The 5Es: Economy
Short Read
Organisations that fund and review programs often specify expected value-for-money (VfM) criteria. Commonly, these criteria include some or all of the "5Es": economy, efficiency, effectiveness, cost-effectiveness, and equity. I’ve been exploring these criteria in a series of short reads. While they’re a useful generic framework, we can bring much-needed clarity by defining them in program-specific terms. My goal is to provide you with strategies for defining each E for your program, making the VfM assessment more meaningful and actionable than a set of generic indicators. So far, we’ve covered equity, cost-effectiveness, effectiveness, and efficiency.
Our 5th and final E is economy.
I'm covering economy last because it's typically mentioned first. I’m not just doing that to be contrary. Economy steals too much of the limelight, because it addresses resource use - an aspect of a program that's often one of the first and easiest things we can quantify - and because spending is a sitting target for political point-scoring. Unfortunately, this can reinforce the perception of a program as a 'cost' rather than an investment in a value proposition - and this myopic view can work against VfM by focusing on cost-cutting rather than long-term value creation.
Typically, economy is concerned with the conversion of resources (which, to funders, means money) into inputs (such as staff, consultants, equipment, etc) needed to deliver a program. In other words, it’s about buying stuff.
Usually, definitions of economy in VfM assessments focus on frugal management of funding and minimising the cost of inputs - with one organisation's framework going so far as to define economy as "spending less".
I am not a fan of this definition.
Oscar Wilde wrote in 1892 that a cynic is someone who “knows the price of everything and the value of nothing.” In VfM assessment we cannot afford such cynicism, because our job is to understand value. As we well know from our own purchasing decisions, value doesn’t equate with cheapness. Sometimes it's best to spend a little more in order to get a disproportionate gain in value through improved quality, fitness-for-purpose, and impact.
This isn’t a licence to spend, spend, spend. Budgets have ceilings. We need to manage them well by buying the right inputs, of the right quality, at the right time and price to fuel productive delivery, effective and equitable impacts, and create worthwhile value. In other words, economy isn’t “spending less”. It’s managing resources well to support the other four Es (efficiency, effectiveness, equity and cost-effectiveness).
I suggest we take a broader view of economy, by asking:
🤔 What resources are invested and by whom? What does good stewardship of those resources look like?
When we approach economy from this perspective, it leads to the insight that money is only part of the investment.
There may be other important resources to be nurtured and marshalled to create value. Examples of wider considerations include:
🔑 Looking after intangible resources such as political capital, knowledge and skills, cultural and technical expertise, relationships and reputations
🔑 Understanding the footprint of the program on the extraction and use of natural resources and minimising harmful environmental side-effects
🔑 Good human resource management practices, such as recruiting talent from diverse backgrounds, fostering an inclusive organisational culture and paying staff equitably, which make a broader contribution to program effectiveness and wider societal value
🔑 Considering trade-offs between cost minimisation and broader dimensions of stewarding resources - e.g., balancing competition-based procurement strategies with opportunities to build the capacity of small local suppliers to the longer-term betterment of a more competitive, diverse and equitable marketplace.
Of course, stewardship of money is important too.
Aspects of good financial management include considerations such as:
💰 Paying reasonable prices for inputs (e.g., average cost per unit of significant items such as salaries, consultant fees, office space, airfares, etc., are not excessive).
💰 Using sound procurement practices (e.g., competitive tendering where appropriate and feasible, whole-of-life costing of significant items).
💰 Managing risks of cost increases (price and/or volume-related).
💰 Proactively finding economies of scale and/or scope, savings and ‘best deals’.
💰 Leveraging support from partner organisations to grow the funding base and/or access resources in-kind (e.g., pro bono technical assistance, low or no cost use of meeting facilities).
💰 Sound financial management and probity arrangements.
💰 Risk management to minimise frictional losses (e.g., potential leakage of funds due to informal or corrupt transactions after funding has been disbursed from the program to subcontractors or the community).
Bottom line
Overall, identifying what resources are invested and defining good stewardship of those resources is the starting point for developing an appropriate set of sub-criteria for Economy that focus on value maximisation rather than cost-cutting.
Extra reading
The 5Es (and other VfM criteria) are also covered in the Guide to Assessing VfM that I wrote with Oxford Policy Management, and in the following Substack article👇
