Cost savings vs cost avoidance – What’s the difference?

money costs

The main key performance indicators of Software Asset Management (SAM) are typically quantified in a financial value. These financial values are typically referring to the cost avoidance and cost savings achieved. Next to this, SAM is typically being used to internally cross charge the fees related to the different software licenses and/or the associated support and/or cloud costs. But what is the real difference between cost avoidance and cost savings? And what specific costs do fall into what specific category?

Cost savings

The majority of companies worldwide, regardless their industry, are typically most interested in cost savings when it comes to software spending. This, since achieving a cost saving actually means to reduce the amount of money that has been spent (or was planned to be spent) compared to the past. Examples of situations that typically fall in this category are:

      a) the termination of support maintenance on software licenses that are no longer used (shelfware); a situation that typically is the case in 95% of the end user organizations.

      b) the replacement of existing software licenses and associated support maintenance fees for cheaper licenses with a lower associated support maintenance fee (cancel and replace).

      c) switching to a less expensive support maintenance type (either from a software publisher itself or from a third-party support provider) since the business requirements for support maintenance have changed (reduction in support level).

      d) renewing only the cloud subscription licenses that you are actually using, instead of the whole suite; many end user organizations nowadays receive a lot of services within the initial purchase of a cloud solution of which only a certain percentage is actually used.

In addition, many end user organizations typically have multiple software programs for the same functionality. Think for example about Quest’s Toad for Oracle and Oracle’s Database Management Packs. End users that look into the kind of situations mentioned above and choose for one or the other are typically able to benefit of considerable cost saving opportunities.

Cost avoidance

Most often companies do not realize the actual value that is prevented from spending when a non-compliance situation is avoided. If and when end user organizations perform regular internal reviews in which compliance issues are identified and remediated before the publisher determines these compliance issues through an audit, then this costs spending that is avoided is classified as “Cost avoidance”. Examples of situations that typically fall in this category are:

          a) optimizing the deployment of your software programs by consolidating your software deployments on a fewer number of servers or cores (if and when the license metrics are hardware based).

          b) optimizing the deployment of your software programs by revoking access rights to specific individuals that no longer require or use the software programs (if and when the license metrics are authorized user based).

          c) re-allocating licenses that are on the shelf for one business unit but are required by another business unit, instead of the business unit that requires the additional licenses to purchase new ones.

           d) re-assigning licenses that are restricted to a specific local legal entity to the ultimate legal entity of your organization, to extend the use rights from business unit to organizational level.

           e) negotiating contractual terms that allow end users to “swap” the value of licenses that are on the shelf for licenses that are actually needed and adding value to your business.

It is quite common that end user organizations do not keep track of their software licenses. The day to day practice teaches us that when some employees leave the company or devices get broken, their associated licenses are simply forgotten. Or when new individuals join the organization, or new devices (desktops/laptops/servers) are being purchased, new software is being purchased as well and money is spent.

As obvious as it may seem, many organizations seem to forget that non-compliance is costly. Monitoring and controlling your compliance situation is important and, on the long run, it will turn out to be cheaper to invest in knowledgeable people, tools and processes than being found non-compliant and having to pay penalties and face a non-budgeted significant financial exposure.

If you want to find out more about how to save money on licensing stay tuned for our next article in which we will tackle the opportunities you have to save cost on support. For a personalized approach, you can reach out to us and one of our specialists will contact you.