Value for Money

It's about how we buy, not just what we buy)!

Category Management seems to be the procurement buzz-word of the day. It’s defined as “a strategic approach which organises procurement resources to focus on specific areas of expenditure”. It enables procurement managers to focus their time, to analyse the market in depth in order to fully leverage their procurement decisions.

Category management is, of course, an essential component of effective procurement. By understanding what you intend to buy (whether it’s a large-scale infrastructure project, ongoing maintenance services, or materials to support your operations), you can work out the optimal volume, priority, and timeline for procuring significant projects.

Procurement management doesn’t stop once those decisions are made, however. In fact, we could argue that effective procurement is only just starting when a procurement programme and budget has been determined.

In Australasia we’re seeing major focus on strategic procurement decision-making. But effective follow-through – to sound procurement tools, weights and effective scoring systems – is still in its infancy. Yet, use of effective procurement tools is the single most important factor leading to value for money decisions!

Our brightest and best procurement managers are justifiably proud of the increase in clarity that they can provide to their suppliers on the pipeline of work in each industry. Government organisations increasingly see the benefits gained by providing information that enables their suppliers to gear up with the skills, plant and resources that they’ll need to cope with upcoming projects.

But as long as procurement processes are stacked with inappropriate weightings, irrelevant generic questions and unclear, inefficient decision tools, we cannot be sure that the right decisions are being made to select the best value supplier.

Time and time again, we hear Councils complaining that their suppliers are cutting corners; that quality is not up to scratch, and that assets are being built without effective future-proofing – ultimately costing far more than a quality provider should have cost in the first place.

It cannot be a surprise that 99 times out of 100, this is a direct result of poor procurement tools. When we ask tender evaluators why, for example, they put a 70% weighting on tender box price, the answer almost invariably is “that’s what we’ve always done” or [worse] “that’s what our bosses told us to do – they want to keep spending down”.

Yet this leads to the most expensive process (because you have to evaluate all the attributes first); and it delivers the cheapest supplier, more than 95% of the time. There are far, far more cost-efficient ways to find the cheapest supplier – if that’s what you really want! But do you?

Consider this: you’re finding that (now that your daughter and her young family have moved back home), your house is getting too crowded. Under the Unitary Plan, you have some new options available to intensify housing in your area.

Your options could include building two more rooms on your existing house, helping your daughter and her family find somewhere else, or looking for a bigger house for you all. So you talk to your family about what they want, you work out what you and they can afford, you discuss the benefits of all the options, you picture the long-term future of the housing market. Based on all those factors you decide that it will be best for everyone if you build two more rooms onto your existing house.

Having made that decision, your job of category management is done. But your real responsibilities to get best value for what you’ll invest is only just beginning. You’ll seek help from an architect or designer to work out the best place to build onto your house. You’ll select them based on their skill level (after all, you can’t afford to have lengthy delays and extra costs if consents aren’t granted). You’ll select your builder largely on their skill level (who wants a leaky building?!); and their price will need to be within your budget. They’ll need to have experience building your kind of house. You’ll check out their reputation for quality and timely completion, too.

You’re pretty unlikely to recycle the design or the build of your neighbour, or the last house you renovated. And it’s equally unlikely that you’d have the same selection criteria that you did last time, when you fixed up a kitchen on a different house, in a different location. While you want value, you’re not going to use a dodgy cheap contractor because you know they’ll cost you more in the end.

Put simply, making the decision on how to solve your crowding issue did not, in itself, get you value for money. Only by analysing your priorities and risks for your specific project – then using those to design good decision tools – will you get what you want, at a reliable and predictable investment.

In tendering, as with most things, you generally get what you pay for. Small wonder that the results of evaluations like this end up with false economies, time-consuming and expensive quality issues, and premature obsolescence or break-down of our infrastructure assets.

Governments everywhere are increasingly aware of the need to consider long-term sustainability of their assets, not just short-term costs and benefits. To do this effectively, the lead-in has to be in identifying the right projects to procure.

But the most effective driver of value has to be the skill of carrying through the intelligence of that strategic market analysis to design effective, fit-for-purpose procurement tools that deliver enduring cost-effective asset solutions for generations to come.

Procurement is not just about deciding the best asset to buy right now. It’s also about determining what factors will make that asset the best investment; and then using those factors to design procurement tools that deliver the right long-term decision.

Caroline Boot is the Managing Partner of Clever Buying, an organisation dedicated to providing practical procurement training including Government Rules of Sourcing, NZQA assessment and expert procurement support for tender evaluators. For more information, see www.cleverbuying.com