Cost Savings vs Cost Avoidance: The Ultimate Guide to Slash Spend

Table of Content

1. Cost Savings vs Cost Avoidance

2. What is "Shadow IT"?

3. Avoidance vs Cost Savings Balance

4. Strategies for B2B SaaS Cost Savings

5. B2B SaaS Evaluation Scorecard Template

6. Strategies for Cost Avoidance in B2B SaaS

7. Leveraging Technology for Cost Optimization

8. Building a Culture of Cost Consciousness

9. Measuring Success

10. Future Trends in B2B SaaS Cost Optimization

11. Conclusion

12. FAQs

If you're reading this, chances are you're knee-deep in the world of B2B SaaS procurement, trying to navigate the choppy waters of cost savings vs cost avoidance. Well, you're in the right place. I've been in the of vendor procurement space for years, and I'm here to share some of my strategies and insights.

Did you know that the average company wastes about $18M on unused SaaS licenses? That's a lot of money going down the drain.

But the good news is: companies that implement effective SaaS management strategies see an average cost savings of 30% within the first year. When calculating cost savings, that's not just pocket change – for a mid-sized company spending $20 million on SaaS, we're talking about $6 million in hard cost savings back in your company budget.

Before we start, ask yourself this: Are you really achieving tangible savings if you're just focused on cost avoidance measures? Or are you missing out on opportunities to actually reduce your spend? These are the questions that we're going to tackle in this cost savings vs cost avoidance guide.

Cost Savings vs Cost Avoidance

Let me start with the fundamentals. Cost savings and cost avoidance might sound similar, but they're distinct strategies that can significantly impact your bottom line.

Cost savings refers to actual reductions in your existing expenses. It's tangible, measurable, and has an immediate impact on your budget. Think of it as negotiating a price difference for your current CRM subscription, finding a lower purchasing price for similar functionality, or eliminating unnecessary expenditures through unused licenses or features.

Let me give you a real-world example. One of our clients, once realized they were overpaying for their project management software. They had enterprise-level licenses for everyone. Literally everyone. Even though most team members only needed basic features. By downgrading unnecessary licenses, they achieved an immediate cost savings percentage of 30% in their year's budget. That's the power of cost savings - it creates actual reduction in your expenses right away.

I often see people focus solely on planned cost savings because it's easier to present tangible savings in financial statements to the higher-ups. But, in my opinion, that's not always the best approach to continuous company improvement.

On the other hand, cost avoidance refers to reducing future costs before they occur. Cost avoidance means taking a more proactive approach through preventative maintenance, and while it's often harder to perform a cost avoidance calculation, it can have a significant impact on your projected costs. This might involve implementing a SaaS management tool to prevent "shadow IT", conducting price negotiations for future years, or investing in training to decrease operational costs (I'm looking at you, Salesforce!).

What is "Shadow IT"?

Shadow IT is the use of information technology systems, devices, software, applications, and services without explicit IT department approval. In the context of B2B SaaS, it often involves employees or departments subscribing to and using cloud services without going through proper procurement teams or informing IT.

For example: Marketing decides they need a new analytics tool, so they spend money by swiping the company credit card and sign up, missing opportunities for bulk purchases and bypassing IT completely. That's shadow IT in action, leading to higher operational costs and missed price negotiations.

Why it matters:

1. Security risks: Unapproved apps might create financial risks and not meet company security standards.
2. Compliance issues: Could violate data protection regulations and increase legal costs.
3. Cost inefficiencies: Leads to missed cost savings opportunities, preventing any cost savings calculation from contract renewals or volume discounts.
4. Integration problems: Shadow IT tools often don't play nice with official systems.

At Varisource, we've seen companies where shadow IT accounted for up to 40% of their total SaaS spend. That's a lot of hidden costs and potential future expenses!

Addressing shadow IT is super important for effective SaaS cost management and overall IT governance. You want to find the balance between enabling innovation while maintaining financial management control and maximizing cost savings.‍

Avoidance vs Cost Savings Balance

In my experience, the most successful spend management strategies incorporate both cost savings and cost avoidance. Here's why:

• Cost savings refer to those quick wins that improve financial health right away, while cost avoidance focuses on future savings and success.
• While Cost savings are easy to include in financial reporting, cost avoidance measures require more explanation but can lead to significant financial gains over time.
• Cost savings often come from addressing current overspending, while cost avoidance is about anticipating and preventing future expenses.

Let me share a story from my Expereo days. We had a client who was super focused on calculating cost savings. They chose the lowest initial proposed cost for their VoIP provider, achieving a notable cost savings percentage in the short term. But six months later, they were drowning in quality issues and support tickets. The indirect costs of lost productivity and customer dissatisfaction far outweighed their hard cost savings. If they had balanced their cost saving measures with proactive cost avoidance - perhaps by choosing a provider with a higher final contracted cost but more reliability and investing in proper implementation - they could have achieved sustainable savings over time..

Pro Tip: When presenting your strategy in financial statements to stakeholders, always include a mix of both cost savings and cost avoidance initiatives. It shows you're potentially saving both short-term and long-term.

I've seen companies fall into the trap of prioritizing one strategy over the other. If you over-emphasize cost savings, you might end up with cheaper tools that don't meet your needs, leading to productivity losses or incremental spending on expensive replacements. On the flip side, if you focus too much on cost avoidance, you might miss out on immediate price difference savings opportunities, or invest too heavily in prevention measures that don't pay off.

The key is to find the right mix for your organization. At Varisource, we typically recommend a 60/40 split between cost savings and cost avoidance initiatives for most B2B SaaS portfolios. But this can vary depending on your industry, growth stage, and how you calculate cost avoidance for your specific business needs.

Strategies for B2B SaaS Cost Savings

So how can you actually maximize cost savings on your B2B SaaS spend? At Varisource, we've developed some killer cost savings strategies for negotiating with vendors.

First off, leverage benchmark data. At Varisource, we have access to pricing data for over 30,000 vendors to help calculate cost savings. Use this kind of information to know if you're getting a fair deal. I remember a time when we helped a client negotiate their Salesforce renewal. Since we had this benchmark data, we were able to show that their initial proposed cost was 20% above market rate for their tier. This information alone helped them achieve hard savings of 15% on their final contracted cost.

Consider multi-year deals. In my experience, often, vendors will offer discounts for longer commitments. Just make sure you have exit clauses if needed. One of our clients once locked in a three-year deal with their main cloud provider, securing hard cost savings of 25% compared to their standard pricing. The key was negotiating flexible terms that allowed them to adjust their usage as needed.

Look into bundling services if you're using multiple products from the same vendor. I've seen companies save up to 30% by consolidating their subscriptions with a single vendor. And remember, timing is everything in spend management. Try to negotiate during the vendor's sales promotion period or near the end of the fiscal quarter or year when they're trying to hit targets. I once closed a deal on December 30th and got a 40% price difference because the vendor was desperate to hit their year-end numbers.

But what if the vendor won't budge on price? Well, that's where you need to get a bit creative. Can you get additional services included? Free training? Extended support? Remember, value isn't just about price. We once negotiated a deal for one of our clients where the vendor wouldn't lower their projected cost, BUT they threw in soft savings through a premium support package worth $50,000 at no extra cost. That's still savings achieved in my book. Keep your team as productive as possible is one of your goals.

One of the biggest areas of waste I see in B2B SaaS is overprovisioning. To address this, I recommend you conduct regular usage audits. Use tools to track which licenses are actually being used. At Varisource, our vendor CRM can help with this. I remember a client who discovered they were paying for 500 licenses of a project management tool, but only 300 were active. By rightsizing their subscription, they reduced potential future costs by $50,000 annually. Savings like that add up quickly.

Consider tiered licensing - not everyone needs the premium version. Look into offering different tiers based on user needs. This avoidance vs cost savings approach helps manage soft costs effectively. Power users get the full suite, while occasional users get a lighter version.

Implement just-in-time provisioning. Instead of buying licenses in bulk, set up processes to quickly provision licenses as needed. This approach can be particularly effective for fast-growing companies where headcount is constantly changing. At Varisource, we've helped clients save up to 20% on their SaaS spend by implementing just-in-time provisioning strategies.

Sometimes, the best way to address future costs is to switch vendors. But this needs to be done carefully. Don't just look at the price. Consider the total cost of ownership, including implementation costs, training, and potential productivity impacts. Make sure the alternative actually meets your needs. I've seen companies switch to save money, only to end up with a solution that couldn't scale with their growth. Not the position you want to be in.

Don't forget to involve key stakeholders in the decision. A cheaper tool that your team hates using isn't really effective spend management at all.

B2B SaaS Evaluation Scorecard Template

Create a weighted scorecard for evaluating alternatives that balances hard costs against soft costs. Include factors like cost, features, ease of use, vendor reliability, etc. It'll help you make more objective decisions. We use this approach at Varisource, and it's been incredibly helpful at helping our clients make balanced, informed decisions about their SaaS investments.

Strategies for Cost Avoidance in B2B SaaS

Cost avoidance is all about playing the long game. It's crucial for preventing shadow IT and ensuring you're not duplicating functionality across different tools. The best place to start is to establish and communicate a clear process for requesting and approving new SaaS purchases.

You can implement a SaaS request portal (could be as simple as a Google Sheet) where employees can submit requests for new tools. Each request would go through a standardized evaluation process that'd check for existing tools with similar functionality, ensure compliance with your security standards, and assess the total projected cost of ownership. This avoidance vs cost savings process alone can prevent a lot of unnecessary purchases and help you avoid the costs associated with duplicate or non-compliant tools.

I also recommend doing regular software audits. To make it super easy, you can use tools like the Varisource vendor CRM to keep track of all your SaaS subscriptions and their renewal dates. I can't stress enough how important this is. One of our clients once discovered they were paying for three different project management tools across different departments. By consolidating to a single tool, they avoided the ongoing costs of maintaining multiple systems and the inefficiencies of fragmented project data.

Before approving a new tool, consider how it will integrate with your existing tech stack. Avoiding integration headaches down the line can save you big.

Proper forecasting can help you avoid unexpected costs and make more informed decisions. Work with department heads to understand their future needs. This can help you negotiate better deals or soft savings with vendors.

I highly recommend you always include some wiggle room in your SaaS budget for unexpected needs or price increases. I typically recommend a 10-15% buffer for both hard costs and soft costs.

Also, when budgeting for a new tool, factor in all costs - licensing, implementation, training, and ongoing support. That's your Total Cost of Ownership (TCO).

Don't overlook the importance of investing in training and adoption. It's crucial for achieving hidden cost avoidance. Invest in proper training when implementing new tools. It'll reduce future costs for support and increase productivity. One of our clients once made the mistake of cutting corners on training for a new expense management system. As a result, they saw their cash flow impacted by months of errors, frustrated employees, and a finance team working overtime to correct mistakes. A solid training program would have prevented these expenses.

Schedule periodic reviews to ensure tools are being used effectively. Low adoption can lead to wasted spend. Set up quarterly reviews of your main SaaS tools. Look at usage data, gather feedback from users, and be prepared to make changes if a tool isn't delivering value.

Leveraging Technology for Cost Optimization

I remember the days of trying to manage everything from hard costs and soft costs in spreadsheets. It was a nightmare. One of the companies I worked previously, once missed a critical renewal deadline because the information was buried in an outdated spreadsheet. Long story short, they got locked into another year of an overpriced contract. With a vendor management platform like Varisource, you can avoid these costly oversights with effective cost avoidance strategies.

These platforms provide automated renewal reminders, so you never get caught off guard by an auto-renewal again. At Varisource, we've seen clients achieve significant hard savings of hundreds of thousands of dollars just by being proactive about their renewals. One client was able to negotiate a 20% discount on a major SaaS renewal simply because they started the conversation early, plus they had usage data from our platform.

With usage analytics, you can understand how your teams are actually using the SaaS tools you're paying for. This insight is gold for rightsizing your subscriptions and negotiating with vendors. For example: you don't need to upgrade your CRM subscription if most of your employees are only using basic features. By optimizing license types instead of upgrading, you can avoid a huge price hike.

Smart vendor management systems can identify patterns and opportunities for both hard costs and soft savings that you might miss. They can, for example, flag duplicate subscriptions, identify underutilized features, and even suggest alternative vendors based on your usage patterns.

Building a Culture of Cost Consciousness

All the cost savings and cost avoidance strategies and tools in the world won't help if your organization doesn't have a culture of cost consciousness. This is something I'm really passionate about. Cost avoidance is not about being cheap. It's about being smart with your resources so you can invest in growth. Simple as that.

Start with education and communication about direct cost management. Do regular training sessions on the importance of SaaS optimization and how it impacts the company's bottom line. You can run monthly "SaaS Smart" workshops for your employees. Cover topics like how to evaluate new SaaS tools, understanding cost avoidance vs immediate savings, the importance of reporting unused licenses, and how to leverage our existing tools better.

Share your cost avoidance savings percentage wins with the whole company. It helps everyone see the impact of their choices. Highlight your biggest cost savings wins in your internal newsletter. It can help you create a sense of friendly competition between departments to see who could find the next big cost savings opportunity.

Develop and communicate clear policies on SaaS procurement and usage. This doesn't have to be a dry, boring document. Include real-world scenarios and decision-making exercises. It will make the policies feel more relevant and easier to remember.

Incentivization can also play a crucial role. Think about giving departments more control over their SaaS budgets. When they see direct benefits from cost avoidance, they're more likely to be cost-conscious. You'd be amazed at how creative people can get when they have skin in the game!

Here's a thought: What if we treated company money like our own? That's the kind of mindset we need to cultivate. I often recommend our clients to ask their team, "Would you spend your own money this way?" It's a simple question, but it can lead to some powerful insights and behavior changes.

Measuring Success

You can't improve what you don't measure. To track your cost optimization efforts, focus on key performance indicators (KPIs) like total SaaS spend, spend per employee, utilization rates, cost avoidance, and ROI on SaaS investments.

Use a Monthly SaaS Efficiency Scorecard, like one below. You can track your total SaaS spend and how it's trending over time. But more importantly, you need to look at it in relation to your headcount and revenue growth. This will help you understand if your SaaS tools are scaling efficiently with your business.

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Spend per employee is a particularly useful metric for a company's financial statements. It allows you to benchmark against industry standards and your own historical data. At Varisource, we've seen this metric vary widely by industry and company size. For example, tech startups often have higher compensation costs than traditional manufacturing companies. Understanding these nuances can help you set more realistic targets.

Usage rates are crucial for identifying waste. One of our clients recently discovered that they were paying for 200 licenses of a design tool, but only 50 were being used regularly. By rightsizing their subscription, they saved over $100,000 annually.

Cost avoidance can be trickier to measure, but it's important to try. The best way to start, in my opinion, is by tracking "potential spend avoided" - costs you would have incurred if you hadn't taken proactive measures. This included things like price increases you negotiated away, or unnecessary purchases you prevented through your approval process.

ROI on SaaS investments is not always easy to calculate, but it's absolutely worth the effort. At Varisource, we work with our clients to develop custom ROI models for their major SaaS investments. This might include factors like time saved, errors reduced, or new capabilities enabled.

Set up regular reviews of your SaaS portfolio - monthly or quarterly. These shouldn't be dry financial reviews. Involve stakeholders from different departments to get a holistic view of the value each SaaS tool is providing.

Compare your metrics against industry standards. At Varisource, we provide this kind of data to our clients. It's incredibly powerful to be able to tell a CFO, "We're spending 20% less per employee on SaaS than our industry peers, while maintaining higher productivity scores."

Pro tip: When presenting these metrics to leadership, always tie them back to business outcomes. It's not just about saving money. It's about optimizing resources to drive growth. Instead of just reporting, "We saved $100,000 on SaaS this quarter," try something like, "By optimizing our SaaS spend, we freed up $100,000 to invest in our new product development initiative."

Future Trends in B2B SaaS Cost Optimization

At Varisource, we're already seeing clients factor compliance costs into their SaaS evaluations. It's not just about features and price anymore - data handling practices and compliance certifications are becoming key decision factors. In some cases, paying a bit more for a fully compliant solution can avoid hefty fines and remediation costs down the line.

We're seeing a trend towards more industry-specific SaaS solutions. This could lead to better fit and potentially lower costs, but it also means procurement teams will need to be more knowledgeable about industry-specific needs.

More vendors are moving towards usage-based pricing models. This could be a double-edged sword though - it might lower costs for some, but it could also lead to unexpected spikes if not managed properly. I remember a client who switched to a usage-based model for their cloud services, thinking it would save money. Three months in, they got hit with a bill three times their usual amount due to a traffic spike they hadn't anticipated.

Conclusion

Remember, there's no one-size-fits-all approach. The key to cost savings vs cost avoidance is to find the right balance of strategies that work for your organization. It's about being proactive, leveraging data, and always keeping an eye on both the short-term wins and the long-term value.

At Varisource, we're passionate about helping companies navigate these challenges. Our Spend Advantage Platform is designed to give you the insights and tools you need to optimize your SaaS vendor spend across all categories. But whether you're using a platform like ours or going it alone, the most important thing is to start.

Remember, every dollar saved or avoided is a dollar that can be reinvested in growing your business!

FAQs

What's the best way to prevent shadow IT in a company?

A: Prevent shadow IT by implementing clear SaaS procurement policies, providing an easy process for requesting new tools, and educating employees on the risks of unauthorized software. Regularly audit your network for unknown applications. Offer a diverse, approved software catalog to meet various needs. Foster a culture of open communication about tech needs.

What are some red flags that indicate we're overspending on SaaS?

Red flags for SaaS overspending include duplicate subscriptions, low utilization rates, frequent cost overruns, lack of centralized procurement, and unknown number of total subscriptions. Watch for shadow IT, auto-renewals without review, and resistance to change from legacy systems. If SaaS spend is growing faster than revenue or headcount, it's time to investigate.

How can we negotiate better deals with SaaS vendors?

Negotiate better SaaS deals by leveraging usage data, comparing prices with competitors, and timing negotiations before renewal. Consider multi-year contracts for discounts, but ensure flexibility. Bundle services when possible. Be prepared to walk away or downgrade. Use benchmark data to justify your position. Build strong relationships for long-term value.

How do we balance cost-saving with ensuring we have the right tools for growth?

Balance cost-saving and growth by aligning SaaS investments with strategic goals. Regularly assess the value each tool brings. Invest in scalable solutions that can grow with you. Consider the total cost of ownership, not just upfront savings. Involve stakeholders from various departments in decision-making. Prioritize tools that drive revenue or improve efficiency.

What are some common mistakes companies make when trying to reduce SaaS costs?

Common mistakes in SaaS cost reduction include focusing solely on price without considering value, neglecting employee training on new tools, ignoring integration costs, and making cuts without understanding usage patterns. Other errors are failing to involve end-users in decisions, overlooking contract terms, and not planning for scalability.

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