In business, not all cost savings are created equal. When companies make changes to improve their financial standing, the results can manifest in various ways. Some savings are immediately obvious, appearing as clear reductions in spending that are easy to track on a balance sheet.
There are other financial benefits, however, that are not as direct. These gains are the result of strategic improvements in processes, tools, or workplace culture. While they don’t show up as a reduced line item on an invoice, their positive financial impact can be substantial over time.
Defining Soft Savings
Soft savings are the indirect financial benefits a company realizes from its operational improvements. Unlike direct cost cuts, these savings are not tied to a specific budgeted expense and do not immediately affect the bottom line in a way that can be circled on a profit and loss statement. They represent the financial impact of qualitative improvements, such as increased efficiency.
These savings are described as intangible because they are difficult to assign a precise dollar value without making estimations. Soft savings are about cost avoidance and efficiency gains rather than direct expense reduction. They are the result of forward-thinking investments and answer questions like, “What is the value of saving an employee five hours of work per week?” While the connection to a specific dollar amount is less direct, the value they bring is significant.
Soft Savings Versus Hard Savings
The primary distinction between soft and hard savings lies in their tangibility. Hard savings are direct, quantifiable cost reductions that can be easily measured. When a company negotiates a lower price with a supplier, the difference between the old and new cost is a hard saving. It is a concrete reduction in expenses reflected in financial documents.
In contrast, soft savings are indirect and do not directly reduce a budgeted cost but add value or prevent future costs. For instance, implementing new project management software is a hard cost. If that software streamlines workflows and allows teams to complete projects faster, the value of that saved time is a soft saving.
A clear example illustrates the difference. If a company’s monthly utility bill was $1,000 and they implement energy-efficient lighting that reduces it to $800, the $200 reduction is a hard saving. Conversely, if a company invests in a training program that leads to fewer production errors, the money not spent on wasted materials is a soft saving.
Common Examples of Soft Savings
To make the concept of soft savings more concrete, it helps to look at common examples across different business functions. These instances highlight how operational improvements can generate value that is not always captured on a balance sheet.
- Increased employee productivity when a new technology or process allows employees to accomplish more in less time.
- Improvements in employee morale and retention, which prevent costs associated with hiring and training new staff.
- Risk mitigation or avoidance, such as investing in enhanced safety equipment to prevent potential accidents and associated legal costs.
- Time savings on specific tasks that free up employees for other value-added work.
- Enhanced brand reputation from better customer service, which can improve customer loyalty.
- Improved supplier relationships that might lead to better terms or reliability in the future.
The Importance of Tracking Soft Savings
Tracking soft savings provides a more complete picture of a company’s performance and long-term health. While these savings don’t appear on a standard financial statement, their cumulative effect can be substantial. Monitoring them allows business leaders to make more informed decisions, especially when justifying investments in new technologies or training programs.
By making an effort to quantify these benefits, a company can better understand the full return on its investments. For example, a new platform might have a high initial cost, but showing it generates soft savings through productivity gains makes the investment easier to justify. This practice also fosters a culture of continuous improvement. When employees see that the benefits of their efforts are recognized, even if they are not direct cost cuts, it can encourage further innovation and improve how the business operates.
How to Measure Soft Savings
Quantifying soft savings requires connecting the improvement to a measurable business metric. This involves using formulas, industry benchmarks, or internal data to create a reasonable estimate of the financial impact. A common method for measuring time savings is to translate saved hours into a monetary value. The formula multiplies the number of hours saved per week or month by the average hourly wage of the employees involved. This calculation provides a clear estimate of the productivity gains from a new tool or process.
For other types of soft savings, different approaches are needed. The impact of improved employee morale can be measured by tracking a decrease in employee turnover rates and calculating the associated savings in recruitment costs. Customer satisfaction can be gauged through surveys, and an increase in positive sentiment can be correlated with customer retention and sales growth.