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Impact Measurement : The Faultlines

11/12/2013 11:01 am 11:01:10 | Updated Jan 23, 2014

The world of social entrepreneurs is a wide spectrum.

On one end, we have those who focus on making traditional investment "more responsible" in terms of environmental, social and governance (ESG) factors. On the other end, we have those who propose cash-generative alternatives to charity in the form of "social businesses."

What is common amongst all of them is a positive passion and palpable energy with which they feed off each other at any of their annual congregations -- whether at the World Economic Forum or at the Global Social Business Summit held recently in Kuala Lumpur.

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What is also common is the speed with which the life of the party can be sapped by the very mention of "impact measurement." It is understandable that compared to advocating for or executing on a social mission, compiling accounting metrics is not exactly exciting.

However, what is remarkable is the extent to which this community is polarized on the utility and methods of impact measurement.

There are broadly three strands of debate:

  1. Is the pursuit of measurement productive or value-destructive to the mission?
  2. Should the accent be more on quantitative or qualitative measures? and
  3. Is measurement a challenge that the non-profit sector is uniquely weak at?

Productive or Value-destructive?
There is a phenomenon known amongst macroeconomists as Goodhardt's Law which can be paraphrased as: "That which is measured changes its character due to the act of being measured."

In the same vein, it is argued that the active pursuit of output data may distract or detract a social enterprise from its impact objectives. It is also argued that impact accounting imposes a compliance burden that acts as unnecessary overhead.

On the other hand, there are those who embrace the challenge of measurement not just for communicating with external stakeholders but also to be internally accountable - to better manage the enterprise.

It's a fact that if an enterprise wishes to scale up, collaborate and seek outside resources, it needs to engage in professional measurement -- even if they are imperfect or incomplete.

It's often observed that when it comes to funding, there is a sharp divide between the haves and have-nots. Those who already have a lot of funding tend to get more. Arguably, it is less to do with the difference in the quality of their mission; it is the rigor, discipline and seriousness with which one pursues the duty of measurement that differentiates it from the other.

So the battle is between two adages: "Not everything that counts can be counted" versus "What gets measured gets paid."

Quantitative versus Qualitative

While there is grudging acceptance of the need for some measurement framework (given the agency problem of third-party financing), there is a stronger divide on the extent to which quantitative measures should take precedence over qualitative narratives.

Similar to the Generally Accepted Accounting Principles (GAAP) that govern financial reporting in mainstream businesses, there exists a nascent set of Impact Reporting and Investment Standards (IRIS) that seek to provide standardized vocabulary for social performance categorized by industries.

For example, for the areas of healthcare and nutrition, it is important to ask, "how many years of life have you saved"? and "what is the aggregate income created as a result of those extra healthy years?" Answers to these involve technical terms such as "disability-adjusted life years" (DALYs) and "monetisation factors." Further down the path of quantitative measures are the concepts of social return on investment (SROI) and randomized control trials (RCTs).

Critics argue that many of these estimates rely on broad assumptions, that they do not account for differences in cultural contexts and none of it is particularly relevant to the day-to-day running of the enterprise.

Proponents argue that a collection of imperfect proxies, when combined, can be effective and reliable indicators.

Concomitant with IRIS is the Global Impact Investing Rating System (GIIRS) which carries out third-party assessments to derive a score for each organization. These scores -- similar to mainstream bond ratings -- are intended to be comparable across sectors. This is important for arms-length investors who wish to assess incremental investments on a relative basis.

Critics argue that these are reductionist measures that leave out more than they convey. They argue that a better approach towards ensuring accountability is for investors and partners to assume more of the burden: invest time and effort before an investment is made to understand the delivery model and subsequently, to stay close to the operations.

As a senior microcredit professional said to me, "I know way more about my customers in my current role than I did in my role as a commercial banker. Here we have a higher repayment rate. There, our spreadsheets lulled us into a false sense of security."

Non-profit versus For-profit

Interestingly, even though the for-profit world is more used to a mark-to-market environment, it is grappling with its own measurement challenges.

The concept of accrual accounting is far from perfect. Estimates of items such as depreciation, provisions and goodwill are vulnerable to error. Measures of risk and capital -- whether in the world of banking or insurance -- are being constantly refined.

Secondly, it is no coincidence that the physical size (thickness!) of annual reports being published by listed organizations has multiplied in recent years. The basic set of financials and summary statistics are less and less valuable conveyers of information. They need to be augmented with additional notes of disclosure -- not unlike the narrative style of measurement favored by some in the social sector.

So what next?

Impact measurement is not a challenge that is unique to social businesses. The dashboard of indicators has to be increasingly multi-dimensional. It will require both quantitative and qualitative measures and it will require specialist expertise. Perhaps what the ecosystem needs is a set of social businesses that provide impact measurement services to other social businesses?
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Lutfey Siddiqi was Chair of the Plenary session on "Impact Measurement: Curse of Cure?" at the Global Social Business Summit in Kuala Lumpur on November 8, 2013.