‘Value for money’ about more than benefits and costs

The tighter fiscal environment is requiring public sector agencies to reduce their costs during a period of high inflation. As part of this, public sector agencies will need to be more disciplined in reprioritising and seeking out programmes that are good ‘value for money’. Given the term ‘value for money’ means different things to different people, what does ‘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: that is, 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 the public sector, Government will expect agencies to deliver activities that align closely with the government’s priorities AND have a high benefit to cost ratio. This will require most agencies to re-assess what they are doing and shift resources to activities that meet both of these critical dimensions.

VfM then is a simple and powerful concept that is much more than an assessment of financial performance in a technical sense. Assessing VfM brings together the critical dimensions of alignment with government priorities and benefits to costs as shown below: 

Too often, VfM focuses on either alignment with government priorities or the relationships between benefits and costs. Within an agency, people tend to focus on one of these dimensions, but not both.  VfM is maximised when programmes have a high alignment with government priorities AND a high benefit to cost ratio.  Bringing these two dimensions together to drive VfM assessments and 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 sure how to assess the value for money of your activities, considering which programmes have a high alignment with government priorities AND a high benefit to cost ratio would be an excellent place to start.