Looking at new ways to measure the return on social investments
June 24, 2002
by Nicole Zummach
In the business world, investments of time and money are expected to yield some return and that return can easily be measured. If the company turns a profit then the investment paid off. The nonprofit sector faces a much tougher time calculating its return on investments, given that its very nature precludes the possibility of generating a profit. Of course, nonprofits have always made a point of demonstrating to their donors and to the community that their work is of value, but until recently few were asked to define that 'value' in monetary terms. Now, with many corporations, venture philanthropists, and other donors bringing not only their money, but their business sense to the nonprofit table, charitable organizations are increasingly being asked to report to their donors on the social return of particular investments. The question for many of these organizations is how to put a monetary value on results that are often intangible.
The Roberts Enterprise Development Fund (REDF), a philanthropic
venture of the Roberts Foundation, is working towards a possible
solution to this dilemma with its Social Return On Investment (SROI)
Excel Model. It is their contention that "the true impact of the
collective work taking place in the nonprofit sector is undervalued
by those both within, and outside the sector." They attribute this to
a lack of appropriate metrics by which value creation can be tracked
and calculated. The SROI Excel Model allows social purpose enterprise
practitioners to input their own data and generate their own SROI metrics.
As the REDF web site states, "an SROI analysis creates a powerful tool
for social sector managers to use in advocating for financial support
of their work."
Necessity is the mother of invention
The purpose of the Roberts Enterprise Development Fund is to expand
economic opportunity for homeless and very low-income individuals through
the creation of social purpose business ventures. The fund provides
access to core capital as well as to business technical assistance,
and other program supports. In 1997, in an effort to assess its own
value creation efforts in the San Francisco Bay Area, REDF began to
track and analyze the impact of their investments on seven area nonprofits,
their social service enterprises, and the community they served.
The methodology
became the SROI Framework, which is also the basis of the SROI
Excel Model. This framework focuses on economic and socio-economic value
measurement and uses a discounted cash flow analysis to help monetize
the economic value of social impacts. Of course, REDF concedes that returns on social investment will always include impacts that are impossible to put in monetary terms.
Understanding the SROI framework
Economic value, simply put, is the financial return on an investment.
Social value is created when resources, inputs, and processes combine
to generate improvements in the lives of individuals or society. Socio-economic
value lies between these two opposite ends of the value creation spectrum.
A nonprofit organization creates socio-economic value when its social
value creation also generates cost savings and/or revenues for the public
sector. These cost savings could be in the form of decreased public
expenditures, or an increase in revenue for the public sector through
additional taxes paid. The SROI Framework aims to measure this socio-economic
value creation using six key SROI metrics, which are broken down into
two parts: the measurement of value, and the measurement of return.
The first step is to calculate the value of the nonprofit enterprise
in question by forecasting its cash flow and then discounting its free
cash flow. The next step involves calculating the enterprise's social
purpose value; in particular the average social cost savings per person
involved in the enterprise. The third step is to determine the blended
value by adding together the enterprise value with the social purpose
value and then subtracting any accrued long-term debt.
The second part of the analysis, measuring return, begins by calculating
the enterprise index of return, which is a summary of the enterprise's
financial performance compared to the investment it required. Next,
the social purpose index of return is calculated by comparing monetizable
social impact and the investment that was required to achieve it. Finally,
a blended index of return in determined, illustrating the return on
both business and social mission activities, compared to the investment
to date.
For example, a nonprofit organization might receive a substantial donation
from a local corporation and use it open a for-profit café which
trains and employs homeless youth. By forecasting the revenue that this
venture will generate and adding to that the social cost savings that
will be realized if the participants remain employed, a socio-economic
value can be determined. Once the initial investment of the corporation
is factored out of the equation, the social return on investment becomes
evident. The organization can then report back to the donor about what
their contribution has helped achieve, using real dollars figures, as
opposed to simply reporting how may youth were helped by the program.
REDF's analysis may sound like the basis of a complex financial statement
for a business rather than a nonprofit but by learning to speak the
'language of business', nonprofits can better inform supporters of the
return on their social investments. Such a model can assist organizations
to move smoothly and more quickly through a process that has presented
a great challenge to others. REDF admits that this approach to analysis
is only a start and not applicable to all foundations or to all fields
of practice. However, while it was designed for social purpose enterprises
run by nonprofit organizations, its creators encourage other types of
organizations within the nonprofit sector to deconstruct and reconfigure
REDF's model to better meet their own needs.
For detailed information about this model, visit the Roberts Enterprise
Development Fund web site at: www.redf.org.
