Value for Money Scores
In public and corporate sourcing, Value for Money (VfM) is all the rage.
“Rage” it is, as buyers and category managers face a lengthier, more collaborative, cumbersome and potentially more confrontational sourcing process, during which they see their contribution to the bottom line diluted by the poor scoring of the lowest bid against ambitious “non monetary criteria” devised by stakeholders.
At the same time, stakeholders often feel frustrated, bypassed and even sabotaged by the results of a sourcing event performed by the buyers, in which they took no or little part but with which consequences they have to contend in their daily working life for possibly a number of years. Rage, thus it is.
On both sides…
As in any human undertaking, whether political or reasonable, the solution lies in a consensus, which will be accommodated along the lines of relative power, relative interest, relative value, relative…
A consensus, while being a good mediator can be implemented strictly along rational as in mathematical as opposed to reasonable lines, as in relying firmly on a set of generally accepted principles in the interest of the corporation and/or organisation.
If you accept that mathematics and physics are absolute sciences with a set of generally accepted calculation models and laws, then it will not be a surprise that almost everything we deal with in real life can be expressed in numbers and converted into formulas. Humans are at the centre of this although it does not sound like it.
Now, that is for the theory. Let’s move to the practice.
First of all, it means that in any sourcing event, you need a ceiling price, meaning a price above which none of the tangible or intangible benefits will outweigh the extra price which is quoted.
Second, you also need to identify the tangible or intangible benefits which can be achieved which would justify any additional price point. As a benefit might be subjective, this appreciation needs to be adjusted for each and every case:
- a benefit in terms of timeline is generally nice to have, but if you have no use or benefit for the time saved, does the time benefit really have any value?
- a more efficient technology, might reduce the workload but if you do not plan to redirect the resources you saved through this efficiency gain to activities which add more value or to discontinue these resources, then again, which benefit does that technology bring to you?
- superior past performance, while a possible indicator of future performance, is not something that directly translates into future superior performance. Therefore, while it provides some reassurance, what is a rational price tag to attach to it? In the absence of poor performance by other bids, there is no room for rating. Then again why would other bidders document their poor performance in a competitive event?
Just a few examples of how non straightforward the matter is. In this context, one of the first thing to do, is to 1)identify “soft” benefits 2)allocate rational points to these. If you have no plans to exercise the benefits they bring, then they get no points. If you have a plan to do so, then state it and attribute points to it.
Thirdly, sort out the benefits that can be quantified and attach a relevant scoring to these. This is best done by calculating a Euro value to each point. This means if quality is 20% of the VfM equation of a 1m Euros deal, and rated on 100 points, each point is worth 2.000 Euros. This has to be clear to all graders/stakeholders in the process, to avoid awarding points willy nilly.
Then, again if each point with regard to quality avoids a production line reset every week which furloughs 14 FTEs at the production line for one hour and/or avoids 1% of customer complaints/refunds… then it is certainly worth every cent.
As you understood, if you have followed me, it requires stakeholders and graders to think their scoring grid, weighting and point allocation through. It is also essential, that the arguments in support of the scoring grid, weighting and point allocation be part of the final award recommendation to document the rationale and plan in support of the award.
Further, a very common mistake which is made in sourcing events, is that buyers and stakeholders conflate the minimum requirements with the scoring:
- If suppliers are to meet minimum criteria as suppliers, this should not be part of the actual sourcing event but rather as a pre-selection/pre-qualification process for the category, commodity or service. Either you are a qualified supplier for catering services or you are not, if you are not, you do not get to bid for a catering tender. This would also substantially reduce the sheer size of the tender for both the supplier and the buyer/stakeholders.
- If your event provides for 20% on non monetary criteria and a minimum of 50 points in regard of those non monetary criteria. The contest is actually on a playing field of 50 points for which one is ready to forfeit and additional price tag of 20% vs. lowest bidder. If the same event, provides for a 40% on non monetary criteria with the same minimum, we are saying, that the value of those 50 points is 40% of the price tag. The points are still 50, but their individual value has doubled. Should you decide to raise the minimum, each point’s value would also be increased. These are the considerations one needs to make to reach a good value/benefit balance.
- Further, the non monetary evaluation, should be put into perspective of the award. A supplier might score high on both the monetary and value (non monetary) comparison, but score poorly with regard to an actual award with regard to ancillary costs such as custom duties, transportation/set-up costs and/or supplier switching costs, past performance or phase-in/out costs which also impact the award decision. Therefore, although not part of the scoring matrix, these factors should be considered at the time of award.
- Finally, you also have the risk component. Unless, you have a risk framework in place against you can assess the bids, all bids are the same. Sourcing from a supplier in a volatile country is not the same as from a country in a non volatile one. If the risk reaches a certain threshold, you might need to split the award to have a back-up. This requires the cost of the back-up to be factored in, in someway in your award calculation. This depends on your risk appetite but also risk absorption capacity. Typically, nowadays, companies are only as reliable as their weakest critical suppliers.
To summarise: 1) Have a ceiling price (avoid temptation) 2)Pre-qualify your suppliers (don’t entertain unresponsive bidders) 3)Think about your score weighting (It is still about value for …money)4)Think about the monetary converted value of each non monetary point (points are money too) 5) never forget risk (risk when it materialises costs …tons of money)