Social return on investment (SROI) is a method for measuring values that are not traditionally reflected in financial statements, including social, economic and environmental factors, which can identify how effectively an organization uses its capital and other resources to create value for the community. While a traditional cost-benefit analysis is used to compare different investments or projects, SROI is used more to evaluate the general progress of certain developments, showing both the financial and social impact of the corporation.
SROI is useful to corporations because it can improve program management through better planning and evaluation; increase the corporation’s understanding of their impacts; and allow better communication regarding the value of the corporation’s work (both internally and to external stakeholders). Philanthropists, venture capitalists, foundations and other non-profits may use SROI to monetize the social impact, in financial terms.
A general formula used to calculate SROI is as follows:
SROI = (social impact value – initial investment amount) / initial investment amount *100%
Assigning a dollar value to the social impact can present problems, and various methodologies have been developed to help quantify impact. The Analytical Hierarchy Process (AHP), for example, is one method that converts and organizes qualitative information into quantitative values.
While the approach varies depending on the program that is being evaluated, there are four main elements that are needed to measure SROI:
- Inputs – resources investment in your activity (such as the costs of running a job readiness program)
- Outputs – the direct and tangible products from the activity (for example, the number of people trained)
- Outcomes – the changes to people resulting from the activity (i.e., new jobs, better income, improved quality of life for the individuals; increased taxes and reduced support for the government)
- Impact – the outcome less an estimate of what would have happened anyways (for example, if 20 people got new jobs but 5 of them would have anyways, the impact is based on the 15 people who got jobs as a result of the job readiness program)
Find out how to calculate this common valuation ratio and what the results can tell you about a company's performance.
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