Escolar Documentos
Profissional Documentos
Cultura Documentos
Social Return
Social Return
on Investment:
on Investment:
Exploring
Exploring
Aspects
Aspects of of
Value Creation
Value Creation
in the
in the Nonprofit
Nonprofit
Sector
Sector
Jed Emerson
Executive Director
The Roberts Enterprise Development Fund
and
Executive Overview
s discussed in the chapter on tual and practice framework for using such
ing its challenges and limitations. We look for- approach may be improved and where its
ward to continuing to do so and offer the follow- weaknesses are found. This framework is
ing two chapters as additional contributions to not the answer, but is offered as one more
the ongoing work of not only those engaged in step along the way. We look forward to hear-
Social Entrepreneurship and Venture ing your comments regarding how it may be
Philanthropy, but to the Nonprofit Sector as improved and to learning how you are mov-
a whole. Finally, we welcome the reader’s ing to document the social impact of your
comments and observations for how this own work.
Introduction
he challenge of tracking social impacts
T and calculating a foundation’s “social
return on investment” (SROI) are both issues
In its 1996 report, the framework was
used by the Foundation to analyze a sin-
gle investment, but was not tied to oper-
which have been of increasing concern to ating financial templates that could be
many in the philanthropic and nonprofit com- updated on a regular basis. Thus, calcu-
munities. In 1996, The Roberts Foundation lation of rates of return could not be
presented its initial framework for calculating con ti nu a lly ad ju s ted based upon the
a Social Return on Investment in our report actual performance of an investee orga-
entitled, New Social Entrepreneurs: The Success, nization—a key aspect for assessment of
Challenge and Lessons of Nonprofit Enterprise ongoing value creation in the nonprofit
Creation. That framework used a modified sector.
discounted cash flow analysis in an effort to
calculate the impact achieved through a foun- With these and other considerations in
dation grant and document the economic mind, over the course of 1997 the Roberts
value of the social purpose enterprises the Foundation (under its new initiative, the
foundation had supported. Roberts Enterprise Development Fund or
While this effort was a meaningful, well- “REDF”), spent significant staff, investee and
received, first step, we have come to view that outside consultant time discussing how best
initial framework as needing improvement in to approach the overall issue of “evaluation”
the following areas: and the calculation of a social return on
investment. It was concluded that:
The framework presented was useful in
calculating the return on inve s tm en t
achieved by an individual foundation’s Evaluation, as generally practiced in the
grant, but did not allow for consideration nonprofit sector, tended to be retrospec-
of all investments (e.g., subsidies) und er- tive; did not inform practice by tying per-
writing an enterprise activity and was formance directly to making changes in
therefore felt to be lacking as a measure of practice; and is primarily externally
total social return on investment for a focused (e.g., what did we say we were
nonprofit organization; going to do in our proposal and did we, in
fact, do it?);
The framework made use of three dis-
count rates (0% to represent the cost of Evaluation as a concept,therefore,was less
capital for grant funds,3% for a Program- helpful than information management in
Related Investment and 9% for the stan- support of practitioners’ efforts to serve
dard mar ket cost of capital), but did not populations with complex needs;
address the challenge of using traditional
means of calculating an appropriate dis- With an effective information manage-
count rate, for example through use of the ment system in place both investees and
Capital Asset Pricing Model/Wei gh ted REDF could assess the business and social
Average Cost of Capital (CAPM/WACC) activities of REDF-funded organizations
formulas; more effectively; and
134 Investor Perspectives
ti on s , is de s i gn ed to provide inform a ti on
Such a system could generate social out-
regarding the social and training program
come information of interest to investees,
while laying the foundation for the Fund opera ti on s . As this system becomes fully
to track SROI more effectively. opera ti on a l , it will be possible for investees
and REDF staff to assess progress toward
fulfilling the social mission of our work.
After nearly a year of planning and While critical to qu a n ti f ying SROI, the doc-
de s i gn , in the first quarter of 1998 REDF u m en t a ti on of social impacts is both com-
“went live” with WebTrack, an inform a ti on plex and “process intensive.” Therefore,
management system based on opera ti on a l this document presents a brief de s c ri ption
indicators developed by enterprise man- of the WebTrack system, but does not fully
agers with the staff of BTW Consultants1 discuss it. A companion chapter, “Web-
and REDF. This system began with a pri- Track and Beyon d : Doc u m en ting the
mary focus on business opera ti on s — d a t a Im p act of Social Pu rpose Enterpri s e s ,”
that is now being used to inform business de s c ri bes this social outcomes data system
practi ce . At the con clu s i on of 1 9 9 8 , and design process in full detail.
Web Track’s second com pon en t , that of As the WebTrack inform a ti on manage-
social outcome indicators and data track- ment system was being developed with the
ing, was completed. or ga n i z a ti ons in the REDF Portfolio, other
WebTrack is an Internet-based infor- REDF staff tu rn ed their atten ti on to the
m a ti on management system de s i gn ed for ch a ll en ge of developing both the financial
and with REDF Portfolio investee organiza- frameworks and social metrics for assessing
ti on s . The social outcome component of individual grantee SROI and a portfolio
the system, based in part upon the tem- SROI for the REDF initiative as a whole.
plates developed to track business opera- This effort is known as The SROI Project.
the organization. Over the summer of 1998, Increasingly, nonprofit organizations and
a REDF Fa rber In tern , Jay Wach owi c z , the foundations that support them are under
examined the overall capital structure of a fire to document the effectiveness and value
sample group of REDF Portfolio organiza- of their work. It is our position that support-
ti on s . Toget h er with REDF’s exec utive ing tax-exempt organizations,especially those
d i rector, he app l i ed business va lu a ti on engaged in social purpose enterprise develop-
frameworks to each social purpose enter- ment, makes sense not simply from a general,
prise and its parent corporation. In July of charitable perspective, but on the basis of
1999, REDF’s staff was joined by Suzi Chun, sound,investment logic.
a Farber Fellow serving in the position of The fundamental premise of our work is
SROI Analyst. Jay and Suzi’s work build on twofold:
REDF’s past efforts in this area and form a
significant part of the material presented in First, that a philanthropic dollar invested
the following pages. in the social mission of a nonprofit today
generates future economic and so ci a l
Social Outcome Analysis and returns in excess of the initial value of that
Summary dollar; and
With the WebTrack system fully functioning,
data will be generated showing the aggregate Second, that social purpose enterprises—
social impacts of funded organizations. As the and many tax-exempt, nonprofit organi-
process unfolds over coming months, specific zations—are creating significant value for
outcomes experienced by individual partici- society which goes largely undocumented
pants will also be measured. In the future,this and is vastly under-appreciated.
system will have the potential to provide “real-
time” feedback to operations managers but will To date, the sector has been unable to
initially be tracked in six-month increments. present a cogent, well-structured frame-
REDF, together with REDF Portfolio organiza- work for ongoingmeasurement of the va lu e
tions and partnering funders, will work over created by the nonprofit sector. As a result,
coming months to achieve real-time reporting. much of the social and financial impact
In addition to helping practitioners, the evolv- generated by social investments of grants
ing information system provides the founda- and other resources is undervalued by com-
tion for a database upon which a social return mu n i ty mem bers , f u n ders , practi ti on ers
may be calculated2. and government leaders. This inability to
define and understand social and economic
SROI Portfolio Analysis value has made for a serious information
As we move through 2000, REDF and its gap and a lack of objective performance
investee organizations will be positioned to assessments. In the absence of these mea-
release regular reports that, in addition to sures, effective all oc a ti on of financial and
documenting the qualitative impacts of sup- other resources is hindered, which, in tu rn ,
ported activities, will also document the eco- limits the sector ’s abi l i ty to pursu e
nomic value of those social impacts. Overall improvement of community living stan-
SROI for the REDF Portfolio can be calculat- dards and other long-term goals.
ed using these data, aggregated. An initial REDF has alw ays placed sign i f i c a n t
portfolio report, written in partnership with emphasis on documenting the social and
REDF investee organizations, will be complet- economic value of the work en ga ged in by
ed in the summer of 2000. That report, in portfolio or ga n i z a ti on s . The SROI Project
addition to presenting our SROI figures, will is our effort to move the quality of both
also discuss the limitations of the approach our own work, and that of the field, to a
and the challenges for future research. higher level.
136 Investor Perspectives
Process Focused- Pursues such questions Internal MIS Based - Maintains a pro-
as “How many clients were served?” or spective orientation—assessing what is
“How many people attended a training projected to take place and what has hap-
session?” pened in the immediate reporting period,
rewarding effective execution by managers
Based Upon External Evaluation and, perhaps most importantly, creating a
Measures - Tends to be retrospective, ori- management information system that
ented to meeting the needs of external directly informs the work of practitioners
players such as funders, and does not over time, as opposed to simply justifying
directly inform the work of program or their activities to external players
operations managers Because of these trends, the nonprofit
capital market and those who operate within
Together, these factors have helped create it must begin to understand, enunciate and
the nonprofit capital market that has evolved quantify the value creation of the social sector
over past decades and have fostered resource in a whole new way.
Social Return on Investment 137
We will first briefly discuss the two Social Value cre a ti on may include such
extremes of this continuum, but focus most of “produ ct s” as cultural arts performances,
our discussion on Socio-Economic value cre- the pleasure of enjoying a hike in the woods
ation, the arena in which both economic and or the benefit of living in a more just soci-
social value are considered. It is this combined ety. To quote J. Gregory Dees again, Social
value creation process that an SROI analysis Value is “a bo ut inclusion and access. It is
attempts to measure. a bo ut respect and the openness of i n s ti tu-
ti on s . It is about history, knowl ed ge , a
Economic Value sense of heritage and cultural iden ti ty. Its
Economic value is created by taking a va lue is not redu c i ble to econ omic or
resource or set of inputs, providing addition- socio-economic terms”.5 Social Value can
al inputs or processes that increase the value be found in anti - racism ef fort s , s om e
of those inputs, and thereby generate a prod- aspects of com mu n i ty organizing, animal
uct or service that has greater market value at rights advocacy and folk art. It has intrin-
the next level of the value chain. Examples of sic value, but can be difficult to agree upon
economic value creation may be seen in the or quantify.
activities of most for-profit corporations,
138 Investor Perspectives
direction, but need to be taken one step fur- An SROI analysis does the following
ther, with social impacts being tied back to the
“investment” required to achieve such impacts.
While the SROI framework presented in examines a social service activity over a given time frame
this paper focuses primarily upon the cre- (usually five to 10 years);
ation of metrics by which to quantify Socio-
Economic Value, the reader should note that calculates the amount of “investment” required to support
the REDF information system is simultane- that activity and analyzes the capital structure of the non-
ously attempting to track much more than the profit that is in pla ce to support that activity;
value of cost savings to the public system. As
the reader will see in a review of the informa- identifies the various cost savings, reductions in spending
tion and tracking sur vey found in this chap- and related benefits that accrue as a result of that social ser-
ter’s appendix,REDF and its portfolio organi- vice activity;
zations are also tracking an array of other fac-
tors including such challenging areas as shifts monetizes those cost savings and related benefits (that is to
in personal self-esteem—factors that fall say, calculates the economic value of those costs in real dollar
mainly within the category of Social Value. terms);
In the same way that an informed
investor does not simply look at a single num- discounts those savings back to the beginning of the invest-
ber in order to understand the worth of a par- ment timeframe (referred to as “Time Zero”) using a net pre-
ticular investment, REDF encourages those sent value and/or discounted cash flow analysis; and then
involved in the application of an SROI analy-
sis to seek out and use other tools with which presents the Socio-Economic Value created during the invest-
to understand the value being created by a ment time frame, expressing that value in terms of net pre-
particular organization in which one has sent value and Social Return on Investment rates and ratios.
invested or is considering an investment. By
combining a Socio-Economic measure of
value with other measures, one may then investing limited “social funds” in one form of
begin to understand the full return being social activity as opposed to another, with
leveraged for participants, stakeholders and varying costs of capital. The REDF SROI
society at large. 7 analysis potentially may include views of both
Finally, an SROI analysis is not simply a the cost of that investment and the relative
traditional form of cost/benefit analysis docu- return generated by competing investment
menting that for every dollar spent on “X,” opportunities in the nonprofit capital market.
“Y” number of dollars are saved. Rather, it The balance of this chapter presents in
analyzes both the cost savings generated by detail how that analysis may be undertaken in
any given social program and the effects of the area of social purpose enterprises.
SROI Calculations
($000’s)
Time Period
0 1 2 3 4 5 6 7 8 9 10 Perp
Present Value of the Benefits (NPV Bus. Cash Flow + NPV Social Benefits)
Present Value of the “Costs”* with IRR calculation provides:
* = Present Value of the “costs” in this case is the grant equity contributed to the organization by government and foundation sources
falls. Creating social and socio-economic is then discounted back to a present value fig-
value clearly is of benefit to individual pro- ure using a range of discount rates. The new
gram participants and communities and we tax dollars, net savings, and business cash
also recognize that the immediate burden of flows are discounted using the appropriate
poverty falls upon families and communi- discount rates and then summed to form the
ties. However, the actual dollar expense of total benefits to society. This figure repre-
social and other programs accrues to the sents the performance of the organization—
public sector which is supported by tax- its Socio-Economic Value.
payer dollars and, thus, society at large. The net present value of the benefits is
To quantify this net savings, REDF has divided by the total costs of the organization.
hired BTW Consultants to track on an ongo- The total “costs” represent the philanthropic
ing basis the costs of unemployment and the dollars invested during a given year or other
reduction of these costs as a result of employ- investment time frame. This final figure rep-
ment within the social purpose enterprises. resents one of the performance measures of
The net savings to society is made up of the the organization—its SROI ratio.
additional tax dollars generated from the Another performance measure is the
operations of the business and the reduction SROI rate, which is calculated by performing
in unemployment costs, the new wages of the Internal Rate of Return (IRR) calculations
employees, and additional dollars the enter- based on the total Socio-Economic Value
prises used associated with their social mis- and total “costs.”
sion, less any grant and philanthropic invest- These measurements are for the organi-
ment dollars. Wages and the additional dol- zation and grant dollars in total. The frame-
lars used for the enterprises’ social mission, work to be used for the calculation of an
while costs to the enterprises, are considered individual “investor’s” SROI is addressed in
benefits to the employees. This cash flow is Calculation of Nonprofit Share Value and
forecasted out 10 years and to perpetuity and Equity Ownership, presented in Chapter 9.
Social Return on Investment 141
Name of organization - business: A Really Great Nonprofit Organization Changing the World
Planned use of amount requested funds: Provide down payment for purchase of building housing a
Social Purpose Enterprise in SF
Total Business & Social Benefit $90,100 $107,893 $127,280 $149,307 $139,089
NPV Calculations
Overview of business growth with vs without investment
With investment:
Estimated
1999-2003
1999, 1999, 2003, growth
1998 without with with % growth, attributed to
(actual) investment investment investment 1999-2003 investment
Net income
as % of sales 12.92% -68.51% 11.80% 19.08%
With investment:
Social Benefits
Total target
pop. payment $96,000 $111,600 $111,600 $124,000 $154,000 $168,000
Estimated social
costs ** $30,961 $35,600 $37,525 $39,450 $41,376 $43,301
** Assumes social costs absorbed by the business are 10% of sales
Total Business
& Social Benefit $90,100 $107,893 $127,280 $149,307 $139,089
144 Investor Perspectives
track its Social Return on Investment for debt specific to that enterprise, and
reporting in 2000.
The system processes two forms of quan- a variety of business indicators, including
titative information—Economic and Socio- social cost information.8
Economic:
Socio-Economic data is tracked through
Economic inputs are tracked and evalu- a system developed in partnership with REDF
ated based on the financial and accounting Portfolio organizations and BTW
information systems of the organization. Consultants. Each individual entering the
These Economic inputs include: program is sur veyed with regard to the social
and other programs they participated in prior
grant investments, to employment in the enterprise. This infor-
mation is tracked on a six-month basis, both
debt carried by the nonprofit, and individually and as an aggregate. The social
savings of these individuals (calculated based
the overall valuation of the Parent organi- upon decreasing uses of publicly funded pro-
zation at Time Zero. grams) is then also calculated, as is the
amount of taxes generated by the individual
To this agency-wide information is then while employed in the social purpose enter-
added enterprise specific financial data: prise and after employment in the enterprise.
A sample of the complete sur vey is provided
grants for the social pur pose enterprise, in the appendix to this document.
+ Public Social
Savings 460,204 460,204 469,408 478,796 488,372 539,202 549,986
+ New Taxes 66,717 68,719 70,780 72,904 75,091 87,051 87,921
+ Wages 444,782 444,782 458,125 471,869 486,025 563,437 580,340
+ Social Expenses 1,976 2,055 2,137 2,223 2,289 2,578 2,578
- Grants/Subsidies 840,000 870,350 901,817 934,441 962,474 1,083,588 1,094,424
Total Social Benefit 0% $1,251,696 $133,679 $105,409 $98,634 $91,350 $89,303 $108,679 $126,401
3% $221,139
9% $171,667
15% $143,467
24% $119,738
Discount Total Business ROI Social Social Benefit Total Socio- SROI
Rates (Social) Business Ratio Benefit ROI Ratio Economic Ratio
Value Value
These data are then run through a set of As of this date, the inform a ti on system
financial templates that allow for assessment of to track Economic Inputs is fully opera-
individual social purpose enterprises, each of tional. The inform a ti on system necessary
the organizations in the REDF Portfolio and, to track Socio-Economic Inputs is opera-
finally, the REDF Portfolio as a whole. A sam- ti on a l , but with varying degrees of speci-
ple financial template with SROI calculations is ficity thro u gh o ut the REDF Portfolio. For
included on the previous page and continued example, while REDF and its member non-
above. Together with the documented social profits are able to track all aggregate data,
indicators, Social Return on Investment calcu- not all 23 of the portfolio enterprises are
lations will then be made at each level in order able to report on specific, individual data.
to assist practitioners and investors in under- This data would be necessary for a com-
standing the capital structure required to p l ete and com preh en s ive assessment of
achieve certain social goals and the degree to ongoing SROI and will be available in the
which such goals are achieved over time. fall of 2000.
upon the historical market return; generally For the purposes of the REDF SROI
the figure ranges from 10 to 12 percent. framework, we will endorse a strategy that on
However, the nonprofit sector has no compar- the one hand accepts the current limitations
ative market rates to use in our calculation of of the field, but on the other challenges us to
an appropriate discount rate,and so one must create more accurate discount rates for use in
establish an agreed upon discount rate by calculation of SROI.
other means. In the for-profit sector, interest rates are
In our research, we were not able to find not simply estimated, but set as the relative-
significant information on how those engaged ly logical outcome of com p l ex calcula-
in advancing frameworks for calculation of tions.10 These calculations entail a variety of
SROI are determining their discount rate. The elements relating to the “cost” of capital, risk
dominant assumption appears to be that one ex po su re of that capital and the length of
should assume a discount rate that is viewed as time that capital will be in use before it is
“conservative,” in that there are no market returned to the investor. As stated else-
comparables against which to compare risk where, because there are no market compa-
exposure. Therefore, many have embraced a rables against which to compare the degree
discount rate tied to either a 30-year Treasury of risk involved in social purpose enterprise
Bond rate, or some other standard Municipal development, we are not able to make use of
Bond rating with an “A” grade. A 30-year (as the Capital Asset Pricing Model or Weighted
opposed to 2, 5 or 10-year period) bond is Average Cost of Capital (CAPM/WACC)
selected since the benefits of the social pro- analyses—but that does not mean we should
gram are projected to be permanent. This is not try. As standards are put in place over
the rationale adopted by one foundation that coming years and historical performance of
used a 6.92% discount rate (i.e., Cost of social ventures tracked, we will then be in a
Capital) in its assessment of the ROI generat- position to establish market comparables for
ed by that foundation’s grants. use in such analyses. Complete descriptions
In a separate, and extremely comprehen- of CAPM/WACC are beyond the scope of
sive, review of the social and economic this paper, but are available in most business
impacts of Coastal Enterprises of Maine, this or finance textbooks. And the authors look
issue is explored further: forward to continuing our efforts to success-
“The selection of a discount rate is a par- fully operationalize such approaches in our
ticularly critical step in benefit cost analyses of own work.
programs with benefits extending far into the In the absence of such frameworks, we
future. A somewhat lower rate of discount have no choice but to continue with the basic
would be defensible for CEI’s programs, for approach presented in our analysis of 1996,11
three reasons: with some expansion. In the REDF SROI
framework, we will use a range of discount rates
No earnings growth has been built into reflecting the following market comparables:
the future estimates of benefits.
0%: A zero discount rate reflects the cost
Interest rates have been low for some time of capital represented by philanthropic
and are not expected to rise appreciably in grants. While there may be an opportuni-
the near term. ty cost of sorts, those funds come from a
foundation’s annual payout requirement,
Economists argue that a “social rate of dis- may not themselves be invested in the
count” is appropriate for projects that marketplace and, to the recipient, repre-
generate a large volume of unquantifiable sent “no or zero cost” capital.12
social benefits. The “social” rate is lower
than the market rate of interest.”9 3%: A three percent discount rate reflects
the rate usually carried by a foundation
Having so stated, the authors then Program-Related Investment (PRI). 13 PRI
embrace two discount rates, 5% and 9%, for funds are taken out of a foundation’s cor-
use in their analysis and simply turn to a dis- pus or giving budget and “invested” in
cussion of how to connect shifts in business nonprofit efforts, either housing, business
performance to programs of CEI. lending or other activities. Although they
148 Investor Perspectives
are usually secured at some level and there that significantly under perform, four or
is a pay back period, they represent access five that perform at “acceptable” market
to “low-cost” capital to the investee. rates and then two that may “hit a home
run.” Those final two may return from 50
to more than 150 percent on the original
9%: A nine-percent discount rate repre-
investment. It is that return that brings
sents an average of a standard, fully
the performance of the portfolio as a
secured personal loan. If one were to take
whole up to the overall hurdle rate sought
out an equity line of credit on one’s home
by the venture capital fund managers.
in order to launch a small business ven-
ture, depending upon the degree of addi- Two Points to Consider:
tional debt and a variety of other factors, First, in setting its range of discount rates,REDF
9% would be an average discount rate could simply use the standard endorsed by the
applied. field. Such a standard is to assign a discount rate
of no more than 9%, the highest figure we
15%: A 15 percent discount rate repre- found in use by other practitioners. We have
sents the rate charged by many commu- “raised the bar” on the discount rate issue for
nity development financing institutions one fundamental reason: whatever rate we are
extending credit to local small business finally able to calculate at some future point,
own ers in lower income or targeted social purpose enterprises carry with them a sig-
communities. In such communities, it is nificant amount of risk exposure. Any discount
argued, the cost of capital is less impor- rate applied to this field must in some way
tant than the access to capital and the address the need for this risk premium. We
transaction costs of processing and man- would prefer to do so through application of
a ging small business loans is high CAPM/WACC frameworks, but without the
enough to warrant rates of between 12
ability to do so, we must settle for whatever mar-
and 15 percent. Since social purpose
ket comparables seem appropriate. The appli-
enterprises target specific populations in
cation of small business lending rates and mod-
order to achieve particular social goals,
such a rate would seem appropriate to ified venture capital rates seems most realistic.
include in our range. Second, by committing ourselves to dis-
count rates which may be two to eight times
those used by other practitioners, we will have
24%: Finally, we must address the fact the “negative” effect of driving down the pro-
that social purpose enterprises represent a jected rate of return for REDF investees and the
significant amount of risk to the investor. REDF Portfolio as a whole when viewed in com-
Unlike traditional social service or training parison to those other practitioners. For exam-
programs where one “knows” with some ple, the previously cited foundation that used a
degree of confidence that a given number 6.92% discount rate reported unadjusted SROIs
of individuals will be trained and complete ranging from 877.04% to over 1690% for phil-
the program, those investing in social pur- anthropic funds. By contrast, REDF SROI cal-
pose enterprises are not simply investing in culations, both projected and emerging actuals,
the process of a group of folks receiving report a significantly more “conservative,”
services. They are investing in both a
though still impressive, range, usually between
process of service delivery and the building
25 and 100 percent.14
of a small business enterprise. One is vest-
While we feel our numbers more accurate-
ed in the organization, its business and the
individuals one hopes to assist—and as ly reflect the true carrying cost of the risk expo-
such opens oneself up to a wide array of sure represented by our philanthropic invest-
direct and indirect risk factors. ments, a direct comparison with others will not
provide an accurate understanding of the actual
In attempting to establish an appropriate value generated with REDF dollars. As practi-
discount rate to reflect that risk, the clos- tioners and funders move to report their Social
est approximation is that of venture capi- Return on Investment, it will be critical for play-
tal and the “hurdle rates” pursued by such ers to embrace a single process for valuation of
investors. A central strategy of venture the cost of capital as well as a standardization of
capital investors is that across a portfolio inputs brought to the calculation of a given
of investments one may have two or three portfolio’s SROI.
Social Return on Investment 149
Why Calculate a Social Beta?15 sibility of applying the concept of beta to the
A social return on investment analysis offers a nonprofit sector. Each of these methods
means of assessing a nonprofit organization’s produces a statistic (a coefficient of risk in
performance in serving its target population. the first analysis and social betas with differ-
If this type of performance assessment is to ent applications in the second and third
facilitate comparison of “apples to apples,” analyses) to provide potential “investors” in
however, it must take into account that cer- the nonprofit sector with a qu a n ti t a tive
tain populations are more difficult to serve assessment of an organization’s expected rate
than others. Some nonprofits serve targeted of social returns as well as indicate the degree
members of the general population (such as of risk inherent in working with a given tar-
youth or displaced workers), while others serve get population.
specific at-risk and/or high-risk populations The foremost limitation in attempting to
(such as the homeless youth or formerly incar- apply the concept of beta analysis to nonprof-
cerated adults). At-risk and high-risk popula- its lies in the lack of a market-based bench-
tions, compared to their counterparts in the mark by which to compare the result. The
general population, need a more complex set rest of this section presents three experimen-
of social servi ce s ,m ay require a greater level of tal approaches that in various ways account
effort and resources from the social service for this limitation. The first two approach-
provider, and often carry greater risk of “fail- es(the coefficient of risk calculation and risk-
ure” or face compounded challenges. return social beta analysis) do not require a
market-based benchmark as they rely solely
Overview of the Concept of “Beta” upon intra-agency information,introducing a
In the Capital Asset Pricing Model (CAPM), measurement of risk based on social factors.
beta is a quantitative measure of an invest- The third approach most closely resembles
ment’s volatility relative to the overall mar- the CAPM beta analysis, where investment
ket. Thus, beta serves as a primary indicator returns are regressed on market returns;how-
of a particular investment’s degree of risk to ever, in the absence o f a nonprofit stock mar-
the investor. Interpretation of an invest- ket, a proxy nonprofit market is constructed
ment’s beta relies upon comparison to the with the composite information across orga-
overa ll market , wh i ch , as the referen ce nizations in the REDF Portfolio augmented
point, has a beta of 1.0. Thus, an investment with information from other organizations
with a beta of 0.75, for example, is expected serving lower-risk populations.
to produce returns at 75% of the market Comparison of the social return on
rate; conversely, an investment with a beta of investment across social service agencies
1.75, is expected to produce returns at 175% must take into account this population “risk
of the market rate. In essence, the market factor” which indicates both the need for a
rate of return provides the benchmark for greater investment in the high-risk individ-
interpreting beta. ual as well as the potential for a greater social
Beta values are calculated based upon return on that investment. As described
regression models that assess the degree of below, calculation of a beta is one approach
linear correlation between an investment’s to understanding risk. In our case we would
return and overall market returns. When propose the development of a “social beta”
these two sets of returns are plotted against for use in SROI calculations. Accounting for
each other, the regression analysis fits a line the “degree of difficulty”16 in serving a given
through the plotted p oints and measures the population is the purpose of calculating a
slope of the line. Beta is the slope of this social beta. An organization’s social beta
regression line. would serve as a risk rating given the popu-
As part of the SROI analysis, three lation it serves. The social beta calculations
methodological approaches are being devel- proposed here are experimental; they repre-
oped by REDF for use in exploring the pos- sent our current best thinking in theory and
150 Investor Perspectives
discussion and analysis, but initially might b e factors. These factors include severe eco-
dealt with by focusing SROI analysis and the nomic disadvantage, homelessness or unsta-
use of a social beta upon groups sharing cer- ble housing, chronic unemployment, sub-
tain basic characteristics, such as urban/rural, s t a n ce abuse issu e s , and mental health
youth/adult and so forth. issues. Other characteristics, such as age,
Using the Social Impact Survey (the will likely be factored into this index to
instrument developed by BTW Consultants account for the degree of effect of the pre-
with REDF Portfolio organizations to track s en ting probl em in the indivi du a l .
and quantify social costs), information is Individual client/con su m ers can then be
being gathered on an individual basis on the given a risk score based on the set of factors
risk factors faced by those employed in they report, which can in turn be brought to
REDF portfolio enterprises.17 A weighted scale for a target population, producing a
composite index of risk will be constructed coefficient of risk associated with serving
that assigns a numeric value to all relevant that population.
Entering the following information into the WACC formula, the cost of capital equals 9.225%
Debt = $250,000
Equity = $750,000
Cost of debt (rdebt)= 9.6%
Cost of equity (requity) = 9.1%
This coefficient of risk will serve as a lation of risk. Putting these two concepts
coefficient in calculating a social purpose (coefficient of risk and social return on invest-
enterprise’s appropriate discount rate through ment) together, a nonprofit organization’s
the Wei gh ted Average Cost of Capital social beta can be determined by regressing
(WACC) formula. In the WACC formula,the return on degree of risk. This analysis plots
coefficient of risk adjusts for the degree of dif- return at each point of risk and fits a line
ficulty posed to a nonprofit in serving a given through the plotted points. The beta value is
population. A higher coefficient of risk (R) the slope of the line. Thus, a beta of 1.0 indi-
indicates a higher degree of risk, which conse- cates that return increases one unit for each
quently increases the cost of capital (as illus- unit increase in risk. A beta lower than 1.0
trated on the previous page). would indicate a lower return given the level of
In this sample calculation, the coefficient risk and a beta higher than 1.0 would indicate
of risk for the Homeless Youth Center is 1.7 greater return given the level of risk.
compared to 0.6 for the Youth Summer Camp As the exhibit below illustrates, Non-
program. The Homeless Youth Center’s coef- profit Organization A serves homeless youth
ficient of risk is higher, accounting for the and has a risk-return social beta of 1.7; this
higher level of risk involved in serving its tar- means they serve a high-risk population and
get population. When the coefficient of risk is produce high social returns. Nonprofit
applied to an interest rate of 9%, for example, Organization B provides summer camp ser-
the resulting interest rate for the Homeless vices and have a risk-return social beta of 0.6;
Youth Center is 15.7% (0.09*1.7 = 0.15) com- they serve youth who are not at-risk and pro-
pared to 5.5% for the Youth Summer Camp duce low social returns.
program (0.09*0.6 = 0.054). Just as beta indicates in CAPM,this social
The coefficient of risk will also serve as a beta provides an indication of a nonprofit’s
component in calculating an organization’s potential performance relative to risk in serv-
risk-return social beta, as described below. ing its target population. The higher the beta
value, the higher the level of return despite
Risk-Return Social Beta Analysis high levels of risk presented by the popula-
at the Individual Agency Level tion; strong-performing nonprofit organiza-
The first approach to deriving a social beta tions would have high social betas.
for a nonprofit organization draws upon
information from an individual organization Relative Return Social Beta
and does not require a benchmark for inter- Analysis Across Agencies in a
pretation. This type of analysis is a risk- Nonprofit Marketplace
return assessment; it will produce a beta In the corporate sector, information on busi-
value that indicates expected return given nesses’ historical performance is maintained
the degree of social risk to the organization and used as the basis for calculating several
in working with its target population. This important indicators,including beta. To date,
analysis can be applied to any nonprofit the same information is not maintained on
organization as well as, with minor changes, organizations in the nonprofit sector. While
to social purpose enterprises run by non- REDF is developing such a database of histor-
profit organizations. ical performance for nonprofits in its portfo-
The coefficient of risk discussed above lio, until this database is adequate, the lack of
constitutes the first component of this analy- historical information must be accounted for
sis. Social return on investment (the very experimentally.
focus of this paper) is then built off that calcu- The second approach to a social beta
analysis brings the concept to the level of a
nonprofit marketplace, where it becomes use-
Risk-Return ful for relative assessment of SROI across
Population Social Beta nonprofit organizations. Bringing the social
Nonprofit Homeless 1.7 beta concept to scale raises the issue of a mar-
Organization A Youth ket benchmark by which to compare the indi-
vidual organization.
Nonprofit Youth in 0.6 In the absence of a nonprofit stock mar-
Organization B Summer Camp ketplace, a synthetic reference group will be
Social Return on Investment 153
ed. However, for the present analysis, we will isolate the relative value of various program
presume socio-economic returns do have contributions, other factors must also be
value, acknowledge it as imputed value and, understood as making contributions to posi-
having done so, use this imputed value to cal- tive Socio-Economic Value creation. For
culate a measure of socio-economic worth for example,a young person may be participating
use in SROI analysis. in an effective program that re-unites him
with his parents. As a result of this reunifica-
A final technical issue is that of causation, tion, the family develops b etter communica-
namely: tion, remains together, and the youth goes on
to lead a productive life. The question must
How can a single nonprofit take credit for be asked: Was this b enefit a result of the pro-
a life change in an individual client who gram or the parents?20
may be the focus of any number of known The answer may easily be both. From our
or unknown intervention efforts? perspective we would propose that the value
generated by the program’s activities on behalf
This is perhaps the most central and of reunification be measured in terms of SROI
meaningful challenge to those who would apply and Socio-Economic Value, as described in this
SROI in their work. There are several ways we paper and other chapters of this book. In turn,
may begin to respond to this challenge. those extremely difficult to quantify contribu-
First,nonprofit organizations must create tions made by a parent to a child would fall
internal accounting systems that allow them to under the category of Social Value and be cap-
track social costs within their organization tured through the use of some qualitative
and tie those costs to their own program offer- assessment. This is not to say the parent does
ings.21 Having established internal integrity to not contribute value, but rather that it is an
their accounting and management informa- investment and a return of a different type
tion systems, they may then begin to isolate (social as opposed to socio-economic) than
the value added by related programs that may that of the nonprofit organization. As Dennis
be contributing to individual success. In the Benson has so aptly observed:
case of the REDF Portfolio, program/finan-
cial/social cost audits were conducted in each “When you invest $1,000 in your mutual
organization (including its social purpose fund and receive a return for this invest-
enterprise) in an attempt to document what ment, do you presume that your invest-
percentage of a given program was the domain ment was directly or indirectly involved
of a given nonprofit. That percentage could in influencing that return? Of course
then be used to calculate relative rates of not. You had planned to invest this sum,
return on a per program basis. and your main question is whether an
A second approach to this challenge is to alternative investment would have pro-
have in place, a formal, high-end client data vided a greater return. If you wish your
tracking and documentation process. With investment to play a causal role, then you
such a management information system would find it necessary to add a number
designed and on line, program staff can track of zeros to your investment amount. At
and record all program contributions made that point you may find yourself making
by other organizations and significant others, things happen.”21
separating out various benefits accordingly in
the SROI calculation. As previously stated, a basic premise of
However, the creation of such a manage- the REDF SROI analysis is, in fact, that there
ment information system is no small task. is a fundamental socio-economic value to
REDF, in partnership with other funders and which each organization may lay claim—the
its investee portfolio, is currently embarking organization’s total SROI. Each investor in
on an effort to create this type of comprehen- that organization, each “owner” of equity,
sive, integrated MIS across its portfolio. As may then also lay claim to degrees of that
previously stated,other REDF d ocuments dis- return which are com en su ra te with the
cuss this issue in greater detail. amount of their investment, that is to say, the
While the improvement of MIS used by nonprofit shares they control. This idea is
nonprofits may address the concern of how to expanded upon in the next chapter.
156 Investor Perspectives
It should be noted that while this may coming these accounting limitations may be
begin to address the question of how to advanced in order for both practitioners and
approach issues of allocating investorequity, “investors” to engage in a more informed and
what remains to be addressed is a discussion accurate assessment of the value being created
of how to convert organizational equity into by both.
either employee or client equity. The issue
in this regard is not simply how to calculate
a nonprofit employee stock ownership plan, Strategic Criticisms
but whether and how to credit program par- With technical criticisms initially addressed,
ticipants with the “return” they deserve for we may turn our attention to the strategic
their work in making possible their own criticisms raised by others. In these days of
success as individuals in recovery, or work- market obsession and a “business rules” cul-
ing to improve their lives in other ways. tural context, some feel the movement in
That question remains to be pursued in recent years to quantify social impacts and
f utu re papers ; h owever, as indivi du a l measure outcomes is both misled and ill-
investors with various stakes in an organiza- fated. And,indeed, there are times when such
tion may lay claim to a range of returns on critics are correct and their cautions should
their investment portfolio, the fundamental be heeded; namely we are concerned that:
social earnings of the organization remain
u n ch a n ged—regardless of wh et h er those In the rush to quantify all programs and
earnings are designated to individual pro- justify every charitable dollar, there is the
gram participants or outside investors such very real danger of poorly designed tools
as foundations. being applied inappropriately by low-
A final, and very significant, technical skilled,though well intentioned,individu-
criticism is that the accounting rules promul- als— whether nonprofit practi ti on er,
gated by the Financial Accounting Standards independent evaluator, governmental
Board (FASB) for nonprofit corporations dif- agent or foundation program officer.22
fer from those of for-profit corporations.
Funds received in one year must be “booked” First, it must be recognized that there is a
that same year and are not viewed as invest- very real danger (already witnessed) of
ments in capital or equity, but rather as rev- increasing numbers of foundations and gov-
enues to the organization. Since there is no ernment funders demanding measurable out-
“true” basis for viewing investments in the comes from nonprofit practitioners without
equity of a nonprofit organization,an analysis also providing the investment of financial
of social return on that equity becomes tenu- support necessary to build credible informa-
ous in practical, present day terms. tion systems that might track those outcomes.
The implications of these criticisms are And without such investments in the manage-
sound and not to be avoided. However, at the rial capacity and information management
same time what is presented in these pages is infrastructure we run the risk of leaping off
a framework for an analysis of social return cliffs in our haste to artificially justify and val-
that maintains one foot in the present and idate one approach over another.
one in the future. The framework is based This is a real threat we must all seek to
upon fundamental valuation and financial avoid. In the case of The Roberts Foundation,
return metrics used in the for-profit sector. our interest in documenting the impact of
These metrics have been applied to the cre- our philanthropic investments has been
ation of social value in order to develop a bet- matched by a capital outlay of over $750,000
ter understanding of how that value is created to assist in building the required information
in the nonprofit sector. Wherever possible, system to track social and financial data. That
the authors have sought to make their analy- initial investment has recently been augment-
sis transparent to the reader, iden ti f yi n g ed by $500,000 from the Charles and Helen
places where critical assumptions have been Schwab Family Foundation and an additional
made and problems in the subsequent analy- $100,000 from the Surdna Foundation of
sis may arise. In the future,as more attention New York.
is directed to this area of SROI analysis, it is Second, there is also the risk that we may
hoped that more effective approaches to over- simply be replacing one flawed system with
Social Return on Investment 157
another. Even the best-intended efforts can over another. We must improve the current
easily be subverted by human nature. Once system, even if we know there will be flaws in
standards are established and reporting sys- our evolving systems of measurement. If we
tems in place, people will no doubt discover accept that there is Economic Value and Social
ways to “cook the books” and falsely docu- Value—and that Economic Value is measur-
ment performance. By way of example,it was able, while Social Value remains fully immea-
recently reported that in one school district a surable—we must accept that we will never be
few unscrupulous teachers systematically fal- able to more fully understand the true value
sified the answer sheets and grading of some of much of the work presently taking place in
of their students in order to appear more suc- the nonprofit sector.
cessful than they actually were in taking state The authors and The Roberts
“educational quality” exams. Foundation are not willing to accept such an
And, of course, many caseworkers in idea and will work to assure full transparency
trad i ti onal human service nonprofits are in our analysis so that all who would attempt
accustomed to the “m on t h ly scra m bl e ,” to understand our measures and statements
whereby charts are pulled, back-of-the-enve- of value creation will be able to openly exam-
lope calculations made and “eva lu a ti on” ine our assumptions and claims. By taking
reports submitted to outside funders. The progressive steps toward greater and increas-
creation of broad-based standards of mea- ingly accurate measures, we will at least be
sure in the nonprofit sector could well end moving in the correct direction. And by mak-
up being received as simply “the next hoop to ing that analysis fully available to others, we
jump through.” Admittedly, in a matter of will be able to openly discuss its shortcomings
only a few years professionals could easily and strengths.
develop an array of impressive ways to fool A third strategic concern is the previous-
the system and misreport performance ly discussed difficulty of assessing the relative
results. Or organizations could simply claim value of differing programs or nonprofit
to be serving one population while actually strategies. For example, one may have two
serving another, thereby performing better youth programs under consideration; one
then their cohort and generating a higher works with “at-risk” out of school (but school
SROI. Indeed, there are those who would age) youth in the inner city and the other pro-
claim that this already takes place today. vides after-school tutorial and recreational
One way in which this issue may be programs to urban “latch-key” kids. Can a
addressed is to engage in an “inside out” cre- single SROI assess the comparative value of
ation of both social indices and systems of two distinct programs? This challenge is even
measurement, as opposed to the traditional more significant if one is comparing nonprof-
“outside in” approach whereby an “objective” it work in completely unrelated areas of inter-
evaluator is brought in to pass judgement on est—for example, environmental versus edu-
practitioners. Through a process of mutual cational programs. Can an SROI analysis ever
exploration, REDF organizations have them- generate a single figure by which two compet-
selves enunciated what measures they feel best ing philanthropic investment opportunities
reflect the goals of their programs. These may be compared?
indices have been mutually agreed to by both Two approaches might help address this
practitioner and funder. And an accurate, issue:
computer-based data reporting system creat- First, as standards are developed and
ed to track performance over time. With a applied in the field, similar programs may be
vested interest in knowing whether or not grouped into related sub-sectors or cohorts.
their efforts are having the intended impact, In the same way that a for-profit investment
practitioners are more significantly motivated strategy recognizes differing rates of return
to assure the integrity of the data and to then between a Small Cap Fund and a Bond Fund,
modify approaches with reference to the similar related funds and sub-sectors in the
information generated. nonprofit capital market could also be so
Furthermore, while concerns about the identified.
integrity of information systems are certainly Second, one element in the calculation of
valid, it does not necessarily follow that one any rate of return is that of risk and risk pre-
system of measures cannot be improved upon miums: the greater the degree of risk expo-
158 Investor Perspectives
sure,the higher the risk premium. Within an assess, the “returns” more challenging to
interest rate calculation, risk is reflected in the quantify.
beta used to calculate the discount rate. In the This fourth criticism may be expanded
same way that Olympic divers are awarded upon when one considers the fact that the
higher point scores for the degree of difficulty SROI framework as pre s en ted pre su m e s
inherent in a given dive, nonprofit organiza- those involved in the analysis represent some
tions could receive greater reward for under- level of cost to the public system—for exam-
taking more significant risks. 23 As previously ple, those receiving general assistance or
discussed, it is not unrealistic to envision a other public support. However, there are
time when nonprofits might operate with ref- those who are so far outside society’s main-
erence to “Social Betas” that reward greater stream that they received virtually no public
degrees of difficulty represented by working support, making an SROI analysis based
with homeless youth as opposed to operating upon public sector cost savings inapplicable
a summer day camp for elementary age chil- to their situation.
dren. Both have a degree of difficulty and Were we presenting the SROI framework
carry a certain risk exposure, but they are dif- as some form of definitive measure of value,
ferent and should be valued as such. we would be concerned by these and other
The challenge in calculating such Social limitations one may identify. However, our
Betas is not to be ignored. Establishing a beta position is that, on the whole, traditional
that truly reflects the risk entailed by a specif- frameworks for understanding value creation
ic organization’s pursuit o f its social mission in the nonprofit sector have not been ade-
driven goals may be extremely difficult to quate. The SROI framework is presented as
translate from one organization to another— simply one way to understand value creation.
even if both organizations target similar pop- Given that it has evolved out of our work in
ulations. While practitioners and investors the field of social purpose enterprise develop-
may be able to work together to agree upon ment,it is only natural it reflect that discipline
common assumptions to guide such a beta and have limited direct applicability across
analysis, there is always the danger that some the board in a variety of other contexts.
will orient themselves to meeting funder defi- We do feel, however, that while it is not
nitions of risk and mission as opposed to directly applicable to other areas of work, the
those that have true community value from fundamental tenets are, namely, that all non-
the practitioner or community stakeholder profit organizations, regardless of activity, can
perspective. The discussion of Social Betas develop and apply appropriate metrics to
presented in the previous pages attempts to assess the relative worth of their efforts—
recognizee that fact; however, we must also whether economic, socio-economic or social.
acknowledge that the present system is cur- If one never attempts to create new metrics,
rently driven by funder priorities and defini- one will never have such metrics to apply.
tions of which strategies are most appropri- Which leads us to the final concern.
ate. If those experimenting with SROI analy- The fifth and final area of strategic crit-
sis take great care not to simply replicate the icism is that many practitioners and funders
existing problems and engage practitioners in are simply not willing to begin the dialogue
an honest discussion of risk and reward as we at all. These individuals would rather defend
move forward, perhaps we will create a system existing “evaluation” measures than assess
that is at least not as dysfunctional as certain whether those measures are as useful as pos-
elements of the present one. sible or truly capture the full value of their
Closely related to the previous concern, work. There are certainly many gifted and
the fourth criticism is that the proposed SROI talented individuals steering foundation and
framework, being grounded in economic governmental funds into excellent programs
development, naturally lends itself to modi- and organizations in the nonprofit sector.
fied econometric measures, whereas other However, it would also appear that some
program activities, such as artistic or recre- individuals are more comfortable with their
ational programs, are not so easily analyzed. positions than with the idea of acknowledg-
While falling short of the Social Value activi- ing the potential for program failures or fun-
ties p reviously discussed, these areas of non- der shortcomings and taking steps for chang-
profit activity are felt to be more difficult to ing both.
Social Return on Investment 159
For example,in a recent list-serve discus- However, on the whole the sector has not
sion one of the authors of this paper chal- aggressively addressed how to measure or
lenged the integrity of the field’s evaluation track the value created by nonprofits, whether
systems and metrics, only to have a respon- social or economic. Rather than apply itself to
dent to his post chafe at the perceived slight the challenge of isolating, quantifying and
and state that he “shuts d own” when anyone documenting the unique and nuanced value
challenges the integrity of his reporting. Such creation process taking place in the nonprofit
delicate sensitivities do not serve the nonprof- sector, the field,as a whole,has simply allowed
it sector well. If we cannot question and chal- a resource allocation system to evolve which is
lenge the dominant approaches to document- grounded more in politics, persuasion and
ing the effectiveness of organizations that perception than rational analysis or the appli-
address poverty and social problems in this cation of standards to which the work of the
country, we are clearly in much worse shape sector could be held.
than many have thought. This is not only intellectually lazy; it is
Furthermore, it makes no sense to create morally w rong. Increasing numbers of non-
systems of reporting and accountability when profits compete for a wide variety of often
decision-makers on both sides of the funding decreasing financial supports. This is a time
table may disregard the information or are when we expect even the poorest among us to
largely unaccountable to the donors they rep- justify their receipt of TANF or General
resent or communities they serve. Assistance benefits through measurable out-
Overcoming this challenge remains an impor- comes of a changed life. We cannot simply
tant part of the change process for creating award grants because an organization has a
widely embraced systems able to track and gifted grant writer or director with a vision
calculate social impacts, and is yet one more that enthralls. We must tie financial support
reason nonprofits and funders alike will be with the demonstrated impact of the actions
disinclined to attempt this task. made possible by such support.
We should not compare different strategies
in words alone, but in numbers and metrics that
The Imperative of Pursuing SROI capture socio-economic value, for we are talking
Strategies about making investments of scarce resources in
Each of these concerns and criticisms is valid to efforts we hope will create yet greater social, eco-
a point. They are raised by intelligent individu- nomic and other value—which does, in turn,
als with the same strong commitment to social lend itself to at least some level of measure and
change as the advocates of SROI analysis. And analysis. Numbers and rates of return are not
it would be easy to simply accept their observa- the only tools we may take to this task, but are a
tions as a rationale for not moving ahead with good starting point for understanding what is
implementation of an SROI framework. and is not subject to analysis.
However, with these factors in mind,sim- There are four additional reasons we
ply because a task is difficult or represents a should attempt to quantify and measure the
shift in thinking does not mean one should work of the nonprofit sector:
not pursue it. We strongly suspect that the
work of the nonprofit sector has historically First and perhaps foremost, efforts to quanti-
been grossly undervalued. In many instances, fy the economic value of nonprofit ac tivities
we have simply accepted the notion that there help lay the foundation for the creation of
are no metrics by which the value created in management information systems that man-
the nonprofit sector may be assessed. agers and others involved in program opera-
There are a number of significant efforts tions may use to isolate problem areas and
currently in process to create better manage- develop more effective oversight of their
ment information and tracking systems for use intervention strategies. The majority of non-
by both nonprofit managers and those who profit, tax-exempt organizations active in this
invest in their work. Such efforts range from the country do not have information systems
leading work of Coastal Enterprises in Maine, to sophisticated enough to engaged in the type
that of the Corporation for Enterprise of analysis presented in this paper. While
Development in Washington, DC, to Pioneer this is the status quo, it cannot remain so.
Human Services in Seattle, and beyond.24 Any effort to track the long-term impact of
160 Investor Perspectives
a program requires the establishment of there are only the vaguest cross-cutting stan-
data systems that can continually feed infor- dards in place by which nonprofit organiza-
m a ti on back to program managers and oth- tions may be measured or to which they may
ers involved in the development and execu- be held accountable. By engaging profession-
tion of various intervention strategies. With als and community residents in a process of
such client/consumer information systems enunciating expectations and goals, through
in place, managers may receive real-time establishing systems of measurement to track
feed b ack upon wh i ch to base dec i s i on s performance toward those goals, we may
regarding the structure, goals and compo- move the sector as a whole toward a day when
nents of their programs. standards (but not mindless standardization)
Managers want such information and will are widely understood and broadly embraced.
work hard to guard the integrity of reporting It is easy to be overwhelmed by the issues
systems they view as valuable to their own such an effort would raise and to simply stop
effort to provide clients, customers and pro- before such a system could be created. We
gram participants with high quality services. have already posed a number of such ques-
Foundations and public sector funders must tions and others remain:
make the commensurate investment in capaci-
ty-building and administrative infrastructure How does one compare the relative value
necessary to create and maintain such infor- of two seemingly similar programs?
mation systems. To make social investments in
strategies with no documentation or impact What operating systems need to be in place
assessment capacity is almost as bad as not for all nonprofit accounting systems?
making any investment at all.
How do we know a program is approach-
Second, meaningful efforts to quantify the ing its work with the appropriate balance
true value of various nonprofit activities of administrative and program supports?
have the potential to help advance the cre-
ation of significantl y greater community Regardless, we believe that the creation of
ownership and accountability. In order to performance standards, necessary for the
establish meaningful measures, debates need long-term success of calculating any individ-
to be held, assumptions challenged and non- ual organization’s social return on invest-
profit managers assisted in more clearly enun- ment, will only improve the overall perfor-
ciating their own strategies for change. While mance of the sector as a whole.
this can certainly be a “closed” process, the This process could be pursu ed and
opportunity exists for en ga ging a much achieved in a variety of ways. In other writ-
broader segment of our society in these same ings we have called for the creation of a
debates regarding expectations, outcomes “Moody’s Socio-Economic Credit Area” that
and measures of success. This process of would score and rank a wide array of non-
defining outcomes could easily involve a profit organizations, assigning what would
cross-section of our communities. In so in essence become nonprofit bond ratings to
doing we have the potential for re-engaging help guide the charitable investments of
citizens in the work of a nonprofit sector don ors and govern m ent funders .25
presently dominated by professionals paid to Organizations such as GuideStar and the
address social problems on behalf of those National Charities Information Bureau are
same communities and our society at large. working to develop both financial reporting
The process of enunciating community goals s t a n d a rds and non profit financial ra ti o
for social and other programs presents us analysis by which potential funders and
with a powerful tool for community organiz- individual donors may assess relative “phil-
ing and civic empowerment. a n t h ropic inve s tm en t” opportu n i ti e s .
Regardless of how they are pursued, the
Third, the larger outcome of such efforts lays potential value of standards against which to
the groundwork for embracing standards measure our efforts is an important reason
and commonly shared values for perfor- to support the creation of strategies for the
mance in the nonprofit sector. Presently, calculation of SROI.
Social Return on Investment 161
and user-friendly presentation of the basic measurement of social impacts is not only
concept of ROI and how it may be applied coming from the foundation and practi-
to workforce development programs. tioner communities, but is increasingly
reflected in the work of the business com-
Related work you should know about: munity as well. The London
Benchmarking Group is a working group
Success Measures Project of for-profit corpora ti ons developing
(Kathy Tholin, SMP Project Director, templates for quantifying the impact of
Development Leadership Network, 601 S. corporate community involvement and
LaSalle Building, #D-514, Chicago, IL, related activities.
60605, (773) 486-8804).
A practitioner-driven p rocess, the SMP is Balanced Scorecard
a multi-year initiative to create a com- Presented in an article by Robert Kaplan and
monly embraced set of measures by which David Norton, published in the 1996
community development practi ti on ers January-February issue of the Harvard
may assess the impact of their work. Business Review, the Balanced Scorecard
Operating through a number of working approach is not a form of SROI, but does
groups, practi ti on ers are proposing present a framework for understanding
potential success measures in the areas of value creation process of both for-profit and
housing and business development, as tax-exempt organizations. The Scorecard
well as comprehensive community initia- measures performance against four perspec-
tives. The goal of this ongoing effort is to tives—financial, customer, internal business
publish a Success Measures Guidebook in processes and learning and growth—in
2000. While it does not tie these measures order to understand what drives perfor-
back to the capital investments required to mance and how organizations achieve
achieve the stated impact, the SMP repre- improved performance. The Balanced
sents a significant effort by practitioners Scorecard approach has been used to assess
to specify how best to assess the impact of performance of such organizations as The
community development efforts. Special Olympics, United Way and New
Profit, Inc.
SmithOBrien
(www.smithobrien.com) Public Health Research
SmithOBrien is a management consulting Many of us are generally familiar with the
and research firm that helps companies application of cost/benefit analysis in the
operate responsibly, in ways that quantifi- arena of public health services (a dollar spent
ably increase profitability. S/O’s services on polio vaccine generates $25 in benefit to
are built on a simple premise: organiza- society, etc.). Given the significant work
tions that build mutually beneficial rela- already done in this field, a review of how
tionships with all stakeholders— includ- public health practitioners understand
ing employees, customers, the communi- social/health impacts is of value to those
ty, and the environment—uncover oppor- exploring concepts for valuing social impact
tunities for, and eliminate barriers to, alone. Of particular interest are the follow-
competitive advantage. They have devel- ing articles:
oped two interesting approaches to valua-
“Toward the Incorporation of Costs, Cost-
tion of both economic and non-economic
Effectiveness Analysis and Cost-Benefit
factors: The Corporate Responsibility
Analysis Into Clinical Research,” Brian Yates,
Audit and the Econometric Impact Index. Journal of Consulting/Clinical Psychology,
Both these tools are used to assist for- Vol.62,#4,1994.
profit corpora ti on and governmental
leaders in their decision- making process. Clinical Decision Analysis, Chapter 8:
“Clinical Decisions and Limited Resources,”
London Benchmarking Group Weinstein and Fineberg.
(www.philanthropy.org/benchmarking/
“500 Life-Saving Interventions and Their
contents.html)
Cost-Effectiveness,” Tammy Tengs, et al.,
The push for greater accountability and Risk Analysis, Vol.15, #3, 1995, pg. 369.
Social Return on Investment 163
Name of Business B
Name of Business C
Name of Business D
Employee I.D.
INSTRUCTIONS TO INTERVIEWER
Please read the following to your client before starting this assessment:
Thank you very much for taking the time to speak with me today. This interview is part of a study of how Name of
REDF Portfolio Organization programs that provide work opportunities make a difference in people’s lives. Also, by
speaking with people like yourself directly, we can better understand what kind of support you need in order to become
successfully employed.
Everything we discuss will be kept confidential, which means that there will be no way of linking your name to your
answers. I would like to ask you some questions about your current housing situation, your work history and the kinds
of support services you use. There are also some general questions about how you describe yourself and your situation.
Some of these questions are personal. However, I would appreciate your honest answers, remembering that every-
thing will be kept confidential and that your answers will not be used in any way to influence decisions made by your busi-
ness manager or supervisor. Still,if there are questions you are uncomfortable answering, please let me know and we will
skip that question and continue with the interview.
The interview should take about 20-30 minutes. Do you have any questions before we start?
164 Investor Perspectives
5. In the past six (6) months have you 11. In the past month, on average, how many
received Section 8 subsidy to help pay hours did you work each week at this
your housing expenses? REDF Portfolio business? ________hours
❑ Yes ❑ No answer
❑ No
Social Return on Investment 165
12. What is your hourly wage* at this REDF ❑ Not applicable
business? $___________/hour ❑ No answer
*including tips,commissions,etc
❑ Don’t know 19. During the past six (6) months, how many
❑ No answer times have you gone to the emergency
room for medical treatment? ______ times
13. What is your estimated annual salary* at
this REDF business? $___________/year 20. Have you,in the past six (6) months, been
*including tips,commissions,etc to a public health or community clinic?
14. Do you receive income from any other 21. During the past six (6) months have you
work that you do? received or used any of the following?
❑ Yes
AFDC / TANF
❑ No
❑ No answer ❑ Yes
# of months: _____________
Approx.amount received monthly
Use of Social / Support Services $ _____________
❑ No
15. Do you have health insurance, including
private insurance or Medi-Cal?
❑ Yes Food stamps
❑ No ❑ Yes
# of months: _____________
16. Who pays for your health insurance? Approx. amount received monthly
(Check all that apply.) $ _____________
❑ Self ❑ No
❑ Employer
Supplemental Security Insurance (SSI)
❑ Covered by spouse/parent/family mem-
ber’s plan ❑ Yes
❑ Medi-Cal F How many months have you # of months: _____________
been on Medi-Cal? ______ months Approx. amount received monthly
$ _____________
❑ How many times have you used it in the
❑ No
past six (6) months? _____ times
❑ Other: ___________________________ General Assistance (GA)
17. Please specify if you have: ❑ Yes
(Check all that apply.) # of months: _____________
Approx. amount received monthly
❑ Medical insurance
$ _____________
❑ Dental insurance
❑ No
18. Does this insurance include coverage for
any other family member’s care? ❑ None of the above
❑ No answer
❑ Yes
❑ No
❑ Unsure
166 Investor Perspectives
❑ No
22. Have you, in the past six (6) months, par- ❑ No answer
ticipated in any type of substance abuse
treatment program (AA, residential or Housing (shelter, group home, transitional
outpatient)? living)
❑ Yes ❑ Yes
Approximately how many times in the Approximately how many times in the
past 6 months? _________ past 6 months? _________
❑ No ❑ No
❑ No answer ❑ No answer
23. Have you, in the past six (6) months, par- Legal/advocacy services
ticipated in any type of mental health pro-
gram or counseling? ❑ Yes
Approximately how many times in the
❑ Yes past 6 months? _________
Approximately how many times in the ❑ No
past 6 months? _________
❑ No answer
❑ No
❑ No answer Other
24. Have you, in the past six (6) months, got- ❑ Yes
ten bags of groceries from a community Approximately how many times in the
food bank, eaten meals at an agency, or past 6 months? _________
received food from another source? ❑ No
❑ Yes ❑ No answer
Approximately how many times in the
past 6 months? _________ Other
❑ No ❑ Yes
❑ No answer Approximately how many times in the
past 6 months? _________
❑ No
25. Have you, in the past six (6) months, ❑ No answer
accessed any other support services in
your community, such as shelter services
or case management? Criminal Justice History
❑ Yes
26. Have you ever been convicted of a crime?
❑ No
❑ No answer ❑ Yes
❑ No (Skip to Question #29)
(If Yes) What other services have you ❑ No answer
used?
27. Have you been convicted of a crime in the
past six (6) months?
Case Management ❑ Yes
❑ Yes ❑ No
Approximately how many times in the ❑ No answer
past 6 months? _________
❑ No 28. Are you currently on probation or parole?
❑ No answer ❑ Yes
❑ No
Outreach/Drop-in center ❑ No answer
❑ Yes
Approximately how many times in the
past 6 months? _________
Social Return on Investment 167
For this next section I will read a statement, someone to take me to the hospital, I
and I want you to tell me how much you agree would have no trouble finding someone.
or disagree with the statement. The choices ❑ Strongly agree
are: ❑ Agree a little
❑ Strongly agree ❑ Neither agree or disagree
❑ Agree a little ❑ Disagree a little
❑ Neither agree or disagree ❑ Strongly disagree
❑ Disagree a little ❑ No answer
❑ Strongly disagree
❑ No answer 34. If I were hungry and had no money to buy
food, there are p eople I know who would
give me food.
How I Feel About My Life ❑ Strongly agree
❑ Agree a little
29. There are a lot of people I like to hang out
❑ Neither agree or disagree
with.
❑ Disagree a little
❑ Strongly agree ❑ Strongly disagree
❑ Agree a little ❑ No answer
❑ Neither agree or disagree
❑ Disagree a little 35. If I were in trouble and some people were
❑ Strongly disagree going to try to hurt me, there are other
❑ No answer people I could get protection from.
❑ Strongly agree
30. I like to get together with friends as much ❑ Agree a little
as possible.
❑ Neither agree or disagree
❑ Strongly agree ❑ Disagree a little
❑ Agree a little ❑ Strongly disagree
❑ Neither agree or disagree ❑ No answer
❑ Disagree a little
❑ Strongly disagree
❑ No answer How I Feel About Myself
31. I have people in my life who really care 36. I feel that I have a number of good quali-
about what’s happening to me. ties.
❑ Strongly agree
❑ Strongly agree
❑ Agree a little
❑ Agree a little
❑ Neither agree or disagree
❑ Neither agree or disagree
❑ Disagree a little
❑ Disagree a little
❑ Strongly disagree
❑ Strongly disagree
❑ No answer
❑ No answer
37. Overall, I am happy and satisfied with
32. If for some reason I w ere put in jail, there
myself.
are people I could call who would bail me
out. ❑ Strongly agree
❑ Agree a little
❑ Strongly agree
❑ Neither agree or disagree
❑ Agree a little
❑ Disagree a little
❑ Neither agree or disagree
❑ Strongly disagree
❑ Disagree a little
❑ No answer
❑ Strongly disagree
❑ No answer 38. Overall,I feel that I am a failure.
How long were you employed? Adult family member who needs care
❑ Yes ❑ Regularly
# _________ months ❑ Sometimes
❑ No ❑ Almost never
❑ No answer ❑ Never
❑ Unsure ❑ No answer
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
Social Return on Investment 171
Contact Information
READ: You may be contacted in 6 months to complete a follow-up to this questionnaire. If you
agree to come back for the follow-up interview you’ll be given a [gift certificate, voucher, etc].
We’ll be asking some similar questions to those I just asked you to see if things have changed for
you over time. So I want to make sure we’ll be able to reach you in 6 months.
If you have a phone number, in whose name is the phone listed? __________________________
To what address could we send you a notice in 6 months to schedule a follow-up interview?
Address:___________________________________________________ Apt.#________________
In case we have trouble reaching you, we would like to have the names of two people (such as a
grandparent or parent) who would most likely know how to reach you or who you keep in close
contact with. The only reason we would contact these people would be if we cannot locate you
when we do our follow-up evaluation.
FIRST CONTACT:
Name: _________________________________________________________________________
Relationship ____________________________________________________________________
Address:___________________________________________________ Apt.#________________
SECOND CONTACT:
Name: _________________________________________________________________________
Relationship ____________________________________________________________________
Address:___________________________________________________ Apt.#________________
Footnotes
1 During prior periods, evaluation services were 11 For a presentation of this initial framework
provided by Harder+Company Community please see New Social Entrepren eu rs: The
Research, however, in 1998 the principals Success, Challenge and Lessons ofSocial Purpose
involved in the REDF work launched their own Venture Creation, published in 1996 by The
firm, BTW Consultants. Roberts Foundation and available at
www.redf.org.
2 See “WebTrack and Beyond: Documenting the
Impact of Social Purpose Enterprises”, Chapter 12 It should be acknowledged, however, that these
7 of this book. funds are not truly “no cost” to the grant recip-
ient in that most nonprofits invest significant
3 “The Meaning of Social Entrepreneurship,” J. staff and board time and resources in soliciting
Gregory Dees, paper published in October, and meeting the demands of outside funders,
1998. whether foundation or governmental. While
technically such funds do not carry a discount
4 The reader should know that Mark Moore of rate, realistically they do come with some
the Hauser Center, Kennedy School of degree of expense.
Government, (Harvard University) has pre-
s en ted a framework for understanding 13 Please see the chapter en ti t l ed , “The U.S.
“Business Value” and “Public Value.” Business Nonprofit Capital Market: An Introductory
Value focuses primarily upon issues of financial Overview,” for additional information on PRIs
and competitive performance. Public Value and how they fit within the capital structure of
addresses issues such as Legitimacy and nonprofit organizations.
Support, as well as such factors as Social
Capital, Advoc ac y, Client Services and 14 It has also been argued that, in fact, the appro-
Channels for Self Expression (such as volun- priate starting point for calculating a discount
teerism, board participation and other forms of rate for use in an SROI calculation is negative
engagement). The REDF framework focuses 100% given that no principal is returned to the
pri m a ri ly upon understanding Socio- investor / fo u n d a ti on . This issue will be
Economic Value, as defined in this paper, and addressed in future SROI papers, but for the
was conceived apart from Dr. Moore’s substan- pre s en t ,s i n ce the standard for the field is not to
tial work and contributions to the field. assume a –100% starting point we will save that
issue for future discussions.
5 These quotes are taken from a personal email
from Greg Dees to Jed Emerson as they debat- 15 The following overview of Social Betas was
ed the nature of Social Value and efforts to written by Steven LaFrance of BTW
describe its essence. Consultants, in consultation with Fay Twersky
of BTW Consultants and Jed Emerson.
6 While this specific definition of Transformative
Value is the author’s, the label itself was coined 16 To our knowledge, the idea of applying a test of
by Chris Letts of the Hauser Center, Kennedy “degree of difficulty” in SROI analysis was first
School of Govern m en t ,( Ha rvard University). advanced by Carol Guyer of the James C. Penny
Foundation.
7 The consulting group of SmithOBrien has
developed what it calls a “Full ROI Assessment” 17 For a full discussion of the information manage-
which attempts to conduct just such an analysis ment activities undertaken by REDF with its port-
of for-profit corporations. folio, please see Chapter 7, WebTrack and Beyond.
8 Please see the chapter on True Cost Accounting 18 For a discussion of Equity values in this con-
for a description of this issue. text, please see the Chapter 9.
9 Evaluating Social and Economic Effects of Small 19 Please see the chapter entitled, “True Cost
Business Development Assistance: Framework for Accounting” for further discussion of this chal-
Analysis and Application to the Small Business lenge.
Assistance Programs of Coastal Enterpri se s,
Josephine LaPlante, Ph.D., Edmund Muskis 20 In truth, the question is even larger than that:
Institute of Public Affairs, University of Was it the program, the parents, the peers, the
Southern Maine, pg. 215. teacher and so forth. For the purpose o f sim-
plicity, the issue is causality and we will simply
10 While this is generally the case, it must also be leave it at that!
acknowledged that loan officers and lending
institutions do have a great degree of flexibility 21 Return on Investment: Guidelines to Determine
when it comes to how loans are structured and Workforce Development Impact, Dennis Benson,
what rates are charged for loaned capital. Appropriate Solutions,1996.
Social Return on Investment 173
22 This is not an actual quote, but simply a concern of in the following pages for a brief presentation and
the authors! references to the work of several organizations that
may be of interest.
23 This analogy was first made by Carol Guyer, of the
James C. Penny Foundation. 25 Please see “Grants, Debt and Equity: The Nonprofit
Capital Market and Its Malcontents,” a chapter in
24 See “Documents You May Be Interested in Reading” New Social Entrep reneurs.