Activity 25
Option appraisal
Overview
The Chartered Institute of Public Finance and Accountancy (CIPFA) deem option appraisal as ‘an essential tool to help you to deliver organisational goals’. It originated as an accounting decision-making tool that examined all available outcomes, weighing the costs, benefits, risks and uncertainties to enable an objective and systematic evaluation of the best proposal to be made.
Initial (outline) opportunities for financial benefits and other noncashable benefits are assessed using the opportunity matrix (see Activity 24). These are then refined, often on an iterative basis, so that a range of realistic, pragmatic and relevant options are established that can be compared and evaluated through the appraisal process.
It is important that the option selected by the category team be capable of delivering the output required by the initial category management programme objectives (i.e. the business requirements, RAQSCI), and in this way option appraisal distinguishes itself from opportunity analysis.
Elements
The principles of option appraisal are as follows:
- Be clear about the output desired (your objectives).
- Consider the options for achieving the objectives.
- Assess the costs and benefits of the different options.
- Quantify and value the options wherever possible.
- Consider any risks and sensitivities.
- Assess the most appropriate use of resources.
A common stepped approach to option appraisal might be as illustrated in Figure 4.11.
So what?
Option appraisal is frequently used within the procurement environment during the tender or quotation-evaluation process. The thinking and methodology used for this activity are the same in category management. It is based upon the premise that the most suitable option is selected given the criteria, which should consider both financial and nonfinancial benefits.
Each option may not need to be appraised to the same level of detail, as some may be ruled out early on in the process. Those that are assessed by the team need to be ranked, and it is often the case that individuals will need to undergo a ‘standardisation process’ beforehand in order to ensure consistency across the piece of work.
Ideally, all facts and data relating to the options should have been gathered and given to the category team so that the ranking process can happen simultaneously; however, practically, this may not occur, as new information can become available and therefore the process will need to be reviewed and updated.
It is essential that stakeholders are included in this process to validate the outcome and to build buy-in and commitment to the final solution. Peer review and challenge during this process can form a helpful dynamic, as they help stress-test the final option and ensure viability.
Category management application
- Supports the development of a coherent category strategy which links back to business requirements
- Provides a consistent approach to decision making
- Enables informed and transparent decisions
- Provides a clear basis for review
- Gives a clear and objective evaluation process
- Gains commitment from key stakeholders
Limitations
There is much confusion between opportunity analysis and option appraisal, and the two are often mistaken, which can lead to suboptimal decision making. Resource limitations may also dictate which documents are used/omitted from the category management process.
It is important to remember that all costs associated with the options must be included; otherwise the decision-making process will be flawed. A failure to match the option benefits back to the business requirements is another recurring theme – more commonly found in large projects over long durations.
Option appraisal is best developed as a result of team consensus; however, again, time limitations can force unilateral development of the ranking criteria, often accompanied by a financial bias which can impact upon stakeholder buy-in to the outcome.
Template
The following template can be used to support the option appraisal process:
- Template 25: Option appraisal