Economic analysis: What is it good for?

A guide for deciding whether to conduct an economic evaluation

Economic evaluations help organisations and their funders compare the value of the impact created by a charity with the cost of creating that impact. There are several different types of economic evaluation. The types most relevant for the charity sector are: cost-minimisation analysis; cost-effectiveness analysis; break-even analysis; cost-benefit analysis; and social return on investment (SROI).

Each type of evaluation can help a charity assess the value of what it does, identify where it can increase its value, and convey its impact to funders and other stakeholders.

But like any tool, economic evaluation can be destructive as well as constructive. Its misuse can have a number of negative consequences: it can misrepresent value and potentially lead to less-than-optimal allocation of resources within and across organisations; it can take up scarce resources and produce something of little value; and it can generate scepticism among stakeholders about the value of economic evaluations in general.

Therefore, it is important that the right approach is used, if appropriate, and that it is used well.

Many of the benefits of and issues with economic evaluation can be applied to evaluation in general. But there are some issues that are particularly pertinent to economic evaluation.

This report covers three main topics:

1. What is economic evaluation and what is it useful and not useful for?
2. What is the experience of organisations that have conducted economic evaluations and the funders that review them?
3. How should organisations decide whether an economic evaluation is for them, and if so, which type is best?

 We hope [this report] will help charities navigate the pros and cons of conducting an economic evaluation so they can produce information on their impact that is useful to them, their stakeholders, and society at large.

Dan Corry, Chief executive, NPC