Tough economic times often present a conundrum: supply chain and logistics executives may be called on to reduce costs, but many cost reduction projects will require investments, while capital is scarce.

In addition, while in good times, company execs may be more trusting in terms of expected ROI from a new project or initiative, in tough times, they are always far more skeptical as to projected savings estimates.

“Prove it,” becomes the order of the day.

One approach to this dilemma is to consider gainsharing, in which the consultant or technology vendor gets paid depending on the savings that are actually achieved.

It’s hard to do – actually defining the basis for the gainsharing is very difficult, and calculating actual results can be even harder, and subject to disputes. In many cases, however, it may be the only way to move things forward in the next few months.

One of the chief reasons gainsharing is hard is because things change.

Let’s say, for example, you contract with a Lean manufacturing consultant to do a Lean project on a gainshare basis, with the consultant to be paid at least, in part, based on the actual savings that are achieved.

What if after the project starts, a major customer is lost? That loss changes the volume of work in the plant, and also a variety of cost measures, such as burden rates, standard cost, etc.

Yes, we could probably decide a fair way to treat this scenario, but even in this fairly simple example, issues with the gainsharing can occur, especially if the approach to changes from the baseline scenario are not well defined in the original contract. Other external changes can be more complex or subtle, with less clear answers as to how to factor them out of the gainshare basis.

Nonetheless, I talked this week to a consultant friend of mine who said he was reluctantly doing a project on a gainsharing basis right now. I suppose he said “reluctantly” mostly because it is more work up front and sometimes subject to these disputes. Also, of course, you get paid later – and take on some risk if the results aren’t achieved.

But, he said in this case, it was gainshare or nothing. The company wasn’t willing to spend the money just hoping for a return.

Gainsharing’s popularity tends to run in cycles, and right now it may be a good alternative to get things moving. Give it a look.

If you have an interesting gainsharing story you can share, I would love to hear it.