The New Business Metrics: Measuring Social Returns

The Sustainable MBA

The New Business Metrics: Measuring Social Returns

[Editor's note: a version of this article originally appeared on Triple Pundit.]

How do you create effective organizations focused on sustainable social impact? For those who believe in combining social mission with the efficiency of a market-based approach, the answer is: social enterprise. This growing sector, driven by both social purpose and financial promise, is attracting growing amounts of talent, money, and attention. Initially funded primarily through philanthropic support, social enterprises are now reaching the status of mainstream investment opportunities for banks, venture firms, foundations and wealthy individuals.

But with new models come new metrics, especially if this sector will continue to attract significant capital investment. These new metrics (referred to as Social Return on Investment or SROI) were one of the key topics at the Social Capital Markets 08 conference. The conference, October 13-15 in San Francisco, aimed to bring together social capital and social enterprise to address this basic question of social investing: How do you measure the non-financial, social or environmental value created by an enterprise?

The Responsibility Revolution and How to Measure It

The Social Enterprise Alliance recently offered a definition for social enterprise that is gaining wide acceptance: Social enterprise describes any non-profit, for-profit or hybrid corporate form that utilizes market-based strategies to advance a social mission. This differentiates a social enterprise from a socially responsible business, which may strive to be a good corporate citizen, but does not typically incur a significant structural cost for addressing a social or environmental issue as part of their business model.

The glossary from the Social Capital Markets conference, recently held in San Francisco, defines SROI as: A concept developed to account for (monetize) both traditional financial as well as social value created by an enterprise. SROI expands the concept of financial return by broadening the concept of "who" benefits from returns widening this concept to include the whole community.

As recently as 1996, the term SROI was not even in our vocabulary. It was around this time the Roberts Enterprise Development Fund (REDF), a San Francisco-based venture philanthropy fund, pioneered the concept of SROI in the context of their job creation programs. Since then, the REDF framework has been widely adapted (it's currently taught at Harvard Business School) but still there is no current standard methodology.

One Size Does Not Fit All

Certainly the determination of social value can be very difficult to quantify. So different social enterprise sectors are developing their own measures, and some are unique to particular countries, regions, and type and size of enterprise. The range of tools and frameworks available is staggering. Some provide user guides that are hundreds of pages long, while others offer simple web based tools: answer a few questions, plug in a few numbers then hit the calculate button.

Despite the variety of approaches, almost every social capital firm now uses some SROI tool to address these basic questions:
- How do we compare the resources invested in an activity to some measure of the benefits generated by it? What are the results versus the costs?
- Which programs are the most effective and is this the best use of our resources?
- What are the risk factors to achieving maximum impact and what mechanisms should be in place to minimize those risks?
- What else could be done with the money (opportunity costs)?
- Would the impact happen anyway without the program (deadweight assessment)?

SROI in Practice

According to the U.K.-based new economic foundation (they prefer to go all lowercase) the critical stage of the process is identifying “indicators” for your project outcomes, and when necessary developing “proxies” to calculate a monetary value for these indicators. From their “Measuring Real Impact” guide: An indicator is a specific piece of information, sign or signal that you can measure to determine whether you have achieved a given outcome. For example, if “improved physical health” is one of the outcomes of your health care program, an indicator refers to the way you would measure this improvement.

Some indicators are easy to monetize. The indicator for improved physical health could be a reduction in doctor visits, for which you can easily derive a monetary value based on publicly available data. When direct monetary value of an indicator is less clear-cut, you must use a proxy to approximate the value with a close substitute. The use of proxies is gaining acceptance as practitioners can at least agree and standardize on an approach even if it is recognized as imperfect. When used within the same sectors, proxies provide a method to create benchmarks for comparison.

Vital Wave Consulting, a strategy firm focused on developing-country technology business, is measuring social impact for its clients. According to CEO Brooke Partridge, particular industries, such as healthcare, require very rigorous field assessments. “Our clients who are implementing healthcare technologies like mobile health (mhealth) want to quantify the value of improved health outcomes and the operational efficiencies they gain through the implementation of the technology platform,” explains Ms. Partridge.

In the case of mhealth, direct measures of impact will require several years of rigorous study. “Until long-term field studies can be conducted, we are looking to use other mServices implementations such as mbanking and mgovernance programs as proxies in order to estimate operational efficiencies that can be gained through mhealth implementations,” explains Partridge. “We can also estimate the impact on healthcare outcomes by assessing broader ehealth (electronic health) programs of which mhealth is a subset.”

Not All That is Important Can Be Measured

But not everyone is onboard with these new metrics based on a traditional ROI model and application. Critics are concerned that these measures will thwart investment in social ventures where returns are more difficult to quantify. Investors will lean toward those outcomes that are easier to measure in financial terms, leaving many non-profits out of the funding picture. Simply put: what gets measured is often what gets prioritized and resourced.

Let us know what you think. Do we need a whole new approach to measuring outcomes like “impact” and “return”?

Jim Witkin is a writer and consultant focused on the Green Economy. You can email him at [email protected].

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