New Procurement Metrics: What About Measuring Cost Per Outcome?

In the coming months, I’ll be talking much more about two new initiatives that that I’ll (individually and part of a team) be participating in at Spend Matters. The first involves being one of the founders of a new 501(c)(3) organization – you know, the kind that lets you solicit pre-tax donations for Israel and the Tea Party while also raising IRS eyebrows – (just kidding on the political part, as that’s not our intent).

Rather, the focus of the organization will be to quantify the cost of effective and efficient outcomes in the public sector, and this has just as much relevance in the private sector. The other founders are some of the biggest-picture thinkers I’ve ever had the pleasure of working with. And we’re excited to make a difference.

As part of this effort, another colleague who’s involved with the program has already set out, in his day job, to begin to measure the true cost per outcome (higher graduation rates, job offers, etc.) of various government programs. Doing this truly flips the concept of investment on its head in public sector circles, and also obviously has relevance for procurement organizations in the private sector in terms of total value modeling and measurement.

If you begin to measure the actual outputs of effective government (i.e., what they actually do on a standardized basis) using true cost rather than internal costs alone – or the cherry-picked outputs of individual agencies, departments and even nonprofits – you begin to see a finite number of outcomes. This enables you to do a whole lot of fascinating things. For example, if a desired outcome in government is to increase “high school graduation rates” then it is possible to comparatively measure the effectiveness of diverse programs against each other (e.g., after school programs, early intervention programs, tutoring programs, vocational centric training/credits, etc.) to understand the true cost per outcome.

Such an approach enables you to “compete” programs against each other based on the efficient allocation of capital and the specific cost to achieve a measured result. It also allows you to do program benchmarking and provide a feedback mechanism to those who are not only in charge of carrying them out, but also to those who help structure and define them in the first place. This can ultimately yield to the future design of programs based around specific correlated KPIs (e.g., “web-based” education, “hands-on” tutoring and mentoring) that lead to better and more cost effective outcomes, as measured by the overall sample of programs, specific outcomes achieved, and costs to achieve them. Besides the ‘friendly competition’ aspect, it’s important to track these metrics over time to show improvements within a particular program or more broadly across a department or organization.

Granted, there are limits to approaches like this as we’ve envisioned them. It’s a whole lot easier to quantify the costs of getting someone off welfare and employed at a higher than minimum wage job than it is to measure the effectiveness of individual defense programs at maintaining stability and peace on the Korean peninsula.

Moreover, so far the measurement of programs has focused on effectiveness and efficiency based on individual line items in a budget – not how they might interact  to support each other in a complex system. Still, you have to admit it’s a whole new way of looking at the true value of public sector services and the specific Federal agencies and departments – as well as state and local institutions – that contribute to taxpayer-centric outcomes.

As I continue to explore this notion while putting on a private sector hat, I’ll introduce how we can begin to “compete” procurement programs against each other based on desired outcomes required.

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