Local Multiplier 3 (LM3)

Primary purpose
Summary
Potential benefits
Who can use the tool?
What resources are needed?
Development, ownership and support
Third sector examples
Further sources of information

Primary purpose

Local Multiplier 3 (LM3) was developed by the New Economics Foundation as a simple and understandable way of measuring local economic impact. It is designed to help people to think about local money flows and how their organisation can practically improve its local economic impact, as well as influence the public sector to consider the impact of its procurement decisions. It was designed to be quick and relatively easy, and to highlight where an organisation can improve its impact.

Summary

The measuring process starts with;

  1. a source of income (say total income into a social enterprise) and follows how it is
  2. spent and then
  3. re-spent within a defined geographic area (that is called the ‘local economy’).

These three steps are the ‘3’ in LM3. The ‘multiplier’ is an economics concept that puts a label on a concept we understand intuitively: money that enters an economy has a multiplied impact on that economy based on the way people spend and respend money. More re-spending in the local economy means a higher multiplier effect because more income is generated.

There are five general stages to an LM3 analysis:

  1. Determine what your ‘local’ area is (troubleshooting advice on this is in The Money Trail).
  2. Identify what your starting point, or your income source is (Round 1).
  3. If Round 1 is the organisation’s income, then for Round 2 you need to break down how you spend your income within the local area.
  4. For Round 3, you need to survey the businesses and people you spend your money on to find out how they spend their incomes.
  5. Collate all responses, do some quick maths, and then you have your LM3 score.

Some organisations, such as Rolls on Wheels and Gorbals Initiative, write up a report of the process and results. Others, such as Northumberland County Council, incorporate the results into future strategic planning documents. The process can be revisited on a periodic (say annual) basis and progress compared.

By 2008, all 25 North East Local Authorities had completed an LM3 exercise as they recognised that public sector procurement spend could have significant economic impact within local communities. Likewise, using LM3 The Princes Trust (North East ) was able to demonstrate that £1.9 million disbursed in 2006/2007 generated £4.1 million per annum within the North East regional economy via the impact of grant funding, development awards, supplier spend and expenditure on staff salaries.

Potential benefits

  • It is quick and easy relative to other forms of economic evaluation and uses numbers to show the organisation’s impact. It also highlights for the organisation where it can improve its impact.
  • LM3 shows external bodies (funders, public bodies) the value of funding or contracting with the organisation in terms of local economic regeneration. For example, as highlighted in The money trail, Eden Community Outdoors was able to use the LM3 to demonstrate its impact on the local economy, which helped the organisation to secure funding for a new post to take work on local economic impact forward.

Potential limitations

  • LM3 only captures economic impact, and does not focus on social or environmental impacts.
  • Within economic impact, the multiplier only captures the impact of cash, and shows income generated but does not directly show savings (often a concern to external organisations). It does not directly measure the organisation’s impact on poverty.
  • LM3 is only a viable tool for showing impact on deprived areas. Increasing the multiplier effect in wealthy areas can lead to ‘overheating’ and further inequalities with deprived areas.
  • LM3 can only help an organisation to measure the effect on its defined ‘local’ area, and not on the other areas in which it operates or brings income.

Who can use LM3?

All third sector organisations, regardless of sector or size can use LM3. It is most effective for organisations seeking to understand or demonstrate its effect on local economic regeneration.

What resources are needed?

Leadership

LM3 requires a leader, generally from within the organisation, though many have been carried out by external organisations or people. The organisation will need to buy into improving the results of subsequent LM3 measures at a high level for this improvement to occur. It is also important for the organisation to have a good rapport with suppliers and staff, who will be surveyed as part of the process.

Proficiencies or skills

LM3 requires one person to lead who is comfortable with numbers. The LM3 process requires only basic maths skills, and the person must feel comfortable discussing figures relevant to things like turnover, overhead, salaries, etc. Generally, the process requires accessing financial accounts, so the person involved must know how to use Sage (or whatever financial accounting software the organisation uses) or be able to get someone to do the work for him/her.

Staff time

The amount of time spent by each organisation has varied widely. Some organisations can complete the process in a week, while other organisations have let the process stretch out over time. Some organisations were able to build some real momentum in the community around the work, so the timeframe in which it is completed matters. In terms of time, the first two rounds can be quite quick. The third round, usually surveying suppliers and staff, can take longer depending on the size of the organisation. Some of the best LM3s have entailed visiting suppliers in person and working through the survey.

Courses, support, and information

The money trail is intended to be a how-to and troubleshooting guide. The Plugging the Leaks website contains additional documents, such as survey templates and PowerPoint presentations.

There is also an online version of the LM3 tool. It provides the all the materials necessary and detailed guidance for carrying out an LM3 study. Users can choose from three customised versions of the tool for the private, public or non-profit sectors.

Development, ownership and support

The New Economics Foundation developed the tool with significant support from the Countryside Agency from 2000–2004, and is in the public domain. The New Economics Foundation holds the copyright to the how-to manual, The Money Trail, but it is downloadable from the website for free.

Further sources of information

The Money Trail: Measuring your impact on the local economy using LM3

 

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