Value Based Procurement. Traditional Procurement Systems and Practices Are Problematic.

Today's procurement systems are largely built on purchaser/vendor mistrust, the lack of rigorous purchasing procedures and a lack of tools that can be used to compare bids and assess value. Going for the cheapest option and laying the risk on the vendor looks attractive, in the short term, but is far less effective in the long term.

Traditional Procurement Systems and Practices Are Problematic. Ask purchasing professionals about the problems they face purchasing on-trivial products and services and they will typically come up some or all of the following:

• The process takes too long.
• Vendors are given overly complex and detailed specifications to meet, leading to overly restrictive contracts and complex renegotiation at a later date.
• Proposals are judged chiefly on cost, not on their overall benefit to the organisation.
• All risks tend to be assigned to the vendor, and rewards are not used to spur performance.

Today's procurement systems reached this point because they are largely built on purchaser/vendor mistrust, the lack of rigorous purchasing procedures and a lack of tools that can be used to compare bids and assess value. Going for the cheapest option and laying the risk on the vendor looks attractive, in the short term, but is far less effective in the long term.

Value Purchasing

Value-based purchasing requires you to buy the goods or services that produce the best overall value. For example, if company A offers to build a software system that costs 5 million but yields 10 million in added revenue, then company A’s bid has a net value of 5 million. In contrast, if the system offered by company B costs 10 million but returns more than 40 million in added revenue, then company B’s bid has a net value of more than 30 million.

Under a traditional procurement approach, company A's bid [the low-cost solution] would win the contract. Under value-based purchasing, company B wins, paying more up front but receiving much more in return over the long term.

Value-based purchasing can take many forms. In some cases, the benefit may be measured in an expanded set of services provided by one vendor's solution over another. In other cases, the winning bid may involve a system with higher initial costs but lower life-cycle expenses and easier updating capabilities.

Your problem is how to judge the value of competing proposals; a task that isn't easy when dealing with large or complex bids.

To help you with your decision making, we have our Value Based Procurement methodology

Value Based Procurement Methodology

The Lucidus approach to Value Based Procurement combines a number of approaches to the procurement process. It aids you by helping you with:

• Writing solution-oriented bids, where the bid articulates the problem to be solved and asks the vendor to propose a solution.
• Using value based purchasing to evaluate suppliers based not on cost but other factors, such as total cost of ownership; the technical merit of the vendor's proposal; the vendor's past performance; and the probability of meeting your current and future business objectives
• Sharing the risks with vendors, allowing you to incorporate a risk/reward structure that incentivises vendor flexibility and performance.
• Tracks the delivery of the benefits that the vendor has claimed and allows strategic decisions to be made based on projected performance rather than past failures.