What is Value? How do you define, and measure, it?

There was a poll on Linkedin recently where the question was of which, between “Cost” and “Value”, is more important from a Procurement perspective, where the clear winner (with ca 96% of the vote) was identified as “Value”. This result then prompted the poll setter to pose the question “What is Value?” which in turn got me thinking……

Let’s start with a dictionary definition (courtesy of Merriam-Webster) for Value in the context we are going to be discussing here:

1. : the monetary worth of something : market price.

2. : a fair return or equivalent in goods, services, or money for something exchanged.

The above definition – and this is also true of those in any number of dictionaries – presents a clear issue as the first derivation equates to “Cost” ie what is paid for something; something that is easy to understand, tangible and simple to measure, whereas the second is much more complex and nuanced.

Therefore, it should not be a surprise that Stakeholders – both inside and outside of Procurement – can, and do, regularly equate “Value” with “Cost”. This can be especially an issue within the Public Sector where delivery of “Value for Money (VfM)” is an over-riding Policy objective – thus by adding “Money” into the description of “Value” making the focus more actually about “Cost”. This is why, in the introduction of the UK’s new Public Procurement Regulations (aka the Procurement Act 2023, which takes effect from 24th February 2025) a subtle change has been made where the influence of “Cost” has been reduced by moving to the requirement to identify the Most Advantageous Tender (MAT) rather than the Most Economically Advantageous Tender (MEAT). ????

Why is this a problem?

“Value” is more than “Cost”

Apart from for the purchase of highly commoditised Goods where “Cost” may well be the main determinant, as suggested by the second definition above “Value” can be represented in many forms both Financial and Non-financial and Tangible and Intangible and so must be assessed appropriately.

Defining “Cost” may NOT be simple

Even in simple, highly commoditised Procurements, it is likely that there may be multiple elements to an individual Procurement: eg for an IT system; initial installation / commissioning of hardware / software; on-going licence costs; staff (re)training; on-going support costs; with each of these have different “Cost” structures and payment profiles and also meeting different needs, therefore a simple definition of “Value” may be difficult to determine.

However, even defining “Cost” can be problematic is it just the “Cost” of the Good and / or Service at the time of [initial] purchase or is it Total Cost of Ownership (TCO) / Whole Life Cost (WLC) and if the later what elements do you include in the calculation, and how do you allow for variation over time; eg due to inflationary effects or the application to price breaks, discounts and rebates.

Stakeholders may see “Value” differently

Different Stakeholders will have different views as to what constitutes “Value” shaped by BOTH what they hope to get from the Procurement AND also where they sit within the organisation; ie

• the Board may be concerned about supporting the delivery of Corporate Objectives / Policy;
• the Finance community about “Cost” as against Budget / Forecast;
• Operations may focus upon Specification and / or adherence to schedule;
• end Customers may look to delivery of / support for meeting their Objectives / Needs.

Policy impacts “Value”

In Public Procurement especially, though not exclusively, there may be other Policy objectives to be delivered eg Social Value / CSR; Environmental / ESG; market stimulation / inclusion of SMEs. These elements may be defined well, a little, or not at all (but there is still an expectation to deliver).

Definitions may change

The effects of TIME also need to be considered both in terms of how “Cost” profiles may change – as mentioned above in relation to TCO / WLC – and in relation the definition of non-financial / intangible aspects as the needs of Stakeholders mature / change to reflect new Requirements / Needs; changing market conditions; Supplier performance; Customer expectations; etc. ?

So what should we do?

In essence something analogous to a Continuous Improvement (eg PDCA) approach is a good method to follow:

Plan

Identify all Stakeholders involved / affected by the Procurement. Then understand what their Aims, Objectives and Expectations from the Procurement are. Use a Stakeholder mapping tool to understand and document what these are and their relative importance / influence.

When building the map ensure that you have first understood the component parts of the Goods and / or Services being procured and what the Aims, Objectives and Expectations are for each element, and how these may change over time. Different components are likely to have [very] different [and potentially contrasting] definitions of “Value”.

For Policy related Objectives – especially in the Public Sector – there may be pre-defined / proscribed “models” that you can / must use.

Do

Based upon the above develop, agree and baseline suitable Measures and Metrics to track and record delivery of “Value”. This is likely to reflect some form of Balanced Business Scorecard.

Agree the Governance around Reporting progress and how changes to Aims, Objectives, Expectations, Metrics and Measures are to be captured, agreed and enacted.

Check

After the completion of the Procurement activity review with the Aims, Objectives, Expectations, Measures and Metrics with the Stakeholders on a continuous basis (as agreed per the Governance). As a minimum reviews should occur upon completion of a delivery Phase, or a Milestone or following an agreed Change. ??

Act

Take action as required, and identified, by the “Check” step as appropriate in line with agreed Governance arrangements.

A final thought (or three)….

Measuring “Value” is neither simple and straightforward, nor is it a “one off” process, and to do effectively requires an investment of effort, and more importantly a willingness of Stakeholders to continuously engage.

“Value”, apart from in the case of simple commoditised Goods and Services is [very] likely to consist of multiple factors, across a number of dimensions, each requiring separate measurement and reporting – “one size [aka Metric / Measure] does NOT fit all”.

You should also bear in mind that the definition of “Value” may change over time BOTH as Stakeholder Needs change AND over the delivery life-cycle of the resultant Contract.

About the author

Simon Hay has 25+ years of consulting / interim experience developing, delivering and implementing Supply Chain and Procurement projects in industries across both the Public and Private Sectors including Central Government, ?NHS / Health, MoD, Aerospace, Pharmaceuticals, FMCG / Retail, Food & Drink and Telecoms.