Consider a business paying £1m annually for a supplier service. At renewal, the supplier proposes £1.1m. Negotiations finish at £950,000. How much did the business save?
Against last year's comparable £1m cost, the new rate is £50,000 lower. Against the supplier's proposed £1.1m rate, it is £150,000 lower. That second figure depends on a counterfactual: would the company really have accepted and paid the proposed increase? A savings-linked engagement should settle this question before negotiation.
Hard savings reduce a defensible baseline
A hard saving is generally a measured reduction from an agreed, normalised baseline for goods or services that the business continues to buy. The comparison must account for the volume, specification, service and commercial terms. A price reduction that requires materially lower service can be valid, but it should be described as a deliberate scope change, not necessarily a like-for-like supplier negotiation gain.
Cost avoidance measures a counterfactual
Cost avoidance can be commercially important. Preventing a proposed increase may protect operating margin. But it is measured against a price that might not have been paid. Whether—and how—it counts for a consultancy fee requires explicit agreement.
Five points finance should sign off
- What is the comparable current cost, and which period establishes the baseline?
- Are service level, product quality, volume and delivery terms truly equivalent?
- Are transition, implementation and one-off costs included?
- How do we treat inflation clauses, rebates, foreign exchange and demand changes?
- When is the saving considered implemented and evidenced?
Use our private CFO savings worksheet to check how the maths changes when implementation costs and gainshare fees are included. Worksheet percentages are user-selected illustrations; we do not present them as expected results.
Decide whose work created the change
If the client's purchasing team already negotiated a 4% rate reduction, an external consultant should not automatically earn a fee on that earlier work. Record existing tenders, pending supplier offers and planned cost initiatives before the mandate starts. Agree which later improvements can be attributed to the consultancy and how disagreements will be settled.
For PE-backed businesses, whether savings improve sustainable EBITDA is a separate finance and accounting determination. Not every headline procurement gain is recurring operating profit.
The test is mundane but decisive: does the revised supplier agreement match the agreed scope, and do the invoices confirm the lower cost? If not, finance should keep the opportunity separate from realised savings.