NP SROI Kenya 51
NP SROI Kenya 51 (Photo credit: CIAT International Center for Tropical Agriculture)

There has been a lot written on the technicalities of social return on investment (SROI). Much of this is very important and useful, but it can sometimes drill down too far to the nuts and bolts of a process and neglect to address broader contextual issues. For the uninitiated and for those who prefer an overview, I’ve picked out five key themes on SROI.

The benefits of SROI (or why do it)

Research has shown that third sector organisations (TSOs) conduct SROIs for two principal reasons: to appease grant making and commissioning bodies and to market themselves to other potential investors. The latter is important at a time when TSOs are sometimes in direct competition with other TSOs but also with private sector organisations when tendering for service contracts.Impressive SROI figures allows TSOs to showcase the ‘blended’ value they offer, both in terms of financial and non-financial returns. They do not measure outputs (standard deliverable items) but focus on outcomes ( the effects caused.) SROI therefore measures the effectiveness of the intervention, not the intervention itself. SROI is often expressed as a ratio, so that £1: 3.30 indicates £3.30 of social return for every £1 invested. This ratio can then be used to calculated a monetised net benefit.

Research among TSOs also tells us, however, that they feel compelled to conduct SROIs to conform to trends in industry ‘professionalisation’ and that the process itself is often perceived to be onerous and imposed – this is explored in point 3.

The relative value of SROI to diverse stakeholders 

SROIs generate headline ratios which impact investors and other external funders can pinpoint as a snapshot of an organisation’s social return. If investors are comparing like with like organisations in a similar sector, this can be very useful market-level data. They are also central to specific social investment tools, such as social impact bonds (SIBs). SIBs depends on the attractiveness of forecast SROIs as well evaluative SROIs which judge outcomes against expectations. On the other hand, SROI ratios are vulnerable to distortion, inflation, and inconsistency. It is also the case that headline ratios do not tell us about the sector or network level impact of TSO activity, and it is at this level that governments, for example, might want to know more. Equally, an emphasis on the importance of headline ratios for impact investment can misrepresent the complexity of impact investor decision making. We don’t know enough about impact investor behaviour to make assumptions about the importance assigned to headline ratios or the ways in which impact investment operates as an asset class.

The costs and problems with SROIs

There are several here, so I’ll bullet point them for economy’s sake:

1) Inaccuracies in the application of discount rates – this is often too low, and can lead to mistaken calculations of marginal economic impact and therefore a flawed informational basis for social investment.

2) Inconsistencies in the application of other critical social accounting conventions such as the life of the project, inflation, and deadweight (the likely occurrence of desired outcomes in the absence of a particular intervention).

3) The steep financial costs of conducting a SROI.In the UK, the market rate starts at £6k, so it can be prohibitive.

4) The laborious process of stakeholder involvement (which contributes to the financial cost). The politics of stakeholder consultation is another issue here.

Are there better alternatives?

Some would argue that SROIs are little different from cost-benefit analysis, but a great deal more expensive. In truth they aren’t that similar, but the marginal benefits of conducting SROIs over CB analysis  are debatable. They are however increasingly being adopted as a sector standard for both forecasting and evaluation, so the future probably lies in the driving down the cost of SROI, ironing out inconsistencies in the application of key elements in the calculative process, and ensuring equity in stakeholder involvement.

The impact of impact measurement

Last but not least is the impact of SROI on the organisational behaviour of TSOs. Does it drive innovation, efficiency, both, or neither? The introduction of impact assessment and outcome driven activity in the NHS and higher education have certainly had a less than celebrated effect. Key research agendas for the future will centre around understanding how  organisations use such methods not only to demonstrate impact, but sector niche, and how impact measurement shape sectors and third sector ecologies in their entirety.

There’s a lot that couldn’t be included here, but if you’d like more information or more detailed analysis on all or any of these individual themes, please contact me at P.Pathak@soton.ac.uk.  Fuller explanations and examples of SROI will be made in my next book,  titled Social Investment Made Simple and due for publication in 2013.

One thought on “Social return on investment: what matters

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