Procurement teams are expected to demonstrate financial impact, but savings figures are only useful when everyone understands how they were calculated. Knowing how to calculate cost savings starts with a defensible baseline, a consistent methodology, and a clear distinction between projected savings and savings actually realized.
For colleges and universities, measuring procurement savings should also account for contract utilization, purchasing behavior, process efficiency, and other factors that determine whether negotiated value reaches the institution.
A procurement savings baseline is the reference point against which a new price or cost is compared. Depending on the purchase, that baseline might be:
The baseline needs to represent a credible cost the institution otherwise would have incurred. Procurement and finance should ideally agree on that methodology before reporting results because changing the baseline can significantly change the reported savings.
The basic formula is straightforward:
Cost Savings = Baseline Cost − Actual Cost
Savings can also be expressed as a percentage:
Savings Percentage = (Cost Savings ÷ Baseline Cost) × 100
Suppose a university’s existing annual contract costs $500,000. After a competitive sourcing process, the new annual cost is $450,000.
$500,000 − $450,000 = $50,000 in cost savings
The percentage calculation is:
($50,000 ÷ $500,000) × 100 = 10% savings
This example shows how to calculate cost savings against an established historical baseline. However, the $50,000 initially represents expected or negotiated savings. Procurement still needs to determine how much of that value reaches the institution.
Realized savings are the financial benefits that occur after a contract, sourcing decision, or other procurement initiative is implemented.
Assume that $50,000 in expected annual savings, but departments move only 80% of eligible purchasing to the new contract. Off-contract spending, changes in volume, implementation delays, or substitutions may prevent the institution from capturing the full amount.
That is why teams should distinguish among:
Tracking the final purchasing helps demonstrate whether procurement initiatives are delivering the results originally projected.
Baseline selection becomes more complicated when prices are increasing. For example, let’s say an institution previously paid $500,000 annually for a service. The supplier proposes a renewal at $540,000, but procurement negotiates the price down to $510,000. Compared with the supplier proposal, procurement prevented $30,000 in additional cost. Compared with the previous contract, however, the institution is still paying $10,000 more.
Those figures represent different types of value and should be reported separately. Clear classification prevents cost avoidance from being presented as a direct budget reduction and gives finance teams a more accurate view of procurement’s economic contribution.
Procurement teams also need to determine whether the institution is actually buying at negotiated prices and using the contract as intended.
Useful measures include:
This lifecycle approach makes measuring procurement savings an ongoing discipline rather than an exercise completed only at contract award.
Procurement performance also extends beyond the price paid for goods and services. The American Productivity & Quality Center (APQC) identifies four important KPI categories:
E&I’s Economic Benefit ModelTM helps quantify the potential savings in each cooperative contract, accounting for cost savings, cost avoidance, incentives, and rebates. Savings can range from 5% to 12% in many cases.
A practical procurement scorecard does not need to be complicated, but does need to provide leadership with enough information to understand both financial results and how those results were achieved, including:
A sound methodology connects a defensible baseline with actual purchasing results and operational performance, so institutional leaders can see the value procurement is truly delivering.
Explore E&I’s competitively solicited contracts to help improve procurement efficiency, contract utilization, and measurable value.