Procurement

  • 6 min read

5 Ways To Practice Cost Avoidance While Buying SaaS

Tathagata Chakrabarti

26th January, 2023

SHARE ON:

Organizations can manage their expenses in two ways: by saving costs and avoiding unnecessary expenses. Cost avoidance is about avoiding unnecessary expenses that are predicted in the future. It includes organizational practices to reduce future costs.

Cost avoidance is a strategy to prevent future costs from SaaS purchases or contract agreements. It is a way to lower a company's future costs by reducing possible costs that could go up. Cost avoidance will allow the organization to use that money for growth-promoting purchases and investments.

In this article, we will discuss a few practical ways to practice cost avoidance in your organization and increase your return on investment (ROI).

But first, let's see a few examples of cost avoidance strategies and how they affect the organization.

When an organization cuts expenses, it results in cost avoidance, often known as "soft savings." Because of this practice, the amount of money spent by the organization will be less than it would have been if it had not taken any steps to cut costs. 

Since these actions don't seem to affect your company's balance sheet directly, they are also called "intangible cost savings." However, even though they will never be shown on financial statements, they still positively affect your business ROI. 

When end-user organizations do regular internal reviews that find compliance problems, and you fix them before an audit, the money saved is called "cost avoidance." A few more examples of practices that fall into this category are:

• Consolidating your software deployments on fewer servers or cores can help you get the most out of your software deployments. 

• Getting rid of access rights for people who no longer need or use your software programs can help you get the most out of their use (if and when the license metrics are authorized user based).

• Proper SaaS utilization: Re-allocating licenses that are on the shelf for one business unit but needed by another business unit instead of making them buy new ones.

•  Canceling auto-renewals & security risk management

• To expand usage rights from the business unit to the organizational level. Licenses that are restricted to a specific local legal entity can be reassigned to the main legal entity of your organization.

• Negotiating contract terms that permit end users to "exchange" the value of unused licenses for required licenses and bring value to your company.

Cost Avoidance vs Cost Savings

Cost savings and cost avoidance are two essential business terms that sound the same but have different meanings. They are often used interchangeably, but their in-depth understanding can improve how a business works. 

Suppose you manage a project or give approval for large capital or program expenditures; you should know the difference between the terms -cost avoidance and cost savings- and how their information on the financial statements can be reported.

You can find out how much money was saved by looking at the financial statements and the budget. This is done when you compare the current year's financial statements to those from the previous year.

Cost savings are "hard savings" that can be measured and are made at the negotiating table. For example, one way to save money is to use the number of licenses as a bargaining chip to get a more significant discount on purchases. These savings can add up to real money and can be shown as a percentage saved or a return on investment.

On the contrary, the cost avoidance is soft savings. It primarily influences indirect expenses. Good cost avoidance entails closely examining future situations, collaborating with suppliers to understand their implications, and mitigating unforeseen expenses. It may not be in financial accounts or measurements, but it can affect the bottom line.

Both Cost avoidance and cost-saving help a business or organization save money, which is the same thing. But, as we said before, they are different in their own ways.

In the table below, you can see the differences between the two savings plans:

Even though saving money on costs is an essential part of buying SaaS, avoiding costs is much more critical for the long-term well-being of the company budget.

Why Is Cost Avoidance Essential When Buying SaaS?

Cost avoidance is an effective technique for reducing software spending throughout the contract. However, poor procurement negotiation or lack of understanding of the contract terms and circumstances may lead to wasting thousands of dollars.  

Cost Avoidance can help you drive procurement value. Depending on your organization, you can use one or more ways of cost avoidance to improve your budget operations.

In general, procurement is in charge of transparency, compliance, and oversight regarding sourcing. As a result of this, the procurement function plays a significant role in lowering costs associated with risk. Therefore, managing your organization's cash flow effectively requires optimal risk management.

Ways to Practice Cost Avoidance

It's crucial to strike the right balance between saving costs and avoiding unnecessary expenditures. To maintain the balance, you must understand the different ways to practice cost avoidance. Following are a few ways in which you can practice a good cost avoidance practice:

1. Evaluate every vendor before making a purchase

Vendors always bring something different and valuable to the deal. No matter what you're negotiating for, it's best to get quotes from multiple suppliers before negotiating with any of them. When evaluating software, do your research and get numerous quotes so you only pay a little to the first supplier you talk to.

You can get quotes by sending a request for proposal (RFP) to several suppliers. This helps your business be more competitive and get the best deal possible.

Before you talk to the vendors, it's best to know the critical points of SaaS agreements. It helps you understand what you are getting into and lets you get terms tailored to your needs.

The "three bids and a buy" method might take more time upfront, but it will help you avoid the costs of choosing the wrong service from a group of competing providers.

2. Follow an appropriate SaaS negotiation strategy 

The procurement team can reduce costs by using the right skills when negotiating a new contract or discussing a renewal.

If you negotiate with your SaaS provider, you still need to start off on the right foot. On the contrary, if you ensure all of your needs are met, your relationship with the vendor will be even more valuable and could last longer.

The best deal is where you and the vendor come out ahead. This means that both parties are working together to make a contract that is easy to understand and has benefits for both parties.

Setting up the context and goal of negotiations with vendors to cut costs may lead to a cooperative and flexible negotiation style. In addition, you may use BATNA or ZOPA negotiation strategies to avoid costs of the organization.

If your company's leaders have set up a plan to cut costs, make sure any SaaS vendors who are part of the plan know about it. In this notice, the company's official position is laid out. It shows that cost-cutting measures are being taken across the supplier inventory and that all vendors are being looked at.

3. Right-sizing unused licenses or downgrading to a suitable tier

SaaS pricing models can be difficult to understand, varying from one provider to the other. For instance, many providers offer tiered licensing based on various features availability. On the other hand, some companies may need all the mentioned features of a particular tier.

On the other hand, companies overestimate their capabilities and purchase the highest pricing tier. But, in reality, they don't need all the features. Therefore, before signing the contract, you should carefully consider your users and their requirements in your organization. This analysis will help you avoid the cost and save money for the future. 

4. Keep track of renewals and cancellations

The collaboration between SaaS contract management and SaaS spend management requires careful monitoring of renewal periods and cancellation provisions. This is an essential part of the process.

You've decided to skip the renewal dates for your SaaS services and renew them annually instead. Consequently, you also miss opportunities to reduce SaaS waste, negotiate better agreements, and amend the agreement to match the demands of your organization's environment.

In the same light, one could say the same thing about cancellation policies. Again, if you need to know when your subscription's renewal date is, you run the risk of paying a charge for an additional year of service that you may not require.

5. Maintain a proper vendor-relationship

A well-designed vendor management framework helps you control spending, streamline purchasing, and secure the best vendor offers.

With a "well-thought-out" plan for managing vendors, you can have better relationships with your vendors. In the process of procuring SaaS, vendor relationship management is vital. It is a process that helps organizations keep costs down and reduce risks as much as possible. In addition, this enables you to get the most out of the vendors throughout the whole time you have a contract with them.

When you buy something in the future, having better relationships can help you get better deals or discounts. This will help you avoid costs in the future.

Moreover, managing relationships with vendors helps the IT procurement team and vendors work together to reach a common goal and build trust. As a result, it will help the organization get better vendor deals and maximize the overall ROI.

How Zluri Helps You With Cost Avoidance During Procurement?

Zluri is a SaaS management platform that helps you buy SaaS by negotiating on your behalf and working as an extended procurement team member. We help you buy and keep your SaaS apps up to date. Our SaaS procurement services save you time and money and hence give you a compelling opportunity for cost avoidance. 

We have data on 1 billion SaaS transactions and know how much the average customer pays for an app of a specific size. Also, we know the right price to pay for different types of licenses for SaaS apps worldwide.

Zluri offers zero upfront costs. You need to pay us only when we assist you with 2x savings. So the amount you save is twice the amount you pay us for the service. For instance, if we promise to save you $50,000 and we do, you pay Zluri $25,000. If you save more than the amount we guaranteed, you still pay us the same amount.

We will give you better prices and negotiate a better SaaS deal on your behalf. Once we have a better idea of the needs, we will choose the right software vendors.

For more information on our SaaS buying, Book a Demo.

About the author

Tathagata Chakrabarti

Tathagata is a Technical Content Writer with 4+ of experience in the SaaS industry. He has a keen eye for research and understanding macro trends in the SaaS & AI-based technology space. He has worked across several marketing & strategy roles in various domains like banking, e-commerce, and education sectors. In his leisure time, Tathagata is a full-time PC gamer.