The Value for Money principle

For many years, the role of procurement staff was to obtain goods and services at the lowest possible price, but this resulted in the purchase of low quality items or poor workmanship that wasted money in the long run. As a result, 'value for money' became the goal of procurement staff, i.e., arranging the best available purchase, consistent with the defined specification, and taking into account factors such as quality, transport and installation costs, warranties, after sales service, reliability, maintainability, residual value and so on during the full life cycle of the product or service contract. Factors such as technology lock-in and end of contract vendor flexibility were also included as value for money evaluation criteria where appropriate.

More recently, however, procurement has become a vehicle for effecting social change in many cases, with policy changes that require purchasers to evaluate a range of other factors that are overlaid on the definition of value for money. Thus, 'buy local' requirements were added, with preferences being given to goods and services produced or provided from national or regional sources, rather than from overseas. Ethical procurement (usually intended to preclude suppliers who use 'sweat-shop' labour) soon became the norm and environmentally friendly products and processes were also favoured. Most recently, social procurement (taking into account a range of social factors, typically including contributions made by suppliers to local causes) has become an important factor in many areas of procurement.

A word about 'Value for Money'

Incorporating additional factors into your organisation's definition of value for money is a perfectly sound practice. It may be completely consistent with your objectives and may assist in establishing or confirming your place within the community. For example, an organisation operating in a regional area may be quite willing to use local suppliers whenever possible, even if that increases the cost of its purchases, because it keeps the money in the community and because it demonstrates the organisation's commitment to the area. Similarly, an organisation committed to promoting debate on environmental issues may choose to purchase goods and services that are seen to be environmentally friendly, irrespective of any premium that may be associated with the purchase.

For organisations without a strong policy objective, however, changing your definition of value for money should only be done in the full knowledge of its implications. It is likely to come at some cost so do it because you have evaluated, understand and accept the implications: not just to be 'politically correct'. Preferences based on policy grounds are traditionally difficult to define, to justify, and to administer. Governments have tried it on numerous occasions and eventually been forced to abandon it in most cases, particularly when attempts have been made to apply preferences based on quantitative measures and/or where price adjustments have been applied based on the suppliers' claims. Moreover, in practice, it is very rare that the application of a preference actually results in a different procurement outcome: and where it does, it has invariably resulted in premium prices being paid. (It is also possible that the application of some preferences may be in breach of the World Trade Organisation's Free Trade Agreement.) Note that this is NOT an argument to proscribe preferences based on particular policies: rather it is to highlight the need to enter into any such arrangements in the full knowledge of the likely outcome.

Conventional wisdom dictates certain policies and the perceived outcome is often so obvious to the policy-maker that the decision to apply a preference in certain situations simply cannot be ignored. This is not the place to be teaching organisations policy formulation theory or techniques, but it is important to be fully aware of the implications of a policy before adopting it.

An example might be the ethical purchasing argument - to which we would all subscribe without question. It is simply not ethical to purchase goods and services from unscrupulous suppliers who use coercion to produce goods from workers in sweat-shops. But if those workers are producing goods that cannot be sold, fairly soon they will not be working at all - and some people might consider this to be even worse than working for below-award wages. In formulating a policy that precludes suppliers that pay below award wages to their staff, you need to make your own judgement on issues such as this.

Similarly, the efficacy of a number of presumed environmentally friendly products has recently been called into question following scientific analysis that suggests that taking a wider perspective of all the factors surrounding the item may not prove it as desirable as was previously believed. For example, there have been reports that the production of some recycled products consumes a disproportionate amount of energy and the deleterious impacts of that may outweigh the benefits attributed to the use of the product itself. The validity or otherwise of such reports is not the issue here and it is emphasised that this is not an argument for abandoning a policy of preferring or procuring only environmentally friendly products. Indeed, there may even be benefits in promoting such a policy where the actual outcome is dubious if it promotes debate and heightens awareness of the issues. Rather, it is important to evaluate your policies fully and rigorously, before adopting and applying them based on information obtained from untested external sources.