Keeping money local – the LM3 Model

2 Sep

Wiser spending can bring huge benefits to struggling communities

At Tree Shepherd we believe that a lot of the money needed to bring local economies alive already exists – it’s just being spent badly.

LM3Even our most deprived areas attract considerable income in the form of business activity, maintenance and contractors and even welfare payments.   Unfortunately, most of this money simply leaks out of the area and provides little long term benefit to the community.

We believe that a different approach could help retain a lot of this money in the area and put it to work supporting the community.

We are helping local people to set up businesses in their area that can tap into this revenue and who will then re-spend it within their community.  These businesses can provide the maintenance and other service contracts that are so often out-sourced and they can attract some of the money that would otherwise be spent with national chain stores which take all their profits out of the area.   Indeed, nef, (The New Economic Foundation) have shown that up to 6 times more money could be spent in an area if local enterprise was promoted and encouraged.

LM3bAs these businesses start to thrive the amount of money lost from the area will decrease and gradually the local respending of this money will start to regenerate the whole area and create opportunities for a much wider cross section of local people. But how do you know how much money is disappearing in the first place?

We use a method called LM3 (which stands for Local Multiplier 3) which was developed by nef to measure where organisations spend their money and how their recipients then re-spend it.

It is a simple and understandable way of measuring the local economic impact of any organisations’ spend by providing a  single number that shows how much money stays local.

In LM3 you just follow the money.   How much money do you start with (i.e. the contract value)? Who receives it first? What or who do they spend it on?  By methodically following the formula below you get a simple value which you can compare year on year:

LM3 Score =       Round 1 + Round 2 + Round 3

Round 1

Where Round 1 = total spend

Where Round 2 = spend on local suppliers + spend on local direct employees

Where Round 3 = re-spend by suppliers on local suppliers and local employees of their own + local re-spend by local and non-local employees

Recent study shows contracts’ local value could be increased by a factor of 3

We recently did some work with an urban local authority to analyse one of their smaller service contracts.  We found that only 5.6% of the contract spend stayed with local suppliers and only 10% was paid to employees who lived in the area.

This meant that for every £1 spent, only 23pence was spent or re-spent in the local economy.  This gave the contract a score of 1.23.

When we looked at best practice elsewhere we could see that it was more than possible to raise the score to more like 1.7 which would in effect TRIPLE the amount of money kept in the area and enable the employment of a significant number of locally workless people.

At a time of ever diminishing public spending we believe it is critical that money is spent in ways that more directly benefit local people especially those who live in areas of significant deprivation where every penny counts.

Illustrations by Rory Seaford of The Creative Element