How to negotiate a gain sharing agreement with a fee for a service model
Gain-sharing agreements are contractual relationships between a business and provider that reward innovation, productivity and profitability outside the terms of a master agreement, or as an addendum to it. They are difficult agreements to craft, monitor and implement efficiently under traditional supplier models.
It's even more difficult under fee-for-service models because the fee for service can often act as a disincentive due to risk-sharing implicit in gain-sharing. Fee-for-service models have been used most extensively in the health care industry, with mixed results. In order to successfully craft a fee-for-service model agreement, the keys lie in specificity of the contract detailing governance and oversight, responsibilities for equitable risk and investment, and how ultimate authority will be managed.
Establish service oversight, direction and governance of the client as the baseline of the contract. The provider organisation must have personnel or a department dedicated to management, accountability, service quality, and encourage innovation for both parties to benefit from gain-sharing.
Codify step 1 in writing in great detail, particularly establishing the fee model as a floor to the agreement and not a ceiling, in order to encourage substantial innovation and cost savings that will be shared equitably between both parties. Fairness is the key for both sides. The provider organisation and service provider must strike an equitable balance between investment (risk) and benefits of savings. In other words, one side can't unilaterally assume all the investment risk without reaping a disproportionate share of the benefits. Likewise, if the investment risk is equitably shared, so too should the rewards. Often overlooked is who holds ultimate approval or disapproval authority on both sides. Specificity and detail of the contract cannot be overemphasised on who holds that authority.
Detail the possible directions of innovation, specific steps to achieve innovations, and potential cost savings if possible. Do your homework and come to the negotiating table with specific recommendations and a timetable in which they should be implemented. Be reasonable in your expectations since both the recommendations and timetables may be challenging to the service provider. However, both sides should be clear on the fee arrangement that serves as the carrot, to encourage satisfactory completion of the goals. Put it all in writing.
Specify the period in which the gain share is applicable. If the gain share is to be renewed after that period, it must be established before the agreement is finalised. Include the method of reimbursement and at what specific period of time partial and full gain share entitlements will be paid.
Establish a mechanism through which progress reports and information-sharing sessions will be scheduled regularly. Since the concept of sharing risks and benefits lies at the root of establishing a gain-sharing agreement, it is in the best interest of both parties to participate in the innovation and implementation, as well. Make certain, again, that all details of the agreement are in writing and signed by both parties for the agreement to take effect.
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- Gain Share agreements have been used extensively in the health care industry with, at best, mixed results. Analysis has shown where success has been achieved at cost containment; it is often traceable back to the effectiveness of the agreement and cooperation between parties.