Cost savings versus cost avoidance

Whiteboard Wednesday Episode 15: Cost savings versus cost avoidance

Whiteboard Wednesday is me, a whiteboard and learning about all things IT Asset Management (ITAM), every Wednesday!

This week, cost savings and cost avoidance, what’s the difference between those two terms? And when do we use them? 

https://www.youtube.com/watch?v=PCCTCyuEdOI

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Cost savings versus cost avoidance

Cost savings and cost avoidance, two terms used interchangeably, we need to know the difference. Because in asset management we need to justify our spend, justify our existence and sometimes justify our practice. And we do that via cost savings, and cost avoidance and other terms. So, it’s useful to know these when we’re expressing our savings.

Cost savings is basically now this, this financial year, or this budget cycle, or an impact we can have right now. If you had a million-pound renewal, and you were able to demonstrate savings over that renewal of say 200 000 then that is an absolute cost saving. It’s also called a hard saving as opposed to cost avoidance is savings in the future, this is called a soft saving. And let’s say that you implement a process and over the next two to three years, you’re going to streamline that process and saving the company a lot of money and a lot of maybe licenses or whatever it might be a lot of assets. You would say that that is a future saving, not in this financial year therefore its cost avoidance.  

Know the terms  

Cost savings hit the budget this year, they hit the financial statements of the company, you can save the money and potentially spend it somewhere else. Whereas cost avoidance is doing things in the future, they’re going to hit future cycles. So, if you had saved half a million pounds by removing unused assets but the renewal is not until next year, that’s going to be a cost avoidance, that’s not going to be till next year.

Similarly, with audit defence, if you get a nasty audit letter and a nasty settlement, and you managed to avoid that, that is cost avoidance because it probably wasn’t budgeted for in the first place. It was a cost that you weren’t expecting that you saved. So, it’s still cost avoidance.

It is useful to know these terms when we’re communicating, especially with financial procurement, to articulate our messages. Obviously, these are awesome if you could do these this year and save money. A lot of our work is here in process improvement and savings in the future.