Factoring savings calculations: how do you factor cost avoidance into your savings model?

“Don’t insult yourself, or your CFO, by reporting on cost avoidance.”

Tania Seary wrote the above in a 2016 article indicating that ISM CEO Tom Derry shared the same opinion regarding the measurement of cost avoidance.

Here we are in 2019, and I am surprised that cost avoidance measurement is still a debate.

Now before you bring out the pitchfork and torches, hear me out on this one.  

The David Copperfield Effect  

As one of the most famous magicians of all time, David Copperfield is a master of illusion. Witnessing his “now you see it, now you don’t” mastery of taking something and making it disappear into thin air is nothing short of amazing.

Do you know what else is amazing? The way that cost avoidance takes something and turns it into nothing.  

However, if you miss the first part of the trick and only come in at the end when Copperfield goes ta-dah, it’s disappeared; you would likely say “ta-dah what?” The reason for your lack of recognition is that you never saw “the before” – the thing he made disappear.

With cost avoidance, it is the same thing. While we in procurement have the benefit of seeing the trick materialize from start to finish, i.e., we negotiate a supplier down from a 20 percent price increase to 10 percent, no one else in the organization is there to witness that accomplishment.

Like trying to explain the Copperfield magic to someone who isn’t there to see it first-hand, it loses something in the translation. Think of a tree falling in a forest and no one being there to hear it.

The Horse Is Dead

So, we are at a crossroads regarding this cost avoidance thing. Let’s face it, if the CEO of the oldest purchasing association in the world tells everyone that promoting cost avoidance as a viable metrics is a waste of time, then why are we even talking about it?

Please continue to hold off with the pitchfork and torches.

The point I am making is this; engaging in a chicken or the egg debate – by the way, the egg came first, is a waste of time because there are other, newer metrics that have an even greater impact on the enterprise towards which we should turn our attention. In other words, we should broaden the scope by which we measure procurement’s impact.

For example, do you realize that in the digital age in which procurement is taking place beyond the cloud on “the edge,” that the supply chain will deliver 70 percent of all digital advancements within the global enterprise?

What are the metrics for measuring success in this newly expanded arena? If you do not have a ready answer, you risk missing a great opportunity to showcase how valuable procurement is beyond cost avoidance.

A “Risky” Calculation?

In the context of risk, the cost avoidance debate is not entirely a lost cause.

Companies like IBM have plugged their supply chain into the Weather Network’s systems to use AI to track weather patterns to determine the likelihood of a supply chain interruption.

Avoiding problems before they arise by circumventing bad weather or other conditions that could negatively impact a company’s supply chain makes good sense.

The only question I have is how you measure the return on avoiding a supply chain interruption due to weather?

Okay, time to put away the pitchforks and torches.