Local Multiplier 3 (LM3) Measuring your impact on the local economy.
nef consulting is the ground-breaking advisor to public and private sector organisations, on integrated performance management, environmental and social impact evaluation, and work and well-being business psychology. We provide rigorous extra-financial measurement, inter-disciplinary analysis and cutting edge solutions, to optimise future value for money and sustainability in economic decision-making. Our clients and partners benefit from our unique lineage to nef’s (new economics foundation) twentyyear history and influence as a pioneer of corporate accountability, sustainable development and socioeconomic well-being. 3 Jonathan Street, London SE11 5NH, United Kingdom T: +44(0)20 7820 6364 F: +44(0)20 7820 6301 www.nef-consulting.co.uk
Measuring your Impact on the Local Economy LM3 Online is a web-based tool that enables any organisation to measure its economic impact and identify how to improve it. Across the UK, organisations face the same growing challenge: deliver more for less. The public sector faces budget cuts for the next decade, while the not-for-profit sector faces a dwindling pot and movement away from grant-making. LM3 makes it possible for any organisation to understand where its money goes, how that money impacts on the local economy, and, most importantly, how to improve the local economy while spending the same or less money. LM3 Online marks a step-change in measuring economic sustainability by enabling any organisation to measure any expenditure on any geographic area using current data. LM3 Online brings these benefits to organisations of any size by minimising the work effort required. The user simply uploads their spending data, such as a contract or company turnover, specifies the target local area, and the system does all the surveying and calculations.
Introduction to the LM3 model The Local Multiplier 3 (LM3) tool has been developed by nef (the new economics foundation) to help strengthen local communities using resources they already possess. LM3 helps businesses to measure the impact they have on a local economy by tracking where they spend money. The purpose of tracking and measuring this spending is to identify ways to increase the proportion of this money that stays local, which in turn will strengthen the local economy. For many years, the proposed solution for supporting urban and rural areas has been to attract more money into them, whether it is in the form of tourism, agriculture, corporate relocations, and other forms of inward investment. There is, however, a different approach that can have an even greater, more sustainable, impact: regenerating the local economy from within by recognising and increasing the impact of local companies. In many areas, the issue is not that too little money comes in but that most of the money that does enter the local economy flows right out again in the form of spending on businesses and labour outside the area. Research by the Countryside Agency has shown that on average upwards of 40 per cent of business turnover ‘leaks’ outside of the local economy. By finding ways to ‘plug the leaks’ by creating economic linkages and developing local distribution, a local workforce and local purchasing, communities can build a healthier local economy that can stand on its own long after regeneration funding dries up. LM3 dates back to 2000, with the first UK pilot projects led by nef (the new economics foundation). In 2005, the North East Centre of Excellence and One North-East co-funded a regional project to support the use of LM3 throughout the region. LM3 has become a recognised methodology for public procurement, cited in both the recommendations of the Sustainable Procurement Task Force and the Government’s response to those recommendations. LM3 is in active use by over 20 local authorities and over 30 private and not-for-profit organisations across the UK.
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LM3 features More effective regeneration: The issue in many places is not that too little money comes in, but that most of it flows out of the local economy in the form of spending on businesses and labour outside the area. Plugging the leaks: The use of LM3 allows the identification of ways to ‘plug the leaks’ in local economy by creating economic linkages. More independence: It can help develop local distribution, a local workforce and local purchasing, so that communities can build a healthier local economy that can stand on its own long after regeneration funding dries up. Flexibility: It brings benefits to organisations of any size by minimising the work they have to do to make the necessary calculations. You just upload data, such as a contract or company turnover, specify the target local area, and the system does all the surveying and calculations. Demonstrating impact: The results of the study will help you demonstrate the impact your organisation has on the local economy, and that which it could have in the future.
What are the benefits to your company? • You will receive a study that you can use with others to demonstrate the impact you have on the local economy. • The LM3 study will point to ways that you can improve your local economic impact further. • With your permission, nef consulting may case study your LM3 work in future publications, which will bring wider promotional value to your business.
Methodology An LM3 evaluation measures three ‘rounds’ of spending: Round 1: The company’s turnover. Round 2: The postcode location of places where the company spends its turnover – suppliers, staff, overheads, etc. It is only necessary to identify where the majority of this money goes, not all of it. Round 3: Where these suppliers and staff then spend that income. It is necessary to work closely with the company to compile this information. Finding out where staff spend their income is feasible, undertaken in the form of surveys. Supplier spending is much less feasible and often proxies are necessary.
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The figure below gives a visual representation of these spending rounds.
forX Company Figure 1: Money Money Flows for flows Company Money Money staying staying in in local local area area
X
leaving local area Money Money leaving local area
Round 1: £50,000 Company X’s turnover per annum
Round 2: £30,000 (local spend) Spending by Company X. Company X spent £27,500 on local staff and contractors and £2,500 on local suppliers of goods and services
Round 3: £13,375 (local spend) Spending by Company X’s staff and suppliers. Staff spent on food, entertainment, rent etc. Suppliers spent money on their own staff and supplies.
Round 2: £20,000 (non-local spend) Company X spent money outside the area on non-local staff, fuel, utilities, taxes and pensions. It also spent money on non-local suppliers
Round 3: £16,625 (non-local spend) Company X’s staff spent money outside the area on income tax, home costs, goods and services, etc. Suppliers also spent money on non-local items.
These figures are then used to calculate the company’s LM3 score which gives a financial representation of its impact on the local economy. The worked example offers a representation of the headline figures from an LM3 example. The table and analysis below is an example of a completed LM3. Company LM3
Round 1
£982,000
Company turnover
Round 2
£75,320
Value of company spending on local staff and suppliers
Round 3
£36,263
Value of local staff’s local spending and local suppliers local spending
Total (1)
£1,093,583
Value of company to its local economy
Total (2)
£111,583
Value of local economic impacts
The Company generates £111,583 in direct local impacts: this money circulates and re-circulates within the local economy. In total, the Company generates nearly £1.1 million for the local economy. The Company’s local multiplier is 1.11, which means that for every £10 it earns in income, the company generates £1.10 in direct spending on local goods and services and employees. In addition, the Company is part of the local economy and as such generates over £1 million in economic value. More worked examples can be found in nef’s fuller LM3 texts 1 and the ‘Plugging the Leaks’ website 2. References 1 The Money Trail: Measuring your impact on the local economy using LM3, J.Sacks, nef, 2002 2 www.pluggingtheleaks.org
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