In the words of J. Gregory Dees, Faculty Director of the Center for the Advancement of Social Entrepreneurship at Duke University’s Fuqua School of Business, the term entrepreneurism “came to be used to identify some individuals who stimulated economic progress by finding new and better ways of doing things. The French economist most commonly credited with giving the term this particular meaning is Jean Baptiste Say. Writing around the turn of the 19th century, Say put it this way, ‘The entrepreneur shifts resources out of an area of lower and into an area of higher productivity and greater yield.’ Entrepreneurs create value.”
For social entrepreneurs operating social enterprises, this value creation process simultaneously occurs in three ways along a continuum, ranging from purely economic, to socio-economic, to social:
We will first briefly discuss the two extremes of this continuum, but focus most of our discussion on socio-economic value creation, the arena in which both economic and social value are considered. It is this combined value creation process that an SROI analysis attempts to measure.
Economic value is created by taking a resource or set of inputs, providing additional inputs or processes that increase the value of those inputs, and thereby generate a product or service that has greater market value at the next level of the value chain. Examples of economic value creation may be seen in the activities of most for-profit corporations, whether small business, regional or global. Measures of economic value creation have been refined over centuries, resulting in a host of econometrics, including return on investment, debt/equity ratios, price/earnings and numerous others. These measures form the basis for analyzing most economic activity in the world.
Social Value is created when resources, inputs, processes or policies are combined to generate improvements in the lives of individuals or society as a whole. It is in this arena that most nonprofits justify their existence, and unfortunately it is at this level that one has the most difficulty measuring the true value created. Examples of social value creation may include such “products” as cultural arts performances, the pleasure of enjoying a hike in the woods or the benefit of living in a more just society. To quote J. Gregory Dees again, Social Value is “about inclusion and access. It is about respect and the openness of institutions. It is about history, knowledge, a sense of heritage and cultural identity. Its value is not reducible to economic or socio-economic terms”. Social value can be found in anti-racism efforts, some aspects of community organizing, animal rights advocacy and folk art. It has intrinsic value, but can be difficult to agree upon or quantify.
Frameworks for The Measurement of Socio-Economic Value
We have already stated that measures of economic value are standardized and support the basis for most economic activity in the world. And we have also acknowledged that in the social value arena there are factors that are indeed beyond measurement, yet clearly are of value and worth affirming. In between these two poles of value creation lies socio-economic value.
Socio-economic value builds on the foundation of economic value creation by attempting to quantify and incorporate certain elements of social value. An entity creates socio-economic value by making use of resources, inputs, or processes; increasing the value of these inputs, and by then generating cost savings for the public system or environment of which the entity is a part. These cost savings are potentially realized in decreased public dollar expenditures and partially in increased revenues to the public sector, in the form of additional taxes.
Examples of activities that generate socio-economic value are supported employment programs for the disabled or homeless, job training programs or other initiatives that provide employment for those presently receiving public support and divert individuals away from public systems and toward private markets. We posit that value creation in this arena can be measured using a social return on investment metric, social earnings calculations and other evolving metrics. While not the focus of REDFworkshop.org, variations on an SROI metric may also be applied to environmental, educational and other areas of interest and activity to the nonprofit sector.
In this context, it is important to understand that the core SROI analysis does not attempt to definitively quantify and capture all aspects of the benefits and value that accrue as a result of a successful program, but rather to identify direct, demonstrable cost savings or revenue contributions that result from that intervention. And, with that documentation in place, an SROI analysis argues that the nonprofit should be at least partially compensated and/or credited for the value it creates in the marketplace. Public sector “pay for performance” and other trends are a move in this direction, but need to be taken one step further, with social impacts being tied back to the “investment” required to achieve such impacts.
While the SROI framework presented on this site focuses primarily upon the creation of metrics by which to quantify socio-economic value, the reader should note that there are additional efforts to track much more than the value of cost savings to the public system. Some sorial enterprises are also tracking an array of other factors including such challenging areas as shifts in personal self-esteem — factors that fall mainly within the category of social value.
In the same way that an informed investor does not simply look at a single number in order to understand the worth of a particular investment, REDF encourages those involved in the application of an SROI analysis to seek out and use other tools with which to understand the value being created by a particular organization in which one has invested or is considering an investment. By combining a socio-economic measure of value with other measures, one may then begin to understand the full return being leveraged for participants, stakeholders and society at large.
Finally, an SROI analysis is not simply a traditional form of cost/benefit analysis documenting that for every dollar spent on “X,” “Y” number of dollars are saved. Rather, it analyzes both the cost savings generated by any given social program and the effects of investing limited “social funds” in one form of social activity as opposed to another, with varying costs of capital. The REDF SROI analysis potentially may include views of both the cost of that investment and the relative return generated by competing investment opportunities in the nonprofit capital market.