August 01, 2017

Costs Need Containment? Balancing Hard and Soft Costs

It probably comes as no surprise that managers at today’s leading companies are increasingly concerned about containing costs to realize hard and soft cost savings. In a corporate environment which focuses heavily on data and quantifiable and measurable value, often soft cost savings are ignored since hard savings are easier to measure success against.

What’s the Difference Between Hard Costs and Soft Costs

Generally hard costs are more tangible and thus easier to estimate. For example, through a Vendor Management System (VMS), organizations could expect hard cost savings from better rate negotiations, standardization of volume discounts, overtime discounts, early payment arrangements and more. Meanwhile soft cost savings are often intangible in the current period (though they could turn into hard cost savings over time). In the VMS example, soft cost savings could be seen in faster hiring cycle times, contract optimization, reduction of timecard errors or reduction of rogue spending.

Example of Hard & Cost Savings Realized Through a VMS

Source: DCR Workforce

The Savings Spectrum

Experts in organizational cost containment recommend looking at cost savings not as hard or soft, but rather as more of a savings spectrum. For example, think of it as four major categories in hard and soft savings (A, B, C and D) that are a spectrum. A is often on the Income Statement, for the current period and in the budget; and most definitely hard savings. B is also hard savings but is a little more in the future such as savings on the balance sheet, cash flow, or working capital. C is where we start shifting into soft savings and consider things like cost avoidance or capacity enhancement (such as removing a bottleneck from a process could result in greater production, increased customer satisfaction or faster transaction speed). D is where you know that it’s the right thing to do such as legal or environmental changes or safety improvements, but have no quantifiers of cost savings. Any project can migrate from one category to another, with what starts as soft cost savings turning into hard savings over time.