Value for Money

Value for Money

The phrase ‘Value for Money’ has become a cliché. We often use the term loosely to indicate a purchase made for a reasonable price. This is, however, a very narrow connotation of the term. Value for money (VfM) is not about achieving the lowest price. It is about achieving the optimum combination of whole life costs and quality. More recently, the term has been redefined as ‘the most advantageous combination of cost, quality and sustainability to meet customer requirements.’

It is to be noted that:

  • cost implies the whole life cost
  • quality implies conformance to customers’ requirements
  • sustainability implies a balance of economic, social and environmental benefits
One of the models for assessing Value for Money is the ‘4E framework’ developed by the Department for International Development (DFID) which was set up in 1997 by the United Kingdom government for administering overseas aid. The goal was to ‘maximize the impact of each pound spent to improve poor people’s lives’.

The 4Es in the framework, viz, Economy, Efficiency, Effectiveness and Equity are explained below:

  • Economy -Are we buying right quality inputs at the right price? (‘Spending less’)
  • Efficiency - How well are we transforming inputs into outputs? (‘Spending well’)
  • Effectiveness -How effective are the outputs produced by an intervention having the intended effect? (‘Spending wisely’)
  • Equity – is there a fair distribution of benefits? What is the extent of our reach to the marginalized groups? (“spending fairly”)
While economy is relatively easier to understand, it is worthwhile to understand the differences between efficiency and effectiveness. Efficiency may be defined as the ability to produce an intended outcome in the way that results in the least waste of time, effort, and resources. In other words, efficiency is about managing the process well. On the other hand, effectiveness is the ability to reach a desired result. According to Peter Drucker, "Efficiency is doing things right. Effectiveness is doing the right things”. It may be noted that one may be effective but inefficient (somehow getting things done with total disregard for waste of resources), one may be efficient but not effective (doing the wrong things in the best possible manner) or both ineffective and inefficient. The ultimate goal of procurement is to get the best possible outcome for every Dirham spent. Hence, the 4E framework is suitable to measure the performance of any procurement initiative. In fact, the National Audit Office (NAO) in the UK defines Value for Money as ‘the optimal use of resources to achieve intended outcomes’ and uses the 4E framework to audit public procurement. There are several barriers to achieving VfM. Inadequate or improper understanding of value is one of the main reasons. Defining and agreeing with stakeholders on what constitutes value, is crucial to avoid misunderstandings and unrealistic expectations.Other barriers include the poor choice of projects, sloppy project implementation, weak procurement controls, over-specified products without any proper justification, obsession with brands and so on. Achieving the 5 Rights of Procurement (Quality, Quantity, Time, Place and Price) is the bare minimum value that can be achieved. However, that is not good enough. We must consider other factors like supplier reputation and sustainability, warranty and maintenance, carriage and transport, service excellence, eco-friendly packaging, managing adverse currency fluctuations etc. Achieving Value for Money is a process of continuous improvement and requires a sustained drive for it. It doesn’t mean we only do the cheapest things, but we need to get better at understanding what is driving our costs and make sure that we are getting the desired quality at the lowest price. The purpose of this drive is to develop a better understanding of costs and results so that we can make more informed, evidence-based choices.

Even in our personal lives we should refrain from making an impulsive purchase and pause for a moment to decide whether it is the best use of our hard-earned money!

Article by:

Sudipta Chatterjee

Program Director - Procurement and SCM, Blue Ocean Academy Ref: DFID’s Approach to Value for Money, Department for International Development, July 2011
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