Applying Your Intellectual Capital

Gains for sharing come about as the result of applications of one or more of three forms of capital:

1. Intellectual capital in the form of the expertise required to initiate and manage a profit-improvement project

2. Financial capital in the form of investment

3. Operating capital in the form of products, services, and systems

Applying intellectual capital to create profit-improvement projects, not simply stocking them with operating capital, is becoming increasingly recognized by suppliers as what their business is all about. But ideas in themselves are worth little, being nothing more than raw materials that rank at the bottom of the value curve. By adding values from application and implementation, information and education, and consultation and evaluation of results, intellectual capital can realize whatever opportunity it may have for capitalization.

The gain in gainsharing is net present value (NPV). It is calculated as the present value of a wealth creation project plus the worth of all future values when they are discounted back to the present. This takes into account the reduced value of money over time. In addition to NPV as the key indicator of gain, payback is a measure of the exposure to risk in realizing the NPV. The longer the payback, the greater the risk. A third indicator is the relationship of reward to risk that is calculated by the ROI.

Penetrating Your Customers' Value Chains

In order to share in the gains you contribute on a PIP-by-PIP basis, you must find a customer problem or opportunity that lets you realize three results:

1. The maximum gains from a product, service, or system application can be contributed.

2. They can be accumulated in the least time.

3. They can be accumulated at the highest level of cost-effectiveness.

As a consultative seller, you must seek out customers who can gain the most from your PIPs so that there is maximum gain for both of you to share. Customers who can gain the most are called "gain-sensitive." A customer can be gain-sensitive no matter where the business may be on an industry's value-creation curve:

• Customers who are ahead of the industry curve can be gain-sensitive because they want to stay ahead.

• Customers who are behind the curve must be gain-sensitive because they want to move up before they drop off.

• Customers who are in between are gain-sensitive because they must move up to become one of the top three competitors or face up to two business-altering options: consolidate by acquiring or being acquired, or vacate their market.

Fitting In as a Value-Adding Partner

If you want to gainshare instead of price—in Consultative Selling language, "propose an investment"—you must be able to answer the customer's question, "Where do you fit as a partner in the gains of my business?" In order to answer, you must know where you can add value. Since you are not offering yourself as a partner in the entirety of a customer manager's operation, your positioning is crucial in helping determine if there is a partnerable vacancy that you can fill.

• Suppliers who position themselves as moneymakers are fitting themselves primarily into a customer's sales, marketing, and distribution operations. They may also fit into the parts of a customer's product development, market research, manufacturing, or inventory control operations that affect sales. Moneymakers can range up and down value chains, intervening in operations where they are capability-specific for improving contributions of revenue.

• Suppliers who position themselves as moneysavers are fitting themselves differently into customer support and supply operations. Instead of acting as sales builders or market builders, they add value by reducing an operation's contribution of costs.

Of the two platforms for gainsharing—one to expand revenues and the other to reduce costs—the proposed gains from cost reduction are easier to calculate and propose than revenue improvements. Customers accept potential cost savings more readily than a prospect of newly generated revenues. Costs, being internal, can be better controlled. Markets, the sources of revenues, are more ephemeral since they are outside customer control and defy prediction. Besides, customers are almost always better at control than at expansion. Yet revenue improvements are almost always significantly greater contributions to gain for sharing.