Often, a procurement department touts its ability to save money. Procurement professionals are savvy negotiators, knowledgeable in the benchmarks and cost saving measures necessary to get a fair price on needed items.
However, how is another important procurement metric, cost avoidance, calculated? It’s the other side of the cash preservation story, and getting it right can have a major impact on the company's current spending and future performance.
This piece uncovers the differences between savings and avoidance as the two main mechanisms for cost reduction. It explains when to use cost-avoiding instead of cost-saving measures, and explores how implementing new technology can help achieve both with greater efficiency.
Here's what we'll answer in this guide:
- What is cost avoidance?
- Why cost avoidance is critical when buying SaaS
- Examples of cost avoidance
- When to practice cost avoidance and when to practice cost savings
What is cost avoidance?
Cost avoidance is the practice of preventing future costs resulting from software purchases or contract agreements.
Cost avoidance deals with the future and unknowns: usage expectations, escalator clauses, early termination fees, equipment failures, etc.
How is cost avoidance different from cost savings?
While cost savings is an important part of buying SaaS, cost avoidance plays a critical role in the long-term health of the company budget. Cost savings are quantifiable, “hard savings” achieved at the negotiating table.
One example of cost savings is using license volume as negotiation leverage to receive a larger percentage off of purchases. These savings can represent a tangible financial benefit and can be expressed in a percentage saved and return on investment.
Cost avoidance falls in the realm of soft savings. It most often affects indirect costs. Good cost avoidance involves carefully evaluating possible future scenarios, working with suppliers to understand their implications, and finding ways to mitigate the risk of unexpected expenses. Senior leaders won’t find it included in financial statements and it’s difficult to capture in metrics, but it can have an undeniable impact on the bottom line.
Why cost avoidance is critical when buying SaaS
The adage "an ounce of prevention is better than a pound of cure" neatly sums up the ethos of cost avoidance measures.
Cost avoidance is the more effective means of controlling software spending throughout the contract. Poor procurement negotiation or lack of clarity with the contract terms and conditions may lead to thousands of dollars in wasted spending or impact mitigation.
Examples of cost avoidance
Avoiding overage or usage fees
Depending on a piece of software's fee structure and contract specifics, a data usage cap may be in place. If end users exceed the usage, a surcharge rate may apply.
Often, usage caps can make for tricky budgeting and estimation. Use may exceed estimates set out during negotiation. Avoid these fees by crafting contract language that supports usage growth vs. penalizing it.
Mitigating deterioration and depreciation
Most equipment and some software tools have an expected useful life and a maintenance schedule required for proper upkeep. In the case of software, this may mean performing critical updates or ensuring compatibility with system requirements and integrated tools.
The costs can mount quickly when property usability deteriorates due to a lack of upkeep. To avoid the later costs of failures or sunsetting complications, it’s crucial to promptly invest the right amount of money in maintenance and care.
Proper software utilization
Reducing waste spending is mission-critical to keeping software costs under control. As with overage charges, spending money to maintain “shelfware” licenses incurs high costs over time. Proper vendor management practices can help identify underutilized licenses and either reduce license volume or put those licenses into service.
More insidious than known shelfware spending is unseen software renewal licenses. As with underutilized software, vendor management process improvements can help identify and cancel auto-renewing software agreements. For future contracts, negotiate to remove auto-renewal clauses from contracts and avoid the potential cost of renewing unneeded software altogether.
Minimizing cyber security issues
Good risk management is a cost avoidance strategy. Minimizing the potential for cyber security issues such as data breaches, ransomware, and DDoS attacks can help avoid the expensive reality of disaster recovery. Investing in strong information security teams and conducting thorough new vendor analyses are two high-priority cost avoidance measures.
When to practice cost avoidance and when to practice cost savings
Knowing when to save money versus avoiding cost is a balancing act. The desire to preserve revenue shouldn’t overshadow the need to undertake needed repairs, upgrades, maintenance, and security projects.
Avoid costs when:
Selecting potential suppliers
Every supplier brings different features and advantages into the deal. To avoid paying too much to the first supplier contacted, commit to due diligence and a multi-quote purchasing process when evaluating software.
The “three bids and a buy” method may require a longer upfront time commitment but will help avoid the costs of selecting the wrong service from a field of competing suppliers.
Negotiating new contracts
Negotiations give SaaS buyers the power to save money, and offer a level of control over contract terms that are not to the business’s advantage. Good SaaS negotiation can insulate buyers from cost increases; look for scenarios where a contract clause could lead to uncontrolled or unexpected spending, such as early termination fees or accelerated usage charges.
When shopping for a software solution, be sure the offer includes just the tools needed to get the desired outcome. Some tools are sold in a bundle structure, which could lead to paying for more features than the project or situation warrants. Pay attention to bundled services and ask to have those features or tools de-coupled in the deal.
The secret sauce of cost avoidance is proper vendor relationship management and contract management. Nearly every potential software buying issue can be avoided through robust management processes. While implementing a vendor management platform is viewed as a cost center, often, it can prevent some of the costliest issues. Additionally, using a SaaS management software tool can help organizations realize savings of up to 30 percent, outstripping the investment side of the equation.
Save costs when:
Contract renewals present an excellent opportunity to restate value as a client, and negotiate the cost of licenses and features based on the length of service, increased usage or licenses, the strength of the company's logo, or other factors the sales rep uses to weigh the offer. If the supplier can’t adequately recognize these factors, SaaS buyers can explore the costs versus benefits of transitioning to a new supplier at the contract end.
Building strategic partnerships
Likewise, strategic sourcing initiatives present an excellent opportunity to save money. By moving to a preferred vendor list and making commitments to work exclusively with specific suppliers, SaaS buyers can often save considerably on the cost of software and services.
Budgeting and planning
Forecasting expenditures accurately is one of the most effective ways to save money. Procurement can streamline spending and save money if they have a clear picture of next year's budget and the financial roadmap for the coming month, quarter, or year.
How Vendr can help your company avoid unnecessary costs
Vendor management software can help on both sides of the cost equation, helping mitigate risk while surfacing opportunities to save money when buying SaaS software. With the power of an automated system and the strength of a professional buying team, the organization can save time, save money, and avoid costs automatically.
The process of improving software procurement and supplier management begins with understanding the current software buying situation.
Get an inside look into the platform where you can discover and buy new tools, see how much you're saving on software, and stay up to date on your IT stack with our free guide to the Vendr SaaS buying platform.