Why Gainshare Procurement
Models Fail — And What to
Use Instead

Total at-risk commercial models, commonly called “gainshare” arrangements in indirect procurement, are fundamentally flawed. The core issue is that gainshare deals are tied to identified savings, meaning you’re paying before any initiative or new pricing is implemented. When strategies shift, volumes, decrease, or tariff impacts drive unexpected cost changes, you’re still locked into the gainshare fee – even if the savings never materialize.

These models incentivize parties to focus exclusively on savings, often at the expense of quality, service, relationships, and compliance. The result is commercial and operational misalignment compared to the goals of business stakeholders. The goals of your procurement and business teams are no longer aligned. One is focused on maximizing savings for the gainshare payout. The other wants the best overall solution — which might include enhanced service or quality that doesn’t yield maximum value. Many times, stakeholders begin avoiding procurement altogether to sidestep gainshare fees, creating strained relationships across the organization.

Also, too often, these savings never hit the P&L. For example: your partner negotiates a better snow removal rate and calculates savings based on last year’s volume. What happens if it doesn’t snow this year? You’ve paid for savings on spending that never happened. This flawed execution leads to endless debates over baselines and credit for ideas, creating friction where there should be collaboration.

Despite persistent dialogue highlighting industry-wide financial distress, there is hope for healthcare organizations seeking to alleviate the cost burden. Many health systems have successfully resolved serious financial strain through non-clinical spending management. Although the path may seem overwhelming, there are many opportunities for executives to examine non-clinical spending strategies and get back on track.

Where Gainshare Models Break Down

The Numbers Don’t Add Up

Gainshare relies on projected savings, not performance. You’re paying based on estimated value before the implementation period even begins. When volumes drop or strategies pivot, those projections vanish, but the payment doesn’t.

Worse, internal teams and gainshare partners spend more time debating baselines and attribution than driving outcomes. Meanwhile, cost avoidance and capital expenditures are completely ignored, even though they often matter more than price cuts amid inflation and tariff uncertainty.

Narrow Focus Destroys Value

These models create tunnel vision. Everything is measured in unit price, while broader value levers like demand management, specification optimization, and utilization improvement are pushed aside. Organizations that do it right and invest in strategic category management, report 10%-15% cost reduction through smarter supplier consolidation and more informed sourcing decisions – all strategies that are not thought after in a gainshare model.

There’s no incentive to prioritize innovation, service-level improvements, or procurement best practices. There’s no incentive to focus on procurement best practices or improved SLAs if they don’t directly contribute to the gainshare calculation.

The Hidden Costs to Your Business

Gainshare also creates hidden operational costs that quietly eat into long-term value. Here’s how they show up across the business:

 
Procurement Becomes Reactive

• •
  Incentives drive the wrong behaviors: With gainshare, procurement becomes a blunt tool focused purely on price cuts. While in certain instances cost avoidance could be more valuable than hard savings, it is not considered because gainshare doesn’t reward it.
• •
  Stakeholders bypass procurement: To avoid triggering gainshare fees, business units source independently, leading to fragmented spend and missed best practices.
• •
  No capability is built: Your third-party partner isn’t accountable for supplier qualification, onboarding, or long-term enablement. They get paid for identifying savings and move on.
• •
  Geographic sourcing is overlooked: A gainshare model only rewards cheaper line items and does not account for total cost of ownership, logistics risk, and proximity advantages.

Supply Chain Suffers

• •
  Lack of real expertise: The only firms that accept gainshare terms are generalist consultants, not procurement specialists with category depth and supplier leverage.
• •
  No accountability for results: When savings fall short, the third party deflects blame onto internal teams. They don’t own delivery or outcomes.
• •
  Supplier strategy is ignored: Capabilities, capacity, and geography are overlooked in favor of squeezing rates, often at the expense of performance and innovation.
• •
  Value engineering is lost: Supplier-driven improvements like process optimization or spec changes get skipped if they don’t contribute to the gainshare calculation.
• •
  No supply chain risk mitigation: Disruption management, supplier resilience, and continuity planning are deprioritized.

A Smarter Alternative: The Fee-for-Service Model

Instead of paying based on projected savings, you pay for actual results — realized savings that show up on the P&L when purchases are made. This structure builds true accountability and aligns procurement partners with your long-term goals — not just short-term wins.

With incentives tied to performance, the focus shifts to the full procurement lifecycle: sourcing, supplier onboarding, contract implementation, service level management, and continuous improvement. When business conditions shift, savings are recalibrated based on actual realized results, not on assumptions made months in advance.

Unlike gainshare, fee-for-service models do not ignore cost avoidance, capital expenditures, or innovation. They encourage investment in strategic supplier management, process optimization, and value engineering. These are the levers that improve business performance and protect margins during volatile market conditions.

Most importantly, this model supports capability building. Your organization strengthens internal expertise, improves supplier relationships, and matures its spend management function. When inflation, tariffs, and supply chain disruption are the norm, having a resilient procurement strategy becomes a key advantage for any business.

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