Buying Goods and Services

The new lecturer felt that he was getting the gist of the teaching and learning process and now wished to talk more about the financial aspects of running the school with his mentor and former lecturer, who is now the Head of the new lecturer’s department.

Scarce resources

Over a coffee, the Head said that an organisation has scarce resources including money, people, plant and equipment - and information. He stressed that these need to be used optimally to achieve the objectives in the school’s strategic plan.

How not to do it

The Head wanted to illustrate the need to properly use scarce resources. He spoke about a colleague who sub-optimally purchased (called “procured”) equipment. He said that the senior professor in the science faculty wanted an expensive machine to assist with research, but the procurement department would not allow the purchase because they said it was bigger than what was required, not as good as others, the warranty was poor, and the cost was excessive.

The professor would not take no for an answer and dealt directly with the overseas manufacturer, purchased the item in the name of the school, and agreed to full payment upfront, with nothing said as to a warranty and no agreement to delivery date. The school had to make the payment and when the machine arrived after numerous delays, it was not fully operational and there was no warranty. The professor was severely sanctioned for this breach of procurement policy as it was not in the best interests of the school.

Procurement policy

The Head continued by stating that when goods and services are bought from outside the organisation the buyer needs to think “strategically”. For example, a purchase needs to benefit the organisation in the longer run, and this is often a far more important goal than just the lowest price. He said that the procurer needs to ask whether this purchase “makes commercial sense”, and that the above equipment purchase did not make commercial sense.

Value for money (VFM)

The new lecturer remembered reading about the concept of “value for money”, or VFM. His mentor said that VFM normally underpins procurement. It is the achievement of a desired procurement outcome at the best possible price—not necessarily the lowest price. This is based on a balanced judgment of financial and non-financial factors relevant to the procurement over the life of the procurement, called the total cost of ownership or “TCO”. The Head reiterated that based on the concept of VFM, including TCO, the above equipment purchase should never have occurred.

DIFOTA

The Head said that an easy way to consider procurement of goods and services was that the deliverables need to be Delivered In-Full, On-Time and Accurately (or “DIFOTA”). He said that from a DIFOTA viewpoint, the above purchase was clearly a failure.

The lifecycle of a contract

The Head said that one should take a holistic view of the contracting process. He said that like a human’s “cradle to grave” lifecycle, where risks can be predicted depending on the phase, a contract can also be seen to have a life cycle and risks can be predicted. He said that his preferred lifecycle version was that there are three phases. The first is procurement, this is the buying phase, and includes everything leading up to signing the contract, or “award”. The middle phase is the management of the contract's deliverables, with this phase called “contract management” and the final phase is attending to matters after delivery and includes warranty, ownership of intellectual property, and confidentiality.

What to remember

The Head reiterated that a procurer needs to consider the concept of value for money, the total cost of ownership, DIFOTA and the lifecycle of a contract. He concluded by giving an overarching comment, that if the procurement does not make commercial sense, then the purchase should not proceed.

Associate Professor Cyril Jankoff is Associate Dean, Scholarship (UBSS) and a member of the GCA compliance directorate.