Rebate Models and Frameworks

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    • #292500

      This SIG member from the healthcare industry is conducting an RFP for Professional Services and would like to benchmark the rebate proposals received from the bidders. Different models, structures, and frameworks have been proposed and the Member would like to perform some due diligence. 

      Will you please take a moment and respond:

      1) Does your organization use a standard rebates model for all spend? 

      2) Does your organization use a standard rebates model for professional services spend? 

      3) If yes to either, what models has your organization used for either professional services spend, IT or other categories? Will you please share? 

      As a reminder, SIG is glad to scrub any documentation and remit for your approval before sharing. Please feel free to post below or remit to [email protected].


    • #295059

      1.Does your organization use a standard rebates model for all spend?

      Where contracts have been signed by our Purchasing Consortium – _____, to which all of the Universities belong, there’s a 3% rebate that is passed over by the company to the consortium. The consortium, funds itself in this way however a portion of this rebate will be paid to the University annually based on its participation within these contracts.


      The only other rebate that we receive is with our secondary bank, _____, who manages our procurement card spend. This is a Visa card, and we get a rebate if this spend exceeds certain values, it’s a sliding scale with a cap.


      2. Does your organization use a standard rebates model for professional services spend? 

      Only if we have contracted via [the consortium], who have a consultancy offering. An example of this is we reached out to the consortium, for a consultant to help us with the drafting of a scope of work and a procurement plan for an E-Bus pilot study. This contract which is a standard agreement between the consortium and the consultancy, form part of our annual participation.


      Rebates are contentious unless it’s done within proper governance. 


    • #295060

      1. No – our rebate models depend on a variety of factors including whether the spend if for services or commodities, level of spend, etc.

      2. No – we tailor our rebate models to achieve the best outcome for all parties. Complete transparency on supplier costs is key which is why it is critical to select the right supplier who will work with your business.

      3. A recent example of a basic spend based rebate model we put in place with a marketing design and production agency was as follows:

      £5M spend* within 12 month period = 5% rebate (£250k)

      £7.5M spend* within 12 month period  = 7.5% rebate (£562,500)

      £10M spend* within 12 month period = 10% rebate (£1M)

      *Retained and ad-hoc spend included

      Please note that in this case spend was likely to exceed £7.5, however very unlikely to reach the £10M level.


    • #295061

      I am generally not in favor of rebates, I would prefer best pricing to drive vendor selection. Also, the issue with rebates I’ve found is that they become expected and when volumes fluctuate down it creates budgetary issues. The best way to avoid that is to push rebates into a separate P&L, but that then creates other administrative issues such as managing, reporting, tracking, explaining, etc.


      For rebates, we currently have for the T&E and P-Card programs, office supplies, fleet cars, shipping, car rental, to name a few…….we push this into a separate P&L, I do not comingle or use to fund any procurement functions. As contracts expire, we will look to take a one-time payment or eliminate.


    • #295062

      1. No

      2. Depends on the Opportunity


      3. No one size fits all from my experience. I would highlight it is more about mutual benefit. Pre-bates, Rebates, Value Sharing Models ……. Using the best model and aligned incentives seems to work.


    • #295063

      We discourage proposals that include offers of rebates.  We want to pay the lowest price at the point of sale.  Rebates recreate too much administrative work on the back end.  Especially if an organization wants to apply the rebates to the departments and cost centers that received and paid for the service.  The rebates can be eaten-up by the administrative costs.

    • #295064

      I think the key is to first determine what the annual spend is with your vendors. Ideally, we try and start rebates at $1 so we’ll always get something. Then we do tiers from there that make sense from what a vendor is already doing, and making it mutually beneficial to grow that spend. I like to have 5 tiers with the highest being well beyond what we do today and the second highest being just about/slightly  higher than what we do today. It gives us a cushion if spend drops, but rewards everyone if it grows. 

      And this should be part of any negotiation with vendors. Some refuse to have any rebate, so we may only have tiers above today’s spend that we can get them to agree to. Others may question the amounts, so we may start at .5% rather than 1 or 2%. 


    • #295065

      1. It is not possible nor pracical to use a “standard rebate model” for all spend. Hardware, software, colo/data centers are most likely candidates for a “rebate” or discount to published cost (OEM price list, energy cost in a given region for colo, etc.). Professional Services (staff aug, SOW, managed services, etc.) is a prime example where “rebate” approach is not used, given that there is no readily available unbiased and externaly validated comparison data point (most cost benmarks are stale before they are published and #3 below lists the primary reasons why benchmarks usuallly fail).
      2. As indicated above, rebate model is not appropriate for PS (T, marketing, management consultants, legal, audit, tax, etc.) spend. Instead, we source PS spend based on hourly rate (for staff aug), and project basis (for sow and managed services when requirements are well defined). We develop Baseline and compare vendor bids to the baseline. As part of the RFP, we typically develop detailed requirements including job specs, example of projects that resources will be asked to do, volumetric data (#hrs for the year, seasonablity, etc.) for each position and geo (on, near- and off-shore) requirements for each position. In addition, we define KPIs, SLAs and T&Cs as developed by business stakeholders.
      3. Be careful using benchmarks for rates, as rates for like positions will vary based on

      a.Defined KPIs and SLAs (how much commitment are you asking of the vendors and what is their ‘at risk’ related to the SLAs)

      b.T&Cs and MSA language

      c.Project size ($20MM PS scope will earn a much lower rate than a sourcing project with $3MM scope)

      d.RFP detail (have you eliminated as much uncertainty as possible from scope and requirements)

      e.Challenger vendor selection to include global, regional and niche service providers

      f.Skill of the sourcing team and the extent to which business has cooperated in sending the right message to vendors (e.g. do incumbents believe there is a credible threat of switch? Do the challenger vendors understand the opportunity?)


      I am wrapping a PS sourcing engagement for a client with ~30% cost reduction (received bids were 40%-50% cost reduction but client chose not proceed with low-cost vendors due to switching costs). I would be happy to speak and provide further guidance.


    • #295066

      1. No, each spend is unique and may have a different structure

      2. Yes we do


      Tier 1< $3M

      Tier 2$3M to $6M

      Tier 3$6M to $9M

      Tier 4$12M


      We ask for a rebate check at the end of each year. 


    • #295067

      We do have some deals, and they typically provide a credit to be applied to future projects. The size of the credit is a % of the total spend.

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