Dr Pathik Pathak

Higher education heretic, social innovation junkie, Arsenal saddo.

The trouble with SROI: is it time to ditch the ratio?

My past week has been dominated by heady talk of socialised investment and a new imagining of citizenship where local investment is central, both at the RSA and at the University of Southampton. The Building Better Bristol project, which I’m now fortunate to  be a part of, promises to devolve the impetus and the resources for local enterprise.

The tangible excitement at the potential benefits of a mature, effective and ‘disciplined’ social investment market (both in the UK but also throughout Europe) often snags on the ways in which we forecast, evaluate and generally calculate social returns. Social return on investment (SROI) is presently the dominant means of doing so, but the numerous conversations I’ve had over the past few months have all indicated it is seriously flawed and that the market needs a credible alternative. Below I outline why SROI is a poor indicator of social return for 3 stakeholders: investors, investees, and government.

1. Investors

For many institutional investors, SROI is simply not a credible measure of returns. For many of the reasons outlined in my last post, SROI calculations are vulnerable to so many potential distortions related to the inconsistent consideration of deadweight, inflation and incorrect discount rate application, that two different SROI analysts, faced with the same data, could arrive at wildly different SROI ratios. For similar reasons, no two SROI ratios can be assumed to be comparable.

The corporate and institutional investors we have spoken to have told us that they do not weigh social investments against a benchmark SROI, which they might do for other asset classes, or make decisions based on SROI comparisons. They make social investment decisions based instead on qualitative factors: a compelling mission, a theory of change, testimonials.

2. Investees

Investees, whether charities or social enterprises, do not believe SROI expresses the value of their work. It is often as simple as that. Third sector organisations in particular are mission-driven, and want an expression of impact which can capture that in rich detail, and which can also offer a narrative of organisational learning and sustainability. Research into motivations for commissioning or conducting SROI analysis is instructive here: it is mainly because of pressure from grant-making or commissioning bodies rather than an intrinsic belief in the value of the process. As one youth service organisation put it, they feel they can best attract investment by communicating the difference they’ve made to a particular vulnerable group, or addressing a specific social problem. “No-one would say their greatest achievement is saving the public purse money”.

3. Government

With the advent of Big Society Capital, government perspectives on social return are ever more important. Integral to my concept of social investment ecologies is the need to understand how social impact is not realised through individual interventions (whether by  government, public sector, business or third sector, but through interrelationships across supply chains of social action. Not only does SROI potentially overclaim by failing to recognise to separate out the role of  related  interventions in a given process of caring or training, for example, but they also promote a negligence of complementarity between organisations and services. By not considering this ecological perspective, SROI misrepresents the very nature of social impact.

That may be fine for institutional investors, but governments need a wider lens. One of my favourite articles of recent weeks is this one by Vanessa Swann, director of Cockpit Arts,  micro-finance organisation for the creative arts. Her argument is that the social investment community should move to measuring impact at a  network (or sector), rather than solely at the level of the larger individual enterprise. One of the government’s key roles in growing the social investment market is surely  to drive such a change in mindset, so that the investments it makes through BSC have the kind of broader impact to enable the sustainability of sectors and cities rather than individual enterprises.

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.  I am currently available for expert consultancy and media work. Fuller explanations and examples of alternatives to SROI will be made in my next book,  titled Social Investment Made Simple and due for publication in 2013.

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4 comments on “The trouble with SROI: is it time to ditch the ratio?

  1. Jeremy Nicholls
    May 24, 2012

    Lots of possible comments but to focus on one in relation to the charge that ‘SROI potentially overclaims by failing to recognise to separate out the role of related interventions in a given process of caring or training, for example, but they also promote a negligence of complementarity between organisations and services.

    This isnt the case..A key part of SROI is to assess attribution, in part as a way of encouraging organisations to realise they are part of an ecology and to help them think through what that ecology is. Some of the most exciting SROI work I am involved in is focusing on what I have described as system level change and of the challenges in doing this well.

    Have a look at http://www.thesroinetwork.org/blog/251-collective-impact-and-sroi

    • Pathik Pathak
      May 24, 2012

      Thanks for your comment Jeremy. I agree that attribution needs to be part of understanding social impact. My point is that all current social impact metrics, SROI amongst them, are orientated towards highlighting isolated impact because the objective is to show the value of individual interventions in order to market the venture to funders/investors. There is an inherent tension then, in the exercise of measuring social impact as it is currently practiced. For that reason attribution assessment might always struggle to be anything more a peripheral aspect of SROI, but I’d like to discuss this in more depth.

  2. Sean Smith
    August 25, 2012

    An interesting article Pathik. I imagine you are aware of the Social Audit Network (SAN). I’ve just posted your blog on the SAN Facebook page. Pop over and have a look, ‘like’ us and keep in touch with us.

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This entry was posted on May 21, 2012 by in social enterprise, social investment.