Why Only Hard Savings Can Close The Deal

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Sellers are not the only ones obsessed with making their numbers. Buyers have targets too – typically ambitious targets for cost reduction. However, increasingly only hard savings have the power to close the sale.

We all know that buyers are increasingly numbers obsessed. The question is what format must those numbers be in if they are to be taken seriously?

sellers need to know how the results achieved by buyers are both measured and communicated. They need to understand the challenges the buyer faces in demonstrating value and justifying projects, or purchases. That includes:

– Exactly what buyers can and cannot take credit for

– The controversy that can arise in respect of certain forms of savings claimed

– The likelihood of discounting that will be applied to savings quoted

– The varying perspectives of particular stakeholders and in particular the finance department.

Will Your ROI Pass The Credibility Test?

Your sales targets can only be achieved by helping buyers to meet their own targets. More often the buyer’s targets entail an element of cost reduction. Rather than hiding from this reality, sellers should face it head on. In so doing they can turn it from a challenge to an opportunity.

Can the buyer take credit for all the savings that you are including in your ROI calculation?

If your buyer needs to show credible savings then the advice is to ‘get with the programme’ and help him, or her get what they need. Your payback calculator and ROI model needs to help buyers to calculate, communicate and stand over any cost savings claimed.

Why Not All Savings Are Equal

Seller’s often get frustrated at the degree of buyer scepticism regarding the benefits they promise. What they don’t realize is that the savings claimed by the manager-buyer are likely to be treated the same way by their own colleagues.

The buyer’s claimed savings are generally not going to be accepted on face value. Even the cost savings boasted of by procurement professionals are regularly discounted by finance.

The problem is that not all savings are equal. The sellers job is to help the buyer to cut costs and to cut them convincingly!

What Makes Calculations Credible?

In presenting benefits and in particular calculating cost savings for the buyer, sellers need to understand the savings that matter, and those that are likely to be discounted, or even discredited. The following factors are key to the credibility and relevance of promised savings:

  • How the saving is calculated?
  • Can the savings be tracked?
  • Will the savings appears on a KPI dashboard, or other performance report for senior management?
  • Who takes credit for savings?
  • Are savings linked to any bonus/incentive structure?
  • Who’s budget will benefit from the savings or will corresponding expenditure come out of?
  • When will the savings occur?
  • What financial period will the savings impact?

The key point is that the seller must ask the buyer what benefits and savings are relevant to his/her business and encourage the buyer to display creativity within the rules in terms of how numbers are presented.

Many of the factors listed above hinge around the issue of whether the savings claimed are soft, or hard. People use the terms differently from organization to organization, but it amounts to the same thing: hard savings are hard to contest, while soft savings are hard to defend.

Distinguishing between hard and soft savings in your benefits statement/ROI will help you to equip the buyer with a more compelling justification for the purchase, while at the same time protecting your margin.

What Are Hard Savings?

Hard savings are tangible and concrete – they can be tracked in the financial reports. They are reductions in:

– Office and administration costs

– Energy and communication costs

– Raw material costs

– Cost of production

– Manpower costs

– Sales and marketing costs.

Many managers talk about hard savings as being savings that have been quantified. However, they often go ones step further than just quantification. A hard saving is a reduction in anything that is tracked in the financial statements of the company.

It is important that your client sponsor knows the difference between hard and soft savings in order to get stakeholder consensus and avoid controversy around numbers. That is particularly the case if finance is to be involved in the decision.

What Are Soft Savings?

There are many measures of business, project or team efficiency that cannot be classified as ‘hard savings’. That however does not mean that they are not important.

Soft savings are less tangible – they are realized from not spending money, or by saving time or other resources. Common soft savings are as follows:

  • Improved cash flow and reduced working capital requirements
  • Avoidance of costs that could otherwise have been incurred
  • Preventing a price increase from a supplier
  • Getting more from a supplier for the same money (e.g free training, or support)
  • A purchase price that is lower than the original quoted price
  • Long-term contracts with price-protection provisions
  • Intangibles such as improved safety, increased employee motivation, or customer satisfaction and their direct / indirect impact on costs

Finance departments tend to take a cynical view of soft savings claims, treating them (in the words of one CFO) as ‘coulda shoulda woulda savings’.

It can be hard to convince an accountant, or budget holder of soft savings because are often more ‘up in the air’ and require a little more imagination. Their connection to any line in the financial statements of the company is often tentative at best.

Soft savings are often future, or scenario-based and that makes them something that accountants can’t track between income statements. The lack of a historical cost means that from an accounting point of view a reduction from one period to another cannot be shown.

When savings are soft they are technically more ‘cost avoidance’ than ‘cost saving’. Quantifying cost avoidance is challenging and from the perspective of traditional financial statements is relatively meaningless.

However don’t discount soft savings completely. Issues of risk, strategic fit, or compliance can make soft saving compelling. Total Cost Of Ownership, for example, often involves a mix of both hard and soft savings.

Implications For Sellers

Sellers need to know how the results achieved by buyers are both measured and communicated. They need to know just what buyers can and cannot take credit for.

Savvy sellers recognise the controversy that can arise in respect of some buyer claims and the widespread discounting by some stakeholders, most notably finance, of buyer generated numbers and the overall challenges faced by buyers in demonstrating value and justifying programmes/projects/purchases.

To ensure the credibility of the promised benefits, or savings being called into question, sellers need to:

1. Ask the buyer what benefits matter most and to whom. Calculate the benefits delivered based on the buyer’s performance metrics, based on what will be discussed at the buyer/project’s review meeting and more important what will be used to determine incentive compensation. Remember one in 5 dollars earned by procurement professionals in the US is earned by way of bonus.

2. Ensure there is a high degree of transparency of savings and agreement as to the methods of calculation. Distinguish more clearly between hard and soft savings. They need to use headings such as ‘soft’ and ‘hard’, or ‘cost savings’ and ‘cost avoidance’ in their business cases and proposals.

3. The first step to making your savings claims more compelling is to put numbers on them (numbers that relate to an item in the financial reports). Then tie those numbers to a specific period, for example, if your project requires expenditure today, but does not show the payback until next year that is likely to present problems.

4. If you cannot make the numbers hard then you need to make them compelling with reference to the other business case variables – risk, compliance, strategic fit, etc. If the numbers are not compelling of themselves, attach them to something that is.

5. Check to see if your proposition can stand on the hard savings alone. What is the proportion of hard and soft savings involved in the business case for your solution. Ask yourself: If the soft savings were discounted, would the decision still be a viable one?

6. Above all don’t just present the buyer with a set of numbers, involve the buyer in their creation.

Making Buyer-side Agreement Easier

The seller can be relatively powerless to resolve disputes between stakeholders on the buyer side around numbers. But, what can your buyers do to prevent internal disputes about numbers? The following are some examples:

– Greater collaboration between procurement, finance and other stakeholders

– A common method of calculating savings

– A set of unambiguous metrics or KPIs

– A balanced incentive structure that rewards managers for performance ‘in the round’.

The IT systems in use to track and manage spend play an important role in whether cost savings can be made harder. But perhaps most important of all is consultation with finance – the likelihood of any set of numbers being rejected is greatest if they are presented without any engagement, or interaction.

If the decision is going to be made in a cross-functional manner, then the justification needs to be cross-functional too. This must be recognized by finance. Many procurement manages would argue that Finance is too quick to undermine its reported savings by adopting an overly rigid financial reporting perspective.

There are key metrics that are essential to tracking the performance of projects or business units, beyond that you won’t find in the financial reports of a company. Just because it is not in the income statement, or balance sheet, does not mean it should not be on the managers KPI dashboard.

We’d love to hear your experiences with hard and soft savings claims. Please find the comment box below.

Republished with author's permission from original post.

Ray Collis
Ray Collis is a Business to Business sales coach, sales trainer, Director and Buyer Research Practice Lead of The ASG Group - recognized among the Top 5 sales training organizations worldwide in terms of overcoming the challenges in B2B selling to procurement, or the sophisticated buying organization (ES Research Group). Ray is co-author of several books, including The B2B Sales Revolution and QuickWin B2B Sales, and also of the sales blog Buyer Insights.

13 COMMENTS

  1. Interesting post and some awesome advice that all should heed. However, I must push back. ROI is only part of the buying equation. In our research with over 30 Fortune 100 companies we consistently found that the quality of the relationship outweighs product features, price and even the ROI in the decision process. Companies ranging from Adventist to UBS were very clear that in their buyers’ journey, ROI was a factor. They needed to prove the business case for solving the problem. But the primary determinate in which vendor won the “deal” was the relationship and how well the vendor delivered a consistent, valued experience across all touch points.

    Customer experience is the new competitive differentiator. A marketing/sales team that doesn’t understand and deliver the experience the customer expects won’t get the deal even if they have the best deal. why? Because how the marketing/sales team acts is considered an indication of how the customer service team acts. A rude, unresponsive, hard selling sales person will lose the deal EVERY TIME no matter how ‘sweet’ the quarter end price is.

  2. “Creativity within the rules”–Yikes, that’s a slippery slope! Just ask Jeffrey Skilling, formerly of Enron . . .

    Ray: My ‘agree-disagree’ meter was all over the place on this one, it’s hard to know where to start.

    1) In business development, I’m particularly leery of pronouncements that include the words ‘only,’ ‘always,’ and ‘never.’ You tripped the red-flag indicator on “only hard savings have the power to close the sale.” I don’t question the veracity of another person’s anecdotal experience, but that statement doesn’t come close to comporting with mine.

    2) I’ve beaten to death the issue of overusing ‘ROI’ in sales, and I won’t do it here other than to say the measure is thin and simplistic, and CFO’s don’t rely on it because they use much more robust calculations. Your set of questions under ‘What makes calculations credible’ are good, but a big one is missing altogether: “how likely are the expected benefits?” That question needs to be asked before the other ones you’ve asked because it’s presumptuous to ask for example who gets credit for savings that you’re not even sure you’re going to get.

    3) I agree emphatically with your statement “Above all don't just present the buyer with a set of numbers, involve the buyer in their creation,” but I’d go further than that – use the buyer’s numbers. Put them out on the table. Discuss the assumptions behind them. Test the scenarios. But in the end, they are the buyer’s numbers, so they can’t claim that the vendor is trying to put the wool over their eyes.

  3. Buyers – aka purchasing/procurement folks – don’t make decisions emotionally. Their job is to save money. So why are we even talking about how to sell them? Salespeople may very well have to meet with them at the end of the sales process when the buyer attempts to negotiate a lower price.

    The sale must be made to someone at the management level with decision making ability but more importantly, someone who has a problem to solve or opportunity to leverage – a compelling reason – and who cares enough to drive the decision to buy from you down through purchasing. For them to want to do business with you, you must differentiate from everyone else not be attempting to sell based on a competitive or lower price. This emotional decision maker must be willing to spend more to do business with you.

  4. Ray: Outstanding article! A strong business case, hard savings is mandatory to closing a deal, but increasingly is just table stakes. We are seeing much more is required to get the order.

    It used to be, at least with larger companies, develop a strong business case and they would find the money to invest in the deal to get the business return–however that was defined (ROI, cost reduction, revenue increases or the other variations on ROI and a justified business case).

    We are seeing decisions being pushed up, with management be selective on which projects they invest in–supporting only those that directly address the top 2 strategic initiatives of the organization. So while we might have a great business case, and our “customer” wants to go forward, it still has to be sold and funds allocated by senior management.

    This is a shocking change for both us and the customer. They are used to their management finding the money, so when they are rebuffed, they are surprised, disappointed, etc.

    From a sales point of view, it means we have to do more than just have a great business case. We have to make sure what we are doing is directly tied to the top two strategic priorities of the company. We also have to make sure the “customer” is equipped to sell what she want to top management–positioning what they want to do with the top initiatives. The former is easy–if we are paying attention and doing our job, the latter is quite difficult. Many customers don’t recognize this sea change. Many are unskilled or uncomfortable with “selling” what they want. We need to prepare them and help them because regardless how compelling our business case, if they can’t position and sell it to top management, they funds won’t be allocated.

    I also sense some misinterpretation of your comments. You are saying hard justification is mandatory–which I strongly agree with. But it is not the only factor involved in the decision. Customer have always balanced this with risk and other factors. But without the hard justification, we just aren’t competing in a meaningful way.

    So a compelling business case and hard justification becomes table stakes, upon which we add other factors which impact the decision. We don’t have to have the best business case, but we have to have a compelling business case and all the other factors, taken together must be far superior to the alternatives (including doing nothing).

    So we have a new world. Hard numbers are table stakes, but not sufficient. Risk, relationship (which can be translated to risk), other things are critical. Making sure what we do is aligned with the top 2 priorities of the top executives is mandatory, and making sure our customer can sell this entire package to management (with or without our help) is the only way we get the order.

    Thanks for an outstanding piece!

  5. Sorry I wasn’t clear. When I use the term ‘buyer’ I am not referring to the folks in procurement, global supply chain or purchasing. I’m talking about the economic and emotional decision maker.

    All customers are buyers but not all buyers are customers.

    With that clarification, my comment still stands. Sales needs to understand the steps in a buyers’ journey and align their techniques with those expectations. That means playing a more advocacy role and delivering value that is not always inherent in or based on the product they are selling. What I found most interesting in our F100 research was how quickly “buyers” pigeon holed vendors into tactical, niche vs. strategic players. Sales that optimize margin on every deal, show up only at the end of a quarter, and push product, product, product are quickly labeled as tactical vendors and treated as such.

  6. I’m with Dave on this. A strong ROI is a necessary, but not a sufficient condition for winning the deal. And it isn’t always about savings. In the businesses I work with, the most compelling investments are often the ones that release resources to grow the top line.

    So having a compelling ROI still might not be enough unless the project ties to a strategic priority for the business. At some point (and probably more than once) in the process, someone with the power to kill the deal is going to ask something like “remind me again why we are doing this”?

    Increasingly, we’re competing against both “do nothing” and “do something completely different with the money”. And whilst strong numbers help, we’d better not rely on them as our salvation.

  7. I agree that ROI has a place AND that you have to engage people with emotion AND that you need to call at the right time AND call high in order to engage at the problem solving and value adding portion of the process so you can (as Forrester says) set the buying vision.

    What I use personally is the RIPES method. RIPES stands for:
    – Risk Avoidance
    – Image
    – Productivity
    – Security
    – Expenses

    First I engage decision makers emotionally with the R, I, & S. My thinking is how I can contribute to an initiative that an executive would put on their resume when it comes time to change jobs.

    Then I help people justify to their superiors, subordinates and or shareholders with logic – R, P, & E.

    For me the most important part is to analyze my wins (using a form or Won Sales Analysis – http://WonSalesAnalysis.com) so I know how to replicate them.

    Feel free to call my cell phone (+1.403.874.2998) if you have ANY questions or want to brainstorm how you can apply RIPES your situation.

    Have an ‘eventful’ week!

    Craig

  8. I agree Christine. I use the term ‘buyer’ to refer to not just procurement, but all those involved in shaping or making the decision.

  9. I agree with you Bob, it is not just about savings. Any numbers must be calculated in a way that has maximum credibility for the buyer.

  10. You’re right Craig. Money is not everything for the buyer. The key factors you list are very important for sure.

    But money makes the world go round and the conversation around money is a profitable place for the seller to linger.

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