“Value for money” service provision is a measure performance for not-for-profit organization in Section D of ACCA Advanced Performance Management exam. You find the term “Value for money” appearing in different ACCA papers but we focus on it’s performance management perspective here.
Business entities can measure performance with financial and non-financial indicators. All for-profit making entities are concerned with financial benefits and service quality. The prime purpose of the for-profit entities or business is the wealth maximization of shareholders.
However, not-for-profit entities do not work for profit making and shareholders’ wealth maximization. The prime purpose of the not-for-profit or NFP entities is to meet the objectives of the stakeholders. Performance measurement offers greater control and evaluation, assessment, and improvement of performance. Without performance measurement, organizations cannot improve.
Not-for-Profit entities measure performance with non-financial measures such as Value for money. The term money doesn’t implicate the service or product price or cost. It is the measure of input resources best utilized to offer services.
Value for Money
The concept of Value for Money (VFM) exists in both for-profit and not-for-profit organizations. It is the measure or the correlation between the input resources best utilized to maximize the output. This implies the VFM will depend largely on the organization’s objectives. For example, a profit-making entity may seek VFM measure in customer retention or market share size indicators. Contrarily, an NFP will be more interested in providing the best services to the customers or beneficiaries.
As the NFPs seek to maximize the services offered to their beneficiaries, they seek an optimum balance in spending resources. The best way to measure the VFM for an organization is to compare the results against its objectives. The organizational objectives of public and private NFPs remain closely similar in nature, but may also differ depending on the organization size and resources available.
For example, A Government funded university and a private university both are NFPs, both would set the VFM criteria of student success rate. The difference will rest on the approaches adopted to acquire and utilize the resources, i.e. the Fees structure and employee remuneration will differ.
Value for Money Principle
The VFM approach aims to achieve maximum resource utilization. The NFPs’ objectives may differ depending on the rule and purpose of formation. The foremost principle of the VFM approach remains to achieve the organization’s objectives. NFP organizations may also have multiple set objectives often conflicting. The sequential approach with VFM would then be to identify and prioritize the organization’s objectives.
Identify the Organizational Objective and Prioritize
Plan and implement the action plan for best resource utilization
Monitor and evaluate the performance effectiveness
Objective prioritization becomes important when organizations face conflicting objectives. For Example, an educational institute would want to maximize the student success rate, the teaching faculty and support staff would require increased resources and remuneration. Students at the same institute would seek the best quality education. Different stakeholders in the same institute seek varying objectives. The best way to solve the dilemma is to prioritize and find the optimal balance to achieve all objectives effectively.
Similarly, objective conflicts appear with stakeholders of different NFP entities. The approach to achieving these objectives may differ. In our institute example; the institute may increase student fees to meet the objectives if it’s a private entity, it may not be an easy case if the institute is a government entity.
Measuring the Value for Money
A common practice of measuring the value for money is through 3Es known as Effectiveness, Efficiency, and Economy. These terms can be defined and implemented to achieve the organizational objectives in terms of value for money metrics.
Economy
It is the measure of acquired resources or inputs. It aims at resource acquisition at the lowest possible prices without a compromise in the quality. The best possible lowest cost criteria would depend on the value of the output for the organization. The scale of the economy will differ with the size and sector of the NFP.
Efficiency
It is the measure of resource utilization in operations for the organization. This metric aims to measure how well the organization is utilizing the acquired resources or inputs. The efficient use of the resources in an NFP organization will depend on many factors including the human resources, staff experience and skillset, availability of funds, etc.
Effectiveness
It measures the outputs for an organization. As the name suggests it compares the effectiveness of acquired resources against set objectives of the organization.
How three Es Link in measuring VFM
A not-for-profit entity acquires resources and utilizes these resources in the best possible way to meet its objectives. Usually, the quality of the service is directly linked with the input resources in profit-making entities. The NFPs however, need to achieve the set goals with minimum resources without a compromise on the quality.
Economy in the VFM would contribute to resource acquisition with the lowest prices and the best possible quality. For example, a hospital would issue a tender for medicines and surgical tools for operations and select the bidder offering the lowest cost. However, the management must make sure to perform a quality check on the bidder qualification.
Efficiency in the VFM is concerned with the usefulness of the acquired resources. It is a measure of inputs over outputs. NFPs often face a scarcity of financial resources and constraints due to organizational structure and non-financial objectives.
For example, an NGO serving local communities with pure drinking water plant setups may face a dilemma of choices in several locations. The NGO would then try to maximize the available funds in a way to meet the prioritized objectives benefiting maxim people in the local communities.
Effectiveness measures the economy of inputs in an efficient way to meet the objectives. If the NGO sets the objective of offering pure drinking plants to maximum communities, the measure would then be the number of beneficiaries.
The best possible way to achieve the highest value for money metrics is to set the clear objectives of the organization. Conflicting objectives should be prioritized by the top management. Sometimes organizations struggle to meet all three parameters of VFM. Efficiency in operations may result in expensive inputs, or an effective output can cost the efficiency drop in. The top management can change the objective priority list to enhance the organization total value for money targets.
Value for Money in Not-For-Profit Organizations
The strategic aim of any Not-for-profit entity will be to ensure the maximum value for money. NFPs have multiple and diverse objectives serving the public at large. The nature and size of the organization would play an integral part in meeting the organizational objectives. Different stakeholders in an entity have also varied objectives or stakes.
An NGO working for the community welfare will set an objective of relief package distribution to maximum people. A public hospital will set an objective of offering patient care to maximum patients. Employees working for these organizations will be looking for market competitive compensations.
Different stakeholders create diverse and multiple objectives in any organization. NFPs acquire resources from government funds or public donations. Either way, NFPs have to face a shortage of resources they need or the availability of the funds may not be readily available. A hospital seeking expansion in the patient facilitation center may have to wait for the government approvals for funds. An NGO would set a public appeal for a certain disaster relief fund. The scarcity of resources increases management burden and reduces efficiency. The objectives may become conflicting at times too.
An optimal approach to conflicting objectives will be to clearly identify and prioritize the organization’s objectives. For example, hospital top management would stress its medical staff to attend the maximum number of patients in two shifts. That meets the strategic objective of the organization.
However, the medical and support staff would require additional benefits and compensation to perform extra work. That leads to conflicting objectives with two different stakeholders. The top management cannot simply write off the medical staff demands that may hamper the staff motivation and efficiency eventually. The best possible solution would be hire extra staff, or offer an agreed-upon extra compensation to the existing staff. That approach will keep on top the strategic objective of the hospital of maximum patient care and satisfy the staff too.
Value-for-money (VFM) is often seen in ACCA APM exam. For instance, a question in ACCA APM March 2019 exam asked about the issues around VFM provision of education. Most candidates could not provide the definitions for each of the 3Es given. Remember some of the basic knowledge from previous level papers are easy marks for you in ACCA APM exam and don’t forget to revisit those concepts before going into exam room.
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