According to a survey conducted by Gartner, 75% of CFOs are aiming to align costs with growth in 2023. Strategic investments in SaaS play a massive role in this — but as the average number of tools deployed by organizations rises, and software prices climb by an average of 12% each year, the challenge is mounting to prevent SaaS spending from outpacing organizational growth.
As a result, finance leaders are required to closely monitor software expenditure, make accurate spending projections and search for cost-reduction opportunities at each stage in the SaaS life cycle.
One tool that contributes to an effective spend management strategy is cost avoidance.
The problem is, it’s often an aspiration that many CFOs overlook in favor of cost savings. But cost avoidance shouldn’t be ignored — it plays all too important a role in keeping down SaaS costs, and can often save a business from having to deploy cost-saving measures further down the line.
To integrate cost avoidance into your spend management strategy, you’ll need to understand the difference between cost avoidance and cost savings, and the benefits of preventing costs during procurement.
With this in mind, let’s take a closer look at this up-and-coming SaaS procurement strategy that can minimize spending and allow capital to be reinvested into other productive areas of the business.
What is cost avoidance?
Cost avoidance is a financial management approach which aims to prevent costs before they are incurred. This involves the monitoring and mitigating of prospective expenses and the events that precipitate them.
In the context of SaaS procurement, cost avoidance takes the shape of various measures to avoid any unnecessary costs during the SaaS lifecycle. These can arise as a result of contractual terms or inadequate SaaS management practices.
Cost avoidance vs Cost savings
So, what’s the difference between cost avoidance and cost savings?
Each approach represents a core component of spend management that works to lower overall expenditure, but it’s still important to distinguish between the two and prioritize accordingly.
Essentially, cost avoidance works to anticipate and prevent expenses before they happen. This is a proactive approach involving the inspection of risk areas that could drive up SaaS costs later down the line. Avoidance strategies help identify indirect costs that might emerge and take measures to prevent them from happening.
On the other hand, cost savings focuses on retroactively identifying and reducing costs that have already happened. These represent the quantifiable hard savings that you can achieve through negotiating your upfront, regular fees.
As a proactive approach, cost avoidance is usually harder to quantify than cost savings, and tends not to appear on a traditional balance sheet. In spite of this, each is an invaluable component of a spend management strategy that will protect your company’s long-term financial health.
Examples of cost avoidance in SaaS procurement
Let’s take a closer look at cost savings vs. cost avoidance in practice, using examples within SaaS procurement.
Cost avoidance strategies are typically implemented when:
- Selecting suppliers and tools
- Negotiating new contracts
- Making budget choices
One example of cost avoidance when negotiating a new contract is to stipulate that a usage cap should be enforced to prevent users from exceeding their regular resource allocation. In turn, this means that the organization won’t need to pay out for costly overage fees, and can simply suspend their usage temporarily or upgrade to the next pricing tier.
On the other hand, cost savings strategies tend to come into play during:
- Software renewals
- Application rationalization
These may include renegotiation strategies to optimize SaaS costs, for example by leveraging the offer of a multi-year subscription to secure a discounted recurring fee.
Why finance leaders need to focus on cost avoidance when purchasing software
We’ve discussed the benefits of SaaS cost savings at length in many of our previous articles, including:
- The true cost of SaaS wastage
- The complete guide to software application rationalization
- Hidden SaaS costs: what’s really driving up spend?
However, we’ll switch our focus here to the benefits of SaaS cost avoidance. With the growing cost of SaaS products draining IT budgets, financial officers are quickly learning that in many cases, prevention is better than cure — and if you’re procuring new software deals, there’s no better time to avoid costs than before they accumulate.
So, if you’re purchasing an entirely new software contract, these are some of the top benefits of cost avoidance to be aware of:
Spend-reduction opportunities
Cost avoidance lays the groundwork for spend reduction throughout the SaaS life cycle. By identifying and mitigating unnecessary expenses, organizations can optimize future spending, particularly those indirect costs that weren’t budgeted for or strictly necessary for the purchase of the contract.
Therefore, cost avoidance can provide the fullest spend optimization opportunities, enabling finance leaders to thoroughly assess software needs, evaluate alternatives and make informed decisions prior to purchase. This means avoiding unnecessary expenditures, such as overpaying for licenses or features that aren’t utilized to their full potential. By preventing these expenses from occurring, organizations can achieve more sustainable cost savings over time.
Improved budgeting
Effective cost avoidance contributes to more efficient budgeting and forecasting practices.
When finance leaders focus on preventing unnecessary software costs, they can allocate resources more accurately and ensure that budgets are directed towards strategic investments that drive the organization’s growth, rather than being wasted on avoidable expenses.
Budget optimization also enhances financial predictability.
By proactively managing software costs, finance leaders can reduce the likelihood of unexpected budget overruns or financial crises caused by unplanned software expenses.
These can include large overage charges or termination fees. With this financial stability, organizations can plan and execute their budgets and future decision making with confidence.
Prevents overprovisioning
One key benefit of cost avoidance is that it encourages financial leaders to work cross-departmentally to prevent SaaS wastage. When software resources are not optimized, companies may find themselves locked into expensive contracts or burdened with unused licenses. In fact, our data shows that 33% of software licenses go underutilized or abandoned completely by the intended users.
By taking a proactive approach to avoid unnecessary spending, finance leaders can minimize the risk of new contracts being procured that provide little to no business value. This reduces the likelihood of any productivity harms that can accompany a sprawled software stack. Plus, you will become better equipped to select the solutions that best fulfill your organization’s needs, delivering a higher return on investment.
How Vertice can support your procurement cost avoidance
Cost avoidance is a game-changing tool to integrate into your spend management strategy — but to be most effective, it needs to be informed by your current software portfolio. To make proactive decisions that will go the farthest to reduce your costs, you’ll need company-wide visibility on the existing utilization and costs associated with each stage of the SaaS life cycle.
And that’s where we can help.
Vertice’s SaaS management platform helps businesses record and access their software details from one convenient dashboard, ensuring that all decision makers can access the knowledge they need to avoid unnecessary procurement costs. Gain unparalleled visibility of your pending renewals, billing details and extra fees, and establish a streamlined procurement process by partnering with our SaaS purchasing specialists.
See for yourself how Vertice helped one company optimize its software spending and streamline its entire SaaS purchasing workflow, saving them more than $180K in just six months. Alternatively, find out how much you could be saving on your own annual SaaS spend.
