Knowledge

Social Return on Investment

Social return on investment (SROI) is a means of putting a monetary value on different
social investments. Developed by REDF a venture philanthropy organisation in California,
SROI is based on calculating the reduced public costs (such as social security payments
and costs to health services) resulting from investing in improving peoples’ lives.

The approach is similar to the method that businesses use to value return on investments
(known as discounted cash flow). This method takes the cash flows that an investment is
expected to generate over its life and then ‘discounts’ the value of these future
cash flows to allow for the fact that cash next year is worth less than cash today; (ie
people would prefer money now than in, say, 5 years time).

SROI works particularly well for projects that take unemployed and disabled people and
provide them with training and jobs. The cost of training and providing long term employment
generates massive savings for public authorities (provided those people remain in employment).
It also demonstrates that it is worth investing more into people who are most dependent on
social security and public services.

Here is one example:

IME — an example of social return on investment.

IME is a social enterprise that exists to provide professional cleaning services delivered
by people with psychiatric disabilities, ex-offenders and people with a history of substance
abuse.

It provides janitorial services for 38 buildings and is expected to have sales of
$1.4 million by 2004. It employed 77 people at the start of 2000.

IME — an example of social return on investment
Social purpose results (per target employee) 1999
$
Public savings 23,531
New taxes paid by employees 890
Wage improvement of each employee 5,931
Financial improvement (wage improvement less reduced social security) 3,594

more can be found at:http://www.redf.org

At the time of the report (winter 2000) just over $300,000 had been invested in
the enterprise. The financial value of the enterprise (using the conventional
discounted cash flow method) was $477,000. However, the social purpose value (over
the life-time of the enterprise) was a mighty $58 million, primarily because the
overwhelming majority of employees were people who before employment were heavily
dependent on social security and a range of public services.

Since then, in 2003 IME won a substantial new contract in part because it was
able to demonstrate to the public sector contractor that from 17 to 28 months after
hire, 71% of recruits are still employed.

SROI Report

Here is an excerpt from the SROI report for IME.

IME’s social mission is to provide employment opportunities to individuals with
psychiatric disabilities, and those with a history of substance abuse. As a result
of serving such high risk populations, in 1999 IME saved $23,531 in public dollars
per target employee and generated $890 in new taxes per target employee. The majority
of the cost savings are from decreased use of mental health treatments.

It is projected that IME will employ 77 individuals beginning in 2000 increasing
to a projected 187 people in 2009. The majority of IME’s target employees work on a
part-time basis, accounting for the high number of employees. With such a high
target employee count and high public cost savings of almost $24,000 per employee,
it will therefore have a high social purpose value.

In 2000 alone, IME is projected to generate over $3.1 million in social cost
savings and new taxes. In fact, IME’s social purpose value is more than $58 million
with a return more than 188 times the original investment. On average, IME was able
to improve each target employee’s income by $5,931, which improves an employee’s
financial situation by $3,594.

In 2000, with sales activities more than doubling, IME will also increase the
number of target employees to more than twice the number of positions in 1999.
Social operating expenses per target employee appear to increase dramatically,
however, this is because training costs were not attributed to IME until mid-1999.

Going forward, IME is expected to create more than $59 million in social savings
and new taxes. This will require an additional investment of $1.3 million. This
investment, combined with profits from the business, will enable IME to cover
$2.6 million in social operating expenses and to contribute $98,820 back to
IME’s parent nonprofit.

(reproduced from REDF web site http://www.redf.org)

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Last updated: August 2014