What is the “gain share model”?
In the typical gain share model, a broker or 3PL works with a shipper to discover potential savings in return for a flat fee or percentage of the savings they are said to have obtained.
This brokerage model has received a variety of differing sentiments from the supply chain industry. Some shippers are comfortable with a gain share relationship. Others feel the model lacks credibility and should be avoided for the following reasons:
- Reward goes to the third party. Gain share brokers want to find savings for you in return for a percentage. This means they are incentivized to find errors. However, the downside is that they are most profitable when they discover simple, quick-fix errors, and less incentivized to find the larger, more complex areas of loss. At Trans International, we have seen an invoice where a carrier billed one million dollars for a 500-pound shipment – a simple decimal place error. When operating with a broker under a gain share model, the shipper would have to pay the third party five, ten, or even twenty percent of that million-dollar error. However, any accounts payable department could have caught an error of this size – without requiring a percentage share.
- No incentive to fix errors. If the third party is going to keep making money by catching the error, there is no reason for them to notify you or the carrier to fix the error. If they do, their revenue will go down and you will no longer be a profitable client. This means the third party may allow errors in billing to continue so that they can keep profiting from them.
- Unsustainable business model. Gain share is thought of as an easy-start engagement, as there is virtually no initial cost to the client. However, at some point, the third party will have found all of the errors and the customer will have worked to resolve them, resulting in future invoices being billed correctly. When this happens, the third party’s gain share model is no longer a sustainable source of revenue, so they will look to convert customers to a different payment process with the hope that the customer will remain loyal, regardless of the new cost.
- Skewed data tracking. Everyone reports data differently, and when a broker profits from errors found, they may be tempted to track client savings inconsistently. It’s important to ask a few questions: Does the broker track what you would have spent and earn a percentage from that? Do they track what they found in errors? What about refunds and rejected errors? Data can easily be skewed to increase revenue on a gain share model.
- Lack of attention to service. Are gain share brokers looking out for the long-term interests of the client or the short-term gains? Third parties don’t always look deeply into the reasons clients have chosen their carrier partners. But this partnership is important. Ideally, the broker should investigate whether the client’s carrier provides quality service and meets customer expectations for delivery. However, gain share brokers may steer their clients to use a preferred partner to create deeper discounts across the board, without thoroughly considering the individual needs of the client and the potential long-term benefits of using a slightly more expensive, better-qualified carrier.
Why is the Trans International approach different?
Our model is based on a transaction fee for each shipment, which allows us to provide our clients more in savings each year than the typical gain share model. We also ensure that clients have visibility to their savings through automated reporting, delivered right to their inbox. We focus on providing quality service and correcting issues with freight carriers, rather than promoting the recurrence of issues. What’s more, we realize that carriers are partners to our clients and that they provide a very important service, so we thoroughly investigate and outline long-term implications when suggesting any changes to the relationship. Last year, the savings we found for clients in correcting carrier billing issues, rejecting duplicate invoices, and providing guidance on best shipping practice more than paid for our services.
Interested in learning what savings we can find for your business? Just reach out.