Nutshell: Economy, efficiency, effectiveness: understanding Value for Money

Written by
Future Talent Learning

Published
09 Mar 2021

09 Mar 2021 • by Future Talent Learning

Responsible financial management means creating good Value for Money for our customers and our organisations. But what does that mean and how can we achieve it?

We usually find out at an early age the sad truth of Oscar Wilde’s quip that a cynic is “a man who knows the price of everything and the value of nothing.” When our pocket money runs out and we find ourselves with very little to show for it, we’ve learnt a valuable economic lesson: that, in the words of a more contemporary trader in bon mots, Warren Buffett, "Price is what you pay. Value is what you get.”

In strict economic terms, value is the measurement of the benefit an individual or a company gets from a product or service. It might be about the maximum amount of money that someone is willing to pay (the price) or the minimum amount we expend on producing that product or service in the first place (the cost). We say things like “That’s good value” when we perceive that we’re getting a good deal, perhaps even stealing a march over the person or organisation we’re transacting with.

In business terms, though, the idea of value has become more finessed, acknowledging that there are other factors at play when we look to secure and offer value for ourselves and others. The term Value for Money has even earned its own acronym: VfM.

Value for Money (VfM)

In these terms, Value for Money is just not about achieving the lowest price or cost. Rather, it’s about achieving the optimum combination of a number of factors - not just cost or price, but also things like quality and sustainability – to achieve defined outcomes. The UK’s Audit Office describes good value for money as “the optimal use of resources to achieve the intended outcomes”, with optimal expressed as “the most desirable possible given expressed or implied restrictions or constraints”.

It’s also often described in terms of the ‘three Es’: economy, efficiency and effectiveness:

Economy: obtaining the appropriate quantity and quality of resources at the lowest cost possible; optimising the resources (inputs) which an organisation uses (doing things cost-effectively)

Efficiency: maximising the output generated from units of resource used; optimising the process by which inputs are turned into outputs (doing things the right way)

Effectiveness: the extent to which objectives are met (doing the right things).

VfM asks us to look at the economy of how we use our resources to create inputs; the efficiency of how we translate those inputs into outputs and how effective those outputs are at driving outcomes.

The concept doesn’t just apply to what we buy ourselves. It also applies to the products and services we deliver to our customers.

Achieving VfM in both areas not only helps our organisation to operate efficiently and effectively. It also plays a vital role in generating customer satisfaction and creating profitable and sustainable organisations.

Some organisations also have a statutory responsibility to achieve VfM, for example, public bodies – like schools or local government – who are publicly funded. It’s also become an important benchmark for charities and not-for-profit organisations who may not have the same commercial imperative as companies, but still need to maximise their outputs to create as much benefit as possible for their stakeholders.

VfM is also about a balance between the three Es. We need to keep those outcomes in mind, whatever our context, to guard against too much focus on economy or efficiency (or both) to the detriment of effectiveness. The primary aim is to achieve our objectives while doing so in an economic and efficient manner – but not if that means producing goods in a way that damages the environment, leaves little room for innovation or alienates customers.

So, when implemented well, Value for Money really is worth a lot.

  • It’s good to give…
    • Organisations that deliver value for money typically have a good reputation and stand out against their competitors.
  • …and great to receive
    • And we also stand to benefit when we receive good value for money from the people and things we manage.

By giving and receiving value for money, we can gain advantage in all sorts of areas. For example, we can use a VfM mindset to review a whole host of business transactions, including:

  • improving our operations with more efficient systems and procedures;
  • working with suppliers who provide us with high-quality materials and expertise at the right cost;
  • employing and supporting people who add value to our organisation and practices;
  • making efficient, but sustainable, use of our physical resources, like equipment in offices or shops or manufacturing plant in a factory or warehouse;
  • securing best value financial services like loans to support investment;
  • offering our customers well-designed products and services at a fair price. 

Giving value for money to our customers

Customers rightly have a range of expectations when they interact and transact with us. And, if we do not satisfy those expectations, they can, in most cases, take their custom elsewhere.

VfM for customers certainly includes a financial aspect: in many markets, cost, price and competitiveness will be important drivers for the value the customer perceives. But most customers also see VfM as being something more significant than just cost or price; they want to feel that the whole experience of transacting with us has been of value, including:

The quality of the product or service
Does it meet the expectations or standards advertised in any promotional materials, customer charters, company policies or service agreements? We need to deliver on those outcomes.

Customer service
High quality interaction at every stage of the journey: before, during and after the transaction. We need to listen to customers and take their opinions into account.

Ease of doing business
Customers want products that are easy to access and websites that are easy to navigate; for it to be easy to contact an organisation. We need to keep things simple and accessible.

Promises and problem-solving
Customers want organisations to do the things they say they’ll do, whether that’s deliver on time and as expected; to help resolve any problems and issues, and to have in place and implement complaints procedures. We need to be reliable and trustworthy.

It’s all these things together that complete the picture of good value for money. And that’s what causes customers to return and organisations to thrive.

In practical terms, we might consider factors like:

  • Product range: how does our offer match customer expectations; should we, for example, have budget and luxury as well as regular ranges?
  • Pricing: offering competitive prices and using strategies like grouping complementary products together as a lower-price bundle.
  • Special offers: percentage discounts or buy one get one free (BOGOF).
  • Delivery options: perhaps free standard delivery above a minimum spend.
  • Installation options: reasonable charges for installing appliances or systems.
  • Warranties: free or low-cost extended warranties on goods or services if faults or problems are discovered after the usual cover period.
  • Returns policies: fair rules on exchanges or refunds.
  • Additional value-added features: after sales service; memberships and privilege/loyalty cards.

Getting value for money from our suppliers: the economy factor

As leaders, we have to make decisions about how to obtain value for money when we’re acquiring resources from our suppliers. In larger organisations, that may mean working with a procurement department or specialist. In smaller organisations, it might be down to us. Either way, the principles are the same.

Physical resources need to be:

Of the right quality for their intended use
That is, fit for purpose. Cutting too many corners for economy can be disastrous in terms of outcome. Rubbish in; rubbish out, as they say.

Sustainable
From sources that can maintain the supply chain for future purchases. These days, for example, printed books generally carry a kitemark from the Forest Stewardship Council (FSC) to show that they are printed on paper from responsible sources.

Ethically and legally sourced
Fully compliant with our own policies and any best practice or legal requirements. For example, large companies in the UK have to comply with The Modern Slavery Act, reporting on how they prevent modern slavery in their operations and supply chains.

Wherever, possible, able to be reused, recycled or reconditioned
There’s economy to be had here, too.

When working with suppliers, we become the customer and therefore have many of the same expectations. For example, we can expect to negotiate better processes and discounts; favourable delivery and installation options; bespoke warranties and aftercare service, and potentially other added-value benefits too.

For large-scale or high-priced goods and services, organisations might use a tender or bidding process, a structured process that invites suppliers to submit details of their offer for consideration against a set of criteria, often associated with factors that contribute to VfM, like price, quality and sustainability. Tender processes need to be fair and transparent, and we might also use them to reinforce our values. For example, we might expect potential service suppliers like law firms or accountants to reflect our community in terms of diversity.

In the end, though, a tender is a competition. The aim is to support VfM by choosing from a range of options to maximise our value criteria both in terms of economy and in line with our outcomes.

We also need to keep any ongoing supplier agreements under review. We should review costs, quality and service levels on a regular basis to make sure they stay in step with our changing needs and market conditions and still meet VfM criteria.

Delivering value for money through greater efficiency

We should also encourage our teams or departments to regularly review costs and operational activities, so we can be sure of achieving value for money by using our resources and energy as efficiently as possible.

Reducing costs

Monitoring and reviewing costs should be part of the ongoing budgeting processes and cycles. We should always ask ourselves if we really need to keep spending that money or whether it’s spent to best effect. Do we still need that consultant on retainer? Can we reduce our travel expenses? Are there other ways to keep in touch with our customers without printing expensive promotional materials?

Zero-based budgeting can be a useful tool to keep discretionary spending under review.

Using resources efficiently

There are many things we can do to improve the efficient use of resources. For example, when we consider delivery to customers, we might look to reduce the amount of packaging we use (loose rather than pre-packed vegetables and fruit in supermarkets); developing smart packaging (boxes that stay together with folds rather than glue) or discouraging the wasteful use of consumables (giving out napkins in a fast-food restaurant rather than having customers help themselves to handfuls they won’t use).

When it comes to keeping down the operational costs of our own team or department, there are whole range of options to consider.

Reusing materials
Everything from using washable mugs rather than disposable cups to recycled packaging or reconditioned equipment.

Minimising scrap and waste
Training and monitoring production staff to help cut down on wasted materials; using emails or texts rather than paper memos

Reviewing and fine-tuning
Monitoring and adjusting procedures and systems to streamline them.

Using technology more effectively
For example, using video conferencing rather than travelling for meetings; installing smart meters or sophisticated tills to measure consumption and target production more efficiently; and investing in stock tracking systems to support Just-In-Time supply chain management.

Making the most of the people we have
People in organisation usually represent the single biggest cost to the business. We need to hire the right people with the right skills to do the right things, give them the right support and training and encourage them to continue to learn and grow. Managing and motivating our teams well reduces staff turnover and associated recruitment and training costs.

Being fully compliant
Work practices that support compliance will help to avoid unnecessary investigations, legal proceedings, fines, penalties, compensation and loss of reputation.

Using energy efficiently
There are a number of areas we can look at to improve the use of energy and deliver better value for money. These include:

  • Improving our buildings: with better insulation; by installing glazing with thermal qualities and/or solar panels; and by using efficient heating and air conditioning systems.
  • Using energy-efficient appliances and equipment: using heat pumps for heating and air conditioning; buying A-rated appliances, such as fridges; and using low-energy lighting where possible. We must also remember to switch off lights, office machines, air conditioning and heating when not in use.
  • Using low CO2 emission and electric vehicles: and planning routes and times of journeys to reduce mileage and time spent in traffic jams.
  • Using greener packaging: materials with a lower carbon footprint.
  • Encouraging home working: to reduce costs through having a smaller building, and by saving commuter time, expense and emissions.
  • Using telephone and videoconferencing: to hold virtual meetings, especially when participants are many miles apart.

An old English proverb tells us that “the worth of a thing is what it will bring”. This speaks to the heart of Value for Money, which asks us to manage our resources with economy and efficiency – but with the outcomes we want to achieve firmly in mind. It’s vital to remember that cheap is not the same as value for money. If a lawnmower only cuts corners it’s not going to make our lawn – or us – look good. And, as far as our stakeholder and customers are concerned, the grass may well look greener somewhere else.

 

Test your knowledge

  • Identify the three Es that make up Value for Money.
  • List three qualities you should look for in the physical resources we source from suppliers in order to achieve value for money
  • Give two examples of how you might achieve greater value for money for your organisation by either improving your use of resources or reducing costs

What does it mean for you?

  • Reflect on any policies your organisation has to improve energy efficiency. What more might be done and how might you propose their adoption?