Chapter One: What is Value for Money?

Policy makers need to know whether their policies and programs provide VFM. It’s a very important question. It’s important that we are equipped to answer it well. But what is VFM?

As it turns out, the answer is both simple and complex. Simply put, VFM means good resource use. But – how do we know when a resource use is good? Who decides, and on what basis? That’s what makes it complex.

We understand VFM pretty intuitively as consumers. At the food market, for example, we make little judgments about VFM all the time. Should I buy the cheap brand, or is the more expensive one actually a better product? When we decide to purchase something, we presumably feel it is going to be ‘worth it’ in some way, even if we don’t always get it right. 

When I run workshops on VFM, I sometimes ask participants to think about VFM messages or lessons they grew up with. Talking about their parents’ or grandparents’ generations, people recall principles like being frugal (“look after the pennies and the pounds will look after themselves”), and balancing fitness-for-purpose and durability with cost (“quality remains long after price is forgotten”). These sorts of messages exist in our collective psyche as part of what it means to get VFM. 

The more significant the purchase, the more carefully we look at VFM. We’re likely to think harder about the value of an expensive item that has to last several years, like a car, than we are are about a low-cost, temporary item like a movie ticket. When our finances get tighter, it can also make us think more deliberatively about how valuable or important something is, and whether it’s worth buying. This is just as true for business and government as it is for households. 

Underlying these everyday decisions is an important question, along the lines of: How valuable is this product, service, experience, etc, relative to the things we have to sacrifice in order to get it? Is it good use of resources? 

We can break this question into three parts: 

  • What do we put in? 
  • What do we get out? 
  • Is it worth it? 

It may be relatively simple to answer these questions if we’re evaluating a financial investment. For example, maybe you buy some shares in a company. This literally means you own part of the company. In return for your investment, you hope to get some sort of return. If the company makes money, some of the earnings may be distributed to you as dividends. If the company becomes more valuable, your piece of the company (the shares you own) becomes more valuable, so at some stage you can sell the shares and keep the capital gain (the difference between the price you paid for the shares and the amount you sell them for). 

This sort of investment always involves some risk. For example, the value of the company might not increase. The shares you bought could go down in value, leaving you with less money than you had at the start. Investing also involves some effort on your part – for example, deciding what shares to buy, and keeping an eye on their performance. 

To evaluate this investment, we have to work out how much money you invest, how much money the investment earns through dividends and capital gains, and determine whether the earnings are enough to compensate you for the investment, effort and risk involved. In other words: 

  • What do we put in? (Money, knowledge, time to research investment options, willingness to take a risk – and the next-best thing you would have done with the resources, e.g. perhaps you had to forego a vacation, a new car, or the relative safety of a savings account) 
  • What do we get out? (Hopefully, dividends and capital gains) 
  • Is it worth it? (Are we satisfied this is the best decision, or at least a good decision, bearing in mind all of the above?).  

For convenience, I have posed these questions in the present tense. However, they can be applied before a decision is made (ex-ante) to evaluate potential companies you might invest in, and after the decision (ex-post), to see how well your investment performed.

A similar pattern of reasoning can be applied, by analogy, to social policies and programs. That is, social spending can be thought of as an ‘investment’ (Destremau & Wilson, 2017). For example, a government might be deciding whether to invest in a professional development program for school teachers. Just like our financial investment in the sharemarket, this program involves a sacrifice of resources, an intended result, and a tricky question: 

  • What do we put in? (For example, public funding and teacher time – and the sacrifice of the next-best thing that might have been done with that money and time) 
  • What do we get out? (Hopefully, teachers become more effective and, as a result of that, students learn more) 
  • Is it worth it? (Is the investment in the teacher development program worth the resources used, bearing in mind what was sacrificed and what was gained?).  

The underlying idea is that just like a financial investment, a social investment consumes value, and creates value. It makes sense that we might want to compare these two types of value to see whether the social investment creates more value than it consumes. 

However, once we attempt to actually answer these questions we can quickly find it’s not as simple as it seemed. Even in business, not all investments are as straightforward to evaluate as our sharemarket example. For example, an enterprise can have ethical, social or environmental impacts (positive or negative) and those impacts might cause us to modify our assessment of whether the investment is worthwhile. Increasingly, the public expects corporations to behave responsibly and to consider more than just profits. What constitutes ‘worth it’ is often a matter of context (where and when?) and perspective (to whom, and on what basis?). 

When a government, a philanthropist, a social enterprise, or a business is investing resources in pursuit of a slipperier ambition like the public good, further layers of complexity quickly build up.

When we’re out to make a profit, we can be reasonably single-minded about pursuing this objective (while also being guided by considerations like strategy and values). We can measure profit accurately, and we can sum it up in a single number. In contrast, social outcomes come in many forms and are often fuzzier to define. For instance, social outcomes can be economic (e.g., employment, productivity), health-related (e.g., reducing smoking, improving access to health care services), environmental (e.g., water quality, carbon footprint), cultural (e.g., preservation of ancestral grounds, teaching language and customs to new generations), or intangible things like “social cohesion, social mobility, distributional fairness, societal trust and sustainability, or changes to deeply entrenched but harmful cultural practices and attitudes (e.g., racism, sexism, etc.)” (Boston 2017, p. 93). 

As we’re already starting to see, the outcomes we’re interested in often go beyond things we can count – they are fundamentally about quality, value and importance (Davidson, 2005) – from the perspectives of a diverse range of people. If we want to measure them we are faced with a balancing act: describe them in clear, simple terms and risk being ‘too narrow’ and missing something important; or, provide a richer description and risk being ‘too woolly’ without a clear outcome to measure. And just to increase the difficulty level a bit more, social investments usually have multiple outcomes. Outcomes play out in different ways, for different people (Pawson, 2013). There may be unintended consequences. 

When we’re buying shares in a company, the VFM question can largely be addressed mathematically (I’ll show you how in the next chapter), though it involves a bit of judgment too – for example, deciding what counts as a risk and how much risk is too much. Some other investments involve a lot more judgment. In a social investment, the primary reason for investing is typically not to make a profit, but to change people’s lives. We can measure those changes, perhaps – but this requires judgments about what to measure and how. Deciding what to measure requires a determination of what matters, and determining what matters requires a value judgment: what matters to whom, and why?

The question ‘to whom’ matters a lot. In a social investment, the people with money and decision-making power and the people who are supposed to benefit are typically different groups. We can’t take for granted that they value the same things (Carlton & Perloff, 1994; Destremau & Wilson, 2017; Gargani, 2017).  

Have I convinced you that it’s complex? Don’t be afraid – by the end of this book you will have an intuitive process that you can apply to any social investment to get a sensible, credible, robust answer to a VFM question.

Part of the answer comes from economics. In the next chapter I’ll explain how economic methods of evaluation work, and how they can help answer a VFM question.