Cost avoidance
Cost avoidance prevents future costs that would otherwise occur, such as negotiating to hold prices flat when suppliers request increases, or selecting suppliers that won't require future remediation. Unlike cost reduction, avoided costs don't appear as savings against prior spending since the higher cost never actually happened.
Examples
Price increase negotiation: A supplier requests a 5% price increase citing higher material costs. Procurement negotiates the increase down to 2%. The 3% difference is cost avoidance, preventing $150,000 in additional annual spend that would have occurred.
Specification optimization: Early in design, procurement identifies that a proposed specification would require expensive custom materials. Modifying the specification to use standard materials avoids $500,000 in annual material cost that would otherwise have been designed into the product.
Risk mitigation: Procurement identifies financial instability at a key supplier and qualifies an alternative before problems occur. When the original supplier fails, the prepared backup prevents production disruptions and expediting costs that would have occurred.
Definition
Cost avoidance is real value but challenging to measure and communicate. There's no invoice showing what you didn't pay, making cost avoidance more subjective than cost reduction. Organizations sometimes dismiss cost avoidance as "soft savings."
Documenting cost avoidance requires capturing what would have happened without procurement intervention. For price increases, document the requested increase and the negotiated outcome. For design decisions, document the avoided cost path and the chosen alternative.
Cost avoidance can be more valuable than cost reduction because it prevents costs from entering the baseline. Once a higher cost is established, reducing it later requires additional effort. Avoiding the increase in the first place is more efficient.
Balanced procurement metrics should include both cost reduction and cost avoidance. Focusing only on reduction against prior spending misses significant value from preventing increases, and may even encourage accepting increases to create future reduction opportunities.
Frequently asked questions
What is cost avoidance in procurement?
Cost avoidance prevents future costs that would otherwise occur, such as negotiating a requested price increase down or selecting suppliers that will not require future remediation. Unlike cost reduction, avoided costs never appear as savings against prior spending, because the higher cost never actually happened.
What is the difference between cost avoidance and cost reduction?
Cost reduction lowers spending against an existing baseline, so it shows up when comparing invoices year over year. Cost avoidance keeps a cost from entering the baseline in the first place: a supplier's requested 5% increase negotiated down to 2% is 3% of avoidance, worth $150,000 a year in one example, yet no invoice ever shows what was not paid.
Why is cost avoidance dismissed as soft savings?
Cost avoidance is harder to evidence than cost reduction because there is no invoice showing what you did not pay, which makes it more subjective. Documenting it means capturing the counterfactual: for price increases, record the requested increase and the negotiated outcome, and for design decisions, record the avoided cost path and the chosen alternative.
Can cost avoidance be more valuable than cost reduction?
Cost avoidance can be more valuable because it prevents costs from entering the baseline at all. Once a higher cost is established, reducing it later requires additional effort, so preventing the increase is the more efficient path. Early-design examples are the largest: modifying a specification away from expensive custom materials avoided $500,000 in annual material cost in one case.
Should procurement metrics include cost avoidance?
Balanced procurement metrics include both cost reduction and cost avoidance. Measuring only reduction against prior spending misses significant value from preventing increases, and it can even encourage the wrong behavior: accepting an increase now to create a reduction opportunity to claim later.