Cost avoidance in procurement rarely gets the recognition it deserves from CFOs. Despite the industry’s shift toward a broader value-driven view of procurement excellence, most teams are still primarily measured on cost savings.
Let’s face it: this is frustrating.
Even when leadership acknowledges that buyers deliver more than just bottom-line savings, this appreciation rarely shows up in our performance objectives. We’re still expected to hit those hard savings targets quarter after quarter, regardless of market conditions or category maturity.
For those of us in indirect procurement, the challenge is particularly acute.
Unlike our colleagues purchasing direct materials, measuring hard savings – i.e. those visible on the P&L statement – becomes a complex puzzle in the indirect space. How do you consistently generate measurable savings on categories that are purchased irregularly or have highly variable specifications?
But this isn’t just an indirect spend problem.
Even in direct materials procurement, it’s challenging to get recognition for crucial work like deferring commodity price increases or offsetting inflation to maintain current price levels. When raw material prices are surging 15%, and you negotiate it down to a 10% increase, that 5% difference rarely gets recognised as the significant achievement it represents.
The relationship between Procurement and Finance often becomes strained over rigid definitions of what qualifies as “savings.” What procurement sees as value creation, finance might dismiss as merely doing your job.
This disconnect can lead to demotivation and missed opportunities for both departments.
Today, let’s explore two areas where Procurement teams invest significant effort but struggle to receive proper recognition:
- Cost avoidance (including price increase deferrals)
- Value creation through strategic sourcing and supplier collaboration
Why measuring Procurement only on Hard Savings is misguided
Many companies exclusively recognise savings based on Purchase Price Variance (PPV), measured against budget standard costs from last price paid or moving average price.
This works well for repeatable purchases with stable specifications, but what about one-time or infrequent buys? How do we measure the true economic value that procurement professionals deliver when the baseline for comparison is constantly shifting or doesn’t exist at all?
Consider this contrast:
A direct materials buyer can deliver a $1 million hard saving after one major supplier negotiation by reducing the cost of a component used in thousands of finished products.
But such substantial savings from a single negotiation rarely happen in indirect categories, where spend is often fragmented across dozens or hundreds of suppliers and thousands of unique items.
With indirect spend, we’re often dealing with one-time purchases with no previous price history. Or, we’re stuck with multi-year contracts that can’t be easily terminated, and thus the spend is not immediately addressable.
Think of common indirect categories:
- IT infrastructure
- Facilities management
- Capex for machinery & equipment
- Property maintenance
- Fabricated spare parts
- Promotional goods
All of these require skilled negotiation to avoid costs that would otherwise hit the company’s budget.
So why do organisations insist on using the soul-crushing method of hard, P&L-visible savings to measure indirect procurement performance?
Are we just simply stuck in an outdated method that simply fails to recognise procurement’s evolution?
The “Invisible” Benefits of Cost Avoidance in Procurement
The simple answer: the office of the CFO often sees the world in black and white numerical terms. If it can’t be tracked in the P&L, it doesn’t register on their radar.
Yet the valuable contributions from Category Managers handling indirect spend often come through cost avoidance or successfully deferring contractual price increases or inflationary pressures. These efforts keep budgets stable and prevent unnecessary spending, something every organisation should value.
Interestingly, cost avoidance in procurement is much more widely acknowledged when it comes to purchasing capital equipment. The difference between the final price and the allocated budget is typically recognised. Procurement’s essential contribution for “big ticket” investments is valued.
However, this same methodology gets ignored for smaller, less strategic areas of spend. It’s a puzzling double standard that needs addressing.
Cost avoidance takes many forms, all valuable yet often invisible:
- The gap between original quotes and final negotiated prices
- Value from competitive tendering, where stakeholders would have requested just one supplier quote
- Bonuses or additional goods/services at no extra cost
- Operational efficiency savings that can’t be measured by headcount reduction
- Avoiding contractual traps and unfavourable terms that could lead to future costs
- Mitigating supply chain risks that could result in production delays or emergency purchases
Beyond this, Procurement increasingly drives value-oriented initiatives benefiting the wider business, especially in advancing a company’s ESG goals through supply chain management. From reducing carbon footprints to ensuring ethical labour practices, these efforts create substantial long-term value that rarely appears in traditional savings reports.
Why Procurement should be seen as a Growth Partner
When fully integrated into a business’s value chain, Procurement drives tangible value through:
1. Reduction in total cost of ownership:
Purchasing energy-efficient machinery despite higher initial capex; buying higher-specification spare parts that reduce overall consumption and increase machinery uptime; near-shoring the supply chain to reduce stock-outs, optimise transport costs, and free up cash tied in excess inventory.
These decisions might look more expensive on day one but deliver substantial returns over the asset’s lifetime.
The challenge is capturing this longer-term value in our quarterly-focused reporting systems.
2. Strategic spending that increases sales or profits:
More frequent maintenance intervals that reduce production downtime and increase output (and profits); engaging premium advertising agencies whose campaigns drive more sales or promote higher-margin products; partnering with premium logistics providers to improve on-time deliveries and customer satisfaction.
Sometimes the right decision is to spend more money, not less.
When procurement can demonstrate how higher costs in one area drive greater revenue or margin improvements elsewhere, we transition from cost-cutters to value creators.
3. Innovation acceleration through supplier collaboration:
Co-developing new products with key suppliers; identifying alternative materials that improve performance; leveraging supplier R&D capabilities to solve business challenges
The best suppliers are innovation partners who bring expertise your organisation may lack internally.
Procurement’s role in facilitating these partnerships can dramatically accelerate new product development and problem-solving.
Measuring the Invisible: What’s the Best Approach?
There’s no foolproof method. Any system can theoretically be abused, with soft savings always at risk of measurement criticism. The key is finding a balanced approach that everyone can trust.
However, better collaboration between Procurement and Finance is possible. A successful model acknowledges these three principles:
1. Trust that procurement won’t inflate “savings”
Risk example: Someone trying to hit performance targets might collude with suppliers to get artificially high initial offers.
Building this trust requires transparency in methodology and consistent application of agreed-upon rules. When Finance understands how procurement calculates avoided costs, they’re more likely to accept the figures.
2. Accept that no performance measurement model is perfect
Different business cultures approach negotiations differently. Some haggle over several exchanges while others operate on a “best offer first” basis.
The model needs enough flexibility to accommodate different categories and negotiation styles, while maintaining consistency in how value is recognised.
3. Secure a senior finance stakeholder as sponsor
Cost avoidance and value-driven savings gain credibility only when Procurement and Finance collaborate. Bottom-up attempts usually fail because Finance “owns” accounting and financial reporting, and has the authority to implement changes across all sites.
Without executive sponsorship, alternative measurement systems often become siloed within procurement and fail to gain organisational traction.
How tech helps communicate total procurement performance
There’s an increasing number of tools for all budget ranges that measure purchasing savings beyond last paid price.
Source-to-Pay suites typically don’t cover this, so focus on best-of-breed solutions.
Using these tools instead of Excel-based tracking offers three key advantages:
- Your projects are shared publicly with stakeholders across the organisation, improving communication about your department’s value contribution. This visibility helps shift perceptions about procurement’s role from cost-cutters to value creators.
- This fosters collaborative discussions around reporting disputes and catalyses innovation between Procurement, stakeholders, and external vendors. When everyone sees the same data, conversations become more productive.
- Technology enables supplier participation in the platform for kanban or innovation-driven performance management initiatives. The best systems create transparency that benefits all parties in the supply chain.
The right technology depends on your needs and budget:
You can purchase custom SaaS solutions for procurement performance management from companies such as Provalido, SpendHQ, and Focal Point.
Paul Gurr, Founder of Provalido, was a recent guest on The Procurement Software Podcast.
For simpler needs, you could potentially build something using a No Code tool.
These platforms allow you to create custom applications without extensive coding knowledge, potentially saving significant costs while delivering a tailored solution.
In the end, recognising procurement’s full value contribution requires both cultural and technological changes.
By advocating for more comprehensive performance metrics and implementing the right tools to track them, teams can finally get credit for cost avoidance in procurement. It’s the often invisible work that keeps organisations competitive and resilient.
