Social Return on Investment (SROI) is a method derived to quantify the financial impact of investments which are not captured using traditional Return on Investment (ROI) or Cost-benefit Analysis methods. SROI takes into consideration social, environmental, and economic elements so that the company can determine the gains or losses incurred as a result of a specific investment.
The SROI method will allow for various factors, not typically considered in order to not only calculate the profit for the company but also the value for the community as well. It can be used in the evaluation of the impact on the company in completing projects or developments to demonstrate the repercussions both financially and socially.
One may believe the Social Return on Investment is a qualitative exercise with purely subjective estimates with no empirical foundation. That could be no further from the truth.
Social Return on Investment – SROI focuses on answering five key questions when considering a change in the investment model:
|1. Who is affected by the change?||Who are the stakeholders? An account of any and all the people, organisations and environments who will be affected by the change.|
|2. How does the change affect them?||Affects may be positive or negative and it is imperative that any change be accounted for. Intended changes have no value in the calculation, only real changes have a value.|
|3. How are these changes determined?||Opinions have no place here. Facts are the only thing that matter in the calculation. If you cannot state how the figure was actually determined, it cannot be used in the calculation.|
|4. What are the incidental changes?||Others will be affected by the changes. Is the ripple effect of your changes going to make changes for outside entities? Be sure to take account of positive and negative changes.|
|5. How critical are the changes?||What are the wide reaching effects of the proposed changes on the stakeholders? Consideration of the people and the environment impacted by the changes.|
Any investment must have a benefit which outweighs its initial outlay but the SROI on the investment goes beyond this. SROI measures the long-term savings and revenues of the investment based on several factors which include:
- The value of the social changes brought about by these resources. The calculation goes beyond the immediate direct benefits of the service offered to determine the “real impact” of the investment.
- SROI assess the investment in terms of the social value generated.
- Plus, it takes into account not only the allotted profits but also the savings generated by the investment.
Applying the formula
|Social Return On Investment (SROI) =||
(Social Impact Value less Initial Investment cost)
As an example, let us assume the following:
|Social Impact Value||Initial Investment Cost||SROI|
In this example, the calculations are done as follows:
|Social Return On Investment (SROI) =||
($22,000 – $10,000)
Generally speaking, the SROI is expressed in a ratio or a percentage. In this example, it would be expressed as 1:1.2 or 120% which means for every dollar invested, the Social Return on Investment for every dollar spent is $1.20.
This value can then be further analyzed based on the time value of money taking into consideration the number of months or years the Social Impact Value is spread over.
Calculating the Social Impact Value
Determining the Social Impact Value should be broken down into to following elements:
- Direct benefits the investment creates a value; plus,
- The amount of funds saved by reduction in costs that would have been incurred had the investment not been put into place (medical costs, material waste, repairs, replacement labour and the like); plus,
- Any auxiliary income due to the reduction in lost productivity which would have otherwise been experienced (absenteeism, work stoppages, additional income activities afforded by not having downtime).
In this context, it is key to know the real value of social investment and understand that it cannot only be analyzed in terms of its initial cost or the direct benefit of the service. The benefits go much further.
The same analysis can be done to determine the opportunity cost if the contemplated socially responsible action is not taken. If you were to calculate the scenario if the morally and ethical proper route is not taken, you will be able to determine what will the impact of NOT acting in Socially Responsible manner – what will it cost if you do not choose to act – in either case, at the end you will be Corporately Accountable whether you like it or not.
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For information on calculating traditional Return on Investment (ROI) see Return on Investment – ROI – A PMP’s View