Procurement’s role has shifted.
No longer just cost-cutters or compliance enforcers, today’s procurement leaders are expected to drive strategic value—and prove it.
But with so many metrics floating around, which ones matter most?
Among the most important KPIs for modern procurement teams is cost optimization—and within that, two metrics often cause confusion (and contention): cost savings and cost avoidance.
While they serve different purposes, both are essential to a complete picture of procurement’s impact on an organization’s financial performance.
In this guide, we’ll clarify the differences between cost savings and cost avoidance, explain how to measure each, and share negotiation strategies to help you achieve and report both effectively.
Cost savings refer to the actual, measurable reduction in current expenses achieved through specific procurement actions.
These are often considered “hard savings” because they are visible in the financial statements and directly impact the bottom line.
Cost savings occur when a procurement team negotiates a better price, reduces supplier costs, or switches to a lower-cost vendor—after a purchase has already been budgeted or planned.
These reductions are immediate and verifiable. Finance teams often track cost savings as part of quarterly or annual reporting.
Examples include:
RED BEAR teaches procurement professionals to leverage negotiation principles like "Set High Aspirations" and "Concede According to Plan" to secure hard cost savings without damaging supplier relationships.
Here are a few proven strategies:
Ultimately, cost savings focus on immediate reductions in existing operational expenses—and they’re crucial for finance alignment and procurement’s credibility.
Cost avoidance refers to actions taken to prevent future expenses before they occur.
Unlike cost savings, which reduce existing costs, cost avoidance strategies mitigate potential financial burdens—often by influencing upstream decisions or negotiating smarter contract terms that protect value over time.
In simple terms, cost avoidance (or soft savings) doesn’t show up directly in financial statements, but it plays a crucial role in long-term value creation.
It’s the strategic foresight to recognize and prevent unnecessary costs before they impact the organization.
Examples of cost avoidance include:
RED BEAR helps procurement teams excel at cost avoidance by teaching them to “Satisfy Needs Over Wants” and to identify elegant negotiables—items of high perceived value to suppliers but low actual cost to the buying organization.
Here’s how RED BEAR clients practice cost avoidance effectively:
Why is this so powerful? Because avoiding a $250,000 future expense is every bit as valuable—arguably more so—than saving $100,000 today. Especially in industries with high volatility or complex compliance demands, practicing cost avoidance isn’t optional. It’s strategic risk management.
Although often used interchangeably, cost avoidance and cost savings play very different roles in procurement—and each brings distinct advantages depending on your goals, timelines, and reporting requirements.
|
Criteria |
Cost Savings |
Cost Avoidance |
|
Definition |
Reduction of existing or current costs; immediate cost savings |
Prevention of future or potential costs |
|
Timing |
Immediate, during, or after spend |
Proactive, before spend is incurred |
|
Visibility |
Reflected in financial statements |
Not directly visible in financials |
|
Impact |
Short-term ROI |
Long-term value and risk reduction |
|
Examples |
Renegotiated lower prices, volume discounts |
Locked-in pricing, avoiding legal fees or downtime |
|
Negotiation Focus |
Unit cost reduction, hard savings |
Risk mitigation, smart contract terms |
Procurement leaders can no longer afford to choose one over the other. Cost savings and cost avoidance must be pursued in tandem to optimize the organization’s financial performance:
Think of cost savings as your performance “scorecard” and cost avoidance as your strategic “playbook.”
Recognizing the distinction allows procurement teams to speak the language of finance while also demonstrating foresight and strategic alignment. Avoidance may be harder to quantify, but it’s often where true value creation lives.
Both metrics contribute to procurement's evolving role as a business driver—not just a cost center.
The most effective procurement strategies don’t treat cost avoidance and cost savings as competing priorities—they treat them as complementary levers in a broader value creation model.
For leaders tasked with driving both immediate impact and long-term resilience, knowing when to push each lever is a strategic necessity.
Cost savings offer clarity. They’re easy to report, track, and attribute directly to procurement’s efforts. When a team negotiates a lower unit price, streamlines logistics, or consolidates supplier contracts to reduce redundancy, the results show up clearly in financial statements. These savings play well with finance and help validate procurement’s role in achieving quarterly targets.
But relying solely on cost savings metrics creates risk. It often leads to chasing visible wins at the expense of sustainability—cutting costs in ways that eventually increase operational or compliance burdens down the line.
This is where cost avoidance plays a crucial role. Most teams are way too quiet about these wins, but they are the ones that often have the greatest impact.
For example, negotiating a cap on price increases, embedding penalty protections for delivery failures, or planning with suppliers to avoid the need for expedited fees—all are cost avoidance measures that protect future budgets.
They may not reduce this quarter’s P&L, but they prevent disruptions, maintain margin, and position procurement as a proactive business partner.
RED BEAR trains procurement professionals to plan for both types of savings. By focusing on both cost types, procurement becomes more than a gatekeeper of spend—it becomes an architect of competitive advantage.
Ultimately, balancing these two dimensions isn't just a best practice—it's a requirement for teams that want to lead procurement transformation, not just support it.
Understanding the value of cost savings and cost avoidance is one thing—proving it is another. For procurement leaders tasked with aligning outcomes to business performance, tracking and quantifying both types of impact is essential.
It's relatively straightforward to calculate cost savings.
They can be calculated as the difference between the baseline price (often the initial quote, previous contract, or market average) and the final negotiated price.
These savings are captured directly in the P&L and typically measured per contract, per supplier, or per category.
But accurate tracking requires discipline.
Procurement teams must standardize how cost savings are defined and consistently communicate with finance on what qualifies as a legitimate, reportable reduction.
RED BEAR clients often use our Negotiation Planner to define target, opening, and walkaway positions—ensuring every negotiated dollar is tied to a strategic intent.
Calculating cost avoidance, however, demands a more nuanced approach.
Because these represent "soft costs", the savings don’t appear on financial statements, they require forecasting, modeling, and scenario analysis.
A great example is a cost avoidance savings percentage.
For example, avoiding a contractual escalation clause might prevent a 7% price hike over the next 12 months. That’s a future savings—but only if the procurement team documents the risk, quantifies the avoided cost, and provides evidence of negotiation foresight.
To manage this rigor, leaders can embed cost avoidance into the negotiation planning process:
RED BEAR emphasizes that negotiation power often lies in anticipating these future risks—and addressing them before they show up on an invoice.
Leaders who operationalize this foresight into how teams negotiate, plan, and report their deals gain a distinct edge.
To fully leverage cost savings and cost avoidance, procurement leaders must move beyond theory and build these metrics into the DNA of supplier strategy, contract design, and cross-functional alignment.
RED BEAR clients regularly deploy both to strengthen performance and protect margin—here’s how that looks in practice.
Imagine a global manufacturing company facing mounting pressure on operational costs. Their procurement team renegotiates raw material contracts, securing a 12% unit cost reduction through volume consolidation.
This is hard savings—easily measured, instantly visible on financial reports, and a win for the quarter.
But that same team also includes a price-adjustment cap tied to inflation metrics, preventing a potential 8% price increase over the next contract cycle. That’s cost avoidance, and though it may never be celebrated in a quarterly earnings call, it shields the company from future financial volatility.
RED BEAR’s training methodology guides teams through these exact negotiations using planning frameworks that force teams to identify elegant negotiables—concessions that deliver high value to suppliers but come at low cost to the buyer.
For instance, we’ve seen:
Cost avoidance also shines in categories such as preventative maintenance, labor costs, energy, and compliance.
Consider a facility upgrade project: opting for a slightly more expensive HVAC system may not yield immediate savings. But if it cuts energy consumption by 30% annually, avoids emergency repairs, and qualifies for tax credits, the long-term benefit far outweighs the upfront investment.
And these aren’t just anecdotes.
RED BEAR clients institutionalize such strategies with negotiation planners that track avoided risks alongside hard-dollar gains—ensuring both are recognized in internal reviews and executive dashboards.
In high-stakes procurement, success is no longer measured by how much you save alone—but also by what you never had to spend.
One of the biggest obstacles procurement leaders face is narrating the value of what their team achieves.
While cost savings often speak for themselves in reports and dashboards, cost avoidance demands greater internal alignment and storytelling.
Without a shared understanding, these proactive wins risk being dismissed as “intangible” or “unproven.”
The root of the challenge is measurement. Cost savings tie neatly into financial reporting: the price went down, the margin improved, the impact is obvious.
But cost avoidance requires careful framing.
These wins are real—but only when they’re documented and communicated effectively.
RED BEAR helps clients address this through structured negotiation planning and internal education. Teams are trained to track initial proposed costs vs. final contracted costs, and to document specific terms negotiated for risk mitigation.
This planning often includes:
But the challenge doesn’t stop at measurement. It extends to stakeholder alignment.
Many procurement teams struggle to articulate soft savings in a way that resonates with finance or executive stakeholders.
The key is linking cost avoidance to business continuity, risk management, and operational agility—not just dollar figures.
For example:
RED BEAR’s negotiation methodology trains teams to anticipate these risks, plan for them, and articulate them clearly. It’s not just about getting the best deal—it’s about managing cost in all its forms and making that impact visible across the business.
Procurement teams that focus solely on cost savings miss a critical opportunity: the ability to shape the future cost structure of the business.
Conversely, those who fixate only on risk avoidance may struggle to show measurable short-term impact. The most strategic leaders don’t choose—they balance.
A balanced cost management approach treats both cost avoidance and cost savings as strategic imperatives.
It begins with planning—ensuring that every negotiation is approached with clear aspirations, defined walkaway points, and an understanding of what success looks like across multiple time horizons. RED BEAR’s training equips teams to build this mindset from the start, using structured frameworks and planning tools that force clarity, discipline, and intentionality.
This approach also redefines how procurement value is communicated internally. Cost savings will always matter—they’re the quick wins that help fund innovation, meet margin targets, and build credibility.
But cost avoidance is what safeguards those wins. It prevents erosion. It preserves flexibility. And in high-risk environments—from global supply chains to regulatory-heavy industries—cost avoidance often becomes the most strategic act procurement can take.
Leaders who integrate both into their reporting, planning, and stakeholder narratives are better equipped to influence at the executive level. They can align procurement outcomes with broader business goals, whether that’s improving EBITDA, reducing exposure, or building supply-side resilience.
While negotiation is in your team’s DNA, optimizing it can lead to more measurable cost outcomes that help you hit your numbers and be seen as a strategic necessity in the business.
Ready to elevate your procurement performance with strategic cost management?
Contact RED BEAR to learn how our workshops equip procurement teams to drive both hard savings and strategic cost avoidance—turning planning into predictable results.