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Value for money presents challenges

October 28, 2019

A shift in procurement practices from awards based on price to awards based on value is much discussed and, for most people, long overdue. All the evidence suggests that many organizations continue to struggle with making the change.

Awards based on lowest price and measured on negotiated savings are simple to assess and manage. For many commodity products, they continue to make sense unless a supplier can prove otherwise. But more complicated acquisitions, and especially those involving services, demand a rather more holistic approach that takes account of lifetime costs and benefits (not all of which may be directly financial in nature).

Barriers to change

Several factors are impeding progress. The change is more dramatic than it sounds and impacts many areas of the business, as well as the supply base. Finance must buy in and contribute, often validating the benefit assessments. Business units need to supply relevant data and often product management or engineering will be required to provide input. This demands levels of collaboration and data that are hard to achieve. Also, suppliers need to buy in to the process and provide reliable information – much of which they may not possess.

Ultimately, many see the short-termism of markets as the major barrier. CFOs are reluctant to promote the shift from ‘negotiated savings’ to ‘’value’ because of the short-term impact this would most likely have on purchase price. However, this is neither inevitable nor insuperable. One contributor can be the shift from products to ‘as-a-service’. Another may be the need for buyers and sellers to negotiate shared-benefit agreements.

Making the transition

Transitioning to value for money represents a benefit to both customers and suppliers. Its achievement requires increased openness around financial data and a greater readiness for partnering. Until then, value for money seems set to remain the exception, rather than becoming the norm.

Do you have examples of ‘value for money’ contracting that you can share, and how they were achieved?

 

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