Calculating cost and benefit to society

To understand this picture we, and/or the management team at the social enterprises we fund, implement surveys at particular points in time with individual target employees. The collected data is then situated in a cost-benefit framework that accounts for societal “costs” attributed to an employee before hire into the social enterprise versus the societal “benefits” that can be attributed after hire.

In the case examples below, detail is provided on the kind of quantifiable data collected in the baseline and follows up questionnaires/interviews that feed into the SROI calculations.

Case example one

Josh¹ had lived most of his live in the inner city, had a high school education, a criminal record and minimal employment experience. Before he was hired at Inner City Renovation (ICR) he was part of a community-based carpentry skill development program that provided on the job training in housing renovation. While part of this program, he was able to collect government income assistance and family allowance benefits for himself, his wife and six children. Neither Josh nor his wife had any other employment related income. Based on his family make up, Josh and his family received approximately $2100 per month - $25,200 annually - of government income. This income was not taxable. After Josh was hired at ICR his annual employment income replaced the majority of the government income he and his family had been receiving but Josh was still eligible for family allowance of approximately $800 per month based on his family size and through declaring his paychecks. Josh’s gross annual employment income was $20,230 from which he paid income tax and contributions to Employment Insurance and Canada Pension Plan totaling $4,235.

Based on the information above, Josh’s individual ‘before and after’ or cost/benefit analysis looks like this:

$25,200 (annual government income assistance) – 0 (annual income tax paid before hire) (Before Cost) + $4,235 (annual income tax and contributions to CPP and EI paid after hire) – $9,600 (annual government income assistance after hire) (After Benefit) = $19,835 (Net Change)

$19,835 represents the (monetized) value – or Change in Societal Contribution - created by employing Josh, decreasing his need for government income assistance by $15,600 or 62% and generating new tax revenues of $4,235.

Case example two

Steven² was twenty-one years old, unemployed, hadn’t finished high school and living in a youth shelter in Toronto. Before he was hired at Turn Around Couriers he had worked on and off at odd jobs but had no steady employment record. Steven was surviving on social assistance monthly payments of $520. The youth shelter receives a $53 per diem rate, per youth, from the city for operations. The average stay at a youth shelter over the course of a year is 4.5 months. Steven found out about the employment opportunity at the bike courier company through a youth employment agency and ended up working there for 3 months. An estimated annual average cost³ per youth who accesses employment and related services is $2,726⁶. While employed at the bike courier company, Steven went back to school and got his GED⁴ (General Education Development). Over the course of 3 months Steven made $2,630 of employment income and got off social assistance. He was able to save enough money to get out of the shelter system and move in with some friends. After deciding that bike couriering was not for him, Steven secured a full time retail job paying minimum wage ($7.15⁵) per hour to pay his bills while he explored opportunities for a career in the trades.

Based on the information above, Steven’s individual ‘before and after’ or cost/benefit analysis looks like this:

7,261 (average annual shelter costs) + $2,726 (average cost per youth for employment and related services) + $6,240 (annual basic allowance - not including shelter allowance - through Ontario Works program for single male) = $16,227 (Before Cost)

$16,227 ( annualized total of above societal costs) – 0 (annual income tax paid before hire) + $1,287⁷ (income tax based after hire) – 0 (government income after hire) (After Benefit) = $17,514 (Net Change)

$17,514 represents the (monetized) value – or Change in Societal Contribution - created by employing Steven, helping him save enough money to leave the youth shelter system eliminating his need for government income assistance by $6,240 or 100%, eliminating his need for and use of youth employment service agencies and generating new tax revenues of $1,287.

The case examples above represent two individuals’ change or difference in need for government income and government funded services after being hired into a social enterprise. Of course, there is variance among individuals. For example in the sample of 10 former bike couriers employed at TurnAround Couriers in the first two years, the individual change in societal contribution ranged from 0 (at follow up, the youth was back in a youth shelter, using youth employment service agencies, unemployed but not collecting any government income) to $17,514. For explanatory purposes Steven’s case was highlighted to illustrate how we accounted for his use of shelter services, employment services and government income before and after he was hired at TurnAround Couriers.

¹Name has been changed to protect individual identity.
²Name has been changed to protect individual identity.
³Representatives from the different social agencies where TurnAround Couriers recruits from were asked to supply an average cost per youth for supplying these services on an annual basis. The numbers provided from 4 different agencies were averaged to come to a cost of $2,726 per youth served. This is a conservative estimate because it does not include weekly youth stipends that many agencies supply when youth are enrolled in an employment related training program.
⁴The General Educational Development (GED) is an international high school equivalency testing program for adults.
⁵$7.15 per hour as the general minimum wage rate in Ontario as of February 1, 2004.
⁶137 days (4.5 months) X $53.00 = $7,261
⁷Annual income tax was accounted for from 3 months work at TurnAround Couriers ($2,630) and 9 months working full time at $7.15 per hour ($10,854)

Calculating total investment

So far, we have discussed how we come up with the ‘numerator’ in the SROI calculation. Now we will turn to discussing what makes up the ‘denominator’ or Total Investment required to generate that cost savings to society.

There are three main components to the denominator:

The reason we use these 3 financial components to make up the ‘total investment’ is because we think that they suitably reflect the additional financing opportunity and social cost inherent in this model.

In order to fully understand the business viability of the social enterprise, it is particularly important to separate out a social enterprise’s sales revenue from grants, government contracts and/or subsidies to the social mission. That is why we account for these separately in our SROI Reports.

There are many ways to look at and debate the methodology to capture social costs. One of the biggest challenges with capturing these costs is being careful not to capture them twice or ‘double count’ which is particularly highlighted when trying to distinguish direct and indirect social costs of the business. For example, as in many businesses, social enterprise target employees often require training on the job or in a more formal, technical setting. When implementing training initiatives at social enterprises, this cost is often higher than a similar business (without the social mission) because of the extra time and/or extra supervision needed to roll out the training. Another related and indirect social cost is then incurred as a result of the management’s additional time and/or supervision because of the nature and needs of the target employee group.

Our solution to the challenge outlined above is to use the operating loss/profit for the fiscal year as part of the total investment. This number captures those social costs that are difficult to extrapolate. These costs are most often captured in the social enterprise’s management and training expenses on the income statement.

The other important investment piece inherent in this model relates to the costs of Additional Social Support Infrastructure (SSI) provided for the target employee group. These costs will vary depending on a number of variables such as:

To summarize, SCP has accounted for social support infrastructure costs in two ways. First, social support infrastructure costs that are harder to distinguish such as management or supervisory time spent with target employees are captured under payroll costs and ultimately in any operational losses. Second, where additional SSI needs are supplied by other sources, these costs are identified separately and also counted as part of the Total Investment.

For example, half way through Inner City Renovations’ (ICR) first year the need for responsive, social support for individual target employees was identified and $8000 was spent on ensuring access of all target employees to a trained social support worker. In year two this support was maintained at a cost of $20,000. These costs are easily quantified and clearly attributable to the social mission and are therefore included in our investment calculations.

Likewise, ICR management has been working through how best to assist target employees with financial management and savings and in 2006 established a company-based savings program in partnership with a local community-based organization, SEED Winnipeg. The planning costs for this program are captured in management salaries. Any additional costs associated with this program and delivered by sources other than ICR management will be accounted for under Additional Social Support Infrastructure.

By way of contrast, TurnAround Courier’s first SROI report accounted for no additional SSI costs. This is not to say that the business incurred no such costs - the founding manager dedicates countless hours to providing support and mentorship to his employees. It is just that these costs are difficult to quantify and to attribute directly to a social mission. Thus, these implicit costs are captured in the Total Operating Profit (Loss) and ultimately reflected in the Total Investment Required.