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The Social Impact Creation Cycle

Every nonprofit, every company, and every investor creates social impacts. If you’re reading this book, you are likely among those looking for ways to increase their impacts in order to contribute to social change. When you decide to invest in social impact, you are embarking on a journey that is uniquely your own—no two individuals or organizations begin or end up at the same point, for reasons you’ll soon see. This book will serve as your companion and guide, leading you through the complex maze from the initial investment to the changes you seek.

The book is organized around the concept of a cycle, which helps you maximize your social impact by making deliberate and well-informed choices at every step in the journey from investment to impact. We will guide you through these steps and the factors you’ll need to think about as you move through each one. Whether you are new to investing in impact or have been doing it for decades, it’s important to make sure that the decisions you make are consistent with both your rational beliefs about how impact is most effectively created and your emotional feelings about which impacts have the greatest value. The method we present here provides you with a way to integrate the important components of your interests into a logical and cohesive whole.

The Social Impact Creation Cycle is designed to help you plan for and create the impacts you care about and to avoid creating negative impacts along the way. If you’re an investor, donor, or volunteer, understanding this cycle can help you make sure that the organizations you invest in understand and can deliver on their intended impacts. If you’re a company or nonprofit, working through the cycle will help you attract the resources most valuable to you and use them most effectively. No matter who you are, the Social Impact Creation Cycle can help you develop the big-picture understanding of how social investments lead to social change.

All kinds of organizations struggle with targeting and achieving their social impact goals. Philanthropic organizations make difficult resource allocation decisions trying to determine which social impact investments and/or donations will maximize benefits for their targeted communities. A foundation may need to decide whether to invest in a for-profit dairy, a nonprofit primary school, or a social enterprise–based health program. A sovereign wealth fund or government agency may reflect on optimizing the social bottom line of its activities for the neediest citizens. Even when a decision is made to invest in a sector such as health, should that investment be in combating malaria or attacking HIV/AIDS? Should the foundation promote new research or concentrate on making proven treatments available? Should it invest in Africa or in the US? Individuals face the same dilemmas when they assess their own social investments. The choices are many, and they are often difficult.

Corporations must often make trade-offs between sustainability and financial performance as they face decisions related to labor practices, environmental responsibility, community activities, and the like. The identification and measurement of the social impacts of these corporate activities often have significant implications for management decisions. Making this work more difficult, inconsistencies in measurement often arise, depending on the corporate function doing the measuring. For example, the sustainability function’s metrics may differ from the corporate foundation’s metrics, while both may contradict the viewpoint of those running the business’s daily operations.

Individuals in the growing field of impact investing face their own challenges as they try to identify social enterprises and other organizations that can produce social impacts while meeting financial return targets. In fact, among the most critical challenges all these actors face is measurement. Social impact is a primary focus of their activities, yet these organizations and individuals are often unclear about how to measure and then improve their impacts. While projecting and measuring financial results is commonplace, most organizations find social impact measurement significantly more difficult. But demands for more careful and complete analysis of impacts are increasing rapidly. One survey shows that more than 80 percent of fund managers agree that impact measurement is important in raising capital, while over 70 percent of grant makers think that foundations do not receive enough performance assessment information. Social impacts are now discussed in corporate annual and sustainability reports as well as in NGO progress reports, foundation annual reports, and external reports to donors, investors, and other parties.

But even when organizations formally evaluate impacts, they do not always do it well. Inter-American Development Bank, one of the world’s most highly respected development banks, once reported that fewer than one-sixth of its active projects had collected data on beneficiaries, and that only 3 percent had data on impacts on nonparticipants. That information is essential for assessing the social impacts of these projects.

To meet both internal and external demands for performance information, organizations need more guidance. They need a better understanding of both how to make investment decisions that maximize social impacts and how to use monitoring and assessment to determine how much social impact has been created.

Systematic processes for gathering and analyzing information about impacts are often absent. Nonprofit organizations often use financial metrics of efficiency to evaluate performance when what they really need are measures of program and organizational impacts that they do not know how to obtain. Companies and foundations face similar dilemmas. They do not have all the information they need to make decisions related to the social impact of alternative projects.

Resolving these measurement inconsistencies requires a broader evaluation of a project’s social impact. What we need is an industrial-strength tool to capture the entire picture. The Social Impact Creation Cycle provides a comprehensive method that can help you work through these issues to gain a better understanding of the social impact of a project, program, initiative, or organization.

Before we take a closer look at the Social Impact Creation Cycle, it is useful to establish a working definition for some of the terms we use. There aren’t yet common definitions for these terms, but understanding how they’re used here will help you as you work through the book.

Social impacts are the societal and environmental changes created by activities and investments. Societal impacts include such issues as equality, livelihoods, health, nutrition, poverty, security, and justice. Environmental impacts include such issues as conservation, energy use, waste, environmental health, resource depletion, and climate change. The term “social impacts” is used throughout this book to refer to both societal and environmental changes—positive and negative, intended and unintended—that result from investments.

Investments that create social impacts can take a variety of forms, including time, expertise, material assets, network connections, reputation, and other valuable resources. These investments can be donated, loaned, or invested with the expectation of social returns. For our purposes, if you donate or invest money or other resources, you are an investor. You are also an investor if you work or volunteer for an organization that creates social impacts or advocates for a social cause.

Social purpose organizations are entities that exist solely or partially to create positive social impacts. These organizations include nonprofits, foundations, social enterprises, impact and social investing funds, social responsibility units within companies, and governmental agencies.

Social impact measurement is designed to identify changes in social impacts that result from your activities. Most organizations measure the outputs they produce (for example, meals served or jobs created). Social impact measurement assesses the ultimate impacts of those outputs on individuals and the environment (for example, on the quality of life, or survival of species).

A logic model is the logical sequence of activities and events through which the resources invested are transformed into desired social and environmental impacts. Organizations use logic models to work through this sequence to ensure that it is well supported before they invest resources.

This book is written with the recognition that your resources are valuable and limited, and that you would like to maximize the social impacts you create with those resources. The ideas and approaches described here will help you gain a better understanding of what impacts you hope to create and how you can best contribute to creating those impacts.

Creating and Measuring Social Impact

This book is organized around the Social Impact Creation Cycle shown in Figure 1. The cycle is built around five questions:

1. What will you invest?

2. What problem will you address?

3. What steps will you take?

4. How will you measure success?

5. How can you increase impact?

These questions are at the heart of promoting, funding, and managing organizations for maximizing social impact. The cycle applies to funders, whether they are individuals, governments, foundations, corporations, or investors. It similarly applies to operating organizations that provide services or support to or advocate for beneficiaries. Donors and investors focus on how their resources—human, material, and financial—can be best used to produce social impact and which problems should be priorities, while NGO managers and other service providers focus on how to address the social problems they face and how to maximize social impacts. For-profit companies need to focus on identifying and managing the impacts they create for their customers and other stakeholders affected by their actions. But all of these concerns are important enough to be explored by anyone interested in social impacts and the processes through which they are created.

Each group can also benefit from better understanding the interests and challenges of the others. Investors can do a better job when they understand the interests and operations of the organizations in which they invest, and operators can do a better job when they understand the needs and interests of those who fund them.

Some of these topics are rarely discussed, such as the resources and interests of the investor, or why impact measures can’t be separated from the values of the individuals and organizations that use them. Also widely recognized but rarely measured are impacts created through sharing best practices and innovations or collaborating on goals. We devote extensive discussion here to those topics that are essential for effective decisions and have typically not been carefully articulated.

Step 1: What will you invest? In this step, you’ll first think about your investment goals. Why are you investing? What do you hope to accomplish through your investment? Do you expect social returns alone, or do you want financial returns as well? Do you have other goals, such as strengthening relationships, building your brand, or reciprocating for benefits you have received? You’ll also consider what resources you are willing to invest in social change—your time, your money, your expertise, your network.

Step 2: What problem will you address? Next, you’ll decide what kinds of problems you are interested in addressing, and whether you will focus on one issue or a portfolio of issues. You will consider which social and environmental causes are most important to you and how you can best serve beneficiaries using the resources you plan to invest. And you’ll consider the intervention approaches you wish to support, such as research, services, advocacy, or ecosystem support. You’ll decide what types of organizations you’re interested in—social enterprises, nonprofits, corporations—as well as how you’ll structure your investment in that organization, whether as venture capital, equity, a loan, or a gift. You’ll also decide what role you want to play in the organizations in which you invest. Do you prefer to be an outside observer, or do you want to be engaged directly in operations or governance?

Step 3: What steps will you take? Once you have identified your causes, you’ll plan for achieving the desired change. Social impacts flow from an organization’s mission and culture and can be created by the goods and services offered, by operations, and from passive investments. You’ll consider the various ways you’ll make an impact through your investments. For desired social impacts you’ll develop a theory about which actions can create those impacts, and then generate a logic model or results chain that can show exactly how the organization’s actions and outputs are expected to result in positive impacts for stakeholders and the environment. Finally, you’ll map out your stakeholders and the effects your organization will have on them, taking particular care to ensure that the interventions you plan are both beneficial to and desired by beneficiaries.

Step 4: How will you measure success? Performance measurement and management systems help you monitor how investments are creating social change. In this stage, you’ll consider the purpose of your measurement. Is it to learn how effective your work has been, to communicate expectations, or to satisfy investors’ accountability demands? You’ll also determine the kinds of measurement approaches that can provide the evidence you seek, whether investigation, analytics, and/or experiments. And you’ll make plans for developing a performance measurement system for gathering, analyzing, and using your performance data.

Step 5: How can you increase impact? In this step, you’ll evaluate the dimensions of your performance measurement system—the metrics collected, the purpose served, and their relationships with your strategy—with the goal of improving your system to increase your impacts. Finally, you’ll consider strategies for growing your organization and its impact. These can include sources of innovation, ingredients needed for successful scaling, and opportunities for collaborating and sharing your capabilities in order to leverage your impact beyond your own organization.

Each element in the Social Impact Creation Cycle in Figure 1 is connected by an arrow, and an arrow connects its last and first elements. The arrows suggest that working through the steps in the cycle is not a one-time process and that you’ll return to each question as you repeat the cycle to modify your actions and improve your performance.

The Need for Accountability

Governments are finding it difficult to provide the necessary resources to address social and environmental issues, and the burden is increasingly borne by nongovernmental service organizations, foundations, impact investors, and companies. Those donating to or investing in these organizations are reasonably asking for more accountability for the invested resources—as are beneficiaries and communities that have significant unmet needs. Further, when governments provide tax benefits for these investments, it is reasonable to demand that the money be wisely invested to create as much social impact as possible.

One of the most important activities in which any foundation, NGO, or impact investor can engage is to think through and articulate what achievements are desired and how they can realistically be achieved. A common explanation for lack of effectiveness is that the organization has not been clear enough about its definition of success and lacks a well-defined logic model that would likely lead to that success. Too often we find serious gaps in the logic model and little evidence that activities are likely to lead to the proposed impacts. These logic models need to be supported by empirical evidence, a clear logic, or both. But often they are supported by neither. As you’ll see, the Social Impact Creation Cycle helps bring clarity to logic models and thus enhances organizational accountability.

The Impact Measurement Roadmap

Although measuring and increasing social impact are commonly understood to be important, many become mystified by the process of implementing an impact measurement system. Even if you are effectively measuring and managing your impacts now, there are methods to increase your impacts that you might have overlooked. Working through the stages of the impact measurement road map can help you identify these methods and maximize your impacts.

Measuring impacts can be a difficult process and requires careful planning. The Impact Measurement Roadmap, summarized in Figure 2 and discussed in depth in chapter 9, has four steps. In the first step, you’ll prepare the measurement foundation by defining the impacts expected to result from the organization’s actions as well as other positive and negative impacts. In the second, you’ll determine the purpose of your measures and how they’ll be used. Based on that information, you’ll determine which measures are most critical to your mission and stakeholders, and choose the appropriate metrics. In the last step, you’ll develop a performance measurement system for gathering, analyzing, and communicating results and taking actions to improve those impacts.

Billions of dollars are spent each year by NGOs, governments, and foundations with the explicit intent to make positive social impacts. Many more billions are spent by other organizations such as for-profit corporations that also have significant social impact interests. Too much of this money is squandered. Yes, some is through waste and inefficiency, and that should be eliminated. However, much is squandered by well-intended yet failed attempts to deliver important social changes. That failure can be remedied by careful attention to the five questions we ask in this book.

Although budgets, fundraising, and efficiency are important, social impact is the new bottom line for the social sector. We believe that you can achieve dramatic social and environmental changes through more careful efforts at defining, measuring, and improving your social impacts. Our Social Impact Creation Cycle can provide you with the guidance to do just that.