Cost savings, often referred to as hard savings, represent direct and measurable reductions in expenditure relative to a prior benchmark (for example, reduced unit costs), which have an immediate impact on financial performance. In contrast, avoidance cost savings, sometimes categorized as soft savings, are realized by preventing future increases in prices or expenses, thereby safeguarding the budget against potential rises rather than reducing current spending.
Cost avoidance in procurement involves taking proactive steps to prevent future price increases or to circumvent costs that have yet to arise. Unlike cost savings which focus on reducing current expenditure cost avoidance aims to maintain existing spending levels by mitigating risks associated with market fluctuations, inflation, and operational uncertainties.
Core Cost Avoidance Strategies
Procurement professionals employ various strategies to achieve cost avoidance:
Contract Negotiation & Price Protection:
- Negotiating Smaller Increases: When a supplier proposes a 10% price increase, successfully negotiating it down to 5% constitutes cost avoidance.
- Long-Term Fixed Pricing: Securing multi-year contracts at current rates safeguards against unpredictable market changes and inflationary pressures.
- Delaying Price Hikes: Arranging for the postponement of anticipated price increases (such as deferring them for six months) prevents additional costs during that timeframe.
Operational & Technical Measures:
- Preventative Maintenance: Implementing scheduled maintenance for equipment reduces the likelihood of costly emergency repairs and unplanned downtime.
- Value Engineering: Adjusting product specifications to incorporate more cost-effective materials without compromising quality helps avoid increased production expenses.
- Extended Warranties: Investing in warranties or service agreements limits potential future maintenance expenditures.
Risk Mitigation:
- Supplier Diversification: Establishing relationships with backup suppliers decreases reliance on any single vendor and helps avert expensive emergency purchases if a primary supplier defaults.
- Spend Analysis: Leveraging AI and analytical tools to anticipate market trends enables procurement teams to take timely action before price escalations occur.
Key Differences: Cost Avoidance vs. Cost Savings
While both aim to improve financial health, they are measured and reported differently:
| Feature | Cost Avoidance (Soft Savings) | Cost Savings (Hard Savings) |
| Focus | Future/Potential costs | Current/Actual spending |
| Action | Preventative (e.g., blocking a hike) | Reductive (e.g., finding a cheaper vendor) |
| Financials | Not visible on P&L statements | Directly visible on P&L |
| Measurement | Difference between projected and actual | Difference between previous and new price |