In a world changing rapidly, organizations and companies are not only caught in the demanding task of calculating costs and benefits and measuring profitability by using ROI metric tool but are becoming more involved in the new paradigm of doing business that captures not only the financial value but the social value as well.
SROI is a tool used to help organisations answer the fundamental question: “How much value are we creating?”
Social Return on Investment (SROI) is a framework for measuring value that is not directly reflected in financial statements, including social, economic and environmental factors. SROI presents how social, environmental and economic outcomes create impact, measures the value created and uses financial terms as a common denominator to express this value. It is all about value and not about money; SROI assigns monetary values to the change outcomes evidenced from the implementation of a certain initiative.
The general formula often used to calculate SROI is:
SROI = (social impact value – initial investment amount) ÷ initial investment amount x 100%
Moreover, there are two types of SROI:
- Evaluative that is conducted retrospectively and is based on actual outcomes of an activity that has already taken place.
- Forecast that predicts how much social value will be created if the intended outcomes are realized through a future activity.
Whether evaluative or forecast SROI is used, there are many benefits that SROI analysis generate and can fulfil a wide range of purposes. SROI can be used as a strategic planning tool, a communicating tool and an investment decision making tool. The use of SROI can aid an organisation in multiple ways: a) to maximise the value it creates through a structured process; b) to use resources more effectively and efficiently; c) to involve its key stakeholders, d) to gain competitive advantage, e) to enhance communications, both internally and externally, f) to attract investors and g) to raise its profile.
A common concern regarding SROI is whether it is a method that can be used exclusively by certain organizations or it can be applied in all sectors and organizations irrespective of their size. There are no barriers that prevent the use of SROI in organizations across the public, private and non-profit sectors regardless of their size.
Public sector as well as organizations that develop public policy may use SROI as a tool that will help in making better decisions in commissioning process in the area of procurement by serving as a catalyst for initiatives that create social value. As a good example of how SROI can be used in the public sector is the national government of the Netherlands that has made the use of SROI mandatory for all public procurement activities since 2011. In its report, the Dutch national government stated that 79% of the Dutch municipalities implemented SROI in 2014. Moreover, SROI can aid NGOs and social enterprises in improving performance and highlighting and easily communicating added value they create. There is an ever-growing pressure coming from investors who use SROI as a key evaluation tool that definitely aids them in deciding where to invest and to assess progress and performance of the value their investment creates over time.
Nowadays, when the old business model that focuses solemnly on profit gains has become obsolete, SROI is being widely used by organizations as a method to determine and measure the extra financial value related to invested resources. This new business model takes into consideration both environmental and social value that organizations’ initiatives have on their stakeholders and the society as a whole.
To find out more on SROI analysis, we invite you to read our brochure
Sustainability Knowledge Group is a global advisory firm dedicated to creating value, through strategic CSR and sustainability solutions. Sustainability Knowledge Group supports companies to develop, manage and measure effective tailor-made Sustainability and CSR programs which address social and environmental challenges while promoting corporate strategy. Sustainability Knowledge Group offers training, coaching and advisory solutions grounded in international theory and successful application, and focuses on proven methodologies that bring tangible results, measurable impact and create better businesses.
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