The Gain Share Model 3PL: Friend or Foe?
There are differing opinions and reports from professionals in the supply chain industry about the use of the gain share model by brokers or 3PL’s. Some shippers are happy with the model and some aren't. There’s no denying that it works in some instances, but many logistics experts are reporting that there is a lack of visibility and control associated with it. The model is similar to a consultant finding a client ways to save money on their business processes. The consultant may ask for a percentage or fee of the achieved savings since it took their expertise to find the cost reduction. This sounds good in theory and usually works well in a consultant type situation, but in the freight world this may not be a true representation of what's happening.
With the gain sharing model a shipper agrees to pay a percentage or flat rate fee of the savings a broker has said to have obtained for them. For instance, if a gain share 3PL proposes that they can save a shipper $10,000 off their current freight spend they may require that the shipper split the $10,000 savings amount with them. The broker could keep $5,000 of the savings and the shipper could keep $5,000 of the savings. There are several problems here. First, the data explaining where the savings comes from is often based on historical, complex formulas that are extremely difficult to explain, much less comprehend. Also, the projected savings amount may be based on the exclusive use of certain carriers in order to actually realize the proposed savings.
Let's say that shipping patterns change. A company now ships to different customers at different destinations. Now the formula the gain sharing 3PL based their projections on wouldn't be an accurate reflection of the true costs or savings that the shipper was experiencing. Regardless, under the contract a shipper is typically required to sign with a gain sharing model, the shipper would still be responsible for paying or allowing the broker to keep their share of the projected savings amount. Now let's say that the shipper decides or needs to use a carrier other than what the projections were based on. This changes the costs and savings amounts too. The gain share 3PL - in most cases - requires that the shipper continue to pay for savings that was supposedly provided based upon the initial historical comparison which was performed by the broker.
Another problem here is that the shipper does not have direct and open access to financial information from the carriers. A shipper receives data provided to them by the broker who has in turn obtained it from the carrier. The gain share broker purchases the freight and resells the freight to their customer, the shipper. With the gain share model, a shipper never knows what the broker or 3PL actually pays for the freight. The broker is constantly adjusting their margins and markups on each and every shipment. Since the end user, or buyer of the freight is not the one who actually purchased the line-haul from the carrier, the broker is usually the responsible party having to file freight claims and pay the carriers as well.
With the gain sharing model, shippers must place a large amount of trust in being provided with accurate data. Shippers now more than ever demand visibility and control over their supply chain. The gain share model doesn't seem to be consistent with the transparency, flexibility, and control that many shippers in the market are looking for. What does this mean for the 3PL gain share model? Only time will tell, but the gain share model seems to be a slippery slope.
With the gain sharing model a shipper agrees to pay a percentage or flat rate fee of the savings a broker has said to have obtained for them. For instance, if a gain share 3PL proposes that they can save a shipper $10,000 off their current freight spend they may require that the shipper split the $10,000 savings amount with them. The broker could keep $5,000 of the savings and the shipper could keep $5,000 of the savings. There are several problems here. First, the data explaining where the savings comes from is often based on historical, complex formulas that are extremely difficult to explain, much less comprehend. Also, the projected savings amount may be based on the exclusive use of certain carriers in order to actually realize the proposed savings.
Let's say that shipping patterns change. A company now ships to different customers at different destinations. Now the formula the gain sharing 3PL based their projections on wouldn't be an accurate reflection of the true costs or savings that the shipper was experiencing. Regardless, under the contract a shipper is typically required to sign with a gain sharing model, the shipper would still be responsible for paying or allowing the broker to keep their share of the projected savings amount. Now let's say that the shipper decides or needs to use a carrier other than what the projections were based on. This changes the costs and savings amounts too. The gain share 3PL - in most cases - requires that the shipper continue to pay for savings that was supposedly provided based upon the initial historical comparison which was performed by the broker.
Another problem here is that the shipper does not have direct and open access to financial information from the carriers. A shipper receives data provided to them by the broker who has in turn obtained it from the carrier. The gain share broker purchases the freight and resells the freight to their customer, the shipper. With the gain share model, a shipper never knows what the broker or 3PL actually pays for the freight. The broker is constantly adjusting their margins and markups on each and every shipment. Since the end user, or buyer of the freight is not the one who actually purchased the line-haul from the carrier, the broker is usually the responsible party having to file freight claims and pay the carriers as well.
With the gain sharing model, shippers must place a large amount of trust in being provided with accurate data. Shippers now more than ever demand visibility and control over their supply chain. The gain share model doesn't seem to be consistent with the transparency, flexibility, and control that many shippers in the market are looking for. What does this mean for the 3PL gain share model? Only time will tell, but the gain share model seems to be a slippery slope.
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