Soft Savings

Soft savings are the intangible benefits of continuous improvement. Contrast this with hard savings which are those that can be directly pointed to as a line item on some sort of financial record such as a receipt or an invoice.

Soft savings include things like reduced frustration, improved job satisfaction, shorter lead times, greater trust, and the like. Each is extremely difficult to directly apply dollar values to. All of them, though, do impact the bottom line. Eventually, soft savings link to hard savings, but the connection can be hard to trace.

For example, shorter lead times help sales, but they also reduce the irritation customers display towards call center operators when checking order status, reducing dissatisfaction.

Greater trust means managers spend less time justifying things to employees, and less time following up to make sure things are being done. It also means that team members might go the extra mile or help bring other employees on board to an unpopular idea.

The problem is that it is extremely difficult to quantify precisely how much these types of savings impact the profit and loss statement.

There are also some “gray area” savings that are hard to classify as hard or soft. Sometimes a potential hard savings relies upon so many projections and estimates that even a ballpark value cannot be reasonably assigned. They are still hard savings because they are specific line items but seem somewhat “squishy” due to the uncertainty.

Consider the addition of a piece of safety equipment to machine. There will be intangible savings that come from the increased job satisfaction that employees will experience from feeling that their employer cares about them.

But there is also a potential hard savings in medical or legal costs if an employee injury is prevented. The problem is that even though this would ultimately be a precisely quantifiable expense, there is simply too much speculation to apply an actual dollar value to a potential injury. It is also possible that even without the added safety feature that an accident would never have happened anyway. You can’t really save money that you might not have ever spent.

A true hard savings would be something that was previously an expense and is now removed, such as reduced space, lower defect rates, and higher productivity. You can also think of an eliminated budgeted item as a hard savings. Not hiring extra people is a hard savings if they were already planned.

Soft savings are, in fact, real savings. Companies save money when employees are more satisfied. For example, acquisition costs go down because satisfied employees are more likely to land new business than disgruntled once. There are also more likely to appease upset customers. Both of these impact the bottom line.

Creating a continuous improvement culture also drives cost savings over time. Having a team of empowered employees that attacks problems can have a tremendous impact on profit.

So, what is the issue with soft savings? Well, a big part of any continuous improvement effort is the application of the PDCA cycle. The “C” stands for “check”. If you make a change, you need to confirm that is actually a positive change. That means looking at its impact.

Soft savings, by their very nature, require that they be taken a bit on faith. Faith is a bit contrary to operating with facts and data.

But you should not avoid doing a project simply because the majority of the savings are soft. One common practice is to find a surrogate when measuring soft savings. You take on faith that the metric you use will fall through to the bottom line. Then you can track progress against that surrogate metric instead of using actual dollars.

Some of these metrics are in common use. For example, many companies track customer complaints and lead time. You could use those to predict if your project actually reduced any costs.

Others, though, will require creativity. For example, if you believe that job satisfaction will impact the bottom line, you can create a survey that tracks progress in that area.