Cost avoidance: Steering procurement performance beyond direct savings

Summary:

Cost avoidance broadens procurement performance management by the protecting company’s budget against price increases, beyond immediate savings. As a preventive measure, it complements cost savings and value creation in a balanced procurement strategy.

Table of Contents:

• What is cost avoidance?
• Cost savings, cost avoidance, value creation: what are the differences?
• How to calculate cost avoidance?
• How to value cost avoidance?

In a volatile market, where energy, raw material or transport prices can change rapidly, cost avoidance becomes a key indicator for protecting margins without waiting for budget overruns to appear in the financial statements. While companies are more than ever seeking to gain a competitive advantage, procurement performance is still too often restricted to negotiated cost savings. Yet other indicators play an equally strategic role, particularly avoided costs, also known as “cost avoidance”. Perceived as an avoidance measure, this indicator aims to mitigate any price increase. Although less tangible than a direct savings, it constitutes a key lever for action to protect budgets, particularly in an inflationary context.

What is cost avoidance?

Cost avoidance refers to all proactive actions taken to anticipate and prevent future cost increases. Unlike cost savings, which focus on reducing existing expenses, cost avoidance aims to stop additional costs from occurring in the first place. In practice, procurement departments intervene to maintain price stability or limit increases linked to inflation and economic condition (for example, by capping supplier price hikes or mitigating risks to prevent costly supply chain disruptions).[NE1] 

This can take various forms:

• Negotiating with suppliers to limit or defer a price increase;
• Securing fixed-price contracts over the long term;
• Reviewing specifications to avoid unnecessary and costly over-specification;
• Investing in maintenance to avoid unforeseen breakdowns and replacements.

With cost avoidance, the budget does not decrease but is protected from a potentially significant increase. In other words, this does not improve the margin, but protects it.

Nicolas Passaquin, Head of Procurement at the Hilti Group, highlights how this strategy is “particularly relevant in sectors sensitive to inflation (raw materials, specific markets, etc.), in the technology sector (particularly new technologies offering the same functionalities at a higher price), in the context of investments and in many other situations.”[1]

Cost avoidance does not therefore appear in the acc mais un peu executiounts as a direct saving. However, it enables proactive financial management of inflation, supplier price increases and operational risks before they have a real impact on spending. It thus helps businesses to maintain a degree of budgetary stability and supports long-term financial health.

Cost saving, cost avoidance, value creation: what are the differences?

These three concepts refer to distinct but complementary procurement strategies. Each addresses a specific objective: optimising current spending, protecting future costs, or sustainably improving the value created for the company. Understanding the differences between cost avoidance and cost saving, as well as value creation, is essential for balanced cost management.

Cost savings

Cost savings involves reducing current spending, with an immediate effect. These are direct and measurable cost savings obtained through supplier management, competitive sourcing or process optimisation. Calculating cost savings is straightforward, as the results appear directly in financial statements and can be tracked from period to period.

Cost avoidance

Cost avoidance aims to prevent future cost increases, by anticipating market developments, price fluctuations and risks. Examples of cost avoidance include securing a price before a supplier raises their rates, or locking in long-term contracts before cost increases take effect. Cost avoidance vs cost savings: whilst cost savings involves reducing existing expenditure, avoidance strategies focus on avoiding future expenditure altogether. Effective cost avoidance strategies rely on analytics, robust software and proactive procurement management.

Cost avoidance with Manutan

At Manutan, we support companies in optimising their long tail spend. This includes cost savings measures, but also cost avoidance measures, by implementing framework agreements and maintenance and repair services. Manutan offers options to minimise downtime and extend equipment lifespan (available under conditions in Belgium, Italy and Netherlands, at the date of content publication).

Value creation

Value creation goes beyond the purely financial dimension. It includes all actions that strengthen procurement performance. This may involve innovation, quality, reducing risks, sustainability, or supplier reliability.

The most effective procurement strategies combine these three levers to balance immediate financial gains with cost management and long-term competitive advantages.

How to calculate cost avoidance?

Just as with cost reduction, cost avoidance can be expressed as an amount or as a percentage. This enables you to quantify the impact of this strategy and track cost avoidance over time, providing valuable resources for reporting. Dedicated software tools and analytics platforms also support procurement departments in calculating cost avoidance more accurately.

Amount

The calculation begins with an estimate of the potential cost if no action were taken. To do this, the procurement team draws on historical data, market analyses or forecasts regarding price developments.

This figure is then subtracted from the cost of taking action. This involves estimating all expenditure relating to the implementation of the proactive solution designed to avoid these costs. The resulting figure represents the amount of avoided costs.

Amount of avoided costs = Estimated cost of inaction – Cost of the proactive solution

Percentage

Once the amount of avoided costs has been obtained, it is possible to calculate cost avoidance as a percentage. Simply divide this figure by the estimated cost of inaction.

Cost avoidance percentage = Amount of avoided costs / Estimated cost of inaction

How to value cost avoidance?

After calculating cost avoidance, the key challenge is to recognise its value within the company. This requires a coherent, transparent and shared approach in order to fully integrate it into the measurement of procurement performance. The right software and resources can help procurement departments track cost avoidance more effectively.

Structuring the Framework

To measure cost avoidance effectively, it is essential to structure your approach. This begins with formalising a clear definition of cost avoidance. This framework must specify the types of costs covered, the recognised use cases and the calculation rules. Once this methodological base has been established, procurement teams can work on standardising reporting. The goal is to present results in a clear and understandable way for all stakeholders. The objective is to strengthen the credibility of the analyses and concretely demonstrate the value generated by the approach.

Involving Finance

To lend credibility to this approach, it is important to involve finance teams. This collaboration helps to refine the calculation methodology, validate assumptions, and ensures that the indicators are aligned with the company’s financial objectives. This cooperation delivers a broader overview, whilst also strengthening the legitimacy of cost avoidance and stakeholder buy-in.

If cost reduction delivers fast and visible gains, cost avoidance constitutes an essential pillar of companies’ long-term financial health. In a period of economic uncertainty, cost avoidance provides valuable visibility, secures margins and protects competitiveness. Cost avoidance plays a crucial role in any purchasing strategy aimed at reducing exposure to price increases. By fully integrating this concept into their procurement performance management, procurement departments strengthen their strategic role within the company.