Nonprofit Leaders Should Embrace Social Return on Investment

In today’s world, sophisticated metrics have been developed to help organizations measure the value of virtually everything — from office supplies to major investments. For nonprofit organizations, one of the most valuable metric tools that has come to the fore is social return on investment (SROI).

Social return on investment measures a nonprofit's ability to produce measurable results from the money it spends.SROI expands upon the financial principle of return on investment (ROI) — the calculation of value for everything organizations make and do. SROI adds economic, social and environmental costs and benefits to that equation.

The payoff for nonprofits is being better able to demonstrate the effectiveness — and value — of their organizations to their communities and to the wider world. Moreover, it’s especially useful for making a case for financial support.

How to calculate social ROI

Taken a step farther, SROI can show the world what social problems truly cost, and how much they might cost society if your organization didn’t exist. Understanding SROI requires first taking a step back and properly understanding how ROI is calculated.

Investopedia, a Web resource for investment information, defines ROI as “a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.” Here’s a simple ROI formula:

ROI = Gain from investment minus the investment’s cost, divided by the cost of the investment.

Social ROI is calculated the same way:

SROI = Social impact value minus initial investment amount, divided by the initial investment amount.

The resulting amount is then multiplied by 100 to provide a percentage that represents the return on social investment. For example, if a hypothetical nonprofit calculated a social impact value of $15 million on a $10 million investment, the SROI would be 50 percent. You can make the calculation yourself in four steps:

  1. Social impact value: $15 million
  2. Subtract investment cost of $10 million = $5 million
  3. Divide $5 million by $10 million = 0.5
  4. Multiply 0.5 by 100 to get SROI = 50 percent.

Key elements of SROI

Before calculating SROI, your organization has to establish the following values:

  • Resources invested. One example might be the total cost involved in running an after-school program for low-income parents.
  • Program output. Keeping our after-school example, the “output” would estimate the dollars earned by those parents, who might otherwise be unable to hold employment.
  • Outcome. This measures the improvements a program produces. In our after-school program, those improvements would include higher family incomes, more taxes paid and tax dollars saved from less reliance on welfare and other governmental assistance.
  • Impact. Some people might be able to achieve the same gains without your organization’s program. SROI refines the final statistic by discounting the program’s impact on these people (that is, subtracting them from the total benefit reported).

Benefits of using SROI

SROI provides vital supporting data for your board, volunteers and stakeholders, but it also strengthens your bonds with another key cohort: your donors. Today’s donors have become highly selective in the types of organizations and programs that they support, often focusing on a narrow set of desired outcomes.

In addition, the nonprofit landscape has become more competitive than ever before as groups clamor for the support of both small donors and large philanthropic organizations.

This owes in part to the sheer growth in numbers of deserving organizations. At the same time, government dollars have become a less dependable source for funding for many nonprofits because of financial crises at the local, state and national levels, and increased demand by citizens to curtail public spending. Such organizations must then rely more heavily on the donor community.

Organizations that can make the most compelling case for support are best positioned to obtain philanthropic support, and SROI is a key component of that.

Cautionary notes

The donor community changed dramatically in recent years as people and organizations became much more focused on outcomes. They now see themselves as investors in social programs, and SROI is key to proving such programs have a measurable social value.

Nonprofits face a big hurdle when they begin to create SROI reports because it’s not so easy to put a dollar amount on an organization’s impact. One source for guidance is other nonprofits: Many will happily share their knowledge and methods in the interests of helping another organization to develop its SROI expertise. In some cases, an organization’s initial foray into SROI might entail hiring outside consultants to conduct studies and gather important data. Yet, in the long run, this one-time expense will have a lasting benefit.

As nonprofits and donor organizations become more sophisticated, SROI techniques and metrics have continually evolved and become more complex. Consequently, this underscores the importance of yours being a “learning enterprise.” You, your organization’s leaders and your financial staff must adopt a continuous-learning outlook when dealing with the evolving topic of SROI.

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