Risk and Reward

Risk and reward, or gainsharing, is a strategy used to motivate providers to deliver superior performance by creating a bonus dependent upon achieving performance standards and a downside risk in the event performance does not meet the required standard. For example, supposing procurement consultants are engaged to make savings in a category, and their usual fee is $3000 per day. They could be engaged on a unit rate contract for 20 man-days at a cost of $60,000. A risk and reward contract might suggest that if they achieve savings less than $300,000 on the category, then their fee rate would be 20 x $2500 per day = $50,000. But if their performance realised savings of more than $300,000, then their daily rate would be $3500 per day, i.e. $70,000. As with all performance-based contracts there are three challenges. First, what is the ‘normal’ level of performance that might be expected? And is the threshold of $300,000 too low or too high? Second, is the upside ‘bonus’ sufficiently attractive to cause the consultants to perform better? Third, are the behaviours being incentivised aligned to the business need, or will the consultants make short-term decisions that benefit them but cause longer-term problems for the buyer? See also Contract, Performance Based and Incentives.

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Discover the world’s largest Glossary of Procurement terms

With over 800 Procurement specific terms (and growing) you will find everything you need to know or thought you knew about the Procurement function. Our aim is to provide you with a comprehensive list collated from the Comprara Groups hub of training and consulting source materials.The Procurement Glossary has been compiled by industry expert Paul Rogers.