Procurement – value or cost?

Two very different bits of news caught my eye this morning.

The BBC are in trouble again for spending licence payers money; this time on their boat party on election night.  I thought at the time it was  cringe-making to watch; who on earth thought we would be interested in Bruce Forsyth, Joan Collins or David Baddiel waffling away on politics or indeed other matters?  The Mail is hammering them now for the cost of the event.

And CIPS erstwhile leader, Chief Exec David Noble, is warning the new Government; as Supply Management reports,

".......he cautioned against a rush to reduce costs, which could lead to poor decisions with disastrous long-term implications.

“It is greater value rather than lower costs that needs to drive procurement decisions, right now.”

Now, the BBC will no doubt say the boat event was good value.  Filled a lot of screen time, etc.  But we are moving into a period where public sector costs are going to be scrutinised as never before as jobs and services get cut.  So things that may be good value for money  (VFM) - but are high cost - will not be acceptable.

I bought my Saab in January 2009, great (lucky) timing, second hand car prices had slumped, a year old, 8000 miles on the clock, over £30K new, I paid £16K.  Absolutely brilliant VFM.

BUT....I didn't have to spend £16K.   I could have bought a second hand Mondeo for, say, £10K.  It would have met my basic specification in terms of space, comfort, safety, more than adequately.  Now, I would argue that the Saab was better VFM, and I could do a procurement-type evaluation process to prove that.   But if that had been taxpayers money....I should have bought the Mondeo.

So, David is wrong when he says "it is greater value rather than lower costs that needs to drive procurement decisions".  Of course the public sector needs to keep an eye on value.  But lower absolute cost is also going to be key as the money runs out.

Buying goods or services that meet the core specifications with the lowest whole life cost is the mantra that needs to drive procurement decisions.

And that means no yachts on election night, no Saabs, and no top of the range office furniture; even if they are all great 'value for money'.

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Voices (6)

  1. Ronald Duncan:

    @Bitter and Twisted
    I have to agree that pure specs, followed by long term lock in on a poor spec is a major problem.

    The other big issue is the “never make mistakes” mentality that means that no matter how big and bad the mistake, the contract is almost always continued to the end, and there is no movement to better providers during the contract period.

  2. Jon Hughes:

    Most useful word in the leader’s vocabulary is “and”, rather than “or”. We need value and extremely large cost reductions, particularly in the public sector. Deficit reduction by necessity will drive multi-billion pound reductions. The challenge for procurement is how to connect to that essential requirement, make the necessary changes to unlock huge amounts of cash, while still maximising value for money as well as possible. Probably in that sequence. And yes, Peter – you can’t beat Zind Humbrecht! Not the cheapest but great value.

  3. Ronald Duncan:

    There are simple savings, buying an identical commodity item at a better price.

    We have made a technical breakthrough that allows us to analyse, billions of pounds of spend at item level and spot all the individual items that are being purchased at the wrong price.

    Clearly that is a quick win for any organisation, and the reason is normally that whilst procurement have done a great job in negotiating and setting the contract the organisation does not know the contract prices and thus ends up making the occasional purchase at list price.

    An automated comprehensive analysis of all spend results in enough of these occasional purchases (or sometime frequent purchases) to result in sufficient savings that having analysed over £ 67 billion of spend we are happy to offer a fixed price for the analysis of £ 6,000 and a money back guarantee.

    On the subject of cars, a few years ago, we swapped a Jag and a Subaru for two 2nd hand prius. We got over 2 x the miles per gallon 19 and 22 mpg went up to 55 and 60 mpg, cash back and a pair of cars that had more room and were quieter driving around town.

    Automated analysis can not yet make informed decisions about value, but it certainly helps with cost.

  4. bitter and twisted:

    Isnt the real problem that public sector specifications are bad.

    And then the OJEU rules carve the poor spec in stone.

  5. admin:

    Yeah, but it has leather seats and the wing mirrors retract when you press a button….

    Actually, i think to be technical (and trying to remember the bit of economics and decision theory i studied many years ago) it is about the utility of money versus the utility of other factors when you make evalaution decisions; and I think the public sector is entering a period whne the utility of money is VERY high compared with everything else!

  6. Peter Jones:

    Peter is right in one sense – that is if I wanted to justify a stand alone purchase I can do it

    BUT did the Mondeo meet his specification – if it did then he has not achieved value for money by buying the Saab

    So VFM has to be against specification – and here I assume VFM includes TCO. I guess the Saab loses on this to!!

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