Social return on investment (SROI)

Social return on investment (SROI) is a systematic way of measuring an organization’s social and economic value. Social return on investment was first used in the 1990s and was based on a cost-benefit analysis that is common among for-profit businesses. Foundations and other nonprofit organizations often use SROI to determine the effectiveness and reach of their programs. Philanthropists and venture capitalists also sometimes use SROI to make decisions about investments. SROI is calculated using data collected by the evaluating organizations and governments. The result is usually a ratio that expresses how much monetary value a community receives from each dollar invested in a particular program or organization. SROI is helpful for many organizations, but because it is partly dependent on quantitative data, it is not always the best option for understanding the outcomes of certain investments or projects.

Background

Social return on investment developed from cost-benefit analysis that is common among many businesses and other organizations. Cost-benefit analysis is a more comprehensive way of measuring spending and outcomes than a similar type of analysis called return on investment (ROI), which is where SROI gets its name. Both cost-benefit analysis and ROI determine the costs and benefits of spending or investing in particular ways. Cost-benefit analysis tallies up the costs of a project and subtracts that amount from the total income or monetary benefits of the project. Businesses use ROI and cost-benefit analysis to determine the financial advantages of specific decisions. Cost-benefit analysis is data-driven, as it requires businesses to make calculations using information about the business.

To complete a cost-benefit analysis, a business has to collect certain data, such as direct costs, indirect costs, intangible costs, and opportunity costs. Direct costs are the costs for the supplies, work, and other factors that are needed to implement a new program. Indirect costs are costs that businesses and organizations have to pay that contribute to the running of the organization but are not direct payments for a particular program. Indirect costs are usually fixed and include things like rent and utilities. Intangible costs are not direct or easy to quantify and can include the cost of decreased productivity or a reduction in repeat customers. Organizations typically use data to try to determine intangible costs. Opportunity costs are costs that an organization incurs by taking one opportunity instead of another. For example, an opportunity cost could be spending advertising money on Product A rather than Product B. The company or organization would incur different costs and benefits by investigating different options. Companies try to determine opportunity costs by using existing data. The total cost of an undertaking can be arrived at by adding together all the various costs of the program.

Companies then try to determine the benefits of a particular program or decision. These benefits can be direct, indirect, intangible, and competitive. Direct benefits usually include increased revenue or increased sales. Indirect benefits can be increased brand recognition. Intangible benefits can include things such as increased employee morale. Competitive benefits include becoming more successful in a particular industry. SROI uses similar data to determine its benefits, but the focus on the benefits is more wide-ranging.

Overview

Nonprofit organizations and similar institutions have long valued measuring the social benefits of their work. Understanding the impact of a particular program is vital to guiding an organization’s efforts and its spending. In the 1990s, the Roberts Enterprise Development Fund (REDF) and Harvard Business School wanted to develop a system of measuring the outcomes of employment interventions. The groups developed a process that they called social return on investment. Although not all institutions that employ SROI use the exact same methods for analyzing their work, they all use data to measure the social and economic benefits of their programs. SROI has grown in popularity since the 1990s and is now used by many organizations that devote time and resources to SROI analysis. Nevertheless, different organizations undertake the process in different ways and expect a different degree of detail in their results.

The first step in completing an SROI analysis is identifying the stakeholders, or the people with an interest in the results of the analysis. Identifying the stakeholders is important so that they can help guide the process and provide input about the analysis. Together, the stakeholders can establish the scope of information to be analyzed and the degree of detail required from the results. The group involved in undertaking the analysis, which can include an outside organization with experience in such analysis, should create clear boundaries about the details and information the SROI will cover.

The SROI should then identify the inputs, outputs, and outcomes of the particular program or organization being analyzed. As with a cost-benefit analysis, the SROI inputs may include direct costs, indirect costs, intangible costs, and opportunity costs. However, the inputs will change for each SROI analysis, so the people creating the analysis need to decide the elements that should be included in the analysis.

The group also has to identify the outputs. The outputs for nonprofit organizations are often different from the outputs of a for-profit business. For example, a nonprofit may see one person receiving job training as an output from its work. Yet, the group doing the SROI has to take its analysis one step further, as it also has to analyze the outcomes, which are different from the outputs. If the person who receives the job training then gets a job as a result of the training, the outcome is considered more substantial than the output might have indicated. Understanding the outcomes is the most important part of the SROI, as generating impactful outcomes is the main goal of most nonprofit organizations. Outputs mean less to these organizations, as they want to ensure that the people and communities they serve are benefitting—economically and otherwise—from their investments.

Measuring outcomes can be a challenging process, which is one reason why some organizations hire experienced consultants to conduct SROIs. SROIs depend on data collection, as a great deal of data is needed to understand the outcomes and to measure the overall social impact. After the group determines outcomes through data collection and analysis, the next step is to give the outcomes a monetary value. This often requires groups to attach a financial value to events or effects that may be difficult to measure monetarily. For example, improving people’s mental health may not be an easy outcome to value financially, but the SROI analysis needs to find a way to determine a value so that a final analysis can be made. This step requires the SROI to add up all the benefits (generally the outcomes and sometimes the outputs) and subtract all the identified inputs.

After the SROI is calculated, the group typically then reports its findings. The group may release the findings only to the stakeholders, or it may report them to the entire organization or the larger community. Reporting an SROI can help people inside an organization understand what works and what does not work. It can also help organizations raise more money, as donors may be more likely to contribute money to an organization that makes its goals and results clear and transparent. Some experts believe that high-quality social programs will result in anywhere from a 3:1 to 5:1 benefit-to-cost ratio. In other words, people believe that a program is very effective if the SROI finds that each dollar invested in the program generates from three to five dollars in social value (based on the outcomes).

Although many organizations have found SROI to be a useful tool, it can have some drawbacks. Conducting an SROI can be a rigorous process. A great deal of quantitative data is required when conducting an SROI, and the data collection and analysis are time-consuming and often expensive. Furthermore, the data should go beyond measuring outputs (e.g., the number of patients cared for in a clinic) and should measure outcomes (e.g., increases in employment because of quality healthcare). If an organization does not already have a robust data collection system or a wealth of relevant data publicly available, collecting the data needed to conduct an SROI may be very costly and complicated. Furthermore, SROI analyzes outcomes, which means it can only give an organization feedback after it has already implemented and practiced a certain plan or idea. Other measurements may be more appropriate when trying to determine whether a project in its beginning stages will be a good investment of resources. Finally, SROI can cause organizations to narrowly focus on the final ratio when sometimes looking at specific outcomes or even outputs might give necessary context to the ratio.

Bibliography

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