Last month, I had the pleasure of presenting a lightning round at the Canada Day @ Social Capital Markets 2010 event. I decided to present on “What’s Wrong with Social Metrics?” Below are my key points (and a few slides) from the presentation.

Often, social value metrics are seen as a fuzzy offshoot of social enterprise, situated somewhere between impact investing and the actual work of operating social enterprises. I have never agreed with this view, and I want to shed light on the practical, concrete value of metrics for social entrepreneurs.

Metrics of any sort encourages certain behaviours. This is analogous to the observer’s paradox: by looking at something we change it. Metrics takes this basic fact and hyperbolizes it: by measuring something (i.e. the number of young people earning a high school diploma) as indicative of success, we are encouraging social enterprises to focus on increasing this indicator. So, social metrics via the behaviours they encourage, are a key element of success. Good metrics encourage good behaviours. Bad metrics encourage bad behaviours.

In this frame, the way that social metrics is practiced is worrying. Currently, we think the key role of social metrics is to attract financial capital to this sector. We believe that if we can use ratios like Social Return on Investment to attract investors, then we can enable social enterprises to create scalable solutions.

There is an assumption here: we think once social enterprises gain access to financial capital, they will be able optimize social and financial returns. However, a scan of the Canadian social venture field reveals that there are not many profitable, socially-motivated firms, either non-profit or for-profit. There could be many reasons for this: lack of interest in starting social enterprises, or simply a lack of understanding of how to create the bottom line. My firm, Social Asset Measurements (SAM)believes there are a lack of profitable social enterprises because of the latter.

Further, we think that social metrics, because of their ability to motivate behaviours, can be used to help firms optimize impact. We gear social metrics towards the enterprise (Figure B). It turns out, this approach requires a theory of how social impact is created. If we do not know how impact is created, then we can’t optimize the process.

In my previous post, I talked about SAM’s theories on this topic. In brief, we believe that sustainable change happens when we change behaviours; behaviours spread through networks. To help social enterprises make resource allocation decisions, we need to look at their social networks and identify areas that are conducive to social change. Figure C shows the masked data of a SAM client. We have visualized the client’s social network. The size of the node represents the monetized social and financial impact experienced by each stakeholder. Nodes with blue text represent an aggregate cost to the person. In this case, the grey nodes, representing the organization’s staff have an aggregate cost. The lines between nodes show the relationships between each person.

From here, we move into further analysis. As a brief example, see Figure D. SAM has placed people within a continuum: On the y-axis, there is aggregate benefit and aggregate cost. Stakeholders are placed along this axis depending on the magnitude of cost and benefit they create.

From this diagram, it becomes clear that although this organization has a high ratio of SROI, it is not sustainable: the bulk cost is being taken on by the organizational staff. By slicing the data in different ways, SAM clients can have better discussions on how to allocate resources to create aggregate benefit for everyone.

This is just the beginning of the kind of analysis that SAM undertakes. Our analysis is always ‘social-enterprise-focused’ metrics that help social organizations make better decisions.

Financial capital will come, partially because of impact investor focused metrics, but also because of social-enterprise-focused metrics via the sustainable behaviours we can encourage with the latter.

Nothing is more enticing to an investor than a profitable enterprise, and to create profitability, we need metrics that encourage multiple-bottom-line behaviours.