Differentiating between hard savings and soft savings is a critical responsibility for procurement professionals. While organizations may vary in their preferred measurement methods, establishing a standardized approach to tracking savings is essential for delivering credible and meaningful results that demonstrate procurement’s true value.
What Are Hard Cost Savings?
Hard cost savings refer to tangible, direct reductions that have an immediate impact on a company’s bottom line. These savings often result from concrete actions such as bulk purchasing discounts, negotiated price reductions, or efficiency gains through process improvements. For example, reducing the baseline spend through targeted cuts, achieving volume reductions, or securing vendor rebates all contribute to hard savings. Essentially, these savings are quantifiable and verifiable within the company’s financial statements, making them a primary focus for many procurement teams.
What Are Soft Cost Savings or Cost Avoidance?
In contrast, soft cost savings (or cost avoidance) represent efforts that prevent potential price increases or reduce future expenditures, rather than lowering current costs. While these savings may not immediately reflect as reductions in spend, they mitigate the impact of rising prices or improve operational efficiency over time. Examples include negotiating free training or upgrades with suppliers, securing price protections within contracts, or implementing process improvements that enhance productivity without additional costs. Over time, these actions can translate into measurable cost savings and improved supplier value.
Balancing Both to Maximize Procurement Value
Although hard savings tend to receive the most attention due to their direct financial impact, it is common (and advisable) for procurement teams to track both hard cost savings and cost avoidance. To effectively demonstrate procurement’s contribution to business success, organizations must adopt standardized methodologies aligned with their core values and financial goals.
Therefore, regular collaboration between procurement, executive leadership, and finance teams is essential. By aligning on consistent definitions and measurement standards, these groups can ensure transparency and accurately capture the full scope of procurement’s value – from immediate cost reductions to long-term efficiency gains and risk mitigation.
Maximizing Procurement Impact with Clear Savings and Alignment
Today’s business environment demands a clear understanding of hard and soft savings so procurement can effectively communicate its value and support strategic decisions. By standardizing savings measurement and working closely with other teams, procurement can drive better cost control and improve operations.
