How do you provide “Value for Money”?
One of the worst mistakes you can make is to assume that everybody makes buying decisions based solely on price. That’s a quotation from Dan Kennedy a contribution from whom I posted recently.
Here’s another quote, suggesting this mistake has been around for quite some time, "There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man's lawful prey." (John Ruskin -1863)
If there was one thing that really annoyed me in all my years consulting it was winning a job, whether it was a straight client quotation, or a government tender, because I had the lowest price, as if price was the main differentiator that set me apart from my competitors.
Do you have a clear idea about what makes up your customer’s value equation? Value is rarely only price, it is about what your product/service will do for them (the benefits); their value equation; Value = Benefits - Price.
I discussed the Value Equation recently in Is “Perceived Value” in the Value Equation Changing? That discussion focused on the buying public. In this post I’ll look at more formal quotations, and in particular tendering to governments, where everything is much more rigid, and the need for transparency imperative.
If you are bidding on a Government tender, the ‘benefits’ of the Value Equation are different - other factors come into play.
“One of the most common misconceptions among service firms is that the best way to beat the competition is to lower your price, so that you are the low bidder. That may work in consumer retailing, where every store is selling the same items. But for professional services, being the low-priced provider is a bad move. Many prospects do not buy on price ... and in fact, if your price is low, their perception is that you must not be very good at what you do.” (Bob Bly)
When quoting or tendering, whether you are successful comes down to the “Evaluation Process”, which in Australia seeks to determine the best “Value for Money” (VFM).
The purpose of an evaluation process in sourcing is to identify which bid offers the best value for money i.e. the most economically advantageous tender or proposal. The criteria that are specified in the invitation to tender document are the basis for the buying decision.
These will vary from jurisdiction to jurisdiction. They all look different and criteria differs depending on each customer’s needs. The scoring can range from simple percentage splits to complex weighting systems. But the basic principles of tender evaluation criteria remain the same.
Most jurisdictions will have some form of Procurement Principles which must be met in calling the tender, and the assessment of the responses.
These will typically cover such issues as:
• Value for Money - not just price although price has become more important. It is a weighting of all the Assessment Criteria, including price.
• Open & Effective Competition – designed to get the best value for the Government.
• Enhancing local business – can be regarded as a key Assessment Criteria
• Environmental protection – speaks for itself
• Ethical behaviour and fair dealing – the awarding of contracts should be done by due process
How is Value for Money Determined?
You will understand that before your response is assessed you must pass the first checkpoint – Compliance! Do you comply with the tender compliance requirements?
I’m sure you understand why is this the first checkpoint. If you were busy, and everyone is busy, even public servants, and had a pile of 15 tenders in front of you, each 100 plus pages, you would want to cull those that don’t meet the requirements.
At this stage there is likely to be only one person on the compliance gate. Not compliant with the Conditions of Tender – reject; not compliant with the Scope of Work/Technical Requirements – out; not compliant with the Assessment Criteria – sorry.
More on this in another post.
Step Two – separate out the pricing. Now I know price can be the dominant factor at times, but most of the time it is but one factor. In fact, depending on the nature of the requirement and risk involved, the weighting placed on price will vary. Price is usually a criterion, not the criteria.
It’s no surprise that the second step of many evaluations involves the removal of pricing from the tender document. Typically, it is provided to a separate team or pricing analyst, whose feedback is given outside of the primary assessment (step three). Often the primary assessors never see it.
Now this will vary between jurisdictions, but many operate on the basis they do not want impressions of the price offered to colour the assessment of experience, approach, capacity and capability. The pricing section will be pulled from the tender to be analysed separately and balanced with the evaluation of the Assessment team.
Note that there are a number of ways Price can be scored:
- One formula for assessing the values derived is Price Score = Lowest Tender Price X 100/Tender Price
- Another uses the Average tender Price instead of the Lowest Price
Price will have a weighting in the overall Assessment.
Now the Assessment Panel can get down to business.
This is your opportunity to convince the Assessors that your proposal is the only logical choice, that you are uniquely placed to help the agency meet its objectives.
The Assessors review the responses to the various criteria that have been set down and score them. That may be a numerical score.
Each section may also be weighted. It takes time.
It is also the area where so many businesses fall down. They fall down because of an almost unconscious reaction to the requirements of that gate through which they have been drafted – compliance.
Perhaps you should ask yourself why they are asking these questions? Could it be because they have doubts about your ability to deliver the outcome they are seeking, and of the various other tenderers? Doubts mean risk. Could it be because they, the Assessment team, don’t want to end up with egg on their face because they made a poor decision? It certainly has happened more than once.
To be successful in winning government business you must deliver the best value for money (VFM) solution. A VFM solution does not simply mean the lowest price. A VFM solution will balance the non-financial score against the cost, where the non-financial score refers to the score received against the evaluation criteria.
The VFM index is calculated by dividing the non-financial score by the cost. The higher the VFM index the more VFM is being offered to government. The greater your non-financial score the greater scope there is for a higher priced bid to be considered as VFM.
Of course, you must be in the “price range”.
Let’s look at two examples of Evaluation Criteria:
Evaluation criteria commonly used to score Victorian Government quotes and tenders fall under four categories as listed below:
- professional competence: your compliance with specifications, capability, past performance and current work, quality systems, customer service and innovation
- commercial capability: your financial viability, risk assessment, insurance, compliance with the proposed contract and conflict of interest
- environmental commitments: your environmental approach, policy and management systems
- financial competence: your costings, does it all add up?
Evaluation scoring - Evaluation scoring is usually measured on a scale of 0 to 10 as follows:
0 Not acceptable, has not met any reasonable criteria
1-4 Has only met some minimum requirements and may not be acceptable
6-9 Acceptable, has met all requirements and exceeded some
10 Acceptable, has well exceeded all requirements
Now for the Northern Territory criteria:
- Past Performance
- Local Development and Value adding (Now minimum 30% weighting)
- Price (mandated)
Each Agency has the ability to define their requirements against these criteria.
Other jurisdictions will have similar criteria they use to determine “Value for Money”.
This is the other factor you have to think about. Not surprisingly the weighting given to each of these criteria, from whatever the jurisdiction, can vary.
In generating the final non-financial score, the raw score given out of 10 is multiplied by the weighting to give a final score against evaluation criteria. All scores are added to give the final non-financial score.
The Victorian evaluation criteria are generally given weightings between 1 (lowest) and 5 (highest). Highest weightings are generally given to 'compliance with specifications', 'capability' and 'past performance and current work'.
Compliance criteria do not generally attract evaluation weightings. They are evaluated against a ‘yes or no’ scale, with an accompanying risk statement e.g. 'company is financially viable with a moderate risk'.
Let’s look at another example – this is a real one which I worked:
Assessment Criteria Weighting %
Past Performance 20%
Local Development & Value Adding 30%
Scope Specific Criteria 15%
Each tender assessment criterion may include sub-criteria; however percentage weightings are only published as a cumulative percentage against the tender assessment criterion. The Agency reserves the right to apply percentage weightings to each criterion at its total discretion, having regard to requirements contained within the Minister’s Procurement Directions.
In this example, ”timeliness” has not been used. Price is rather low. I have seen it up to 50%.
One of the clues Weightings give is where you should apply your best effort. In the above example, price is of little importance, but Local Development and Past Experience are 50% of the weighting. Where would you be putting your emphasis?
What is this all about?
Remember the Value Equation; Value = Benefits – Price! As you can see, the benefits in a government tender are rather different than those in the commercial arena, as I discussed in “Perceived Value” in the Value Equation Changing? . It is not just identifying which bid offers the best Value For Money i.e. the most economically advantageous tender or proposal, but one which offers the least risk for those returns.
Remove the risk - If you were pitching for a sale, I’m sure you would make every effort to present a solid case that removes all doubts the buyer may have, eliminates the risk in their minds, leaves the prospect with one clear choice…. you!
The Agency is looking for the most economically advantageous tender or proposal, and one which does not come with a significant risk.
That is the benefit- that provides value for money.
Could your Tender Responses be Improved?
There’s nothing like an outside view, a second opinion of your response to a Request for Quotation or Request for Tender. Have you identified their Value Equation, and responded to it effectively?
Very often when we read something we’ve written, we read what we expect to see. And miss the mistakes, or lack of logic, or lack of persuasiveness.
I have an upcoming online course, TenderWins, a 4-week intensive course designed to help you win more tenders, without the stress and time issues that currently hold you back!
Or buy "Small Change, Big Result", my manual on how to increase your success rate with proposals and quotations; make a few small changes, and reap the rewards.