilities).