Hard vs. Soft Cost Savings, How to Prioritize and Measure Your Cost Savings

In a previously published article, How Effective Procurement Can Help DSOs Drive Profits, we discussed the relationship between cost savings and profitability vs increased production and profitability. As a reminder, hard cost savings go straight to your bottom line while any production revenue has a cost associated with it. This means that saving $1,000 is equivalent to a production gain of $2,940. Of course, increasing production is key to growing your business, but a commitment to lowering your costs will also have a significant impact on profitability, improving your EBITDA and increasing the value of your practice.

With this in mind, it becomes important to understand exactly what constitutes “cost savings?” There are two types of savings to consider, hard costs and soft costs. Hard costs are straightforward. If you purchase a product from Supplier#1 for $2 and Supplier #2 only charges you $1, then you can realize one dollar in hard cost savings by purchasing from Supplier #2. Soft costs are a little more difficult to quantify but can have an equally significant impact on your bottom line. Consider the following scenario. Janet is an employee in one of your practices. She has a variety of responsibilities, including servicing patients and managing the inventory of your office supplies. Janet spends 15 hours a week checking the level of supplies, placing orders (including looking for the best prices, deals and promotions), issuing POs and checking and recording received orders. Now, let's imagine that you start to use an inventory management solution, like e-procurement software, that allows Janet to complete her inventory management tasks in just five hours a week. How would you classify the savings and calculate the financial impact? Well, it depends. If Janet gets paid by the hour and winds up working ten hours less each week, that's considered hard cost savings, equivalent to ten hours multiplied by Janet's hourly wage. However, if Janet uses those ten hours to complete other tasks, including ones that allow you to see more patients, then it becomes trickier to quantify the savings. What if Janet works five hours a week less, giving her more family time which improves her job satisfaction and decreases the likelihood of her quitting? What is this worth?

Clearly, there are significant benefits to increasing efficiencies and freeing up your employees to focus on what they do best, taking care of your patients and during a labor shortage, learning to do more with less should be a key initiative for DSOs. However, although these improvements should help maintain (or even increase) production levels and better your bottom line, the savings are indirect and often difficult to quantify. Hence, they are considered to be what is known as “soft” cost savings. To clarify things further, here are just a few examples of both hard and soft cost savings.

“Hard” Savings

• The purchase price of a supply is reduced.
• Reduction in labor, IF that reduction actually saves in labor costs. I.E., Janet is an hourly employee, and her hours are thereby reduced.
• Shipping costs are reduced or eliminated.
• Lowering usage quantities, i.e., we now reuse an item rather than discard it, reducing our total monthly or yearly spend on that item.

“Soft” Savings

• Lowered inventory levels resulting in improved cash flow.
• Extended payment terms, allowing you to pay later and improve cash flow.
• Improved employee satisfaction or decreased turnover rates.
• Improved efficiencies, which thereby allow you to increase production rates.
• In other words: Hard savings= Savings directly, quickly, and easily measurable on your profit and loss statement. Soft savings= Possibility for future indirect improvements to your bottom line, most often due to improved efficiencies. Although there are clearly great benefits to soft savings, they are simply harder to quantify and measure. And when it comes to “hard savings,” if you want to ensure they improve your bottom line, it’s important to educate buyers on the pitfalls they need to watch out for.

Cost Avoidance

We’ve already established that actual hard cost savings are tangible and immediately impact your financial results. Cost avoidance is, as the name hints at, a cost you circumvent through preemptive actions. Cost avoidance measures include negotiating a reduction in or eliminating price increases or eliminating the need for increased labor through streamlined processes.

It’s important to remember that although soft cost savings and cost avoidance may seem or feel less important than hard savings, that is most often far from the case. Their intangibility doesn’t necessarily align with the value they bring to your organization, especially if you are challenged with attracting or retaining staff.

For instance, improved inventory control may ensure you avoid stock-outs on critical dental supplies, safeguarding your service levels, and preventing a revenue loss. These things are vital to your organization’s health and your potential growth, and their importance is no less significant, perhaps even more so, than the purchase price of supplies. It’s essential to understand how the varying types of savings may impact your financial statements, but it’s also equally important to keep the naming conventions in perspective.

Despite the name, hard cost savings are hard worked for and can bring massive benefits to your dental practice. Underestimating their impacts may put you at a competitive disadvantage.

Leverage Method to Improve Your Cost Savings

Using a dental inventory management system helps you improve your bottom line, both from a hard and soft cost savings standpoint. To learn more about how Method can help your dental practice, contact us today to get a free demo and talk with our dental procurement experts!