A Brief Guide to Value for Money
(summarised from HEFCE website)
The HEFCE describes VFM in the following way:
'Value for money' (VFM) is a term used to assess whether or not an organisation has obtained the maximum benefit from the goods and services it both acquires and provides, within the resources available to it. Some elements may be subjective, difficult to measure, intangible and misunderstood. Judgement is therefore required when considering whether VFM has been satisfactorily achieved or not. It not only measures the cost of goods and services, but also takes account of the mix of quality, cost, resource use, fitness for purpose, timeliness, and convenience to judge whether or not, together, they constitute good value.
Achieving VFM is also often described in terms of the 'three Es' - economy, efficiency and effectiveness. The definition of the three Es approved by the Value for Money Committee is as follows:
Economy - careful use of resources to save expense, time or effort.
Efficiency - delivering the same level of service for less cost, time or effort.
Effectiveness - delivering a better service or getting a better return for the same amount of expense, time or effort.
The HEFCE goes on to state that in many areas of activity there is recognised 'good practice' or 'best practice', although this may be contested. In general terms, all organisations want to adopt such good practice as appropriate to their own circumstances, as a recognised way not only of achieving value for money but also of demonstrating that value for money has been both sought and achieved. Good practice will often require a well-planned, thorough and clear approach to an activity. The use of good practice is rarely seen as a waste of effort by those who adopt it, provided that it is adapted to their own circumstances. However, procedures by themselves are not necessarily sufficient, since the achievement of VFM requires an attitude and culture that seeks continuous improvement. The main benefits of promoting VFM principles include:
The clarification of objectives. Rather than acting on assumptions about what is required, VFM principles will give managers a proper assessment of the objectives of an activity. This will maximise their chance of achieving the desired ends without unnecessary expenditure and effort. An 'assessment' should also demonstrate that the proposed activity fits in with the organisation's strategies and policies. Where this does not happen, an activity is, by definition, not achieving what the organisation has set out to do. An assessment will also help end-users to get what they need (which may be different from what they want) to do their job properly.
Planning is an essential part of all well managed processes. Good planning minimises the risk of an activity failing to deliver the intended outcome, at the right time and at the right price.
Openness and transparency of process. Through properly documented planning and assessment, and the adoption of open processes involving all interested parties, organisations can publicly demonstrate a commitment to achieving propriety as well as VFM. This is are increasingly important in a world of growing accountability and responsibility, and is absolutely essential for organisations that receive public funds. Such organisations have a special responsibility to show that they operate honestly, fairly and without bias.
Compliance with statutes and regulations. All organisations need to comply with legal and other associated requirements. By adopting good practice, the risk of failing to identify and comply with such requirements is significantly reduced.
Risk assessment. All activities have risks attached. These include, for example, a reputational risk, control risk, financial risk (including financial health risk), health and safety risk, and a business risk. Risk assessment is an area that can often be improved. Although it is often not necessary to undertake a full risk assessment for every activity, an inadequate risk assessment, particularly for significant activities, can result in poor value for money.
Responsibility for VFM
Under the Financial Memorandum between HE institutions and the HEFCE, and the HEFCE Audit Code of Practice, all institutions have a clear responsibility to obtain 'value for money'. Although this is usually an aim of all organisations, it is of particular significance to those that receive public funds. Virtually all HE institutions receive a significant proportion of their income from 'public' sources, including grants, fees and charitable income. An institution's assets and other income invariably would not exist without that public income. It is in an institution's own interest to treat all income by the same standards that it treats public income.
In general terms, an institution's governing body is responsible for the VFM that is obtained from the activities undertaken. The governing body is reminded annually of this through the 'members' responsibility' statement in the institution's annual financial statements. In practice, the responsibility for VFM is largely (and properly) delegated to management. Consequently, the governing body should ensure that its own processes are sufficient for it to be assured that management is satisfactorily discharging its responsibility for VFM. In practice, this can be achieved through proper scrutiny of the institution's affairs, through exercising appropriate oversight over the institution's strategies and policies, and through the normal activities required of the audit, finance and other committees.
The audit committee in particular has a defined duty with regard to VFM. The HEFCE Audit Code of Practice requires the committee to state formally in its annual report to the governing body whether or not it is satisfied with the arrangements in place to promote VFM. The HEFCE Audit Service believes that, to do this, audit committees should oversee a VFM strategy or policy prepared by management, which shows what approach management has adopted to satisfy the governing body's responsibility for VFM. It then becomes appropriate for management to provide a formal report to the audit committee each year describing, in summary terms, how the VFM strategy/policy has been implemented. This report, and the internal audit annual report, should be made available in time to inform the preparation of the audit committee's annual report, and to inform the governing body's approval of the annual financial statement which contains the 'members' responsibility' statement.
Approach to VFM
In achieving, and seeking to achieve, VFM, there are many objectives for organisational behaviour and activity to be taken into account. These include:
the culture of the organisation, for example, continually striving to do more at the appropriate quality for less money
adopting good practice
clearly defining the organisation's aims, strategies and policies
providing an organisational structure which promotes accountability, through placing power at the point where responsibility is required to be taken, together with appropriate control and oversight exercised at a higher level
being committed to effective communication and staff development so that the culture and aims of the organisation permeate to, and are identifiable at, all levels within the organisational structure
providing an appropriate infrastructure in systems, resources and training.
An assessment of VFM can be achieved in a number of ways, for example:
through benchmarking an activity against similar activities in other organisations
by using performance indicators
through conducting VFM studies (possibly in conjunction with other institutions)
by seeking out and then adopting recognised good practice where this can be adapted to the institution's circumstances
through internal audit work. Although internal audit has a primary responsibility for assessing the internal control system, the auditor is frequently well placed to assess and comment on VFM in the areas reviewed. This should be reported in individual audit reports and in the internal audit annual report
through retaining both documents that show how an activity has been planned to build in VFM, and evidence of the good practices adopted
by examining the results or outcomes of an activity.
It is clear that conducting VFM studies is not the only way to show a commitment to VFM. Existing management practices that seek to integrate VFM principles and the active promotion of a culture of continuous improvement are two alternative approaches. Conducting a VFM study does not, in itself, demonstrate VFM: this is dependent on the result of the study and on any action taken in response to its findings.
VFM studies are frequently undertaken in conjunction with other organisations. This enables comparisons to be made (including the use of benchmarking techniques) and each can draw upon good practice identified elsewhere.
There is no right answer as to who should undertake a VFM study. The people involved in a study should, between them, have a basic range of skills, including an understanding of VFM study methodology and project management, and knowledge of the subject. They may be internal staff or external experts. Internal auditors also often have the knowledge, skills and experience to contribute to such work. Routine internal audit work should always keep in mind the arrangements for VFM. Any issues identified can be reported as part of that routine work.
The HEFCE has a specific responsibility for VFM and conducts studies under arrangements approved by a VFM Steering Group, which includes sector representatives. It also publishes advice, such as that on 'Effective financial management' (HEFCE 98/29), which institutions can use as self-assessment tools. The outcomes of the VFM studies are published, with guidance to help institutions assess their own position in the area studied. The guidance generally promotes self-assessment by management, although the work could be done by the institution.s internal auditor, or any other appropriate person. All the HEFCE VFM reports should be sent to the institution.s audit committee on receipt (for information), together with details of how management proposes to deal with the report. If an assessment is undertaken, the results should be relayed to the audit committee and other appropriate governing body committees.