Measuring Social Impact

Source: Jill Kickul and Thomas S. Lyons, Understanding Social Entrepreneurship

The Relentless Pursuit of Mission in
an Ever Changing World, Chapter 7
Measuring Social Impact

 Social entrepreneurs often have difficulty coming up with a precise and

measurable indicator that can accurately represent the amount of social
return generated by their ventures (Saul, 2004; Trelstad, 2008).
 For years, there has been a massive, unfilled gap in the world of social
enterprise: the need for clear, objective, measurable, and cross-
comparable metrics on the positive social and environmental returns of
projects (Kramer, 2005; Paton, 2003; Poister, 2003; Porter & Kramer, 1999).
 Increasingly, organizations are feeling pressure from funders to account for
their social returns (Clark, Rosenzweig, Long, & Olsen, 2004).
 how should we measure the “return on investment” of better health, cleaner air
and water, families having nourishing food on their tables, or children receiving
education they would not have had access to otherwise?
Measuring Social Impact

 Current approaches to measuring social impact have not yet reached

maturity primarily because of two factors (Scholten, Nicholls, Olsen, &
Galimidi, 2006):
 The general lack of maturity in social program evaluation. The field of social
program evaluation—the process of collecting social impact and social
outcome data—and the methods of calculating the costs of social program
delivery are not very well developed.
 The variety of purposes that organizations have for conducting these analyses. At
present, there is a lack of consensus about how one should use cost-related
impact data to make certain investment decisions.
THE BENEFITS OF LEARNING HOW TO
MEASURE SOCIAL IMPACT
 One of the main benefits of learning how to calculate a firm’s social impact
is a clear picture of the measurable results of the organization’s work
 Another benefit lies in being able to make a stronger case to your
stakeholders that your organization is achieving its mission.
 Finally, when they learn how to measure their firm’s social impact, they can
identify themselves and the organization with the cutting edge of the
industry.
 STEPS TO MEASURING SOCIAL IMPACT
1. Define Your Social Value Proposition (SVP)- This first step involves beginning a conversation with the
social venture’s stakeholders.
Types of Stakeholders:
 constituents or beneficiaries of your work;
 board members; key leadership of your organization;
 key partners;
 affiliates or chapter leaders;
 government officials;
 individual donors;
 institutional funders. key leadership of your organization;
 key partners;
 affiliates or chapter leaders;
 government officials;
 individual donors;
 institutional funders.
STEPS TO MEASURING SOCIAL IMPACT
Define Your Social Value Proposition (SVP)-
With all of these various stakeholders, the types of questions the social
entrepreneur will want to ask include:
 How would you define success for the work we do?
 What outcomes do you value most about our work?
 Do you think we were successful last year? If so, why? Or if not, why not?
 What’s the ultimate impact that you value from our work? For example, in five
years’ time, how will the world look different if we are successful?
 What do you think the project needs to accomplish over the next one to three
years to achieve this longer term impact?
 What data or evidence would you need to see that would convince you that
our work has been successful?
 STEPS TO MEASURING SOCIAL IMPACT

2. Quantify Your Social Value - the social entrepreneur should identify top 3 or
4 measurable social indicators that are mentioned most frequently across all
types of stakeholders.
 For example, a solar panel retailer might believe that deriving energy from
solar power is cleaner and less harmful for the environment and thus might
define its social indicators as:
 number of solar panels installed per fiscal year;
 percentage of panels installed that replace other forms of energy; and
 savings in air emissions (in dollars, or in particulates per 1,000?) related to nonsolar
 power energy generation per sale.
STEPS TO MEASURING SOCIAL IMPACT
3. Monetize Your Social Value - monetizing the social value of the social
indicators chosen in Step 2. The reason for monetizing is that it not only
increases the credibility of the social venture and its mission, but also
establishes metrics that can be used to evaluate a venture’s effectiveness in
achieving the desired social impact (Scholten et al., 2006; London Business
School, 2009).
 eight integrated approaches on how to monetize a firm’s social value
Melinda T.Tuan, (2008)
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)

Approaches Description Advantages Disadvantages

Cost-effectiveness
analysis (CEA)
involves the
calculation of a ratio it is relatively
of cost to a straightforward, However, a
nonmonetary given that it does drawback of the
benefit or outcome not require the method is that it can
1. Cost-Effectiveness
(e.g., cost per child conversion of the account for only
Analysis
cured of malaria). It impact or outcome one area of
is used when of the given program impact at
monetizing the program into any given time.
impact or benefits of monetary units.
a program is not
possible or not
desirable
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)
Approaches Description Advantages Disadvantages
CBA answers the question
of whether or not it is
worthwhile to undertake a
program by providing the
net benefits to key
stakeholders and society
it requires the ability to
(benefits less costs).
place a dollar value on the
Cost–benefit analysis It also provides the decision
impact of a particular
monetizes the benefits or maker with the ability to
program. As a result of this,
outcomes of a program compare different initiatives
2. Cost–Benefit Analysis it intends to provide in
along with its costs in order and see which one has the
accounting terms the net
to compare them and greatest merit (i.e., which
benefits to society as a
observe which are greater. has the largest net benefit).
whole that occur as a result
It is widely used across the
of the initiative.
public, private, and
nonprofit sectors to
evaluate a series of
investment decisions (Zerbe,
Bauman, & Finkle, 2006;
Zerbe & Bellas, 2006).
 Sample Cost-Benefit Analysis
Example of a cost–benefit analysis a
hypothetical organization called Give
Back Get Back (GBGB).
This social venture promotes and
facilitates volunteerism among New
York City’s youth population with the
goals of:
 supplying volunteer services for New
York’s pressing community needs;
 reducing the number of “at-risk”
youth by providing meaningful
opportunities
 for civic development;
 growing “volunteers for life.”
 Sample Cost-Benefit Analysis

The Social Business Venture Opportunity

GBGB’s business is to deliver youth volunteer resources to a wide variety of social ventures that
rely on volunteer labor and contributions to provide returns to the community. By pooling and
matching volunteers with the right program, and empowering them to give back to their
community, GBGB will increase the number of volunteers and increase the amount of
volunteering in the youth population overall in New York City. Essentially, GBGB will act as the
“matchmaker” between volunteers and social or communal organizations and provide
incentives to its volunteers (members) to encourage consistent, habitual service.
Through partnerships with key stakeholders within the local community—specifically,
philanthropically focused local businesses, large corporations with philanthropic divisions or
interests, and existing community charities and humanitarian organizations—GBGB will increase
the throughput to and from these organizations of volunteer manpower and physical resources.
 Sample Cost-Benefit Analysis
Business Model
Although GBGB will be a nonprofit organization, several revenue streams and secondary
and tertiary income streams will be established to support the fiscal requirements of the
organization. Advertising revenues on the GBGB.org website and in-kind donations from
partner organizations will be a major source of financial support for GBGB in the short run.
Government (federal and local) grants and foundation donations will be secondary
financial support outlets, mainly in the early seed stages of GBGB. Membership fees imposed
on specific corporate sponsors, payable either monetarily or through providing key resources
needed by a large number of community-based activities (e.g., lumber and hardware to
be distributed for a Habitat for Humanity® housing build effort), will allow GBGB to shift from
initial monetary support plans to a more sustainable earned income revenue model.
Lastly, GBGB will strive to keep its costs at a bare minimum through a variety of innovative
methods. Office space will be employed to have a physical presence in low income areas
that subsidize real estate expenses for nonprofit organizations. Marketing and advertising will
rely on in-kind donations from local business partners. Computer and phone hardware and
software will be gathered through charity drives and donation solicitations. All operational
and logistical functions will rely on virtual communication and participation, mainly over the
internet or via phone calls, to reduce travel and logistical expenses (fleets of cars, gasoline
costs, etc.). By keeping GBGB small and focused, costs will be minimized, allowing GBGB to
efficiently give back to the community.
Sample Cost-Benefit Analysis
 NET PRESENT VALUE
When cash inflows are even: Decision Rule
In the above formula, • In case of
R is the net cash inflow expected to be received in each period; standalone
projects, accept
i is the required rate of return per period; a project only if
n are the number of periods during which the project is its NPV is
expected to operate and generate cash inflows. positive, reject
it if its NPV is
1 − (1 + i)-n − Initial negative and
NPV = R ×
i Investment stay indifferent
between
When cash inflows are uneven: accepting or
rejecting if NPV
Where, is zero.
i is the target rate of return per period; • In case of
R1 is the net cash inflow during the first period; mutually
exclusive
R2 is the net cash inflow during the second period; projects (i.e.
R3 is the net cash inflow during the third period, and so on ... competing
projects),
R1 R2 R3 + accept the
NPV = + + − Initial Investment
(1 + i)1 (1 + i)2 (1 + i)3 ... project with
higher NPV.
 INTERNAL RATE OF RETURN (IRR)
Internal rate of return (IRR) is the interest rate at which the net present value of all
the cash flows (both positive and negative) from a project or investment equal zero.

The formula for IRR is:

0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n

where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and IRR
equals the project's internal rate of return.

Internal rate of return is used to evaluate the attractiveness of a project

or investment.
• If the IRR of a new project exceeds a company’s required rate of return, that
project is desirable.
• If IRR falls below the required rate of return, the project should be rejected.
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)

Approaches Description Advantages Disadvantages

REDF is a nonprofit venture
in San Francisco that
supports employment for
low income and formerly
homeless individuals by
making grants to several
nonprofit enterprises (see
www.redf.org).
SROI is a method for
3. REDF’s Social Return on measuring environmental
Investment (SROI) and social value not
currently reflected in
financial statements, in
comparison to funds
invested.
It is used to judge the
impact of an investment on
stakeholders and to
ascertain ways in which
performance can be
The SROI methodology
continues to be refined and
now includes elements of
cost-effectiveness analysis,
which allows for an
integrated cost-based
approach to social value
creation
This measurement includes
the qualitative and
quantitative impact of
making a social
investment.
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)

Approaches Description Advantages Disadvantages

Robin Hood’s benefit–
cost ratio captures
the best estimate of
the benefit–cost ratio
the collective benefit
is used by Robin Hood
to poor individuals
only to make
The Robin Hood that Robin Hood
decisions regarding
Foundation targets grants create per
individual grants
poverty in New York dollar cost to the
rather than allocation
4. The Robin Hood City by finding and organization
decisions among
Foundation’s Benefit– funding the best and (Weinstein & Lamy,
portfolios. This ratio
Cost Ratio most effective 2009).
serves to highlight
programs and This ratio serves to
which programs Robin
partnering with them translate the
Hood should fund and
to maximize results. outcomes of diverse
how much it should
programs into a
invest in such
single, monetized
initiatives
value that measures
povertyalleviation on
a continued basis
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)
Approaches Description Advantages Disadvantages
The Best Available
The Acumen Fund’s Charitable Option
goal is to fight poverty (BACO) ratio serves to
through the ascertain the
investment of patient prospective merit of
capital to identify, an individual
strengthen, and scale investment
business models that opportunity when
5. The Acumen Fund’s
effectively serve the compared to making
Best Available
poor. a charitable grant
Charitable Option
(Brest & Harvey, 2007).
(BACO) Ratio
It champions this
approach as a
complement to both
The ratio is reassessed
charity and market
on an annual basis
approaches
after investment
(www.acumenfund.or
g/about-us/about-
us.html).
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)

Approaches Description Advantages Disadvantages

The Foundation’s programs
have ambitious goals that
include: helping to reduce
global poverty, limiting the This formula forces program
risk of climate change, officers to test their
improving education for assumptions and logic models
students in California and against the expected return
elsewhere, improving (ER) value, quantify high-level
reproductive health and rights trade-offs between
worldwide, supporting vibrant investments within an
6. The William and Flora performing arts in our investment portfolio, and
Hewlett Foundation’s community, advancing the ideally make better funding
Expected Return (ER) field of philanthropy, and decisions.
supporting disadvantaged
communities in the San
Francisco Bay Area.
The Foundation uses a formula The ER of various investments
for its decision making as is considered before funds are
follows: actually allocated.
Expected Return = (Outcome
* Probability of Outcome *
Philanthropic
Contribution)/Cost
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)
Approaches Description Advantages Disadvantages
The Center for High Impact
Philanthropy (CHIP) provides
Reports published by CHIP
independent analysis and
outline the ways in which
decision-making tools to
individual philanthropists can
make sure that philanthropic
have an impact, and also
funds are achieving the
provide estimates of cost.
greatest impact (see
www.impact.upenn.edu).

7. The Center for High Impact Its “cost per impact”

Philanthropy’s (CHIP) Cost per measure is promoted as a
Impact measure critical to high-
impact giving. It was
developed by alumni of the
Wharton School at the
University of Pennsylvania
who wanted to compare
desirable social change to
the costs of organizing
programs intended to bring
about such change.
 Eight integrated approaches on how to
monetize a firm’s social value
Melinda T.Tuan, (2008)

Approaches Description Advantages Disadvantages

The purpose of the
bubble chart (similar
to such displays used
by investment
managers in the for-
profit world) is to
illustrate a set of
Certain nonprofits use reporting metrics at
a bubble chart to the organizational or
8. The Foundation
display comparative program level that are
Investment Bubble
information regarding common across the
Chart
multiple organizations programs of a
or programs. nonprofit or a segment
of a foundation
portfolio
(e.g., number of
people reached with
bed nets vs.
percentage of bed
nets utilized).