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Social Impact Measurement. An evaluation and synthesis of existing tools and frameworks

Master's Thesis 2014 86 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

List of Figures

List of Tables

List of Abbreviations and Acronyms

Acknowledgements

Chapter 1: Introduction
1.1 Background
1.2 Problem statement and research objective
1.3 Structure

Chapter 2: Literature review
2.1 Social value creation
2.2 The importance of measuring social impact
2.3 Current limitations of social impact measurement
2.4 An overview of existing tools and frameworks

Chapter 3: Evaluation and comparison of existing tools and frameworks
3.1 Description and evaluation
3.1.1 Balanced Scorecard
3.1.2 Base of the Pyramid Impact Assessment Framework
3.1.3 Cost-Effectiveness Analysis (CEA)
3.1.4 Practical Quality Assurance System for Small Organizations (PQASSO)
3.1.5 Prove It! Toolkit
3.1.6 Social Accounting and Audit (SAA)
3.1.7 Social IMPact measurement for Local Economies (SIMPLE)
3.1.8 Social Return on Investment (SROI)
3.1.9 Wellbeing Valuation
3.2 Comparison and main findings

Chapter 4: Synthesis and extension of existing frameworks
4.1 Objective
4.2 Description of a blended framework for social impact measurement
4.3 Discussion

Chapter 5: Limitations

Chapter 6: Conclusion

References

Appendix

Word count: 20,159

List of Figures

Figure 1: Social value chain

Figure 2: Importance of social impact measurement and main drivers

Figure 3: Limitations of social impact measurement

Figure 4: Balanced Scorecard: social enterprise model

Figure 5: Blended framework for social impact measurement

List of Tables

Table 1: Classification grid

Table 2: Analysed tools and frameworks

Table 3: Balanced Scorecard for social enterprises: Advantages and disadvantages

Table 4: Base of the Pyramid Impact Assessment Framework: Impact matrix

Table 5: Base of the Pyramid Impact Assessment Framework: Advantages and disadvantages

Table 6: Cost-Effectiveness Analysis (CEA): Advantages and disadvantages

Table 7: Practical Quality Assurance System for Small Organizations (PQASSO): Advantages and disadvantages

Table 8: Prove It! Toolkit: Advantages and disadvantages

Table 9: Social Accounting and Audit: Advantages and disadvantages

Table 10: Social IMPact measurement for Local Economies (SIMPLE): Advantages and disadvantages

Table 11: Social Return on Investment (SROI): Advantages and disadvantages

Table 12: Wellbeing Valuation: Advantages and disadvantages

List of Abbreviations and Acronyms

illustration not visible in this excerpt

Acknowledgements

I would like to thank Manchester Business School’s faculty and staff. In particular, I would like to thank my supervisor, Noemi Sinkovics, who provided invaluable motivation and guidance during the preparation and writing of this dissertation.

Furthermore, I would like to thank the ‘Dream Team’, consisting of my dear friends Michael Hall, Sheikh “John” Janealam, Konstantinos Makrydakis and Ferdinando Zamprotta, who kept my spirits up during my exchange in Melbourne, Australia.

Finally, I would like to express my heartfelt gratitude to my parents, Dorothea and Mirko Flam, who made it possible for me to study abroad and finish my Master of Science degree with this dissertation. I sincerely thank my parents for their continuous encouragement and support.

Chapter 1: Introduction

1.1 Background

Third sector (or social economy/sector) organisations provide vital products and services to their communities and beyond. They fill the gap between companies operating in a market environ­ment (private sector) and states or local governments (public sector), providing services which aim to benefit the whole society. In the academic literature, it has been widely discussed and agreed upon that markets, in reality, are not perfect. One specific type of market failure is externalities. Externalities are the positive or negative effects of transactions on third parties that did not take part in those transactions and therefore could not choose to accept these effects (Nicholls 2007). A frequently used example is pollution as a result of economic activity. In order to reduce externalities, governments often resort to market interventions. However, interventions are limited by their political acceptability, the visibility of market failures, the expected costs and the probability of success (Nicholls 2007). Although private sector organisations have increased their focus towards CSR (Corporate Social Responsibility) activities, as well as social and environmental reporting over the past years, and governments that try to remedy the effects of externalities, there still seems to be a need for the services of social sector organisations. The social needs and their growing recognition in today’s society together with tight government budgets have led to a boost in the social economy (Clifford et al. 2013).

One key characteristic of social sector organi­sa­tions is that they put their social mission at the centre of their activities, as opposed to private sector corporations that strive to maximise financial returns. That, however, causes problems when allocating resources. In the private sector, resources flow to the companies that utilise those resources most effectively and efficiently. The (financial) value that has been created by a company in the private sector can be easily measured in monetary terms. Hence, market mechanisms can ensure optimal resource allocation in the long run. However, the social value created by organisations in the third sector is often hard or even impossible to measure in financial terms (Dees 1998). Therefore, the social economy faces the problem of a suboptimal resource allocation that is not linked to the performance of organisations (Emerson 2003). That means that funds do not necessarily flow to those organisations that make the best use of the scarce resources. Regularly, the decision to provide resources is based on trust and the reputation of the receiving organisation rather than its performance (Foster & Bradach 2005).

The problem of an inefficient resource allocation, together with the continuous expansion of the social economy, increases the importance and demand for social impact measurement. Furthermore, performance measurement enhances organisations’ learning and development capabilities and facilitates the diffusion of innovation and best practices (Sarasvathy 2008; Nicholls 2009; LeRoux & Wright 2010; Barraket & Yousefpour 2013; Mair & Sharma 2012). Section 2.2 discusses the importance of social impact measurement in more detail.

1.2 Problem statement and research objective

To this day, a great variety of tools, frameworks and best practices, aiming to measure the social impact of organisations, have been developed and used in practice. This variety reflects the fact that there is no perfect measurement tool and that there are still a lot of challenges to be faced by organisations that want to measure their social impact successfully.

The challenges with impact measurement can be categorised into three different areas: Measurement limitations, limitations of an organisation’s resource base and limitations arising from the external environment. The problems presented here will be discussed in more detail in part 2.3 of the literature review.

Measurement issues involve questions about the time frame, scope, monetisation, causality, defining social impact and selecting or developing the right tools (Maas & Liket 2011; Mair & Sharma 2012; Puttick & Ludlow 2012; Barraket & Yousefpour 2013; Clifford et al. 2013). Additional problems are the lack of consistency in collected data, an abstract mission and overlooking negative effects of organisations’ activities (Sawhill & Williamson 2001; Puttick & Ludlow 2012; Barraket & Yousefpour 2013).

Issues stemming from the organisation itself include the lack of necessary resources (e.g., know-how and capacity), the complexity in planning and implementing the required processes and the organisational culture (Arvidson & Lyon 2013; Barraket & Yousefpour 2013). In this context change management plays a key role.

The environment of organisations can pose additional challenges for social impact measurement. One major problem is the lack of industry standards (Mair & Sharma 2012). Another difficulty results from the heterogeneity of organisations’ missions and goals (Lane & Casile 2011). For investors to assess where they should allocate their funds, and for organisations to assess their performance, it is necessary to compare the impact of organisations and measure it against set benchmarks or control groups. Finding a sensible benchmark and adjusting it over time is another challenging task (Clifford et al. 2013). Furthermore, pressures form external stakeholders with varying interests is an important issue that is often raised by practitioners and academics (Nicholls 2009; Maas & Liket 2011; Mair & Sharma 2012; Barraket & Yousefpour 2013; Clifford et al. 2013). Measurement tools that fulfil all the requirements of external stakeholders are often not optimal for organisational development and internal evaluation and control (Arvidson & Lyon 2013; Barraket & Yousefpour 2013).

The present dissertation has two objectives. Firstly, it aims at reviewing existing impact measurement tools and frameworks. Secondly, it aims at proposing a framework that synthesises and extends the existing social impact measurement practices.

This study aims to aid third sector organisations to improve their performance measurement, which would contribute to a better resource allocation in the social economy and at the same time support organisational development and the transformation towards sustainable business models. In short, this research is intended to facilitate social change.

1.3 Structure

This dissertation is divided into six chapters. The introductory chapter presents the background, problem statement and objectives of this research. This is followed by a literature review in chapter two that discusses the definition of social value creation, outlines the importance and current limitations of social impact measurement and concludes with an overview and classification of existing impact measurement practices. The third chapter analyses and compares a selected set of existing social impact measurement tools and frameworks. Based on the findings of chapter three and the literature review, the fourth chapter proposes and discusses a blended framework that combines the strengths and aims to addresses the weaknesses of existing measurement tools and frameworks. The fifth chapter highlights the limitations of this research, before chapter 6 concludes this dissertation.

Chapter 2: Literature review

2.1 Social value creation

The definition and understanding of social value creation is central to the performance measurement of social enterprises. It is not possible to assess the contribution of organisations without having a clear understanding of what constitutes this contribution. However, to date, there is no consensus in academia and industry about the definition of social value creation (Clark et al. 2004; Maas & Liket 2011; Lautermann 2013). The subsequent literature review aims to shed light on the concept of social value creation. First, the generally accepted definition of value creation, as used in the commercial context, is presented and distinguished from social value. Second, different dimensions and contexts of social value creation are discussed, before the relationship between social value and social impact is outlined.

Economic value versus social value

In a commercial context, value is realised through market transactions. Customers and suppliers form markets to exchange goods for monetary compensation or other goods. Utility theory and marginal utility is a concept often cited in conjunction with value creation (Bowman & Ambrosini 2000). This theory suggests that buyers make their purchase decisions with the aim to maximise their utility. Here, utility represents the total satisfaction that a customer obtains from the possession of a particular good. Marginal utility refers to the benefit originating from the purchase of one additional unit of a product. Central to the utility theory is the premise that, due to the limited satisfaction potential, the marginal utility decreases with increasing volume of a good. For example, the marginal utility of the first car a person owns is higher than the marginal utility of the second one – assuming that both cars are exactly the same.

To better understand utility, that is a function of the perceived value of a product, Bowman & Ambrosini (2000) put forward two perspectives on the value definition from a customer standpoint. On the one hand, value is defined as a customer’s perceived benefit and the usefulness of a particular good. On the other hand, Bowman & Ambrosini (2000) highlight the exchange value, which is defined as the amount paid by the customer in order to acquire the perceived value of a particular good. Therefore, a buyer is expected to engage in a transaction if the perceived value is higher than, or equal to, the exchange value (Lepak et al. 2007). This willingness to pay is determined by the perceived appropriateness and novelty of a product – the greater the perceived appropriateness and novelty, the greater the prospective benefits for the customer (Lepak et al. 2007). Economists refer to the difference between the willingness to pay and the perceived value as consumer surplus (Auerswald 2009).

From an organisation’s perspective, value is created when the received exchange value a customer is willing to pay is higher than the cost of inputs. This difference is termed producer value (Auerswald, 2009). This is a reflection of the input-output model of (Katz & Kahn, 1978) that explains value creation as a result of a transformational process. In general, value is created when the total value of outputs that are created through a transformational process exceeds the total cost of inputs needed to produce those outputs. In simple terms, an organisation can increase its value if it produces the same output with less input or more output with the same input.

In the private sector economic value can be measured comparatively easily and reliably using an organisation’s financial data. For example, the financial metric ‘economic value added’ (EVA) developed by Stern Stewart & Co. indicates an increase in value if the net operating profit after tax (measure of output) is greater than the cost of the invested capital (measure of input). This is in line with Dees's (1998) claim that profit is a useful indicator of the value created by an organisation. If an entrepreneur cannot produce goods that appeal to enough customers who are willing to pay an exchange value that exceeds the total input costs, it is reasonable to assume that the value created by the organisation is insufficient. This further indicates that the resource configuration is not effective. Without changes in the resource base the organisation is likely to continue the downward spiral of value destruction that eventually leads to bankruptcy.

However, in order to capture and explain social value, the utility theory is not always suitable (Auerswald 2009). As opposed to wealth creation that is mainly concerned with profit maximisation, social value deals with the satisfaction of needs such as water, food, shelter, healthcare (Certo & Miller 2008), education and the improvement of peoples’ financial position (Mort et al. 2002). This makes it particularly hard to put a ‘price tag’ on social value. The difficulty in assigning an objective value to the social impact of an organisation lies in the qualitative character of that impact (Maas & Liket 2011). The fragmentation of funder groups further adds to this problem. Each investor tends to have a slightly different value perception (Wei-Skillern et al. 2007). Social investors, as well as profit oriented investors, require a return on their investment with the aim to maximise this return. However, as this required return – in the form of social impact – cannot be measured reliably, it is difficult for funders to build an exchange value for the expected social return (Brooks 2009). Because there is no explicit exchange value, the theory of marginal utility cannot adequately measure social value (Santos 2012). In addition to the lack of a precise exchange value, for the satisfaction of many social needs markets do not exist (Auerswald 2009; Nicholls 2009; Mulgan 2010).

Although Mulgan (2010) admits that there is a lack of markets for some social needs, he thinks of social value as the result of transactions within a market for social value that consists of ‘effective demand’ and ‘effective supply’. ‘Effective demand’ is defined as the willingness to pay for a certain outcome. This willingness is not restricted to beneficiaries, but rather spans all interest groups such as foundations, public agencies or individual citizens. ‘Effective supply’ involves “…that the service or outcome works, is affordable, and is implementable” (Mulgan 2010, p. 42). Moreover, Sarasvathy (2008) makes a case for the creation of equity markets for all ventures, with a non-loss constraint. Besides the non-loss constraint, she claims there is no economic basis for the separation of exclusively for-profit companies and social or non-profit ventures. Establishing markets for all ventures can foster the whole economy and also benefits those stakeholders who are external to those markets (Sarasvathy 2008). To date, the function to match funders and organisations in need of capital is mostly executed by large foundations and social venture capital funds. Sarasvathy (2008) proposes that those organisations are sophisticated enough to create markets for social needs. However, in order to provide the necessary transparency and liquidity, the need for generally agreed and easily measurable exchange values still remains. On the other hand, the measurement of exchange values (social impact) and the public equity markets for social needs can mutually promote each other. Social equity markets would drive impact measurement and vice versa.

As aforementioned, markets are only a reliable indicator for the creation of value if there is an explicit exchange value, which defines the consumer surplus. Yet, the consumer surplus is a function of a person’s willingness to pay (Auerswald 2009). Auerswald (2009) further points out, that the willingness to pay is ultimately dependent on income. The willingness to pay of a person who lives on only two dollars a day is limited to this amount, whereas the actual value of new accommodation, education or health treatment would clearly exceed the maximum ‘price’ of two dollars. Therefore, Auerswald (2009) refers to Sen's (1979) capability approach. It is based on the comparison of individuals’ well-being. As the name suggests, the capability approach does not focus on the willingness to pay, but rather on capabilities, which Auerswald (2009, p. 54) terms the ‘willingness to live’. Sen (1979) understands well-being as the capabilities of individuals to do, or be, what is perceived most valuable and meaningful to each person. Sen’s work allows for a broader information base on which social value can be assessed. It goes beyond monetary customer and producer values (Auerswald 2009).

Scope and context of social value creation

What constitutes social value is hard to capture because it is contingent upon its scope and upon different contexts. Social value creation is widely discussed within the social entre­pre­neurship literature. But this does not mean that social value creation is limited to the activities of social entrepreneurs. Brooks (2009) stresses, that social value can be created by any organisation within the range of non-profit to for-profit. This is supported by Auerswald's (2009) statement that even purely profit driven organisations create social value, as an outcome of market transaction. This boils down to the question, whether it is necessary for an organisation to explicitly state the satisfaction of social needs as part of its mission in order to create social value.

Supporting Brooks (2009) and Auerswald (2009), Ahmad & Hoffman (2007), points out the indirect social impact of commercial entrepreneurs. These organisations – without an explicit social mission – still benefit the broader society by promoting economic growth and job creation, as well as poverty reduction (Ahmad & Hoffman 2007). Dietz & Porter (2012) recognise that social value creation may be outside of organisations’ stated objectives. Following this line of reasoning, Auerswald (2009) argues that large multi­national corporations generate more social value than small organisations with a social mission at the centre of their activities. As an example, Acs et al. (2011) assessed the social impact of the Microsoft Corporation, which is generally considered a commercial enterprise. Their findings suggest that Microsoft’s software innovations had extensive effects on society at large and peoples’ well-being. For instance, Microsoft’s products contributed to the education of students and improved the lives of individuals with disabilities. This example illustrates that there is no distinct separation between commercial corporations maximising economic value and social ventures focusing on social value creation. Organisations work towards a double or triple bottom line (Emerson 2003). Emerson (2003) coined the term ‘blended value’, meaning that enterprises maximise total value by including a social and environmental value dimension in their economic value generating business operations. Barro (2007), who also assessed Microsoft’s social impact, concludes that social value is created through all activities that have beneficial effects on society. Similarly, Young (2006) describes social value as the satisfaction of peoples’ pressing needs that are not met by other means. However, this broad concept of social value creation impedes its operationalization (Auerswald 2009; Dietz & Porter 2012).

Over the last years, the number of enterprises operating to deliberately fulfil a social mission has increased (Clifford et al. 2013). Within the social sector organisations differ, among other dimensions, on the level of their funding strategy (Mair & Sharma 2012). Traditional non-profit ventures such as charities, that are mainly concerned with the redistribution of wealth and that solely rely on donations, build one end of the range (Acs et al. 2011). The other end of the range is formed by social enterprises that are completely self-sufficient (Mair & Sharma 2012). Social enterprises are generally defined as organisations that engage in cash-generating market-based transactions with a social mission at the core of their activities (Luke & Chu 2013). Between those two extremes, various other organi­sational forms exist, such as income-generating charities or partly subsidised social enter­prises (Mair & Sharma 2012). A special form of social enterprise is social entrepre­neurship. This organisation type improves social conditions by changing the social structure through social innovation (Acs et al. 2011).

In the broadest sense, the aforementioned organisations share the same mission, as they all work towards the fulfilment of social needs. However, social and economic value creation are not mutually exclusive, but rather overlapping (Acs et al. 2011). In the context of social value creation, Acs et al. (2011) differentiate between productive, unproductive, and destructive entrepreneurship. Productive entrepreneurship creates both economic and social value, whereas unproductive and destructive entrepreneurship generate commercial value, but no social value. Destructive entrepreneurship has a negative impact on social value (Acs et al. 2011). Although many efforts create social as well as economic value, some activities create social value without a distinct economic value (Lumpkin et al. 2011). It is argued that there is no necessity to state specific social goals in order to generate social impact, and that sometimes, even if explicitly stated, no impact is achieved (Acs et al. 2011). Wilson & Post (2011, p. 1) disagree, by promoting the tight link between mission, methods and processes that “…allows for the multi-stakeholder promise of the business model to be fulfilled.” This is supported by Santos (2012), who concludes that the choice whether to focus on social or economic value maximisation is central. This decision is a crucial part of an organisation’s identity and any ambiguity or changes may result in the impairment of legitimacy (Santos 2012). Austin et al. (2006) further stress the importance of formulating a social mission in order to align operations and keep the focus on the proposed social impact.

The importance of a deliberate social mission is underlined by Phills et al.'s (2008) definition of social value. They define social value as “the creation of benefits or reductions of costs for society – through efforts to address social needs and problems – in ways that go beyond the private gains and general benefits of market activity” (Phills et al. 2008, p. 39). Compared to Barro's (2007) concept of social value, this definition is more restrictive. It incorporates the notion of externalities as it involves impacts that “go beyond … market activities” (Auerswald 2009, p. 52). Similarly, Austin et al. (2006) define social value creation as the active pursuit of societal development and alleviation of social hardship by providing the needed goods and services.

As outlined earlier, social entrepreneurship is characterised by Acs et al. (2011) as a change agent with social innovation at its foundation. Phills et al. (2008, p. 39) differentiate social innovation from conventional innovation by defining it as “a novel solution to a social problem that is more effective, efficient, sustainable, or just than existing solutions and for which the value created accrues primarily to society as a whole rather than private individuals.” This introduces the perspective of social value as an outcome of social innovation. Felício et al. (2013) confirm that initiative and innovation are significant drivers of social impact, social responsibility and social recognition. Thus, social entrepreneurship fosters the creation of social value. This is supported by Ormiston & Seymour's (2011) findings that innovatory activity creates social value, together with the alignment of mission, strategy and resources. Finally, Phills et al. (2008, p. 37) stress that “…ultimately, innovation is what creates social value.”

Furthermore, social value is generated on different levels. Financial market prices only represent a relative value, but do not necessarily capture the absolute net value that was generated, because they ignore potential externalities that go beyond direct market transactions (Nicholls 2007). Similarly, the social value created through a targeted approach, to increase the well-being of individuals or specific groups of people, typically results in positive externalities that benefit the community and society as a whole (Lumpkin et al. 2011). Although various social entrepreneurs focus on specific areas and geographic territories such as the ‘Social Bricoleur’ (focus on local or community level), the ‘Social Constructionist’ (focus on regional or national boundaries) and the ‘Social Engineer’ (focus on transnational or global issues) (Smith & Stevens 2009), their activities create social value on multiple levels (Mulgan 2010; Ormiston & Seymour 2011).

Social value may be created on an individual, community and societal level. Mulgan (2010) explains the different levels using the prevention of drug abuse as an example. This type of intervention creates value for the individual (e.g., improved health and financial position), for the community (e.g., lower crime rates), as well as for society as a whole (e.g., reduced burden on public services such as police, hospitals and prisons). It is evident that those value levels are interrelated. However, it is not always clear how different types of value creation influence each other (Korsgaard & Anderson 2011). Korsgaard & Anderson (2011) assume that interconnection of value types is unique to each organisation and that positive synergies are most likely achieved where stakeholders share the same motivations, whereas a clash of ambitions results in counteractive relations.

Moreover, social value is viewed differently, depending on the environment in which it is created (London et al. 2010; Acs et al. 2011; Felício et al. 2013). Within the bottom of the pyramid (BOP) socio-economic segment, enterprises generate value for their owners by creating value for the BOP (London 2007). This mutual value creation is a result of the alleviation of local constraints (London et al. 2010). In addition, Sinkovics et al. (2014) suggest that explicit social objectives are not a prerequisite for BOP ventures to create substantial social value, and that the creation of businesses with a deliberate social mission is a response to prevalent constraints. The environment of social enterprises also influences the management in the way that unfavourable circumstances lead managers to focus on resource mobilisation and collaborations, whereas in favourable settings managers tend to focus on initiative and innovation (Felício et al. 2013).

Relationship between social value and social impact

In the literature, social value and social impact are often used interchangeably. This section aims to differentiate the two closely related terms. As outlined before, value is generated through processes that transform inputs into outputs. Clark et al. (2004) incorporated this input-output model in their social value chain (see Figure 1). Within the social value chain social impact is defined as “…the portion of the total outcome that happened as a result of the activity of the venture, above and beyond what would have happened anyway” (Clark et al. 2004, p.7), where outcome is the actual social change that is a result of a measurable output created by an organisation’s activities using a specific set of resources as input.

Figure 1: Social value chain

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Source: adapted from Cark et al. (2004)

In line with Clark et al. (2004), Mair & Sharma (2012, p. 181) state that social impact “… is driven by the combination of inputs, activities, processes of a mission driven organi­zation, and may be positive and/or negative effects on a social system.” In essence, this definition is adopted by numerous professionals in the field such as Big Society Capital (Clifford et al. 2013), the National Council for Voluntary Organisations (NCVO) (National Council for Voluntary Organisations, 2013) and Nesta (Puttick & Ludlow 2012).

Compared to social impact which is an absolute output measure, social value is a relative measure that provides a better indication of an organisation’s performance. Social value takes into account the input variables that are required to generate the desired outcome. This definition of value helps to assess the effectiveness of a business model in creating social change. For instance, the social value created by an organisation increases if the social impact in units, or in monetary terms, is extended (e.g. through learning or reorganisation of resources), keeping the input constant. Therefore, the ability to compare organisations’ social value generation capabilities will direct resources to the most effective business models.

Social impact measurement is at the centre of assessing and comparing social value creation efforts. The necessary input can often be quantified easily and reliably, whereas the measurement of the outcome (social impact) poses numerous challenges. Finally, Ormiston & Seymour (2011, p. 133) highlight that the “…measurement of impact is logically included as a final step in the value creation process.”

To this day, there is no consensus about the definition of social impact. For this paper the definition of Clark et al. (2004) p.7 is used: “By impact we mean the portion of the total outcome that happened as a result of the activity of the venture, above and beyond what would have happened anyway.” This definition emerged from their Impact Value Chain model, in which they differentiate ‘impact’ from ‘output’ (measurable result) and ‘outcome’ (desired change).

2.2 The importance of measuring social impact

Organisations’ capabilities to measure, present and compare their performance are crucial in order to attract the necessary financial and human resources to fulfil their mission and to expand operations in a sustainable way (Nicholls 2007; Nicholls 2009; Mair & Sharma 2012; Barraket & Yousefpour 2013). However, the problem of sustainably funding activities is not equally difficult for all types of organisations in the social economy. For example, social enterprises engage in cash-generating market-based transactions with a social mission at the core of their business (Luke & Chu 2013). Social enterprises are partly, or mostly, self-financed through a distinct business model, whereas charities, on the other hand, rely solely on donations. This reliance on donations makes charities not sustainable by definition (Acs et al. 2011). If a charity is unable to attract donors in the future, it cannot achieve its mission in the long run. If, however, organisations could measure and present their social impact – the effective use of the money from socially motivated investors or donors – they could improve their bargaining power for new funds and their ability to diversify their funding structure (LeRoux & Wright 2010). Nevertheless, this still does not ensure the sustainability of organisations. Ultimately, to ensure the long term viability of third sector organisations, a transformation from the reliance on grants and donations towards the implementation of contractual and market-based transactions is needed (Meadows & Pike 2009).

In addition to obtaining financial resources, the assessment and communication of social impact can help organisations to retain and attract skilled employees. Barraket & Yousefpour (2013) found that letting employees know about the actual impact they have achieved has a positive effect on their motivation. Provided an organisation is successful, the proof of its performance can reduce fluctuation in the workforce and help to reach out to employees who provide important skills to the organisation.

Furthermore, social impact measurement can not only lead to an improved resource endowment, but can also reduce the cost of financial resources. Investors can better assess the risks related to a specific organisation because of a higher transparency. What is more, the measurement of performance is expected to improve the management of organisations, by increasing their knowledge base, which will be further discussed in the following paragraphs. These aspects may lead to lower cost of capital (Nicholls 2007; Emerson 2003). Furthermore, the measurement of social impact can mitigate the typical problem of accountability and legitimacy faced by social sector organisations (Nicholls 2009; Clifford et al. 2013). Increased accountability and legitimacy will further reduce the risk to external stakeholders. As a result, potential investors can be encouraged to provide the funds needed to scale up operations (Mair & Sharma 2012). In addition, the accountability to beneficiaries is a crucial element in preserving a social sector organi­sation’s mission (Clifford et al. 2013).

Besides attracting the necessary resources to fulfil their mission, the measurement of social impact plays an important role in organisational development and learning (Sarasvathy 2008; Nicholls 2009; LeRoux & Wright 2010; Barraket & Yousefpour 2013; Mair & Sharma 2012). Every organisation should strive to improve the efficiency and quality of its products and services, in order to fulfil the needs of its beneficiaries in the best way possible. However, if an organisation doesn’t know how and to what extent its activities affect the desired outcomes, the organisation operates like a ship trying to follow a clear route without a navigation system. Social impact measure­ment functions like a navigation system for social sector organisations. It can tell an organisation when it deviates from the planned route, and realign it to achieve the defined goals and strategies. Additionally, as the navigation system on the ship informs the captain about the weather conditions that may require the ship to change its course, so can the performance measurement of an organisation indicate when it becomes necessary to adjust goals and strategies due to changes in its environment. LeRoux & Wright (2010) identify the measurement of impact as one key factor that influences the effective management of social enterprises, together with the level of funding diversity and the education of the executive director. Barraket & Yousefpour (2013) have shown that impact measurement can aid small and medium-sized social enterprises in better understanding their target beneficiaries and their environment. In addition, organisations could benefit from an enhanced opportunity to benchmark their results and thereby improve the organisational learning. Furthermore, Barraket & Yousefpour (2013) highlighted that social impact measurement was indeed a supporting factor in expansion of organisations’ activities.

The importance of social impact measurement is further amplified by the fact that it not only benefits the strategic management within its own organisation, but also fosters the diffusion of innovation and best practices to other organisation in the sector (Sarasvathy 2008; Barraket & Yousefpour 2013).

Overall, social impact measurement can improve the competitive position of an organi­sation (Nicholls 2007), through better resource availability and improved organisational learning capabilities, which support mission fulfilment and growth. It also alleviates the resource allocation problem within the social economy. Therefore, the measurement of social impact can drive the whole sector to become more effective and to provide improved services to people in need of support.

Today, social impact measurement is mainly driven by increasing social needs and awareness, the expansion of the social economy, a widening social investment market, government legislation and constrained government budgets (Puttick & Ludlow 2012; Clifford et al. 2013). The importance of social impact measurement and its main drivers is summarised in Figure 2.

Figure 2: Importance of social impact measurement and main drivers

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Source: self-created

2.3 Current limitations of social impact measurement

Although many tools and frameworks have been developed in recent years, along with an increased focus on social impact measurement, substantial constraints on social impact measurement still exist. The limitations and challenges of measuring social impact are multifaceted. This section outlines these diverse limitations by grouping them into three categories, as summarised in Figure 3. First, general issues that surface from difficulties in defining and gauging social impact are presented. The second category is comprised of limitations that result from organisations’ internal capabilities. Finally, pressures from organisations’ remote and near environment, that may negatively influence the measurement of social impact, are outlined.

Figure 3: Limitations of social impact measurement

illustration not visible in this excerpt

Source: self-created

Measurement limitations

As outlined in section 2.1, to date, there is no consensus in academia and industry about the definition of social value creation (Clark et al. 2004; Maas & Liket 2011; Clifford et al. 2013; Lautermann 2013). The deficiency of a clear and generally accepted definition of social impact impedes the adoption and the development of measurement tools and frameworks (Maas & Liket 2011).

The lack of a common definition is accompanied by a diverse vocabulary. This plurality of terminologies poses an additional obstacle to comparability (Clifford et al. 2013). So far, there are no uniform calculation processes and measurement units (Nicholls 2009). Additionally, Nicholls (2007) highlights the need for shared principles for social impact reporting, similar to the established international accounting principles in the private sector. New ways of measurement can only achieve their potential benefit if the new standards and principles are shared (Nicholls 2007). However, the level of diffusion of a particular standard is not necessarily a reliable indicator of increasing social impact, and the legitimacy of an organisation is not a direct reflection of the level of regulatory compliance (Nicholls 2010). Nevertheless, providing social ventures with a common language and instruments can help to legitimise work, to inform the private sector about the connection between social and commercial, and to establish and scale proven models (Young 2006). For instance, the current work of Inspiring Impact on shared measurement is focused on the development of universal indicators and tools for particular areas of intervention, in order to improve the sharing and comparison of results, methods and lessons, which helps to identify the most effective approaches (Clifford et al. 2013).

Referring back to the literature review on social value creation in section 2.1, the measurement of social value is particularly challenging because of the context dependency of social impact. Social impact can be generated on an individual, community and societal level (Mulgan 2010) and may be assessed differently, depending on the economic environment in which it is created (London & Morfopoulos 2010; Sinkovics et al. 2014). Lane & Casile (2011) add that the culturally contingent character of social impact may restrict the possibility of a common measure of social impact. In addition to the contingency of social value, Young (2006) points out that perceptions of value change over time and are consequently subject to reappraisal.

Changes in perceptions of value add to the problem of subjectivity. Today, it is generally accepted that value is not an objective fact (Mulgan 2010). This is especially true for value created by social ventures, because of the qualitative nature of their impact (Maas & Liket 2011) and the complex and diverse interactions of real life experiences from which it is derived (Young 2006). Therefore, Mulgan (2010) rightfully criticises measurement systems that assume an objective value, quantifiable through analysis, and proposes that the consideration of the subjectivity and variability of social impact can improve measurement tools and methods.

The foundation of any social impact metric is a clear understanding of the impact that an organisation aims to create (Wei-Skillern et al. 2007). This goes beyond the general problems of definition described in the previous paragraphs. In order for an organisation to understand its intended social change, it needs to define the scope of its social impact from an operative perspective. This challenging task is not trivial and involves questions such as what, where, how and when to measure (Clifford et al. 2013). After the decision about measurement goals such as mission alignment, quality or satisfaction levels, as well as the levels of impact, it is crucial to develop suitable indicators and data collection methods (nef 2014). Inappropriate methods and indicators result in unreliable and invalid measurements and provide a skewed picture of the actual impact (Fiennes 2013). Wei-Skillern et al. (2007) criticise, for example, the undue focus on maximising the satisfaction levels of beneficiaries, because it is not necessarily a reflection of the larger intended social impact. The recipients of benefits are often not in a position to reliably judge the impact of a programme; for instance, if the impact is not visible to beneficiaries in the case of the prevention of negative outcomes (Wei-Skillern et al. 2007). They further argue that maximising satisfaction levels would reduce resources that could be used to increase the overall number of beneficiaries. Wei-Skillern et al. (2007) conclude with the recommendation to ensure a defined level of satisfaction, rather than maximise satisfaction.

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Title: Social Impact Measurement. An evaluation and synthesis of existing tools and frameworks