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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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A budget variance is an unplanned change between the budgeted spend and actuals. Learn to protect your software budgets from variances with this quick guide.
Your team worked hard to create an accurate budget for the upcoming year. Considerable planning went into the financial model; Finance was confident in its assumptions.
Now it’s mid-year, and your actual figures are off. Potentially really off in some places.
What’s going on here?
Every company — small business and enterprise company alike — deals with budget variances and other FP&A challenges. In a swiftly changing economic and business environment, they’re somewhat inevitable. But you can control their occurrence and impact on the balance sheet.
Today we’ll look at budget variances: How they occur, what to do when you find one, and how to reduce their likelihood and impact on your business.
First, let's fully define what a budget variance is.
A budget variance is a difference between the budgeted amount for a specific department or project versus the actual amount.
Budget variances are a common part of the financial life of most companies. That being said, frequent or extreme variations in the budget can be disruptive to cash flow. Variances may signal a mismatch between expectations and actual results on revenue or planned spending for products and services.
Budget variances can be either positive or negative:
Positive: A positive budget variance (also called a favorable budget variance) means that your company spent less than intended on a specific budget item. There can be several reasons for a positive variance. And while a variance may not be a cause for concern, it pays to research these when they occur. Run a variance report on the business budget to look for any overestimations or changes to liabilities.
A budget variance should always be investigated, even if that variance seems like a windfall.
Negative: Most finance professionals think of this when they hear the word variance. A negative variance (an unfavorable budget variance) refers to spending over the allotted budget. There are several reasons why budget variances occur. While not every variance can be avoided, monitoring can help reduce their occurrence and impact.
Software contracts are also subject to the effects of variance. With a standard subscription built on an annual or monthly basis, variances are less common. Variance in a fixed contract usually happens because a department needs to add more licenses or tools after establishing budgets. But other contract structures — usage-based or drawdowns — are likely causes of unplanned SaaS spend.
Budget variances aren’t always a matter of errors (though sometimes this is true). Here are the five most common sources of budget variances affecting your budgeting accuracy:
Changing economics: Shifting economic conditions is one of the most common sources of changes to actuals versus budgets. Changes in commodities prices, labor costs, overhead expenditures, and services can create big expense variances between the estimated spending and the numbers at the end of the period.
Budgeting errors: Human error does play a factor in budgeting issues. This can be a matter of underestimating actual expenses or even a simple data entry issue on an Excel sheet or a line item. Variances of this type may be positive or negative, but if they occur repeatedly, it may be time to review your budgeting process and streamline where necessary.
Pricing changes: changes to the pricing of your services or fixed assets can create a variance in a budget. For instance, if insurance premiums at renewal are higher than anticipated for a fixed asset costs have risen as a matter of expansion, variances may be the outcome. It’s important to keep an eye on planned expenditures that diverge from the original budget and make adjustments where necessary.
Process streamlining: Improvements in your operational or financial processes may create a positive budget variance. Implementing streamlined spending approval processes, for example, may result in reduced tail spend that will positively impact the budget for that.
Risk and employee fraud: One unfortunate source of budget variance is risk-based costs such as disaster recovery, legal fees, and procurement fraud. These variances are hard to predict and either and harder to avoid. The best prevention for such budget shortfalls is increased due diligence and robust financial monitoring.
Software budgets are subject to variances just like any other cost. Here are some ways your SaaS buying budget may become out of sync with the actuals.:
Changes in how you use a piece of software may result in fluctuating actual costs associated with that tool. For instance, increasing service level tier mid-contract to better route team or project requirements will consume more of the budget than planned. Building flexible budgets with some play for software changes can help alleviate budgeting issues at the end of the period
Usage-based contracts such as those that charge her credit or her impression may result in higher than expected spending for those tools. When establishing a contract for a usage-based tool, discussing scenarios where usage changes is important. Sometimes, the supplier is willing to work with you for anticipated increases mid-contract. A good rule of thumb is that becoming a better customer should never be more expensive.
Draw-down contracts that rely on a pool of funds, service credits, or use may be subject to early renewal if usage exceeds the anticipated amount or allotment. As with overage fees, it’s important to establish the ground rules with your supplier before you sign the contract. Using more of a product should offer an advantage instead of a penalty.
Both overage scenarios above are often associated with underestimating the need for a product at the point of negotiation and contract execution. Building better modeling for expected usage can help reduce the occurrence of this type of variance. Make this a point of negotiation when dealing with a new supplier for a usage-based or drawdown contract.
Sometimes growth requires spending. One source of budget variance is the need for more licenses or seats of a specific software tool throughout the contract. This happens when hiring cadences increase or new projects get underway. This is another point where a successfully negotiated supplier relationship can benefit when you realize your needs have changed.
Budget variance can be an insidious drain on revenue if left unchecked. Overages in your budget, especially those overages which cannot be tied to a product or project, must be mitigated wherever possible.
Budget issues that affect cash flow can affect your financial statements and creditworthiness as a downstream impact if ongoing problems are left unresolved.
Research the variance cause: granular access to data is your best ally in tracking and resolving budget variances. When you discover an issue between your budget in your actuals, take the time to dig into the numbers and establish that the variance has occurred (that it’s not the result of a data entry error or oversight) and the root cause, if any.
Plan a course of action: Once you establish that a budget variance has occurred, you need to decide how you will handle the variance going forward. There are a few possible scenarios for handling discrepancies between your budget and your actuals.
If you find these adjustments are becoming frequent, it pays to investigate and improve budgeting or estimating criteria.
Regular review and maintenance of your budget are the best ways to avoid changes in your actuals outside budget parameters. A streamlined process and help from technology can also improve budget outcomes.
Regular cost performance and budgeting review are essential to reducing or eliminating variances. Some research is a routine part of your financial cadence. For example, large variances may show up during the month and closing activities for flux analysis.
As an added precaution, quarterly budget reviews are a tried and true way of heading off variances in your budget before they can become a more significant issue. Touch base with your department heads to understand changes to the spending plan before they occur and make necessary adjustments as a proactive measure.
For instances where you’re budgeting parameters may change, consider running scenario analysis and creating contingencies for possible outcomes. By building a budget that can absorb a variety of outcomes, you establish more confidence in the budgeting process and smooth the path for later analysis.
If your industry or business is subject to variable costs, seasonality issues, or other changes, consider moving away from a static budget. Rolling budgets, which are adjusted monthly or quarterly, may give your financial reporting the flexibility it needs for more accurate, agile financial planning.
Tracking software usage, especially in usage-based or drawdown SaaS pricing models, can help you avoid overages in your software spending before they get out of hand. Create regular calendar events to check usage numbers or set up notifications within your platform that can alert you to changes between planned and actual usage. The small step will translate to big savings and cost avoidance if your project plans or scope of work changes.
Tracking your spending on SaaS tools is the best way to avoid discrepancies in your budget vs. actual costs. Spend management software centralizes your data, creates metrics for evaluating spending, and allows you to keep track of usage-based contracts before they can spiral out of control. By getting a better grasp on the day-to-day life of your tech stack, you can avoid surprises at the end of the quarter or year.
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.
Are you using the correct type of purchase order? It can save time and create a smoother procurement process for buying software. Learn more about them here.
Planning procurement activities — whether for supplies, products, services, or software — requires a high level of visibility. The process gets easier by documenting planned purchases to the best of your ability. Department heads will know what purchases are on the horizon, IT can plan for capacity and implementation, Finance can plan spending more accurately, and accounting can lay the groundwork for a smooth end-to-end purchasing process.
One way to achieve all these objectives is to streamline the purchase order process. You ensure everyone knows the game plan by documenting purchase information completely (and in advance).
But what’s the best way to plan if you don’t have all the information? As it turns out, the structure of your purchase order can help show what you know and leave room for future planning.
Let’s look at the different types of purchase orders you can use for purchasing software, and how to use them most effectively.
A purchase order form is a standardized form a buyer transmits to a supplier. The purpose of the purchase order is to outline the requirements and necessary information for placing an order and having it filled. Purchase orders are standard practice for businesses buying supplies, goods, and software from their suppliers. The purchase order also serves as a record for tracking and confirming accurate and timely delivery of purchases.
The purchase order process begins after the evaluation and selection of a supplier. It represents the beginning of the purchase portion of the procurement process, after any needed sourcing activities.
Most often, a purchase requisition precedes the purchase order. This initial document (sometimes called an intake form) outlines the parameters of the business need, any requirements the solution must meet, and any preliminary evaluation the stakeholder has conducted. The information from the purchase req serves as the basis for completing the final purchase order before transmission.
The requisition also creates a second data source for checking the accuracy of orders once the products, materials, or software licenses come in. Accounts payable checks the purchase requisition, purchase order, and invoice for parity in a three-way matching process. This process ensures compliance with delivery terms, date of delivery, the quantity of items ordered, etc. It is one component of ensuring legal protection, as it serves as a source of truth for the outcome of a supplier agreement.
When you know exactly what you need from a selected supplier, you can create a purchase order for immediate or future use. Depending on the timing and quantity of the purchase, you may create one of four common purchase order types: standard PO, planned PO, blanket PO, or contract PO. More on those next.
While standard POs are most common for the purchasing process, there are several ways to structure a purchase order. The type of PO you use will depend on the details and timeline of your purchase. Selecting the right type of purchase order structure helps smooth the procurement process and aids budgeting and planning from the accounting side. Pre-planning purchases through the right purchase order allows finance to ensure the cash will be available when needed.
The Standard PO (aka a “regular purchase order”) is one most buyers are familiar with. Standard purchase orders represent the intent to complete one transaction with a specific product type, quality of items, and quantity. The purchase order should outline all the necessary information for completing the transaction. Standard purchase orders are often used for a one-off purchase.
For software purchases, a buyer may need a set number of licenses for the company or department. For instance, ten seats of a specific accounting software solution for everyone in the AP department. In this case, they would order the specific number of licenses needed to set everyone up with their own instance of the software.
The second common type of purchase order is that planned orders are similar to standard ones but for a future, undetermined delivery date. These purchase orders are developed with all the details of standard orders. The money for these is placed in a reserve called an encumbrance) so the money will be available when it’s time to place the order. Once it’s time to transmit and fulfill, accounting performs a release of the funds and completes the purchase.
Planned purchase orders are ideal for purchases that are made on a semi-regular basis. One example is office consumables like coffee and tea. The purchasing department estimates what you’ll need to use based on previous purchases and timeframes. They then create a series of orders and release them as necessary (for instance, when the admin reports they’re down to the last few boxes). Planned purchase orders are handly when the order details are the same, but the exact consumption period isn’t known.
One example of software purchasing on a planned purchase order: A development team will need 30 licenses of a popular development tracking tool for an upcoming project. The project is slated to kick off in the year's second half, but the exact date is unknown. In this case, the team can encumber funds within the project budget and create the planned order during the planning phase. When it’s time to implement the tracking software, AP releases the funds and completes the purchase.
When you know you need an item continually, but you’re unsure of how many, a blanket purchase order can reduce redundant work and make the procurement process smoother. The information stays the same in this case, but the quantity and timeframe are unknown. Printer paper is a great example because its usage fluctuates based on the headcount in the office and the types of projects happening at a given time. With a blanket order, the release happens when the supplies run low, and the quantity is updated based on expected use for the next interval (whether a month, a quarter, etc.)
Blanket orders may present backorder issues for the supplier if the quantity greatly exceeds expectations. For this reason, blanket orders come with a safeguard for the supplier: they outline a maximum quantity for a single purchase. This ensures the buyer can plan SaaS spending and get what they need (within reason) without creating inventory management issues for a supplier trying to fulfill orders for many customers at a specific period of time.
In purchasing software, the team may need to requisition communication tools to meet the expected headcount for each hiring sprint. The exact timing of the orders is unknown, and the number of licenses may change depending on the hiring activity. The team can rely on receiving a certain number of licenses even if there is some fluctuation in the headcount.
A contract purchase order has the least detail but still sets up the basic parameters of the purchase for when needed. It's essentially a promise of future orders, and an outline of the terms and conditions each party will adhere to once those POs come to fruition. A contract purchase order is not a binding contract until accepted by the seller.
Contract purchase orders don’t contain the specific delivery schedule, quantity, or item information. They may have mutually decided timeframes for purchase (for instance, a quarterly estimate). In software, these purchase orders may come in handy when working with a software reseller. They outline the necessary details for transactions but leave the specifics for a future date when more information is available.
Every purchase order — whether standard, planned, blanket, or contract — should offer the baseline details to complete the purchase. When developing a purchase order to buy SaaS software, include the following information for your procurement and supplier-side stakeholders:
Once known, detail the supplier information, including any details necessary to transmit the purchase order and pay the resulting invoice. By outlining the necessary information for the entire purchase process, you reduce back-and-forth communication and ensure quick delivery/implementation and payment of software.
If known, outline the service or tier level information for the products you’re purchasing. By being more specific on the purchase order, it's easier for accounting and receiving stakeholders to verify that the desired products were ordered and delivered.
If the suppler has specific payment terms (for instance, early payment discounts, preferred payment forms, volume order discounts) outline these in the PO to ensure accurate billing and timely payment.
Using a supplier management system like Vendr can automate many repetitive tasks associated with purchase orders and financial management. By centralizing supplier data, contracts, and license information into one easy-to-use platform, your department stakeholders, Finance, and Accounting departments will maintain a high level of visibility into current software levels, upcoming renewal activity, and future capacity planning.
To get a handle on your PO process and all your software buying activities, consider creating a stronger intake process with our free template. With a better process, your teams enjoy a smoother procurement experience, more accurate planning, and more data-driven decision-making.
Business expense management helps companies optimize, track, and monitor the purchases their employees make. Make it easier with the right process and software.
Managing expenses across hundreds (or even thousands) of employees is a full-time priority for a business. Every business, from small business owners and startups to large, established brands spend a considerable amount of time and money processing and tracking expenses. The average company processes 51,000 reports a year, and spends as much as 3,000 chasing down exceptions.
With business needs accelerating in the post-lockdown period, the need for better spend management has never been greater. Controlling travel management, remote business expenditures, and routine supply chain costs can positively impact revenue and growth over time.
Today we’ll look at the basics of business expense management, address ways for companies to meet rising need for better controls, and show how technology can streamline and optimize the process.
Business expense management is a system or process of controlling or guiding purchases initiated by company employees. Managing these costs refers to both facilitating the process of tracking and paying these expenses, as well as reducing their impact on revenue. Managing business expenses through corporate policy and auditing can improve cash efficiency for your business.
Maverick spending refers to any expenditures that happen outside of a formal business process. While employee expense reports may happen ad hoc (for example, expenses incurred by field sales reps during business travel), they aren’t considered maverick spend unless they go unmonitored or unregulated.
Strong business expense management and overall budgetary controls can reduce or eliminate maverick spending through corporate cards or spending reimbursement.
Process and clarity are the most effective tools in curbing tail spend. By outlining and systematizing your expensing practices, you give staff the guidance they need to operate autonomously while reducing the manual data entry and investigative work required of your AP team. Here are three easy ways to manage business spending without adding more tasks or hours in the day:
Setting reasonable and effective budgetary controls around expenses is the prime way to curb tail spend in your organization. By codifying the spending expectations for employee expenses, you provide necessary guidance for teams.
Common business expenses that benefit from documented expense policies include:
By providing a structured expense management process, you can also fine-tune budgeting for this spending category and monitor spending throughout the year.
Monitoring expenses regularly is the only way to catch issues like maverick spending and Ness categorized expense purchases.
These audits should occur for both corporate card use and reimbursable expense accounts. Though these audits take time, they can surface issues before they spiral out of control and result in unnecessary costs. Expense report software can automate the audit process and relieve the burdens on accounts payable for spend management.
Corporate cards are notoriously difficult to audit and control. While corporate cards have presented the best option for providing flexibility for decades, newer methods of administering expense programs have emerged.
For large-scale expense programs that involve dozens or hundreds of billing owners, consider an alternative such as expense tracking software, procurement cards, etc. Procurement cards offer the same flexibility as a corporate credit card while offering more dynamic budgetary controls and automated options. Expense management software can make it easier for your finance team to keep track of real-time spending
For indirect procurement expenses such as spot buys, supply ordering, for software implementations, consider using a marketplace tool or platform that provides curated access to negotiated vendors and options.
Automation — both in your expense management platform and your AP accounting software — reduces inefficiencies and closes the gaps where maverick and unregulated spending occurs. By providing the best expense functionality, you reduce overall tail spend while offering flexibility for billing owners.
Likewise, by automating the accounting processes around your business expenses, you can enforce expense guidelines and surface spending issues automatically without requiring manual audits that cost time and money for your AP teams.
For any automation you choose, be sure to look for a solution that offers intuitive, user-friendly UI with the ability to perform software integrations. The best platforms will “talk” to your other major platforms: Bookkeeping (e.g. Quickbooks), ERP, communications, etc. An expense tracker that offers receipt scanning is another plus for automating expenses with software solutions.
Establishing better expense management protocols has a natural secondary benefit: lowered risk. By establishing good vendor management practices, working with a shortlist of high-quality suppliers, and automating the audit process, occurrences of procurement risk are greatly reduced.
Procurement management and third-party risk are a major concern for organizations of all sizes but are more likely to occur in larger organizations, especially those with insufficient regulatory controls. Since third-party risk and liability cost businesses billions of dollars — over $42B in 2020 before the surge in remote work — prioritizing expense data and supplier risk management is an important objective to meet.
Software is one of the biggest categories of business spending in most organizations. It’s also the most vulnerable to visibility challenges and waste. Here are three ways to ensure your software spending serves your staff without bloating the budget.
Strategic procurement in business refers to techniques and practices that improve the process and costs of getting supplies and software. Strategic procurement helps to control maverick spending practices and takes advantage of potential volume pricing and favorable contract terms. By negotiating effectively with a consolidated list of suppliers, organizations can build considerable cost savings that scale as they add more employees and licenses.
Sometimes, the bottom line savings on software isn’t the best metric for evaluating the success of a deal. Look at other factors in the cost of implementing and using the software. Consider factors of the deal such as:
While the cost per license may be low, total cost and business impact for implementation should always be a priority when negotiating software.
Auto-renewing subscriptions can sneak up on even the most organized teams. You can create enough time to commit to thorough evaluation and negotiation by automating the renewal evaluation process. Automation also creates a workflow to eliminate approval workflow bottlenecks. This allows you to maintain your tech stack with only the software tools that serve best, without ending up with orphaned apps or underutilized licenses.
By keeping a careful eye on the categories and processes that most impact your bottom line results, companies can realize cost savings while reducing the labor burden of managing employee expenses.
Vendr helps address one of the most critical spend categories, offering a next-generation expense management solution for purchasing software. By offering software management tools as part of their overall expense management system, we help clients save up to 25% when they buy SaaS software.
Looking for more? Learn how we help consolidate your tech stack, perform a free savings analysis, and identify buying process challenges all before you even become a customer with our self-guided tour of our SaaS buying approach.