The right slice

You can cut a cake only in a limited number of ways. The same goes for the Value for Money (VfM) equation: the more pieces you have, the smaller some will become.

The VfM equation has two prime components: price and quality, expressed as a proportion of the whole. A balanced equation is 50:50 price:quality.

As a leading provider of technical procurement advice and procurement solutions, LHC has found the first step in achieving VfM in a procurement exercise is to determine the weighting of the two components to be applied to the specific project. This is quite straightforward. It becomes more complicated when these two elements are broken down into exact requirements. This is when things can go wrong.

More often than not, price is evaluated at the point of purchase when, in reality, what social landlords need is price at the point of delivery. This may also mean assessment of various price scenarios. Of course, the more price scenarios, the more diluted the impact of each is in the VfM calculation.

In terms of quality, the subdivision can be endless, so to avoid slicing up the cake into measly portions, a focus on key requirements is critical. This is a strategic decision and as such will depend on the long-term overall aim of the commissioning organisation. It’s not just about product and service quality - it needs to reflect a range of political, legal and socio-economic factors. These are dynamic and the relative importance of each can change with time.

Thirty years ago, product quality was the main driver. As manufacturing standards improved, this gave way to service quality driven by resident satisfaction. Just before the financial crisis, the green procurement initiative encouraged a bias towards environmental sustainability. With more quality variables being considered, there was a concern that the price portion of the equation was becoming too small, leading to a lack of attention on efficiencies. The Gershon Review inspired a rebalancing of the equation in favour of price, and the public sector austerity measures have served to retain that focus.

On the quality side, the notion of ‘big society’ and the passing of the Localism and Social Value Acts means a bigger slice of the VfM cake is apportioned to social value and community benefits. This is amply demonstrated overleaf by two case studies of our customers, Thurrock Council and Magenta Living. The point is, commissioning organisations need to continually be alert to the changing environment and adapt their VfM equation accordingly, with a clear recognition that increasing the emphasis on one variable will lead to a reduction in another.

We may be approaching the time when the price and quality components are not mutually exclusive. Assessing price on a whole-life cost basis introduces quality elements into the price calculation.

Methodologies for calculating social outcomes of projects are now in use that relate the cost element to social and environmental value, such as the Cabinet Office Guide to Social Return on Investment. Such ‘integrated’ measures will ensure that we can have our big slices of cake and eat it.

John Skivington is director of LHC.