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:
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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