Social Return on Investment-Why is it Socially and Economically Important?

What makes an organization socially significant? Also, is it important for every organization to be socially significant? Let me throw light on these issues by way of explaining Social Return on Investment (SROI) for an organization.

The concept of Social Return on Investment (SROI) provides a framework for measuring and accounting for the much broader concept of value. This is the sum of measurable economic and socio-economic values that the activities along with their outcomes of an organization created on its stakeholders and in its environment and local communities. In the calculation of SROI ratio, we assign monetary values to economic, social and environmental costs and benefits through appropriate methods. To have a better understanding, let me state that an SROI ratio of 3:1 indicates that an investment of £1 delivers £3 of social value.

As you require, SROI may be calculated on all or a part of organization’s activities. SROI analysis can be done in-house or by an external agency. SROI was developed from social accounting and cost-benefit analysis and is based on the principles of effectively involving of stakeholders and verifiably measuring changes that matter, both in a transparent manner.

History of SROI Analysis: It will be interesting to you to know the history. Roberts Enterprise Development Fund (REDF), San Francisco, pioneered the use of SROI as an investment management tool. REDF measured both the economic and socio-economic returns on its invested capital and called them to be ‘enterprise value’ and ‘social purpose value’ respectively.  The economic value was calculated using future projection and discounting method. The social purpose value was calculated by measuring social cost savings and revenue contribution to the State. Finally, the total of economic and socio-economic values gave the SROI value. 

Types of SROI: There are two types of SROI- Evaluative and Forecast. While the Evaluative SROI calculates value creation based on actual outcomes the Forecast SROI does it on predicted value creation. A forecast SROI is prepared in the planning stages of an activity. It can facilitate introduction of new information and outcome assessment systems which in turn make evaluative SROIs easier. The common features of both SROIs are a) The analysis takes less time if a system of social accounting is already in place b) The level of details required in the analysis will depend on the purpose of your SROI c) The processes concerned requires human resources who have skills or experience in finance, accounting, evaluation and involving stakeholders.

Time requirement for SROI: Giving exact guidance on timescales is difficult because they are contingent on many factors such as scope, skills level and data availability, and whether you will be using the report for internal management or external reporting purposes.

An evaluative SROI analysis will be more time-consuming and could take several months, but the time required is much reduced if the organization already produces good outcomes data or has a system of social accounting in place.

General usefulness of SROI: SROI helps in understanding and maximizing the social value that an activity creates. The process of SROI unites an organization with its stakeholders in generating maximum social value. It will also make the organization look for other organizations with whom it can work for better value creation. This process may create a harmonious group of organizations. A forecast SROI has many advantages: a) It can tell you how much resource you require for the conduct of planned activities b) It can be used in planning process to design a programme for market testing and determine scope and specifications of contracts c) It helps in selecting the application or bidding that creates most social value d) It facilitates monitoring the performance of a contractor.

Specific applications of SROI: SROI is used by almost every type of organization- new and established, big and small, for-profit and not-for-profit. Private organizations use SROI to ascertain risks and opportunities arising out of use of their products and services. Social Organizations use it as a management tool to measure effectiveness of activities and highlight added value. Public Service Commissioners are interested to know social value delivered by third parties for decision-making, SROI analysis helps in it.  Public organizations use SROI to develop their strategies and action plans with a view to generate maximum social value.

Conclusion:  Have you got answers to the questions that I raised at the outset? An organization becomes socially significant as per the social value it creates. And, every organization has to be socially significant for its sustainability.  In fact, better SROI can make an organization more sustainable by raising its profile and increasing the scope for better funding. So, SROI is socially and economically important. But, it is not appropriate to compare the social return ratios alone between organizations. The reason is that different organizations work with different stakeholders and will have made different judgments when analyzing their social returns, just a caution…

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