Springtime in my company sees budgets bursting out all around us, marking the blooming of a new financial year. After the latest round of horse trading that masquerades as a budget meeting, our CFO took me to one side. His purpose was not, for a change, to ridicule our latest savings claims or to challenge my department’s wage bill, but to show me some photographs.
These turned out to be of a timeshare somewhere on the Costa del Financiers, which he was about to purchase. Six weeks a year for the next 10 years in a luxury villa overlooking both the sea and the golf course, he gushed. All the same, would I would mind casting my eye over the contract before he signed it?
The “sea view may suffer from future shoreline development” caveat leapt straight off the page. Isn’t it strange how even the sharpest mind is dulled by desire, I thought, as I pointed out the offending clause. Surely that ought to be worth a hefty discount, at the very least?
The upside of this encounter for me was that it raised the issue of “value for money”. Our recently assumed responsibility for the US business requires us to extend our budgeting policy to them for the year ahead. Having always struggled with the concept of predicting prices 15 months out (I’d be running a bookmakers if I could do that for real), I’ve typically adopted a blanket approach – namely, set the budget at “last price paid for the most likely purchase quantities”, then drive hard to beat it.
This approach has three significant advantages. First, it’s simple and requires minimal effort by the finance or purchasing teams. Second, it transfers our true competitive position to the commercial side of the business, who can decide how to price in the market based on real profit. Third, it has a strangely motivating effect: there is no margin for poor performance, since purchase price variance exposes just how good we are, or are not. In today’s market, with oil, metals and various services hitting new price highs, this takes some courage.
After admiring his marble floors and granite worktops for a second time, I raised the subject of value to bring some life to an otherwise sterile budgeting process. Surely, responded the CFO, we just needed to measure purchasing performance in terms of price and cost. Why on earth would we want to measure value?
A lengthy discussion ensued about how we could capture “value added” in the context of purchasing financial measurement. I batted ideas to him and he duly knocked them down – innovations from the supply base brought to market (“prove it”); improvements to product and service specifications where we’ve played a major role (“would have happened anyway”); and even preferential access to new technology (“that’s what R&D does”).
No, it seems the CFO doesn’t want to encourage the right behaviour in us purchasing folks. I can understand his focus on real profit improvement activities, but to ignore the opportunity of value-adding work as well seems to me irrationally austere.
Then I got to thinking about the animal I was dealing with. Some time ago I remember reading an article that described the 10 worst value-for-money things you can buy. Here’s a few that stood out:
- Old houses (in Europe) and new houses (in America) – both command a premium in their relevant markets, but inevitably require, respectively, disproportionate renovation or remodelling.
- New cars – the depreciation is galling even if it’s the company’s money.
- Extended warranties – read the Sale of Goods Act and then try to work out what incremental protection they really offer.
- Any technological gizmo in the first 12 months of its arrival on the market – flatscreen TVs are merely the latest example.
And the last one I can recall? Timeshares. The developers use your money to build their assets if you buy off plan, the margins are astronomical, the restrictions severe, the fees index-linked, the contracts onerous and virtually evergreen, and they can’t even (in his case) guarantee the sea view.
The man I was trying to persuade to support the concept of value in purchasing had fallen for a sales pitch from a dodgy real estate agent and was about to put his cash into a concrete albatross.
Jim Frankley (not his real name) leads a purchasing function in a Fortune Global 500 company. He can be contacted at frankleyspeaking@cpoagenda.com
