White Paper: Financial Model to support value-based selling

“To resolve social issues through its business operations, NTT Group works together with its partners as “Your Value Partner.”
Jun Sawada, President and Chief Executive Officer, Representative Member of the Board
(Extract from NTT Group Web site / message from the President, February 2021)

Introduction

The present paper is a contribution to promoting the concept of “Social Return on Investment” (SROI), a methodology used to evaluate the full value of a project or a solution. It is written in relation to an initiative led by NTT Smart World who developed, together with advisors Insight Signals and Urbatis, a financial & impact valuation model aimed at presenting the full benefits of their Smart Solutions.

The paper draws on the work done within the Social Value International Network[1] on SROI as well as on real hand customer experience. It is illustrated by the innovative approach developed by the NTT Smart World team who decided to compute the holistic value of their solutions to achieve closer alignment with the strategic goals of their prospect clients, in areas such as public health, safety at work and business growth.

In today’s world, any organization is accountable for the social, economic & environmental impacts of its activities to a growing number of stakeholders. This trend has led to initiatives such as Integrated Reporting (IR), Corporate Social Responsibility (CSR) and the widely publicized corporate commitments towards Sustainable Development Goals (SDGs).

In spite of this growing trend, at project level, appraisal techniques remain largely focused on either a purely financial approach (e.g. minimum ROI), or driven by strategic objectives (e.g. creating stable jobs) with socio-economic & environmental effects not being fully included in the business cases because these effects are typically hard to quantify.

In this contribution, the SROI technique is reviewed in light of a practical experience, with the view to promote a full value-based approach in the selling & procuring space. We argue that this approach has practical relevance for any organization, not only in the public /not-for-profit domain, but for any organization that faces any business decision, even when the social & environmental benefit content may seem remote at first glance. A single framework and methodology can help to include these benefits into any project assessment and allow a more informed decision.

This paper is intended for practitioners who wish to review the SROI approach and to learn how NTT has embedded it into an innovative financial model to help its commercial partners develop stronger business cases when they consider buying NTT Smart Solutions.

1. What is Social Return on Investment (SROI)?

Today the definition of value is no longer limited to financial parameters, though it can be observed that for many years, business cases have used metrics such as Internal Rate of Return or Net Present Value (NPV), focusing strictly on cash flows and financial values. Potential project benefits which cannot be easily translated into cash, are usually not included in business appraisal techniques. The same applies to the potential negative effects that cannot be translated into cash.

So how is a project that has a positive NPV but damaging effects on the environment being assessed? These effects are hard to quantify and thus often not included in the NPV calculation. At best, these effects are labelled as “qualitative” and presented separately from financial metrics computation. As stated above, there is an increasing demand from society to incorporate these indirect, wider and sometimes unquantifiable effects in the project assessment. And this is not only the case at the level of investment projects.

Indeed, the idea of Integrated Reporting (IR) is that organizations account for both financial and non-financial effects of value creation in the short, medium and long term. One may also refer to Corporate Social Responsibility (CSR); see The Capitals Background Paper for <IR> (2013) by the Association of Certified Chartered Accountants (ACCA), or Measuring Stakeholder Capitalism, Towards Common Metrics and Consistent Reporting of Sustainable Value Creation (2020) by the World Economic Forum.

We focus here on the full value of a project, and so the key question is how to incorporate hard-to-quantify benefits into a project’s financial assessment? According to Krlev, Münscher and Mülbert (2013), the main social impact assessment method is Social Return on Investment. “SROI is widespread (…), because it is project-oriented, enables organizations to prove and improve the social, environmental and economic benefits they create and it helps to identify positive and negative externalities” (Krlev et al., 2013).

SROI is a relatively new technique with 15 years of existence, though it has been regularly improved by international and multidisciplinary teams. The method is an application of the Cost Benefit Analysis (CBA) which has been around for much longer: according to The Economist, Benjamin Franklin wrote of its use in 1772 and the concept of CBA as we know it today, dates back to Jules Dupuit, a French engineer, who outlined the process in an article in 1848. CBA continues to be applied for public financing investment decisions as a systemic approach to computing the costs and benefits of any project. It is designed to allow the formulation of risk mitigating strategies and to point decision makers in the direction of the optimal scenario; see European Commission Guide to Cost-Benefit Analysis of Investment Projects (2014) Economic appraisal tool for Cohesion Policy[2].

SROI was first devised by the Roberts Enterprise Development Fund[3] in the USA as an attempt to capture and monetize the full value creation of their employment services in San Francisco. The objective was to develop a technique for the financial calculation of the unreported benefits of work integration that could be set against program investments to form a comprehensive cost-benefit analysis. In the last 10 years, SROI has been further developed in Europe by the New Economics Foundation (UK), the Scottish government and the Social Value Network.

As promoted by the Social Value Network (referring to Nicholls, Lawlor, Neitzert & Goodspeed, 2012) SROI is defined as follows: “Social Return on Investment is a framework for measuring and accounting for a much broader concept of value; it seeks to reduce inequality and environmental degradation and improve wellbeing by incorporating social, environmental and economic costs and benefits.”

2. How to implement an SROI?

SROI is a tool to help people answer the basic question: “how much value are we creating?”

It is a technique which measures socio-economic and environmental impact and combines cost-benefit analysis, stakeholder engagement, financial proxies and project improvement.

The technique can be used for an entire organization, a project or a solution, and for any type of sector: profit, not-for-profit and governmental organizations.

It can be applied from the perspective of either:

Forecast, or ex ante studies to predict how much value will be created if the activities meet their intended outcomes. This type of studies is especially helpful for business justification, planning, strategy development and the selection of projects that seek to maximize impact.
Evaluation, or ex post studies to assess the already realized outcomes of a project.

According to the Social Value Network, SROI consists of a set of seven principles that are designed to ensure that the evaluation or implementation process is robust, transparent, and engages stakeholders. These principles can be summarized as follows: 1/ involve stakeholders; 2/ understand what changes; 3/ value the things that matter; 4/ only include what is material; 5/ do not over-claim; 6/ be transparent; and 7/ verify the result.

These principles are the basis of a step-by-step approach which is summarized below in the context of any project assessment:

Step 1: Define the scope of the project and the stakeholders involved.
Step 2: Create a mapping of the impacts affecting the project, drawing a causality relationship between the inputs, outputs and the identified impacts
Step 3: Value the outcomes via indicators. And when outcomes have no direct financial value, use financial proxies ie. value estimations from available market sources
Step 4: Build different scenarios into the impact assessment and valuation i.e.
- (a) deadweight: outcome that would have happened even if the project had not taken place
- (b) displacement: what are the possible unintentional outcomes
- (c) attribution: an assessment of how much the outcome is caused by other projects
- (d) a fourth scenario is calculated as well ie. the drop-off. This deals with the question how long the benefits will last ie. the deterioration of the outcome over time.
Step 5: Calculate the SROI Ratio. This is done based on the inputs and the benefits over the project horizon. By adding up all the benefits, subtracting all negative outcomes or scenarios in Step 4 (deadweight, displacement, and attribution) the impact per year can be computed and Net Present Value (NPV) is calculated using an appropriate discount rate.

SROI = (Net Present Value of Impact) / (Net Present Value of Investment)

Step 6: communicate the results to stakeholders and the embedment of good outcomes.

The signification of the SROI ratio can be expressed as follows: an SROI ratio of 3:1 means that for one euro invested, the project will generate a social benefit of three euros. The Social Value Network insists that ratio alone does not indicate the social value and that qualitative and descriptive evidence should accompany the number.

3. The Example of NTT smart solutions

The illustrative project described below consisted in doing a full impact measurement and Social ROI exercise for a series of NTT Smart Solutions to support NTT consultative selling towards both public and private sector clients.

We will focus here on Occupancy & Notification (O&N) in the context of office workplace, an analytics solution which is intended for example to help organizations minimize the risk of people violating social distancing norms. The solution enables both: 1/ people counting ie. those coming in and out of offices, to establish how many people are inside a facility and provide information and trends for visitors re occupancy levels and associated risks; and 2/ crowd density monitoring for safe distancing ie. perform real-time predictive crowd monitoring and send audio or visual alerts when thresholds are exceeded.

Organizations are accountable for a safe environment for their employees and visitors. Improving customer and employee experience is therefore critical for businesses to grow especially during today’s pandemic. There is also a need for better data to plan operational resources and to reduce costs: e.g. even when firms have camera systems, it is widely recognized that having people monitor multiple screens becomes ineffective after some time.

The objective of NTT was therefore to embed the measurable impacts resulting from the use of its solution into its own marketing and to present holistic business cases from the point of view of their prospective buyers. To achieve this, the work around impact measurement was organised in the following four tasks:

1) Identify material sustainability practices.

2) Determine the relevant benefits form internal sources and external benchmarks that might drive financial and social value from these sustainability-focused practices.

3) Quantify the benefits derived from the sustainability practices with each benefit being quantified in its specific context, using a baseline or deadweight approach.

4) Derive a monetary value for the benefits, including the drop off scenario, to ensure (i) smooth integration into the quantitative model and (ii) building of NTT’s own impact knowledge database.

Below is description on the key outcomes identified in relation to the O&N solution which have been measured and computed in the financial model using the step-by-step SROI method.

Our analysis showed that these outcomes applied notably in the following areas:

Creating a safer environment through increased safe distancing from real time knowledge of facility occupancy and possible violations. The O&N solution detects anomalous patterns and immediately sends alerts, so it represents a cost-effective alternative to keeping a manually operated video monitoring scheme. It is estimated to generate potential cost savings of 20 to 50% compared to existing man-based security schemes.

Enhancing situational awareness through a live “look in” capability, offering an ability to improve workplace user experience and to optimise an employee’s day in the office. The O&N solution provides insight for employees to adjust their schedules e.g. to avoid busy times at cafeterias or improve meeting room bookings. Employee experience and the overall satisfaction is measured via KPIs and is estimated to contribute to individual productivity. As such, it supports “modern” management techniques, promoting ﬂexibility, collaboration and creativity which itself drives innovation. Based on robust research material, and a weighted attribution scenario, the solution is estimated to generate a 5-8% increase in productivity, as measured against the company’s output.

Improving Facility resource planning and operations through data driven decisions. For example, a decision to sanitize a particular building area can be driven by knowing when more than 50 people have come through that space, rather than for ex. once every two hours.
- Decreased energy usage is another potential benefit, as the O&N solution allows optimisation of HVAC and lighting, reducing downtime or excessive usage ie. resulting in an estimated 16-20% decrease in energy cost.
- O&N analytics can help Facilities Management to ensure that Health & Safety regulations are anticipated thoroughly, thus reducing their overall management cost.
- O&N also creates potential opportunities for additional revenues: an estimated optimal use of office space capacity based on the detection of unused space, can allow the occupant to generate income by subletting or reallocating space – creating a potential displacement scenario depending on the client’s own environment.

The above list illustrates the variety of impacts in their respective categories (eg. direct vs. wider vs. unquantifiable benefits) and the importance of reviewing these values based on refined scenarios ie. deadweight / attribution / displacements, so as to attribute monetary values which are relevant in the context of each client.

The monetization of potential benefits is generally in place within any firm for operational efficiencies, for example, the reduction in energy consumption = $0.15 per KW/h saved, or, as in the case of O&N, direct savings resulting from reorganizing the video monitoring process (less staff, less secured premises for security staff). The change in actual input expenditures is then calculated before and after the uptake of improved practices, while subtracting the costs of changed practices.

For Indirect and/or more uncertain benefits, there is a need to apply weighting by materiality and to compute values within ranges.

For Intangible applications, the accounting method to monetize benefits varies depending on the type of benefit and the data available. In the present case, data collection, computations and validations were conducted jointly with internal teams at NTT (ie. Finance, Product, Sales). In cases where there were no data to monetize benefits or build assumptions, estimates were developed from the literature, available market studies (ie. consultancy and academia) and from case studies published on comparable situations.

Based on these benefits’ values and using an appropriate discount rate, the Net Present Value of the investments (capex, deployment costs) and the operational costs of the solution over the project lifecycle, has led to the computation of the SROI and Payback metrics. These ratios – along with the story that applies to each prospect client of NTT – show the degree to which the O&N solution is a value-intensive alternative that generates benefits, both from a direct cash perspective (e.g. staff cost savings) and a monetized value perspective (e.g. enhanced employee satisfaction and productivity output).

The work was then focused on integrating the identified impacts and input values into NTT’s own product design and sales process, along with the definition of relevant Key Performance Indicators.

NTT identified four phases to ensure that the Impacts database and the Financial Model were built together to enable value-based selling. This is illustrated in Figure 1 below, where phases 1 & 2 consist in using the impact content to strengthen discussions with the client and phases 3 & 4 occur after the sale to adjust and monitor the expected impact metrics; this is developed with the intention that each phase contributes to supporting NTT client interactions end-to-end.

4. The value of an SROI approach as developed by NTT

We can summarize the value of the SROI approach, as used in the present case, with the following views, which are in alignment with the feedback from market users of CBA methods.

The SROI methodology represents a holistic approach to assessing any project, as it aims to compute all positive and negative impacts within each key dimension ie. financial/economic, social and environmental, as well as considers external factors influencing the project.

As such, it is a powerful tool for any decision maker (i.e. project promoter, seller or buyer of any solution) to achieve a more efficient and sustainable use of resources, which is particularly relevant in times of financial constraints.

The efforts required to create an impact mapping and to collect data both from internal stakeholders and externally, may seem overwhelming particularly for smaller organizations. The present approach, whereby a large organization such as NTT invests in an impact-linked Financial Model to boost the selling of its solutions, is in fact a valuable contribution to raising awareness on the material impacts of IOT and data analytics solutions in the market at large. The process of sharing a knowledge base of impacts with trading partners for the computation of SROI and other business case metrics, is not only a way for NTT to show its contribution, but also an ambition to influence the procurement of such solutions amongst a diverse community of buyers, towards a more sustainable approach.

SROI is also by definition a method that requires stakeholder involvement along the entire process, from the early project design stage, to monetizing the outcomes of the project. Involving stakeholders at the initial stage of an SROI study is a way to empower them, which is also a strong point from a change management perspective. It promotes an open and transparent dialogue between stakeholders when reviewing, for instance, the calculations of the different scenarios (deadweight, displacement, and attribution) or the assumptions to identify indicators or financial proxies.

SROI is a clear “sustainability enabler” as it helps to direct resources to projects and solutions with the greatest impact because it provides a measure to substantiate a sustainability ambition. It guides the organization to identify indicators to track progress, clarify aims and objectives. And in addition, the active participation of the users of the process, fosters organizational learning, because of its multi-disciplinary approach (financial, social, environmental).

Conversely, it should be noted that, as it relates to impact monetization, SROI is a subjective exercise, just as plain Financial Accounting requires a degree of interpretation. As such, SROI relies on the experience and judgment of experts to identify the appropriate indicators and financial proxies to establish assumptions and estimates. The judgment of practitioners is therefore very important, as well as the access to good-quality data, including research on key impact indicators and financial proxies’ databases.

This is particularly acute when dealing with concepts such as deadweight and attribution, or with the simple challenge of putting a financial value to soft items such as “employee engagement”. This is the reason why a full SROI approach should designate a ‘control person /or group’, sitting outside the influence of the project, tasked with measuring and comparing outcomes at the beginning, during and at the end of the project to ensure that attribution is properly measured cf. in the present case, the proposed ‘calibration’ and ‘performance monitoring’ phases, as shown on Figure 1 above.

In response to the above challenge, the Social Value Network advises that the SROI technique, which may generate a significant investment in time and money if not properly managed, should be commensurate with the audience and purpose. This statement points to the importance of educating the users and the availability of resources (e.g. databases with indicators) to spread the understanding of the method and make best use of the technique. This will reduce the time and investment needed to implement SROI and it will have a positive impact on the learning curve of the practitioners. Capacity building ie. creating awareness and sharing experience, will help organizations, even small ones, to understand the benefits of the tool, adopt an open mindset and extract the maximum value from it in an operational context.

Conclusion

In conclusion, the SROI technique should be regarded as a powerful and holistic method to measure socio-economic and environmental impacts. It can apply to project management, ‘go-to-market’ product strategies, or in support of sustainability ambitions (eg. SDG alignment), in both forecasting and evaluative situations. It is a strong supporting tool to address and respond to the expectations of trading partners, financial institutions, or any other stakeholder.

SROI is not only a quantitative exercise and its main value is not to be found strictly in the computation of ratios and metrics, but instead in the development of a comprehensive insight into a project’s value. As such, it is intended to nourish the dialogue between project stakeholders and its use should lead to the inclusion of more dimensions of value creation than only financial value.

SROI has the potential to support organizations to make better decisions and to focus on the important societal challenges that lie ahead, as pointed by the current pandemic. It is a comprehensive and valuable approach because it combines cost-benefit analysis, stakeholder engagement, financial proxies and project improvement.

As experienced with the NTT Smart World team, SROI is a tool to motivate people to think differently about the way they do things: a strong value proposition in today’s world.

[1] https://socialvalueint.org/

[2] https://ec.europa.eu/regional_policy/en/information/publications/guides/2014/guide-to-cost-benefit-analysis-of-investment-projects-for-cohesion-policy-2014-2020

[3] https://redf.org/