‘Value for money’ about more than benefits and costs

The Labour-led government has signalled a drive towards a more productive economy. The Minister of Finance has noted that this will require discipline and “we will need to reprioritise and seek out programmes that are good value for money”. He expects that existing programmes will be assessed for value for money over the next two years.

OK, but given the term ‘value for money’ means different things to different people, what does achieving ‘good’ value for money mean in practice?

The generally accepted definition of value for money (VfM) comes from an accounting perspective and considers the relationship between economy, efficiency and effectiveness.  This leads to a focus on benefits and costs using investment tools such as benefit:cost ratio, return on investment and whole-of-life costs.  But VfM also needs to include achievement of outcomes.  Good value for money is the optimal use of resources to achieve intended outcomes.

What this definition hints at but doesn’t make explicit is whose intended outcomes those might be. In this case, it’s a new government which expects the public sector to make the changes necessary to expedite a significant change of direction. This will require agencies to re-assess what they do and consider options to shift resources to activities that align more closely with the new government’s priorities.

VfM then is a simple and powerful concept that is about more than assessing financial performance. It brings together the critical dimensions of alignment with government priorities and benefits to costs as shown below.   

Too often, VfM focuses either on alignment with government priorities or the relationships between benefits and costs. Within an agency, people tend to focus on one or other of these dimensions, but not both.  VfM is maximised when programmes have a high alignment to government priorities and a high benefit to cost ratio.  Bringing these two dimensions together to drive VfM decisions doesn’t happen often enough.

As a concept, value for money has wide application: it can be applied to day-to-day business decisions about where to focus resources as well as strategic choices on long-term priorities with inter-generational and international implications.  If your agency isn’t familiar with how you might assess the value for money your activities and programmes provide, you might want to put this near the top of your ‘to do’ list.