An increasing number of outsourcing contracts in 2009 are incorporating incentive schemes. Prospective sourcing buyers want continued process improvements, real business impact, and innovation tied to their outsourced functions. Driven by their perceptions of what constitutes effective pricing and/or by consultants guiding them in negotiations, they are demanding that pricing be tied to performance for specific functions or in defined project situations.

Performance-based systems, like gain sharing and outcome-based pricing, can drive common behavior between the customer and service provider. They also encourage ongoing cost reduction through process improvement. Incentive approaches work best in partnership-oriented engagements rather than those based mostly on cost savings motivations alone.

The Use of Gain Sharing
Gain sharing has become an important element of sourcing contracting. Most outsourcing contracts focus on the basic minimum requirements as to what can be committed. The negotiated increase in committed productivity is always minimal. There typically is little focus on finding end-to-end improvement, which will have much larger benefit potential. Gain sharing goes beyond cost arbitrage resulting in value addition to the customer.

Gain-sharing mechanisms provide ongoing incentives for outsourcing customers and service providers to identify and invest in continuous improvement opportunities. The notion of financially sharing added value is envisioned as a long term plan, not an esoteric “quick fix.” The goal with gain sharing is to drive the innovation and financial transformation that prospective customers need.

There is a clear distinction between rewarding for efficiency and “gain sharing.” Gain sharing provides an ongoing incentive for both the customer and service provider organizations to identify and invest in continuous improvement opportunities. Gain sharing, or incentive schemes, is a critical consideration of many outsourcing engagements today, to drive improvements beyond pure cost-cutting measures.