Over the Christmas and New Year period, we will be featuring a daily favourite article from each month of 2016, which should take us nicely up to January 8th when we assume everything kicks back into gear! In October, we thought about how we define “value” in tenders. A tricky issue…
We wrote recently here about the US government “lowest cost technically acceptable” policy, that requires an organisation to choose the lowest cost tender from potential providers that meets the basic requirements defined by the buyer.
It seems to be becoming less popular, but as said in the previous article, it does highlight a couple of interesting and quite challenging issues for public sector buyers. The first is linked to the whole issue of “value”, how it is defined and measured – and evaluated in tenders. The logic for not accepting the lowest cost tender – or the lowest cost acceptable tender – is that non-cost factors in a bidder’s proposal can add real value to that proposal and make it the “best” selection for the buyer to make.
So we look at a proposal for software and assess that some of the additional features of one supplier’s proposal add value that makes it worth paying an additional amount of money over and above a more basic proposal. That may be true even if the basic proposal meets all the stated needs in the tender documentation. It may be that the buyer did not realise such features were available; or assesses that the additional featured will bring real benefits to users.
However, we start getting into problematical areas when we try and define real “value”. Let’s take an example – based on real experience from a UK government department. A tender for cars was launched. Most were used by operational managers and junior to mid level staff who had to travel to see branch offices and visit “clients” of the agency. The evaluation criteria developed by the budget holder and procurement included cost, and let us assume that it was a total lifetime cost incorporating running cots, depreciation value for the car, tax and so on as well as the capital cost.
But other criteria included safety, comfort, and the performance of the car. Whilst cost had a fairly high weighting, at one point it looked like the winning car would be a very nice BMW model. It scored better than you might expect on the cost factor (low depreciation) and very well on those other factors such as comfort and performance.
Yet it would not have been the right choice. Those additional non-cost factors had a “value” – but just how real and how relevant was that value? We might argue that the additional safety for staff has a value that we might even be able to quantify somehow – but “comfort” is more difficult. Does that really add a value that translates into a measurable benefit for the taxpayer, who ultimately is paying for this purchase? Performance is even harder to justify, although it might be argued that getting to appointments faster because of the 0-60 acceleration has some notional value!
There are similar issues in many tenders. Do those additional features in the software really add value that might be quantified? Is paying more for a big 5 consultant really worth the extra £500 or $500 a day compared to a second tier practice? Again, can you quantify those benefits (quality, service, or whatever else we use as criteria) in some way to justify the additional spend?
We often hear the complaint that too many government contracts are determined by lowest price rather than true value, in Europe as well as in the US. That is often the cry from suppliers who are disappointed to have lost out in the bidding process. Yet we are not sure that is the case very often. In our personal experience, we would suggest the opposite: that many contracts actually give too much weighting to factors that are hard to link back to real, quantifiable and measurable value, or that are simply not very well thought-out.
So whilst we are not big supporters of using LCTA for anything but the most straightforward contracts, it does highlight this important point. We do not want to become too price or cost focused to the exclusion of everything else, but we would strongly suggest that buyers take a hard look at the non-cost evaluation factors being used or proposed. Contracting authorities, buyers and budget holders need to assure themselves that the additional value those factors represent is as solid, real and measurable as possible. “Nice to have” factors (the auto-change CD player maybe in our hypothetical car) should not cost the taxpayer real money in the context of public expenditure.