There is a notion in procurement called “value for money.” Here is the definition from the website of the Northern Ireland Department of Finance in the United Kingdom, approved by their Procurement Board in 2010:
“Best value for money is defined as the most advantageous combination of cost, quality and sustainability to meet customer requirements.”
Where they define cost as “consideration of the whole life cost,” and sustainability includes “economic, social, and environmental benefits considered in the business case.”
This is an administrative explanation. For me, the practical explanation of “value for the money” after speaking to people who have spent their adult lives in sourcing is simpler, even as it is relatively relaxed.
“Value for money is getting the right solution at the right price from the right supplier (at the right time).”
This is closer to the definition on Crescent Learning’s website.
It means different things to different people.
If a procurement is meant to solve a problem, the right solution is the good or service that most closely fits the bill.
The right price should mean optimizing for total cost of ownership over the life of the solution, considering the cost of future consumables and services, for example. Often, the concept of “right price” is abbreviated improperly to lowest upfront cost.
The right time means that you purchase something when you need it; if you end up waiting, there are additional costs or frictions from the status quo to factor into the equation. This may sound trivial, but it’s not unusual for sourcing of a technology to take so long as to make the ultimate purchase obsolete and overpriced (for failing to benefit from the natural deflation these types of goods and services evince).
But who is the right supplier? Presumably, if you have bought the right solution at the right price and at the right time, the right supplier should take care of itself, shouldn’t it?
From the perspective of the procurement officer in the traditional context, I think that the complete conception of the “right supplier” comes down to risk.
For example, if there were two suppliers offering the same solution at the same price and at the same time, then the buyer should select the supplier with less risk. Supplier risk is the likelihood that the supplier cannot deliver what they say they can over the life of the contract, say because of undercapitalization or inexperience.
What then is “social value for money?”
“Social value for money” takes the definition one step further to include information about the provenance of the supplier’s ownership. It expands upon the concept of vanilla value for money.
Corporate social responsibility (“CSR”) is a philosophy espoused (if not effectively practiced) by large organizations arguing that being mindful of the impact of their activities on the community around them is good for the organization’s image, even as it improves the quality of life for some part of the community. Often, this means helping people from historically disadvantaged backgrounds such as minorities, women, service-disabled veterans, Indigenous people, and the LGBTQ.
In the context of CSR, “Social value for money” adds an additional dimension to the identification of the “right supplier” in the procurement calculus.
The “right supplier” is one who comes from a targeted background whose lot the organization seeks to improve subject to the constraint that integrating the vendor does minimal harm to the risk profile of the supply chain.
My definition of “social value for money” is getting the right solution at the right price (at the right time) from the right supplier where the choice of supplier considers the supplier’s risk characteristics as well as their provenance. What I call “vanilla” value for money would consider only the supplier’s risk characteristics.
One implementation of this would be to perform two exercises.
Step One, rank order supplier proposals in terms of “vanilla” value for money.
Step Two, re-order the ranking in terms of supplier provenance within an acceptable budget of risk for the sake of CSR.
For example, if you had two finalists who were tied for first place in terms of “vanilla” value for money and one of the suppliers came from a targeted group, you would pick the supplier from the targeted group.
Alternatively, if you had two finalists of equivalent risk and problem-product fit, but who were separated only by price where the higher priced supplier was from a targeted group, you would select the supplier from the targeted group if and only if the difference in price was within a tolerable band.
Or, one could imagine a scenario where there were two finalists of equivalent price and problem-product fit, but who were separated only by assessments of risk where the higher risk supplier was from a targeted group, you would select the supplier from the targeted group if and only if the difference in risk was within a tolerable range.
We know that current sourcing procedures make suppliers think twice about submitting proposals between the administrative complexity of becoming a vendor of record, determining when buyers are in the market, navigating “wired” RFPs, and the expense of developing responses. This means that buyers are prone to overpaying for second-best solutions in the face of diminished competition on price and service from companies that may not include those with the best problem-product fit.
It may be that buyers have to judge between two finalists who differed in price, problem-product fit, and risk (with equivalent distance from optimal problem-product fit). Things get very tricky here.
And there’s the rub.
I suspect that procurement officers are biased to overestimate the supplier risk of vendors who identify themselves upfront as having a historically disadvantaged provenance. This bias then leads to problems for these suppliers in developing capacity, developing capabilities, developing relationships with supply chain participants, and accessing financing in a self-fulfilling prophecy that ultimately hurts not only these vendors but the buyers who miss out on developing depth in their supply chains.
This is why the best MWBE businesses in high value-added business-to-business categories may not disclose their origins. They don’t hide it necessarily. But they don’t lead with their chin, either.
EdgeworthBox is a platform designed to pierce this tissue of bias with data and with the tools to help suppliers collaborate with buyers and other suppliers to lower supply chain risk. We have a platform for prosecuting the RFP cycle, enhanced by three layers of tools: a clearinghouse for simpler administration; a clearinghouse for data; and social networking tools. Let’s talk about making the RFP simpler, fairer, and faster.
