SOCIAL RETURN ON INVESTMENTS

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SOCIAL RETURN ON INVESTMENTS

Social Return on Investment (SROI) is an organizational method of accounting for value creation, primarily social or environmental value. SROI enables organizations to measure how much change is being created by tracking relevant social, environmental, and economic outcomes. The key difference between SROI and other methodologies is assigning monetary values to the amount of change created.

To give a very simplistic example: SROI assigns a monetary value to inputs and outcomes and uses that assignation to calculate a ratio. If that ratio is 5:1, it means that every dollar allocated will generate (or has generated) social value worth five dollars.

THE traditional SROI approach is error-prone, costly, and focuses on impact justification.  Does it allow to learn and scale social impact?  To understand read on.

 

 

SROI CALCULATION

SROI TERMS (SROI DEFINITONS)

  • Attribution: An assessment of how much of the outcome was caused by the contribution of other organizations or people.
  • Deadweight: A measure of the amount of outcome that would have happened even if the activity had not taken place.
  • Discounting: The process by which future financial costs and benefits are recalculated to present-day values.
  • Discount rate: The interest rate used to discount future costs and benefits to a present value.
  • Drop-off: The deterioration of an outcome over time.
  • Duration: How long (usually in years) an outcome lasts after the intervention, such as the length of time a participant remains in a new job.
  • Impact: The difference between the outcome for participants, taking into account what would have happened anyway, the contribution of others, and the length of time the outcomes last.
  • Income: An organization’s financial income from sales, donations, contracts, or grants.
  • Inputs: The contributions made by each stakeholder that is necessary for the activity to happen.
  • Net present value: The value in today’s currency of money expected in the future minus the investment required to generate the activity.
  • Outcome: The changes resulting from an activity. The main types of change from the perspective of stakeholders are unintended (unexpected) and intended (expected), positive and negative.
  • Outputs: A way of describing the activity concerning each stakeholder’s inputs in quantitative terms.
  • Outcome indicator: Well-defined measure of an outcome.
  • Proxy: An approximation of value where an exact measure is impossible to obtain.
  • Scope: The activities, timescale, boundaries, and type of SROI analysis.
  • Social return ratio: Total present value of the impact divided by total investment.
  • Stakeholders: People, organizations, or entities that experience change, whether positive or negative, as a result of the activity that is being analyzed. 

TRADITIONAL SROI AND BETTER WAY TO SROI

While social value principles are the foundation, we need a better SROI model. Let's see how.

SOCIAL VALUE PRINCIPLES

PRINCIPLES OF SROI METHODOLOGY

SROI measures change in ways relevant to the people or organizations that experience or contribute to it, assigning monetary values to represent social, environmental, and economic outcomes.
As a result, this valuation produces a ratio of benefits to costs or investments (inputs). For example, a ratio of 3:1 indicates that every $1 delivers $3 of social value. To estimate the value of the outcomes, SROI uses financial approximations - or proxies - that may vary according to the stakeholder. 

 

MAXIMIZE SROI WITH CONTINUOUS DATA

 

 

According to a guide by the UK Cabinet Office, with methodology development supported by Social Value International, there are 7 key principles underlying the application of the SROI methodology.

The seven SROI principles are:

  1. Involve stakeholders.
  2. Understand what changes.
  3. Value the things that matter.
  4. Only include what is material. 
  5. Do not over-claim.
  6. Be transparent.
  7. Verify the result.

Carrying out an SROI analysis keep the following principles in mind:

  • 01 Involve Stakeholders
  • 02 Understand what changes
  • 03 Value things that matter
  • 04 Only include what is material
  • 05 Do not over-claim
  • 06 Be transparent
  • 07 Verify the result

In this case “stakeholders” refer to individuals (or groups/organizations) affected by the program or activity that is being implemented. More specifically, the change that is expected to occur affects these stakeholders in some way.

The principle calls on those implementing an SROI methodology to first identify who those affected are and then maintain them as active participants throughout the SROI process. What is measured and how it is done can then be executed in a way that is more relevant to all those affected by the program or activity.

The SROI process demands clear understanding and communication of how change has occurred, and whether it is positive or negative. One should also distinguish between change that was expected and change which was not foreseen (positive or otherwise). With these in mind, organizations are encouraged to clearly articulate the theory behind the change they are affecting through their activities.
One of the distinguishing factors of the SROI process, this principle refers to the assignation of monetary values (also referred to as financial proxies) to the outcomes generated. This gives such outcomes a way to be valued in an ideally more objective and comparable manner.

It is important to include information about the outcomes of an activity and who has been involved in affecting (or has been affected by) that change. Organizations should ask themselves whether including or not including certain information would affect the stakeholders involved (those who affect or are affected by the change experienced).

If there is information that might sway a decision about the activity by those stakeholders it should be included. This lends credibility to an organization’s account of the social value created.

This principle is backed up by the transparency organizations must commit to in the SROI accounting process. It asks the questions, what would have happened without the organization’s activities, how much did the organization’s activities contribute to the outcomes generated, and what contributions did other organizations/entities have on those outcomes?

Detailing the answers to these questions enables an organization to avoid the over-claim pitfall and better inform stakeholders of the effectiveness of the organization’s activities.

 

There is transparency to be demonstrated in all aspects of the SROI accounting process. This includes tracking and communicating the methodologies used to determine metrics, collection processes, analyses conducted, etc. This also includes communicating with whom you spoke with (stakeholders) and how they affected or informed the decision-making process.
External validation of the results of your SROI analyses and how you arrived at those results will help lend credibility to your process and enable stakeholders at all levels to better evaluate the outcomes you reported. A process called independent assurance can serve organizations seeking such third party verification of the reliability of an SROI analysis.
SROI METHODOLOGY

SOCIAL RETURN ON INVESTMENT METHODOLOGY

social return on investment process_ (1) (1) (1)

Source: Semantic Scholar

Social Value UK outlines six stages to an SROI analysis.

 

  • 01 Establishing scope and identifying key stakeholders
  • 02 Mapping outcomes
  • 03 Evidencing outcomes and giving them value
  • 04 Establishing impact
  • 05 Calculating the SROI
  • 06 Reporting, using, and embedding
Frame the limits of your analysis well. This demands clear understanding and identification of the stakeholders involved, as well as their roles throughout the process. Setting a realistic (and relevant!) scope will help avoid scope creep down the line
At this stage organizations focus on visualizing how change is created or will be created. Generally, this is done by creating a “Theory of Change” model, demonstrating the interrelationship of inputs, outputs and outcomes for the activity or activities to be analyzed.
This stage requires identifying the outcome indicators which will be used as change metrics and determining the duration of those outcomes (are they long-lasting? short-term?). It also demands collecting those data and assigning values to the outcomes.
Impact must be attributed to the activity executed -- in other words the organization must demonstrate that the change that occurred (looking at the outcomes evidence) would not have resulted anyway (without the activity or program).
A stage that requires unique SROI analysis expertise, at this point, an organization determines the ratio which communicates how much value is generated per investment unit (e.g. per dollar).
Stakeholders need to be informed about the results of the analysis. That way, they can continue informing in a relevant way the evolution and execution of the activity being implemented.
SROI CALCULATION

HOW TO CALCULATE SROI?

Social return on investment example (1) (1) (1)

Example Social Return on Investment Infographic

Forecast

As the name suggests, this type of SROI analysis is implemented before the program or activity itself has been implemented. It is used as a predictive tool to determine the amount of social value that might be created given the outcomes sought.

When to use a Forecast approach to calculate SROI:

Most useful when going through the planning process of a program or activity because it encourages organizations to put in place the infrastructure needed to adequately measure change (relevant indicators, data collection processes, etc.). It also helps to determine how capital can best be leveraged for the most impact.

 

Evaluative

This type of SROI analysis is implemented after a program or activity has already had time to affect change. In other words, there are already outcomes to be measured.

When to use an Evaluative approach to calculate SROI:

Most useful and best leveraged when an organization is already tracking outcomes data properly or at least has a process already in motion that is accounting for the social value of currently running programs or activities. An evaluative approach needs quality outcomes data.

BETTER APPROACH?

SROI CHALLENGES

While SROI as a concept may be easier as it resembles ROI for people coming from ROI, there are many challenges of SROI.  Designing business or financial returns are based on well-defined and well-known key performance indicators and a well-accepted financial formula based on general accounting and reporting approaches. Social impact is associated with context for each organization. 

As a result, we feel that SROI is inaccurate, context-specific, difficult to calculate, and often difficult to compare.  Calculating SROI often requests a costly cost-benefit analysis, which can be ultimately costly no matter how well research exercised is performed. 

That begs an important question, for what reason SROI is useful, "Impact Justification"?  Is there a better approach that can help understand impact and scale social impact?

 

ALTERNATIVES TO SROI

We strongly believe that integrating stakeholder voice with continuous learning and improvement has much better potential, allowing communicating impact through holistic impact dimensions and continuously improving outcomes based on a data-driven approach.

RESOURCES

SROI RESOURCES

The following is a preliminary list of resources that might help you refine your SROI valuation process.

The Social Value Self Assessment Tool is designed to help users judge how well they measure and report on their social value, in line with the Principles of Social Value.

Industry-wide calculators

Social Impact Calculator: estimates the economic social value of community development projects. 

Grounded Solutions Inclusionary Housing Calculator enables exploration of the connection between mixed-income housing development and local incentives in the housing sector.

UK Social Value Bank calculator: used by housing associations, councils, government departments, for-profit organizations, and the National Lottery to measure uplift in wellbeing. 

Networks

Largest international network for social value and worldwide chapters

Practitioners

Social Value UK Members Directory

Outcomes

Social Accounting

 

The U.S.A. Financial Proxies

Job Creation:

Indicator: Jobs Created at Directly Supported/Financed Enterprises: Total (IRIS PI3687)
Financial Proxy: Wisconsin Yearly Minimum Wage: $15,080 (minimum wage.org)
Rationale: We can assume that the new businesses' jobs will pay the minimum wage to their employees. By multiplying $15,080 by the total number of jobs created, we will get the approximate economic value of those jobs. For a more specific financial proxy based on occupation, see the Bureau of Labor Statistics.

Indicator: New Businesses Created: Total (IRIS PI4583)
Financial Proxy: The median income for self-employed individuals at their own incorporated businesses in Wisconsin was $43,432 in 2014 (U.S. Small Business Administration).
Rationale: We can assume that the new businesses created will have the same income as the businesses created in 2014 (the latest reference available to us). By multiplying $43,432 by the total number of businesses created, we will approximate the new businesses' total economic value. 

Indicator: Full-time Employees: Minorities/Previously Excluded (IRIS OI8147)
Financial Proxy: The average wages by race and ethnicity in Wisconsin in 2016 were $65,493 for Alaska Native, $54,823 for Asians, and $46,641 for White (Data USA: Wisconsin). The numbers and ethnicities vary for each state of Wisconsin; for a more accurate value, visit the source and search by state.
Rationale: We can multiply the total jobs given to a minority group by the average wage to approximate the jobs' total economic value.

Indicator: Full-time Employees: Female (IRIS OI6213)
Financial Proxy: The average female salary for a full-time common job in Wisconsin is $46,170 (Data USA: Wisconsin)
Rationale: We can multiply the total jobs given to women by the average female salary to approximate the jobs' total economic value. 

Business Creation:

Indicator: Total Jobs Created by Women-Owned Businesses
Financial Proxy: Women-owned businesses employ over 8.4 million workers and generate $264 billion in payroll (U.S. Department of Labor Blog)
Rationale
: If we divide the $264 billion paid in payroll by the 8.4 million workers, each worker generates an average income of $31,429. By multiplying this value by the total number of jobs created by women-owned businesses, we get the approximate economic value of the jobs created by women-owned businesses.

 

Microfinance:

Indicator: Microfinance: Interest saved from not using loan shark (Robin Hood)
Financial Proxy: Percent of interest saved * average loan amount
Rationale: Calculate the percent of interest saved by subtracting the percent interest your grantees typically charge on loans to women/minority/low-income borrowers from the interest charged by loan sharks, which is approximately 100 percent. 
By multiplying the percent of interest saved by the average loan amount, we get the average amount saved in interests per borrower. Then, we multiply the average interests saved per borrower by the total number of borrowers.

 

Housing:

Indicator: Number of Housing Units Improved (PI058)
Financial Proxy: A change in living area square footage increases the appreciation by approximately 23 percent. Adding beds or baths increases the growth rate by approximately 15 percent. The average gain associated with an increase in effective year built is approximately 6 percent, although this may understate the full value of a property renovation. A change in lot size increases appreciation by approximately 5 percent (Property Renovations and Their Impact on House Price Index)
Rationale: Multiplying the units' average value improved by the appreciation percent according to the improvements, we get the average value of appreciation per house. Then, we multiply the result by the total number of housing units improved to appreciate the total value. 

Indicator: Reduction in risk of dropping out of school
Financial Proxy: Every individual dropout cost Wisconsin more than $1,377 in 2011 (Maclver Institute)
Rationale: Homeowners have less risk of having their children drop out of school. By multiplying the number of students in the community of homeowners by the approximate cost of every individual dropout, we get the economic value of children not dropping out of school.

Indicator: Reduction in risk of homelessness
Financial Proxy: HUD secretary says a homeless person costs taxpayers $40,000 a year (PolitiFact)
Rationale: Homeowners have less risk of suffering homelessness. By multiplying the number of housing loans by the cost of a homeless person, we get the economic impact of not having those persons going into homelessness. 

Indicator: Reduction in risk of mental health treatment-Adults
Financial Proxy: The adult psychiatric services rate in Wisconsin is $1,039 (Department of Health Services, Division of Care and Treatment Services)
Rationale: Homeowners have less risk of suffering stress and anxiety. By multiplying the number of homeowners by the cost of psychiatric services, we get the homeowners' total cost for not receiving mental treatment.  

Car Owners:

Indicator: Reduction in risk of emergency medical care

Financial Proxy: The average charge for an emergency room trip is $1,233 for the following conditions: sprains & strains, open wounds, normal pregnancy or delivery, headache, back problems, upper respiratory infection, kidney stone, urinary tract infection, intestinal infection (The Washington Post)
Rationale: Car owners are more likely to get regular/preventive medical care due to mobility. By multiplying the average charge for an emergency room by the number of car owners, we get the car owners' total cost not to take emergency trips.  

Indicator: Reduction in risk of stress treatment

Financial Proxy: The cost of cognitive-behavioral therapy effective for treating anxiety disorders is $100 or more per hour (Anxiety and Depression Association of America)
Rationale: Car owners are less likely to stress and anxiety attributable to long commutes. By multiplying the number of car owners by the cost of cognitive-behavioral therapy, we get the total cost saved by the car owners for not having to be treated for stress and anxiety. 

CONCLUSION

A better alternative is needed for traditional SROI that allows us to understand social impact better and demonstrate social impact better.  SoPact support both approaches but we have bias towards continuous learning and improvement.