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Social Return on Investment (SROI): Exploring Aspects of Value Creation

Social Return on Investment Analysis gives nonprofit organizations an additional avenue for measuring their value. In this excerpt from a Roberts Foundation publication, "Social Return on Investment (SROI): Exploring Aspects of Value Creation," Jed Emerson (now a senior lecturer at HBS), Jay Wachowicz, and Suzi Chun address the foundations and methodology of this technical method for measuring socioeconomic impact.

Social Return on Investment

In the words of J. Gregory Dees, Kauffman Foundation Social Entrepreneur in Residence, the term entrepreneurism "came to be used to identify some individuals who stimulated economic progress by finding new and better ways of doing things. The French economist most commonly credited with giving the term this particular meaning is Jean Baptiste Say. Writing around the turn of the 19th century, Say put it this way, ‘The entrepreneur shifts resources out of an area of lower and into an area of higher productivity and greater yield.' Entrepreneurs create value." 1

For social entrepreneurs operating social purpose enterprises, this value creation process simultaneously occurs in three ways along a continuum, ranging from purely Economic, to Socio-Economic, to Social: 2

We will first briefly discuss the two extremes of this continuum, but focus most of our discussion on Socio-Economic value creation, the arena in which both economic and social value are considered. It is this combined value creation process that an SROI analysis attempts to measure.

Economic Value
Economic value is created by taking a resource or set of inputs, providing additional inputs or processes that increase the value of those inputs, and thereby generate a product or service that has greater market value at the next level of the value chain. Examples of economic value creation may be seen in the activities of most for-profit corporations, whether small business, regional or global. Measures of economic value creation have been refined over centuries, resulting in a host of econometrics, including return on investment, debt/equity ratios, price/earnings and numerous others. These measures form the basis for analyzing most economic activity in the world.

[Social value] has intrinsic value, but can be difficult to agree upon or quantify.

Social Value
Social Value is created when resources, inputs, processes or policies are combined to generate improvements in the lives of individuals or society as a whole. It is in this arena that most nonprofits justify their existence, and unfortunately it is at this level that one has the most difficulty measuring the true value created. Examples of Social Value creation may include such "products" as cultural arts performances, the pleasure of enjoying a hike in the woods or the benefit of living in a more just society. To quote J. Gregory Dees again, Social Value is "about inclusion and access. It is about respect and the openness of institutions. It is about history, knowledge, a sense of heritage and cultural identity. Its value is not reducible to economic or socio-economic terms". 3 Social Value can be found in anti-racism efforts, some aspects of community organizing, animal rights advocacy and folk art. It has intrinsic value, but can be difficult to agree upon or quantify.

Understanding Frameworks for The Measurement of Socio-Economic Value
We have already stated that measures of Economic Value are standardized and support the basis for most economic activity in the world. And we have also acknowledged that in the Social Value arena there are factors that are indeed beyond measurement, yet clearly are of value and worth affirming. In between these two poles of value creation lies Socio-Economic Value.

Socio-Economic Value builds on the foundation of Economic Value creation by attempting to quantify and incorporate certain elements of social value. An entity creates Socio-Economic Value by making use of resources, inputs, or processes; increasing the value of these inputs, and by then generating cost savings for the public system or environment of which the entity is a part. These cost savings are potentially realized in decreased public dollar expenditures and partially in increased revenues to the public sector, in the form of additional taxes. Examples of activities that generate Socio-Economic Value are supported employment programs for the disabled or homeless, job training programs or other initiatives that provide employment for those presently receiving public support and divert individuals away from public systems and toward private markets. We posit that value creation in this arena can be measured using a social return on investment metric (SROI), social earnings calculations and other evolving metrics discussed in this chapter.

In this context, it is important to understand that:

The core SROI analysis, as presented by REDF, does not attempt to definitively quantify and capture all aspects of the benefits and value that accrue as a result of a successful program, but rather to identify direct, demonstrable cost savings or revenue contributions that result from that intervention. And, with that documentation in place, an SROI analysis argues that the nonprofit should be at least partially compensated and/or credited for the value it creates in the marketplace. Public sector "pay for performance" and other trends are a move in this direction, but need to be taken one step further, with social impacts being tied back to the "investment" required to achieve such impacts.

Excerpted from the article "Social Return on Investment (SROI): Exploring Aspects of Value Creation in the Nonprofit Sector" in the Roberts Enterprise Development Fund Publications.

An SROI analysis does the following:

  • Examines a social service activity over a given time frame (usually five to 10 years);
  • Calculates the amount of "investment" required to support that activity and analyzes the capital structure of the non-profit that is in place to support that activity;
  • Identifies the various cost savings, reductions in spending and related benefits that accrue as a result of that social service activity;
  • Monetizes those cost savings and related benefits (that is to say, calculates the economic value of those costs in real dollar terms);
  • Discounts those savings back to the beginning of the investment timeframe (referred to as "Time Zero") using a net present value and/or discounted cash flow analysis; and then
  • Presents the Socio-Economic Value created during the investment time frame, expressing that value in terms of net present value and Social Return on Investment rates and ratios.
  • 1 "The Meaning of Social Entrepreneurship," J. Gregory Dees, paper published in October, 1998.

    2 The reader should know that Mark Moore of the Hauser Center, Kennedy School of Government (Harvard University), has presented a framework for understanding "Business Value" and "Public Value." Business Value focuses primarily upon issues of financial and competitive performance. Public Value addresses issues such as Legitimacy and Support, as well as such factors as Social Capital, Advocacy, Client Services and Channels for Self Expression (such as volunteerism, board participation and other forms of engagement). The REDF framework focuses primarily upon understanding Socio-Economic Value, as defined in this paper, and was conceived apart from Dr. Moore's substantial work and contributions to the field.

    3 These quotes are taken from a personal email from Greg Dees to Jed Emerson as they debated the nature of Social Value and efforts to describe its essence.

    The three types of value being created by the REDF Portfolio (Economic, Socio-Economic and Social) should be understood as being created over a specific investment time frame. In this case, that time frame is over a 10 year period. Furthermore, all three types of value should be understood to rest upon a fourth dimension of value creation—that of Transformative Value. The central purpose of the nonprofit sector is to create some type of change—to transform our society and world for the better. Transformative Value becomes the basic foundation upon which the other three types of value are based. 4

    Socio-Economic Graph

    4. While this specific definition of Transformative Value is the author's, the label itself was coined by Chris Letts of the Hauser Center, Kennedy School of Government (Harvard University).