Social Capital Partners

How do we define success?

The two primary areas where SCP and our portfolio organizations are evaluating success relate to the setting and reaching of clear goals around enterprise profitability and to providing employment and skill development opportunities to disadvantaged populations. Our definition of success therefore also has a double bottom line; success is achieved if both the target employees of the social enterprise and the enterprise itself are able to develop paths towards self-sufficiency.

We analyze success on the individual (target employee) side through the Sustainable Livelihoods (SL)¹ framework, an asset based approach that provides a useful context from which to specifically address where individuals are now, where they want to go and how they get there. Increasingly, poverty studies both domestically and internationally point to the lack of (access to) assets - financial, social, physical, and natural - as a key indicator for why certain groups slip into and/or cannot move out of poverty. This approach is a significant departure from traditional welfare economics whereby state administered, short-term income assistance was deemed sufficient to get people through periods of unemployment.

From a social outcome perspective, success is achieved if after employment in the social enterprise, target employees are able to secure that next job (and/or educational opportunity) and continue to develop a path for both financial self-sufficiency and personal growth. Transitioning into that next opportunity however could also occur within the social enterprise. Some social enterprises will develop more permanent employment positions, depending on the nature and needs of the target employee group. From a financial outcome perspective, success will be achieved if after the start up, stabilization and growth periods, cash flow from the business is able to cover all associated costs while continuing to generate employment opportunities for the target employee group. Not an easy task we know, but worth the effort we believe, to test the limits of the social enterprise model.

We are very aware of the importance of success definitions being driven by the social enterprise organizations themselves. A recipe for failure would include us trying to force particular definitions of success that do not make sense to the managers of the enterprise, the target employees or other stakeholder groups. A trusting, transparent working culture therefore needs to be fostered to give all individuals and stakeholder groups involved a sense of ownership of the venture and ultimately establish a learning culture whereby all parties see the value of setting up a success measurement framework.

^1. To learn more about this conceptual framework - developed by the Department of International Development (DFID), UK - please go to www.dfid.gov.uk. This framework is being adopted to the Canadian context by groups such as Canadian Women's Foundation.

Need for measurement

One of our core beliefs is that we can't be sure we are succeeding at accomplishing our goals if we don't have a thoughtful measurement framework in place. The measurement framework should allow us not only to understand how we are doing in a relative sense vis-à-vis other models but also identify the area we need to concentrate on in order to improve.

We believe this to be true not only in the narrow context of social enterprise but also in the broader context of the nonprofit sector as a whole. Frankly, as we pointed out earlier, some kind of common measurement framework for the sector as a whole is critical in order to establish a link between performance and funding. This link is second nature in the private sector. Those companies that can consistently generate superior returns on investment for their investors will continue to attract more financing; those that generate inferior returns go bankrupt. The critical feature that permits this to happen is a common accounting measurement framework - however imperfect - that facilitates the comparison of companies. The result is that good companies thrive (generally speaking) and bad ones do not.

The link between performance and funding is not second nature in the nonprofit sector because a common measurement framework that allows easy comparison of the performance of one social service agency to another does not exist. As a result it is very difficult to determine who is most worthy of support and inevitably the sector is much less efficient then it could be because there is no invisible hand to ensure that those agencies doing the best work are the ones that are financially supported and thrive.

Establishing a common measurement framework is a more difficult task in the nonprofit sector than the private sector. Many would argue that any attempt to establish a methodology to quantify success in this sector - when so many aspects of the work can only be judged qualitatively - would actually be counter productive. Our belief is the opposite. While acknowledging that it is much more difficult and complex to do, we believe that the benefits of a common measurement framework - encompassing both quantitative and qualitative measures - ultimately leads to a more productive sector and outweigh the costs of figuring out how to do it. It's beyond our mandate (and capabilities) to develop such a framework, but we hope that we can at least be a catalyst to encourage more debate and hopefully, action around creating such a framework.

A very important part of our mandate is however, to measure the social returns of the social enterprises we help fund. We are investing in social enterprise because we believe that this model can achieve better social outcomes at less societal cost relative to other approaches. At the core of this belief are three hypotheses:

Hypothesis One: Disadvantaged populations that are employed in social enterprises with (continued) access to relevant support services (i.e. training and counseling) will improve their quality of life (generate improved social outcomes for themselves) through increased financial self-sufficiency, creating access to other employment and/or educational opportunities and developing capacity for lifelong learning.
Hypothesis Two: Social enterprises with feasible and scaleable business ideas (financial mission) that employ disadvantaged populations (social mission) have the ability to become self sufficient (exist without external grants) over a certain period of time.
Hypothesis Three: Access to employment and paid training will contribute to the decreased need of individual target employees to rely on specific social services over time (cost savings to society).

Obviously, the only way for us to determine whether the above hypotheses are accurate and that the social enterprise model does in fact generate superior social returns is to measure them. To accomplish this we deploy a Social Return on Investment (SROI) framework.

What is SROI?

In the broadest sense, Social Return on Investment (SROI) is an attempt to quantify the social value being generated by an organization as a result of an investment made in that organization. SROI is proposed as an evaluation strategy to determine what organizations and programs are delivering the 'best' social returns. It is defined as a "return" because it is a result of resources (financial and human) invested. SROI's distinguishing feature compared to the more traditional "return on investment"(ROI) is that the units being measured encompass social and/or environmental impact. This evaluation approach is gaining popularity as competition for charitable dollars continues and organizations become more sophisticated around reporting on the social value of their activities and programming.

SCP is in the fortunate position of being able to draw from the significant work of The Robert's Enterprise Development Fund (REDF), operating out of San Francisco. REDF and their partners are leaders in developing a SROI framework and metrics that articulate the social, economic and socio-economic value of the social enterprise - or social purpose business - model.

As frequent visitors to the REDF site, we can say that it is one of the most thoughtful, content driven websites on SROI out there. REDF has invested significant time and resources in developing their SROI framework with each of their portfolio organizations. The underlying principle of REDF's work is that the value created from social purpose enterprises can be quantified to generate a social return and they do this through a six stage process, utilizing six SROI metrics. The framework uses standard investment analysis tools, adapted to encompass REDF's expanded concept of value. These six metrics¹ are measuring the economic and socio-economic value generated from the social purpose enterprises REDF invests in.

Throughout the documentation of their experience with designing and implementing their SROI framework, they frequently admit the limitations of the model as well as its evolutionary status. It is up to others to use, modify, critique and extend their work to continue to develop standards and 'raise the bar of practice' in this arena.

In our minds, one of the key contributions of the REDF framework is the focus on distinguishing between the different costs in a social enterprise. Historically, cost accounting for social enterprises has lumped all costs together, business related or otherwise. The separation of 'social' and 'business' costs enables managers to have a better understanding of exactly where specific costs are coming from. We also believe separating out these costs is a necessary precursor to establishing when a social enterprise can reach financial self sufficiency through self generated revenues - how much should be spent on social support infrastructure now and in the future? If social costs can be projected over time to a reasonable degree, this can be a valuable planning tool for cash flow and other financial projections.

Below is a brief summary of REDF's methodological process for social cost accounting.

Methodological Steps Towards Social Cost Accounting (REDF)

Step 1
Brainstorm the types of social costs that are significant for the social enterprise (depends on nature of disadvantaged population being employed and on type of business) and assess the likely magnitude of each (i.e. high, medium, low - in terms of importance and/or expressed as an estimate % of time or expense).
Step 2
Outline the methodology that could be used to quantify each type of social cost and pinpoint methodological challenges. Need to consider what methodology will be most accurate and will most likely be completed on a monthly basis.
Step 3
Decide which social costs to include in the analysis by weighing methodological challenges and the estimated magnitude of each social cost. This will most likely need to be done on a case by case basis. Remember: the decision to gather and track particular data makes sense when the costs being tracked are large in dollar impact and the methodological challenges are small.
Step 4
Carry out planned methodology and represent social costs in income statement. Where time and capacity permit, it can also be useful to actually carry out 2 or 3 different methodologies for quantifying the same social cost, to see if/how methodological instrument significantly affects reporting.

NOTE: Remember that the effort to capture social costs is not to discover new costs but rather to clarify costs already accounted for in the income statement.

¹ Enterprise Value, Social Purpose Value, Blended Value, Enterprise Index of Return, Social Purpose Index of Return and Blended Index of Return. Please see REDF's publication "SROI Methodology" for a detailed discussion of how they define and calculate specific SROI metrics.

Why are we betting on it?

We think most people will agree that the total value generated from the work done in the social sector in Canada is largely unknown. We believe that a significant need exists to develop and utilize frameworks that attempt to define social value and measure the outcomes from programs and services delivered by the social sector. A SROI analysis is one such framework and because we are supporting the social enterprise model it is particularly applicable in that both social (target employee) and financial (social enterprise) outcomes are evaluated. Also, the pioneer in conceptualizing and implementing a SROI framework, is the Roberts Enterprise Development Fund (REDF) and they also specifically focus on investing in social (purpose) enterprises.

Below is more explanation around why we are betting on SROI:

A SROI framework encompasses both enterprise and individual outcomes under a joint measurement framework, as opposed to looking at them separately. A common challenge for reporting outcomes from social enterprise operations to donors or funders is that 'the full picture' often goes unreported. Because funding often comes from varied sources and the funding objectives of different donors also vary, evaluations done often do not inform the management on the actual performance of the social enterprise. Operating within a SROI framework allows for continual monitoring of the main intersects between the two missions. Ideally this will guide strategic development.
A SROI Framework forces a company to distinguish between its social costs and business costs and thereby make better decisions on how and where to spend its "marginal" dollars. Social enterprises have to determine the appropriate amount to spend on social support services and infrastructure for their target employees without compromising the financial objectives of the enterprise. Too often however, when social enterprises are part of a large social service organization, the costs of the services provided to target employees are hidden or buried in the expenses of the overall organizational budget. A SROI framework forces an enterprise to make these costs explicit thereby providing critical information about the true financial position of the social enterprise and whether it is making the appropriate trade offs in balancing its financial and social missions.
A SROI framework addresses how social costs change as the enterprise grows. Because we are interested in the scalability of this model, a thorough understanding of key business drivers and associated costs is needed for planning and budgeting for a social enterprise's growth strategy.
A SROI framework addresses the concept of cost savings to society. In REDF's work, articulating socio-economic value and cost savings to society are accomplished through tracking target employees' use of publicly funded programs and services and tracking new tax revenues generated by target employees during and after employment in a social enterprise. By setting up a process that monitors target employee status and progress starting from pre-employment in the social enterprise through to where they are two years after leaving the social enterprise we are (theoretically) able to learn of changes in behaviour - i.e. lessening need and use of particular social services - and learn if former social enterprise employees continue to generate tax revenues.

What are the challenges?

Our overarching challenge in this whole process centers around developing a SROI framework and ultimately a system that will be an integral tool to guide strategic development of the social enterprises we invest in. The process in setting up a SROI framework, leading to the development of a SROI system needs to be valued by all key stakeholder groups in order to be useful. We want to avoid the pitfalls of setting up an evaluation framework that is seen exclusively as an accounting exercise with limited value for decision-making within the social enterprise.

A challenge around jointly setting up a SROI framework is to establish 'buy in' around the value and importance of this process. Our operating assumption is that the 'burden of measurement' is reduced by linking the SROI process directly to the mission and strategy of the social enterprise.

We are happy to report that to date, establishing 'buy in' regarding setting up a SROI framework has not been such a hard sell. Many social organizations have known of the need for such measurement frameworks and are keen to articulate in a more rigorous format the social value they create. They have just not had an outside funding agency approach them before in the manner that we have. Having joint buy in however, does not eliminate the many challenges that come with setting up and operationalizing a SROI framework. Below are some of the issues and challenges:

SROI frameworks are new and evolving and therefore need a lot more testing and refining before touting the success of the framework. We are the first to admit that we are learning as we go and are hoping that reporting our learnings through our website will help others in this arena interested in determining ways to articulate social value and measure success. We will continue reporting on our experience and detailing the issues and challenges we have had in the process and with using particular tools and methodologies.
Deciding on what social outcomes of target employees to track. In any social measurement framework there are numerous social outcomes that could be tracked relating to employment, education, wages, housing, use of public assistance, use of social services, as well as a whole host of additional outcomes that relate to changes in behaviour and attitudes. Important questions to guide the development of a social outcome tracking system include; What do we want to learn? How does what we are tracking relate to our definition of success? In our case, we are framing our work within an asset-based approach and are therefore interested in helping people develop assets - be they social, financial, physical or human - and want to learn if employment in a social enterprise has helped people with developing particular assets.
Deciding on what particular assessment and social tracking tools to use. We want to avoid tools that are too cumbersome and/or take too long to implement. We want the tools to be user friendly and have relevance for target employees - the most important stakeholder group in this whole process. It is the target employees who need to value this process the most and see how it can help them move forward. This is why in our initial 'toolbox' we are promoting the use of individual 'asset development plans' for target employees to map out current asset areas are and what (area) deficits they want to build upon. The nature and needs of different target populations employed in different enterprises should shape tool development. Because this process is comprised largely of social data collection, some combination of surveys, focus groups and face-to-face assessment interviews will be needed. One key thing to remember here is that tools can always be modified based on experience. If tools initially developed are not deriving the information needed, adjust the tools and try again.
Deciding on what social costs to track. The important thing here is to first focus on what key direct social costs in the enterprise can be most easily accounted for. Things such as: wages/salary (or portion of) of management and supervisory personnel responsible for managing and executing on the social mission; key space in the enterprise being used for social mission purposes such as counseling and training - separate from any business-related training -; and any outside trainers, counselors or consultants that have been brought in to deliver specific services relating to the social mission. Once the primary direct costs have been accounted for, the next step is to determine what other more indirect social costs there may be such as; more time needed for making a product or delivering a service or the additional training and/or supervision needed for target employees. The important thing to keep in mind when developing a social cost structure is that it is an exercise in making better decisions when planning for future growth.
Using relevant, existing organizational management information systems that can be built upon in incremental stages. One of the key challenges for most social sector organizations is finding the time and resources (money and expertise) to spend on developing, utilizing and maintaining management information systems that can assist with evaluation reporting and performance management and measurement. Related to this is the challenge around developing the internal organizational capacity to effectively utilize these systems. It is no wonder that without this capacity, the sector has difficulty in articulating the social value it creates. However, expensive and complicated MIS systems are not going to address this problem on their own. Our hope is that we can develop the base from which appropriate MIS systems can be built. Frankly, we first need to further develop our capacity on how to set up appropriate social support infrastructures with attached social cost accounting systems before setting up elaborate MIS systems to measure the value of these components. The important point to remember here is that paper-based tools can be automated down the road.
Avoiding pitfalls around who 'owns' the process and/or who 'owns' the tools developed for the SROI analysis. Our orientation is to share as much as we can with the broader community about how to make this hybrid model work. We are operating under the theory of abundance and strongly believe that the more replication and refinement of tools we help to develop with our portfolio organizations, the stronger our case for betting on this model. We are not in this to develop proprietary tools to then resell to the sector. As with many other public domain resources - such as the Sustainable Livelihoods Guidance Sheets - we want to contribute to the growing body of knowledge concerning how to account for, articulate and measure social value creation.
Retaining common SROI principles across the different organizations we work with while enabling those organizations to have the flexibility to adapt the process to their specific context. For any of our work to really 'stick' it needs to make sense to the people out there 'doing' social enterprise. Despite the common principles among the organizations we are working with, there are key differences regarding organizational 'age and stage' of development. For example we are working with groups who are relative newcomers to social enterprise and with others who have been involved in this type of work for several years. Other differences relate to size of organization, whether they provide other services and programs, or are a single purpose social enterprise. We want to have the ability to compare experiences while recognizing the diversity of our portfolio organizations and know that this will be a challenge.
Recognizing that all assumptions within a SROI framework and limitations of the model need to be clearly articulated. Because many of the cost savings analysis in SROI frameworks are derived from using proxies - or best estimates - where these proxies come from and what assumptions they carry need to be clearly stated and explained. These proxies can be changed over time as new proxies become available and as we learn through experience.