Are Avoidance Savings Real?
I’ve had the opportunity to have this discussion with many CFOs, Controllers, and Procurement Leaders, over the years delivering savings in procurement. While some people may gravitate to the pure, tangible, bottom line savings, the avoidance savings are real. They are real because the world and business conditions are constantly changing and change must factor into the baselines by which we measure results against. If savings teams didn’t take action and didn’t provide their expertise to avoid cost increases, costs very well would have gone in the wrong direction.
Company leaders I’ve worked with generally see this, and to date (knock on wood) I’ve always been able to get teams recognized for their contributions in avoidance savings. The sticking points can sometimes occur if cost increases were not budgeted previously and financial leaders are trying to measure savings against a static budget, it can get a little political. It’s important that savings be measured against what has really historically happened adjusted for the dynamics and complexities of business that are beyond the control of any one company or the people in it. This concept is especially important to apply when dealing with volatile commodities (e.g. petroleum products, chemicals, base materials). Sometimes the indexing by which baseline costs are adjusted is not perfect, but as with many things in business, you make the best decisions with the data and experience you have, and go with the number.