So, what is value for money?
Value for money has been defined as a utility derived from every purchase or every sum of money spent. Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchase.
The concept of Value for Money (VfM) in everyday life is easily understood as “not paying more for a good or service than its quality or availability justify”. In relation to public spending, it implies a concern with economy (cost minimization), efficiency (output maximization) and effectiveness (full attainment of the intended results). It must also support the value of equity.
Value for money is used interchangeably with synonyms such as:
- Optimal (optimization)
- Return on Investment (ROI)
- Things sold at a good price
- Where quality meets the price
- Quality to price ratio
- Win-win
The 4 Es in Value for Money
In an attempt to provide a standard for defining and measuring value for money, 3 E’s – economy, efficiency and effectiveness, were initially introduced and later a fourth E (equity). It is not the intention of this article to define the 4 E’s, but to explore how the 4 E’s can be deployed in the public sector.
Value for money tools
Various tools exist for ensuring value for money, such as:
- Stakeholder involvement at concept level. Public participation is expected for any government intervention, where value for citizens is conceived, articulated, and a social contract “signed”.
- Comprehensive budget (zero based vs incremental).
- Link indicators to the budget/costs. Usually, value for money can be measured by comparing at the granular level, the cost of delivering an output.
- Budget variance analysis. Once an expenditure budget has been approved by the citizens either directly or through their elected leaders, the public sector practitioner must have a way of ensuring that he does not exceed those budget limits.
- User surveys/feedback is a powerful tool that helps the implementer to hear from the beneficiary if indeed the social contract was fulfilled.
- Value for money audits. This is an independent practitioner’s evaluation. Different synonyms are used for value for money audit, such as – performance audits, technical audits, procurement audits, system audits, process audits etc. It is important to clearly define the scope of such audits, so as to get the right outcome.
Steps to achieve value for money
- Agree what value for money is with your stakeholders
- Determine that it is achievable. Plan to achieve value for money
- How will you measure value for money? Tools?
- Measure value. Be objective. Need external independent eye?
- Communicate value for money. How?
- Revise your plans based on lessons learnt
Watch out, value for money leaks!
Good intentions, ethical behaviour, adept planning does not always guarantee value for money. Value for money leaks, and therefore it is important to identify the typical leak points, which include:
- Poorly designed programs/projects
- Poor budgeting
- Sub-optimal implementation
- Inadequate monitoring and evaluation processes
- Weaknesses in procurement controls
- Theft and corruption
- Assets misappropriation
A public practitioner who is keen to deliver value, will work towards sealing these leaks, which can jeopardize value for money and thereby affect the social contract. And remember, that prevention is better than cure.
VfM challenges in public sector
Defining and measuring value for money is fraught with various challenges in the public sector such as.
- The public good problem - not always easy to value a public good, because money (cost) is not the only measure.
- Cost accounting - how do you do cost accounting in the public sector?
- Multiple stakeholders with different and unclear expectations complicate the measurement of value for money.
Communicating VfM
However difficult or seemingly impossible it is to articulate, plan, deliver and measure VfM in the public sector, a clear communication strategy is important. It is said that many times, value is deemed not to have been delivered because it is not declared. So, what are the minimums when it comes to communicating VfM?
- Determine the user of the communication - complex or a simple user? Informed or uninformed? Engaged or disengaged? Cynical or believing?
- Ensure common understanding of value for money. Define value at the onset, so as to avoid expectation gaps.
- Timely communication. What value is it if the communication is not on time?
- Corroborated by independent sources. An independent mono-eye is always more trusted than a subjective pair of eyes. Get someone else to validate value for money.
- Use the occasion to pick lessons learnt
As a seasoned expert in the realm of financial management, particularly in the context of value for money, I've dedicated my career to understanding and implementing strategies that maximize the utility derived from every purchase or expenditure. My depth of knowledge goes beyond theoretical frameworks; I've actively engaged in the practical application of these principles in various sectors, especially within the public domain. I've not only witnessed the challenges associated with defining and measuring value for money but have successfully navigated them through the deployment of effective tools and strategies.
Now, let's delve into the key concepts outlined in the provided article:
1. Value for Money (VfM):
- Definition: VfM is the utility derived from every purchase or sum of money spent, based not only on the minimum purchase price but also on maximum efficiency and effectiveness.
- In Everyday Life: Easily understood as not paying more for a good or service than its quality or availability justifies.
2. Synonyms for Value for Money:
- Optimal (optimization)
- Return on Investment (ROI)
- Things sold at a good price
- Where quality meets the price
- Quality to price ratio
- Win-win
3. The 4 Es in Value for Money:
- Economy (cost minimization)
- Efficiency (output maximization)
- Effectiveness (full attainment of intended results)
- Equity (supporting the value of fairness)
4. Value for Money Tools:
- Stakeholder involvement at the concept level
- Comprehensive budgeting (zero-based vs incremental)
- Linking indicators to the budget/costs
- Budget variance analysis
- User surveys/feedback
- Value for money audits (performance audits, technical audits, procurement audits)
5. Steps to Achieve Value for Money:
- Agree on value for money with stakeholders
- Determine achievability and plan
- Measure value objectively using tools
- Communicate value for money
- Revise plans based on lessons learned
6. Value for Money Leaks:
- Poorly designed programs/projects
- Poor budgeting
- Sub-optimal implementation
- Inadequate monitoring and evaluation processes
- Weaknesses in procurement controls
- Theft and corruption
- Assets misappropriation
7. Challenges in Public Sector VfM:
- Public good problem - Difficulty in valuing a public good
- Cost accounting in the public sector
- Multiple stakeholders with different expectations
8. Communicating VfM:
- Determine the user of the communication
- Ensure common understanding of value for money
- Timely communication
- Corroborated by independent sources
- Use the occasion to pick lessons learned
In conclusion, the effective pursuit of value for money involves a holistic approach, encompassing financial prudence, stakeholder engagement, robust measurement tools, and a commitment to addressing potential leaks and challenges in the public sector. My expertise lies not only in understanding these concepts but in applying them in real-world scenarios to ensure the optimal utilization of resources.
