Procurement and Contracting

Procurement and Contracting

Value For Money: What Does It Mean And Why Is It Hard To Measure?

by Michael Young on Friday, March 15, 2019 with 0 comments

RSS

Obtain the best possible value for money – that’s the overarching goal of procurement for any organisation. But what does “value for money” actually mean? And is it possible to measure the value for money achieved? 

What is value for money?

Value for money (VFM) is a term that’s easily thrown around, but little understood. It is not about buying the cheapest products or services, but striking the balance between the lifetime cost of the purchase and the quality or performance of that product or service. 

The NSW Government defines value for money as “the difference between the total benefit derived from a good or a service against its total cost, when assessed over the period the goods or services are to be used.”

In simple terms:

                      Value For Money = Total Lifetime Benefit – Total Lifetime Cost        

Therefore, to measure and achieve VFM, you first need to identify and weigh up the benefits and costs. 

There are three types of benefits and costs to consider, which include financial and non-financial factors. 

  1. Up-front e.g. savings, avoided costs and transitioning-in costs
  2. Whole of life e.g. contingency costs, contract management risks, transitioning-out costs. 
  3. Fitness-of-purpose e.g. the capability of the good or service to meet the precise identified need, compliance with specifications or standards. 

There is another way to define VFM. According to consultancy firm KPMG, it’s about finding a balance between the three E’s:

  • Economy: Acquisition of resources in appropriate quality and quantity, at minimum cost.
  • Efficiency: Maximum output for any given set of inputs or the minimum inputs for any given quantity and quality of goods and services provided.
  • Effectiveness: Extent to which any activity achieves the intended results, which can be either quantitative or qualitative.

 By effectively striking a balance between the three E’s, you can reduce wastages and inefficiencies to achieve real value for money.  

The challenge of measuring value for money 

But it’s not that easy. You can only improve what you can measure and there is no universal formula for measuring VFM in procurement. You need to consider the entire mix of costs, benefits, fitness for purpose, timelines and risk. 

The biggest challenge here is putting an equivalent money value to factors which cannot be easily valued or quantified. We’re talking about non-financial factors. It might seem easier to simply concentrate on the benefits and ignore the costs, but this wouldn’t show the true value for money.

Also, the factors that are important to one organisation might be of little consequence to another. This means you need to allocate a weighting to each factor at the outset. 

Focus on competition

Buying goods and services through competition helps overcome these challenges to a degree. Competition gives you a way to compare the risk and benefit factors of the goods or services you’re procuring. There’s less need to “measure” the non-monetary factors, as you can simply use them as a KPI for suppliers to meet. 

Never stop measuring

At the end of the day,procurement decisions should be made on the basis of a long-term view of value for money. Don’t only measure value for money at the procurement stage; review it at different stages in the life of the contract. This will help you examine whether planned VFM benefits are being achieved. 

Over to you

What I’ve provided in this article is an introduction to value for money and some of associated challenges. As one of the foundational concepts in procurement, it requires an in-depth study and understanding if you want to be able to effectively apply it to your workplace. 

Learn more about value for money and other key procurement concepts in our courses here 


Comments
Post has no comments.
Post a Comment



Captcha Image


Take our self assessment survey

Are you interested in finding out if you have options for Recognition of Prior Learning (RPL) for a qualification?
 
Do you have some work experience or have been in the workforce for a number of years but not sure how you can apply your existing knowledge to achieving a qualification?
 
Our self assessment survey will give you more information for what your self paced learning pathway looks like based onyour work and life experience – ie do you have options for Recognition of PriorLearning (RPL) or is a distance package best for you – or a blend of both.
 
The survey is free and it takes just 10 mins to complete and within 24 hours you will have a response from a Transformed team member with your recommended learning pathway as well as the fee to complete and the next steps should you wish to enrol. We have payment plans to suit all budgets. 
 
It’s that easy – click on the green button to take a survey for the qualification you are interested in NOW.

Take Survey Now
Testimonials

We askedWhat is the best part of the course?

"Ease of delivery, completing from work”

Simone, Qld Health