The Value Equation

“Price is what you pay. Value is what you get.”
–Warren Buffett




What is the value equation, and it is really possible to compare and contrast equivalent approaches using this relationship?

In my current line of work of developing and implementing strategies for acquiring the goods and services needed by mission operations in Houston, the value equation plays a central role. In soliciting for goods and services, we weigh the proposed benefit in terms of technical, management, and business approaches, along with demonstrated reliability based upon past performance, and contrast that against the cost for the proposed approaches. The Federal Acquisition Regulations (FAR) defines “best value” as “a combination of competitive pricing and improved performance” (i.e., benefit).

With the above we have some clues. In a very simplistic way, the relationship between benefit and cost and the resulting value can be expressed in terms of the following equation:

value = benefit – cost

Let’s look at some results for value in terms of benefit and cost.

One way to increase value is to provide the same benefit at a reduced cost; that is, if the benefit is the same, reducing cost provides more value. Focusing for a minute on the commercial-versus-Government debate on access to low Earth orbit, one can surmise a logical explanation behind the philosophy for handing over routine cargo and crew transportation services to the commercial sector. It is rooted in the belief that standard commercial business practices and the free market will lead to lower costs in the longer run for the same services (i.e., benefits) provided by systems in existence today. This is the relationship that many have in mind as to why it is desirable to reduce cost; as long as one can reduce cost yet continue to provide the same goods or services, it is perceived of greater value. I certainly do. Wal-Mart is the master of this approach with its volume buying and pressure on it suppliers to reduce costs