Achieving Value for Money in Procurement

These factors can be broadly grouped and defined as: 

Economy: the reduction of the cost of resources used for an activity with a regard to supporting quality. It relates to how cost effectively financial, human, or material resources are acquired and used. 

Effectiveness: the successful realisation of the intended benefits from a procurement activity. It relates to how adequately an intervention achieves its intended benefits.

Efficiency: the measure of productivity as it relates to how optimally the inputs are converted into outputs with a regard to supporting quality and subsequent delivery of benefits and how quickly those benefits are realised. 

Equity: the selection of resources and targeting strategies to promote secondary goals for the organisation. It relates to the leverage of the procurement event to generate opportunities for targeted Social and Environmental benefits. 

The key point is that Value for Money does not have to be the lowest price; it is ultimately achieving the greatest possible benefits with regard to the total cost of ownership (or whole-of-life cost) and its contribution to the strategic goals and outcomes for the organisation.

Establishing value for money

There is no universal formula for measuring Value for Money in procurement. Value for Money takes into account the entire mix of quality, costs, resources, suitability (fitness for purpose), timeliness and risk. Hence, there is considerable overlap with evaluating the financial and non-financial factors of Economy, Efficiency, Effectiveness and Equity.

In practice, a Value for Money framework is required, and the key tips are: 

Don’t look for a perfect solution, as the procurement will need to balance the trade-off between financial and non-financial factors, which need to be aligned with the strategic outcomes or benefits you are looking to achieve.

Capture your core strategic and mandatory requirements as the non-negotiables, which provide the starting point from where the procurement evaluation and decisions will be made. 

Consider your risk and opportunity in the trade-off within the evaluation to optimise the procurement outcome and support an agile approach that is flexible to the dynamic internal and external environment and changing circumstances. 

For material procurement and vendor contracts, perform a pre-commitment risk assessment and due diligence, then consider the post-impact on risk categories and the enterprise risk profile.

Provide a quantitative and qualitative analysis to assess the consequences of the diverse options and prioritise the outcomes. This includes an assessment of stakeholders’ expectations for environment, social and governance (ESG) factors.

Conclude on the above but consider external competitive pressures and the market to ensure you meet the stakeholder expectations.

Utilise the procurement process to secure improved outcomes (including social and environmental benefits) and deliver savings on the recurrent spending that relates to procured goods and services.