Gainsharing has been a topic of both criticism and acclaim throughout the business world, and the same is true for gainsharing in logistics. Initially, gainsharing seems like an amazing means of growing your business, but it can prove to be exceedingly difficult to manage and even more difficult to profit from.
Gainsharing comes with its share of benefits too, and more logistics services providers are starting to use a newer pricing model, Vested Outsourcing, in place of rigid gainsharing models. Yet, the fundamental ideas remain similar and different concurrently, and as a shipper, you need to understand what gainsharing is and is not, how it can impact your business and what it means for the industry.
What Is Gainsharing in Logistics?
Gainsharing has been around in some form for ages. Basically, one person or organization agrees to split the profits of joint enterprises when a second partner does something to help the first.
Gainsharing in logistics is often used by third-party logistics providers (3PLs) as a pricing model. The initial investment is low as shippers do not have to pay significantly to start taking advantage of the 3PL’s services. However, gainsharing’s basic principle of “splitting the profits,” as explained by Art van Bodegraven and Kenneth B. Ackerman, may make some shippers hate their pricing models when it is time to do the splitting.
Many shippers turn to gainsharing pricing models because they require little initial investment, but the overall cost of a 3PL’s service through gainsharing could easily exceed the reasonable expectations of the shipper. For example, implementing process changes to save 30 percent would mean that the overall cost of the 3PL’s services would be an ongoing 15 percent of future sales. However, this additional growth could be gained from other sources, which is why some are turning to Vested Outsourcing.
Vested Outsourcing transforms gainsharing by making the process more visible and holding both parties accountable. Unlike gainsharing, the level of trust is defined by a continuing focus on improving all profits for the shipper using the services. This may include increasing technology, reducing the time required to complete workflows and managing shipments.
While these pricing models appear similar, they are not the same. In other words, the degree of work completed by the Vested Outsourcing partner is not as minimal as would have been normally seen in gainsharing. Furthermore, Vested Outsourcing uses real-time data to keep performance records and improvements on track and accessible. As a result, the shipper can more accurately determine the overall cost of using Vested Outsourcing services in both short- and long-term scenarios. In gainsharing, the costs are almost always focused on immediate costs and profits, but Vested Outsourcing goes a step further by keeping the partnership together even when the initial profits have been divided.
The Benefits of Gainsharing.
The primary benefits of gainsharing are simple to understand. A gainsharing partner provides a service, technology or methodology for a shipper to use. In some cases, the service provider may help deploy these services, and a quick return on investment is achieved once savings are realized. The provider receives a share of the shipper’s profits, and the growth of both entities increases.
Another benefit of gainsharing is that it would seem to improve accountability. Having two organizations mind data and information would naturally lead to more check points and opportunities to uncover ways to save money for an organization. However, the tendency to “cut and run” with a shipper’s profits make this benefit difficult to achieve. Once the provider has received payment, it is the opportune time to leave the shipper to fend for himself. Unfortunately, these systems and processes are left unattended and unevolved, making the shipper vulnerable to future problems, in this pricing model.
The Drawbacks of Gainsharing.
Gainsharing in logistics is fundamentally an incentive-based pricing model. Yet, incentive-based pricing models have been under scrutiny for being ineffective, explains Supply Chain Digest. For example, an employee may not have incentive to work better and use newer processes if a few other employees simply do not take interest, asserts Joseph O-Reilly of Inbound Logistics. Essentially, all the work falls to those who are most productive, and while an incentive may be achieved, some workers may feel that others can make up for their inept work ethic.
That example just seems wrong, but it is the exact reason that gainsharing has drawbacks. Traditional gainsharing pricing models are not usually capable of monitoring individualized results and providing incentives in a time that makes changes in processes worthwhile. Moreover, gainsharing in logistics has cost and visibility drawbacks. A shipper may spend more on gaining limited benefits from a minor gainsharing approach, and the cost is not easily determined since it relies on final measures of improvement over large time periods.
The only way to guarantee the future of a successful business partnership through gainsharing is by abandoning the primary principles of this pricing model in favor of a mutually beneficial, detailed and written agreement. Additionally, ongoing re-evaluation and a focus on individual incentives are necessary to ensure both parties increase their focus on improving the needs of the shipper. In other words, the gainsharing pricing model loses it characteristic traits and becomes a new, visible and trusted pricing model.
The Big Picture.
Gainsharing in logistics can be both positive and negative for the logistics industry. However, increased demands from customers and stakeholders are transforming how, when and why some shippers may turn to gainsharing pricing models. In addition, the decreased visibility of gainsharing pricing makes them unattractive to many shippers, and if you were to blindly enter a gainsharing agreement, you could end up losing more money than you would if you looked for ways to increase efficiency internally.
Fortunately, you can make sure you do not give up more control if you know how to structure a gainsharing pricing model in a way that transforms it into a lucrative and mutually beneficial scenario. As a shipper, you need to know what the pricing model is, what it’s expected cost will be and how it will continue to benefit your organization in the long term. Ultimately, gainsharing is bad for most businesses, but if you can make sure your investment makes both parties vested in long-term success of your enterprise, you can transform the process into something beyond the limitations of gainsharing, a trusting, mutually beneficial and ongoing partnership for success.