Performance Based Compensation
If a company offers to perform a service for you and the only compensation they will receive is based on a percentage of the money you actually save, what would be your reaction?
-There’s got to be a catch.
-This is too good to be true.
-I’m too busy to investigate.
-Show me more!
One such company has been using this model. Innovative Cost Solutions (ICS) based in North Andover, MA. Their field is Waste Consulting. ICS helps businesses reduce their waste and recycling costs.
In this post, we discuss the pros and cons of a performance based compensation model and compare it to the LPS compensation method.
THE RISK TO THE SUPPLIER
Any company working on a pay-for-performance basis will have a high skill level in their specialty. They bet that they have enough of an advantage through experience to make an offer and be compensated based on the difference between what you are currently paying and the price or fee they can negotiate.
THE RISK TO THE CLIENT
There are three worst case scenarios:
1. You elect to work with the company and invest a significant amount of time transferring the information they need to them. In the end, you are told that they can’t help you.
2. You invest the time and effort to work with the company but the savings ends up being marginal.
3. The suppliers they choose to replace your previous suppliers don’t provide a satisfactory service level.
The reward for using a performance based compensation model is a win for both the supplier and the customer. The supplier’s definition of a win depends mainly on the size of the transaction. The customer’s definition of a win is saving without much time and effort. Secondly, the new supplier must perform as well or better than the previous supplier.
The money saving potential can be calculated at the front end of the proposal. The performance level of the supplier is determined over time.
MINIMIZING RISK TO MAXIMIZE THE REWARD
Do your due diligence!
The best way to do this is to get references from the company and contact a few existing customers and get their feedback on the experience. If the company offers a large number of references rather than choosing a couple for you – that’s a green light!
Get it in writing and read the fine print!
Read and understand all documents carefully.
Interview the proposed service provider!
Understand who will be providing the product or service. Make sure that they service your geographic area and have a good track record with other customers located near you.
HOW ICS DOES BUSINESS
Just as LPS has expertise in the lab supplies and equipment market, Innovative Cost Solutions are experts in the Waste Management market.
From their web site:
“Innovative Cost Solutions is a cost reduction firm in Andover, MA that primarily focuses on helping businesses throughout the country reduce their waste and recycling costs. Our risk-free services allow you to keep your operating costs low, saving you time and money so that you can focus on your core business. We bring years of industry experience and expertise to the table which allows us to build upon your company’s internal efforts. In addition, our compensation is 100% performance based so we only get paid if we are able to save you money, and we do not charge any upfront fees. With this risk-free approach, you can feel confident that working with us will be a win-win situation and we typically save our clients an average of 35%.”
WHY LPS DOESN’T USE THE PERFORMANCE BASED COMPENSATION MODEL
We have a similar track record and level of expertise in our field that ICS has in theirs. On average, LPS saves clients 36% using a cost plus model. There are several reasons why LPS doesn’t use a performance based model:
- We propose cost saving alternatives but the client always makes the final decision.
- Our savings process is ongoing and continual and applies to new items and equipment that are requested after the initial agreement.
- The savings we provide are both “hard” (i.e., the price of an item) and “soft” (i.e., the cost of processing the order.) Soft cost savings are important but difficult to measure.
To our knowledge, LPS is the only company serving small to mid-sized clients that provide the service without a fee. Our compensation is earned entirely from the profit margin of the product.
There are pros and cons to using the performance based compensation model. LPS earns fees from the lab products and equipment it provides at a savings to their clients. ICS is compensated based on performance. Both companies save customers money.
After discussions with the management of this company, we have decided to recommend their services to LPS Clients. We encourage you to check out their website and especially the testimonial videos on the home page.
If you would like more information, we can arrange the initial call for you. Or if you contact them directly, make sure and let them know you heard about them from LPS!