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Benefit-Based or Gain-Sharing

These models work when a "partnership" approach is needed to achieve a mutually-beneficial result, such as reducing purchasing spend. Gain-sharing inspires both parties to work together creatively and gives the provider flexibility in their delivery. However, this type of arrangement of very clear baselines and target-setting, can be difficult to manage and may lead to debate about the level of contributions provided. The fundamental premise of the gain-sharing model is the existence of 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:

  • 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).
  • 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;
  • Counting of the expenses incurred—based on the same concepts and criteria adopted in the previous phases.
  • 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.

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. In summary this 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 suppliers execution / processing capabilities).

 

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