Performance Management · Performance analysis

Value for Money and Not-for-Profit Performance: The 3 Es Explained

Updated 11 October 2026 · Fact-checked

Value for money (VFM) means using resources well to achieve an organisation's aims. You assess it with the three Es. Economy is spending less on inputs. Efficiency is getting more output from inputs. Effectiveness is achieving the objectives. In the exam, identify which E each measure tests, then comment.

Understand Value for Money and Not-for-Profit Performance

A not-for-profit (NFP) organisation, such as a charity, school, hospital or government department, does not exist to make a profit. Its aim is to deliver a service or achieve a social goal. So profit, ROI and share price tell you little about how well it performs.

Instead, many NFP and public sector bodies are judged on value for money (VFM). VFM asks whether the organisation uses its limited funds well. It is assessed with the three Es.

Economy: acquiring inputs of the right quality at the lowest cost. Think "spending less".
Efficiency: the relationship between inputs and outputs. Think "doing things right" or getting the most output from the resources used.
Effectiveness: whether outputs achieve the objectives or outcomes. Think "doing the right things".

The three are linked. Inputs (money, staff, materials) are used in a process to create outputs (patients treated, students taught). Outputs lead to outcomes (patients cured, qualifications gained). Economy looks at the input side. Efficiency links inputs to outputs. Effectiveness links outputs to outcomes and objectives.

The three Es can conflict. Buying the cheapest materials may be economical but may lower quality and so hurt effectiveness. A hospital that treats many patients quickly is efficient, but if patients return because treatment was rushed, it is not effective.

Measuring NFP performance is hard. Objectives are often multiple, vague and hard to quantify. Outputs may be intangible. Outcomes may take years and depend on other factors. There is often no profit measure and no market competition. Funders, users and the public may each want different things. Managers may also focus on what is easy to measure rather than what matters. Some bodies add a fourth E, equity (fair access), or ethics, but the standard exam framework is the three Es.

Key rules to remember

Economy: Economy = actual cost of inputs compared with the budgeted or benchmark cost of inputs; Lower cost for the same quality means better economy. Example: cost per kg of material, cost per hour of staff.
Efficiency: Efficiency = outputs ÷ inputs (or inputs ÷ outputs); Example: patients treated per nurse hour, or cost per patient treated. Compare with a target, past period or similar body.
Effectiveness: Effectiveness = actual outcome achieved compared with the objective or target; Example: percentage of students passing, or reduction in waiting list against target. Often not a simple ratio.
Link between the Es: Inputs → (economy) | Inputs to outputs → (efficiency) | Outputs to outcomes → (effectiveness); Use this chain to decide which E a measure belongs to.

How to solve Value for Money and Not-for-Profit Performance questions

Use this method for any question that asks you to classify, calculate or discuss VFM and NFP performance.

1Identify the organisation and its objectives. State what success means for it, for example shorter waiting times or more people helped.
2List the inputs (money, staff, time, materials), the outputs (units of service delivered) and the outcomes (the real result for users).
3Decide which E each measure tests. Cost of inputs is economy. Outputs per input is efficiency. Achievement of objectives is effectiveness.
4Calculate any ratios asked for. Show the working and the units, such as cost per patient.
5Compare with a benchmark: budget, last year, target or a similar organisation. A ratio alone means little.
6Comment on the result and link the Es. Say whether one E has been gained at the cost of another.
7Add the limits where relevant: multiple objectives, non-financial outcomes, lack of comparators, and the risk of manipulation of targets.
8Finish with a clear conclusion or recommendation that answers the exact requirement.

Quickest way: Input, output, outcome test

When to use it: Use for Section A and OT case questions that ask which E a measure or statement relates to.

Ask: is it about the price paid for inputs? If yes, it is economy.
Ask: is it about output compared with resources used (or cost per unit of output)? If yes, it is efficiency.
Ask: is it about whether the aim or target was met? If yes, it is effectiveness.
If two seem possible, look at the key words: cheaper, cost of buying (economy); per, ratio, productivity (efficiency); target, objective, result, quality of outcome (effectiveness).

Common mistakes in Value for Money and Not-for-Profit Performance

Treating efficiency and economy as the same thing.
Both seem to be about saving money.
Fix: Economy is the price of inputs. Efficiency needs an output in the ratio. If there is no output, it is not efficiency.
Calling a cost-cutting measure effective.
Students use "effective" in its everyday sense of working well.
Fix: Effective means objectives are achieved. Check the outcome, not the cost.
Calculating a ratio but giving no comparison or comment.
Students think the number is the answer.
Fix: Always compare with a target, prior period or similar body, then say what it means for VFM.
Ignoring that the three Es can conflict.
Students discuss each E in isolation.
Fix: State the trade-off, such as cheap inputs lowering quality, and say which E suffers.
Suggesting profit or ROI as the main measure for a charity or public body.
Students carry private sector habits into NFP questions.
Fix: Use VFM, service quality, user outcomes and cost per unit of service. Mention that financial measures still matter for control and funding.
Listing generic problems of measurement without applying them to the scenario.
Students recall a memorised list.
Fix: Tie each problem to the organisation, such as a school whose results depend on pupils' backgrounds.

Worked examples

Example 1

A public hospital treated 4,800 patients last year using 24,000 nursing hours at a total nursing cost of ₹1,20,00,000. Target: 5,000 patients treated with 25,000 nursing hours at ₹1,15,00,000 total nursing cost. Calculate one measure of economy and one of efficiency, and compare with target.

Show the solution

Economy: actual cost per nursing hour = ₹1,20,00,000 ÷ 24,000 = ₹500.
Target cost per nursing hour = ₹1,15,00,000 ÷ 25,000 = ₹460.
Actual cost per hour is ₹40 above target, so economy is worse than planned.
Efficiency: actual patients per nursing hour = 4,800 ÷ 24,000 = 0.20.
Target patients per nursing hour = 5,000 ÷ 25,000 = 0.20.
Efficiency equals the target, so staff were used as productively as planned.
Comment: the overspend arises from the price paid for nursing time, not from poor use of hours. Effectiveness would need outcome data such as recovery rates.

Answer: Economy: ₹500 per nursing hour against a target of ₹460, which is adverse. Efficiency: 0.20 patients per nursing hour, equal to target. The cost problem lies in input prices, not productivity.

Example 2

A charity aims to help long-term unemployed people find jobs. It spent ₹60,00,000 on training courses and trained 1,500 people. Of these, 600 found work within six months. Last year, it spent ₹50,00,000, trained 1,250 people and 625 found work. Assess performance using the three Es.

Show the solution

Economy: the question gives no input prices, so a full economy test is not possible. Total spend rose by ₹10,00,000, from ₹50,00,000 to ₹60,00,000, which is a 20% rise. More information on input prices is needed.
Efficiency: cost per person trained this year = ₹60,00,000 ÷ 1,500 = ₹4,000.
Last year = ₹50,00,000 ÷ 1,250 = ₹4,000.
Cost per person trained is unchanged, so efficiency is the same.
Effectiveness: this year, 600 ÷ 1,500 = 40% found work.
Last year, 625 ÷ 1,250 = 50% found work.
Effectiveness has fallen by 10 percentage points.
Cost per job found: this year ₹60,00,000 ÷ 600 = ₹10,000. Last year ₹50,00,000 ÷ 625 = ₹8,000. This is a 25% rise in cost per successful outcome.
Conclusion: the charity trained people at the same unit cost but achieved poorer results. Possible causes are weaker job market or less suitable courses. Management should review course quality and the selection of participants.

Answer: Cost per person trained is ₹4,000 in both years, so efficiency is unchanged. Success rate fell from 50% to 40%, and cost per job found rose from ₹8,000 to ₹10,000, so effectiveness has declined. Economy cannot be judged without input price data.

Exam tips

In objective questions, find the key word first: cheaper inputs, per unit, or objective achieved. This usually decides the E in seconds.
Always state the benchmark you compare against. Marks in written answers go to comment and interpretation, not only to the figures.
If the scenario gives no input price data, say that economy cannot be assessed. Do not invent figures.
When asked for problems of measuring NFP performance, apply each point to the scenario, for example multiple stakeholders or outcomes outside the organisation's control.
Use a clear layout in Section C: a short heading for each E, the figure, then one line of comment.

Practice questions from Performance analysis

Value for Money and Not-for-Profit Performance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Value for Money and Not-for-Profit Performance: frequently asked questions

What is the difference between economy and efficiency?

Economy is about the cost of inputs, such as paying less for supplies of the same quality. Efficiency compares outputs with inputs, such as patients treated per nurse hour. You can be economical but inefficient if cheap resources are wasted.

Can an organisation be efficient but not effective?

Yes. A charity might distribute leaflets at very low cost per leaflet, but if the leaflets change nobody's behaviour, the objective is not met. Efficiency is about doing things right. Effectiveness is about doing the right things.

Why is performance harder to measure in not-for-profit organisations?

Objectives are often multiple and hard to quantify, and outcomes can take years to appear. There is usually no profit figure and little competition to compare against. Different stakeholders also want different results.

Do the three Es apply to private sector companies?

They can, but they are most used in the public sector and NFP bodies where profit does not measure success. A company can use the same ideas inside departments, for example a call centre.