SROI

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SROI: social return on investment

This summary was developed by the New Economics Foundation as part of the Social Enterprise Partnership EQUAL project.

Contents

Primary purpose of SROI

SROI aims to help organisations understand and manage the social, environmental and economic benefits (value) that they are creating. It is a measurement approach, developed from traditional cost-benefit analysis that captures the economic value of social benefits by translating social objectives into financial measures and focuses on the most important sources of value as defined by stakeholders.(1) The SROI model developed by nef is designed to promote the inclusion of all stakeholders’ voices in the way organisations make decisions about allocating resources.

An SROI analysis is the process of understanding, measuring and reporting on the social, environmental and economic value that is created by an organisation. An SROI ratio is a monetised measure of the social value that has been created, compared to the investment required to achieve that impact.(2) It takes the financial concept of return on investment a step further by capturing social, economic, and environmental as well as financial value. For example, when a previously unemployed person completes a training programme and starts a new job, not only does she increase her personal income, but also she creates value for the Government by paying taxes and no longer claiming welfare benefits. Thus, the impacts of the training programme are both social and economic, the value of which SROI was designed to measure.

Summary

Three key features of nef’s SROI framework are a stakeholder approach, an impact map and an estimation of the value that would have been created even without the organisation’s intervention.

First, as it is based on social and environmental accounting principles, nef’s approach includes a process for involving stakeholders. In the nef model, each stakeholder identifies his/her own objectives for the programme—or what he or she wants to get out of it-- enabling common objectives to be identified, whilst also allowing for an SROI analysis specific to each stakeholder.

The following are the key stages in undertaking an SROI analysis:

1. Understand and plan. Gain support for the process.

2. Stakeholders. Identify stakeholders, their overarching goals and their specific objectives for the programme. Prioritise key stakeholders and objectives. Identify common or overriding objectives.

3. Boundaries. Define the organisation or programme, geographies covered, and a time period. Explain how, if at all, income and expenditure are broken out into social and economic elements.

4. Analyse income and expenditure between social and financial elements.

5. Impacts and indicators. Identify how the programme works and how the programme affects key stakeholders (linking this to stakeholders’ objectives). Capture this through an analysis of Inputs, Outputs, Outcomes, and Impacts. Identify appropriate indicators for capturing Inputs, Outputs, Outcomes, and Impacts. Identify monetary values for the indicators, using averages and estimates where information is not available. Use deadweight to take account of the extent to which outcomes would have happened without the intervention. 6. Prepare an SROI plan. Set out the timescales and resource requirements of an SROI process.

7. Implement the plan.

8. Projections. Prepare projections of future costs and benefits.

9. Calculate the SROI. Create a discounted cash flow model using gathered data and projections. Calculate the net present value of benefits and investment, total value added, SROI and payback period. Use sensitivity analysis to identify the relative significance of data.

10. Consider and present the results in a way that brings out the subtleties and underlying limitations and assumptions.

Potential benefits

The approach to SROI developed by nef offers a number of benefits, including:

  • Impact management: Monetised indicators can help management analyse what might happen if they change their strategy, as well as allow them to evaluate the suitability of that strategy to generating social returns, or whether there may be better means of using their resources.
  • Investment mentality: The concept of social return enables people to view grants and loans as investments in an organisation, rather than as subsidies. This is an advantageous shift in mentality for the public, policy-makers, and internal staff engaged in impact measurement. Further, SROI presents a clear message: that is, every pound invested in an organisation is linked to £X in social return.
  • SROI puts social impact into the language of ‘return on investment’, which is widely understood by investors or lenders. There is increasing interest in SROI from lenders and funders as a way to demonstrate or measure the social value of investment, beyond the standard financial measurement – return on investment (ROI).
  • SROI may be helpful in showing potential customers (for example, public bodies or other large purchasers) that they can develop new ways to define what they want out of contracts, by taking account of social and environmental impacts.
  • SROI can be done relatively easily within organisations that already undertake a social accounting process, as information about outcomes will be more readily available, decreasing the time and effort spent on the stakeholder mapping and engagement processes that comprise the beginning of the SROI analysis.

Potential limitations

  • There will be some benefits that are important to stakeholders but which cannot be monetised. An SROI analysis should not be restricted to one number, but seen as a framework for exploring an organisation’s social impact, in which monetisation plays an important but not an exclusive role.
  • One of the dangers of SROI is that people may focus on monetisation without following the rest of the process, which is crucial to proving and improving. Moreover, an organisation must be clear about its mission and values and understand how its activities change the world – not only what it does but also what difference it makes.

This clarity informs stakeholder engagement. Therefore, if an organisation seeks to monetise its impact without having considered its mission and stakeholders, then it risks choosing inappropriate indicators; and as a result the SROI calculations can be of limited use or even misconstrued.

  • There is no external accreditation, and no brand or mark is available.
  • If an organisation does not have an existing social accounting system, SROI will be more time intensive the first time but is designed to focus on the most important areas, It is most easily used when an organisation is already measuring the direct and longer-term results of its work with people, groups, or the environment.
  • Some outcomes and impacts (for example, increased self-esteem, improved family relationships) cannot be easily associated with a monetary value. In order to incorporate these benefits into the SROI ratio proxies for these values would be required. SROI analysis is a developing area and as SROI evolves it is possible that methods of monetising more outcomes will become available and that there will be increasing numbers of people using the same proxies.

Who can use SROI?

While it is designed so that small organisations can use the process as well, it does require a basic level of proficiency with measuring outcomes that is more commonly found in well-established organisations.

What resources are needed?

  • Leadership

An SROI analysis should be led by a member of the organisation in a position senior enough to have access to information from across the organisation’s activities.

  • Proficiencies or skills

Skills in measuring long-term outcomes can help to make the process easier. An organisation needs at least a basic understanding of its outcomes to begin. If intending to follow through to develop the social return on investment calculation, it is useful to have a background in cost-benefit analysis and basic accounting principles.

  • Staff time

Staff time to complete an SROI analysis is variable, depending upon the quality of information the organisation already collects, the difficulty of finding appropriate proxies for the value of its impacts, and its proficiency with calculations. It can take several days of staff time over several months or can be done within a period of weeks.

  • Courses, support, and information

Courses may be available to introduce SROI (see organisations below). Some business schools’ social entrepreneurship programmes may offer modules on measuring social value as part of their social entrepreneurship modules. The measurement of SROI is part of the judgement criteria for applicants to the Global Social Venture Competition open to MBA students and alumni.

There is no cost for materials, as nef makes SROI materials and reports available free of charge. While there is no cost to undertake the process of developing an analysis of an organisation’s social return on investment, it can be time intensive for organisations wishing to build a full model and develop the SROI calculations. nef makes assistance available by contract.

  • Development, ownership and support

SROI was pioneered by REDF, a San Francisco US-based venture philanthropy fund.

The concept has since been adopted by organisations in various fields, including social enterprise, socially responsible investing (SRI) and government, in an attempt to assess social aspects of their investments.

In 2003 nef began exploring ways in which SROI could be tested and developed in a UK context. An important goal of the project was to advance an approach to SROI that is as widely applicable and as usable as possible. In addition to the UK work, nef is collaborating with the SROI Circle in the US and the European Social Return on Investment Network to develop common standards for SROI analysis and methods.

Social enterprise examples

  • Shaw Trust
  • Eldonians
  • Tomorrow’s People Trust – Getting Out to Work Programme
  • Fairfields Materials Management
  • Lister Steps
  • Pack-IT
  • MillRace IT

References

The following publications can be downloaded for free at: http://www.neweconomics.org

  • Measuring Real Value: a DIY guide to Social Return on Investment. This EQUAL-funded step-by-step guide includes a very helpful case study on MillRace IT, but in 2011 is out of print.
  • Social Return on Investment: Valuing what matters
  • Getting Out to Work Merseyside: A social return on investment analysis

The SROI Primer can be accessed online at http://sroi.london.edu

Notes

[1] Cost-benefit analysis: A method of reaching economic decisions by comparing the costs of doing something with its benefits. The calculation of a benefit to customers accruing from a particular cost; for example, how much extra will consumers pay to get a special service? Is the benefit to be gained from buying that service at a premium price higher than the cost of purchasing the enhanced service? The concept is relatively simple, but difficulty often arises in decisions about which costs to include in the analysis and which benefits to include. CBA also becomes complex when the benefits being measured do not have a price. SROI is one form of cost benefit analysis that tries to address this difficulty by associating some impacts of social enterprises, offerings with monetary values and in the nef model values costs and benefits to multiple stakeholders.

[2] Discounted value of money: a ‘£’ today is worth more than a ‘£’ tomorrow, because its value will have decreased by a certain percentage, known as the discount rate.

See also

Integrated reporting