Local Multiplier 3 (LM3)

Primary purpose
Summary
Potential benefits
Who can use the tool?
What resources are needed?
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).
  2. How this income is spent.
  3. How it is re-spent within a defined geographic area (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 in an LM3 analysis:

  1. Determine your ‘local’ area (troubleshooting advice on this is in The Money Trail).
  2. Identify your starting point, or your income source (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 write up a report of the process and results. Others  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?

Any organisation 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. 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.

Staff time

The amount of time spent by each organisation varies. 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 entail visiting suppliers in person and working through the survey.


Further sources of information

Contact us for a briefing on how to measure local economic impact, including use of LM3. Find our more here.

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

Plugging the Leaks contains additional documents.

There is also an online version of the LM3 tool. Users can choose from three customised versions of the tool for the private, public or non-profit sectors.

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