The Life Changes Trust recognises that the economic impact of activities and projects can be significant. However as the main focus of the work of the Trust is to increase the quality of life and well-being of our beneficiaries, we do not think it is appropriate to think of this in only financial terms.
Economic evaluation may be useful where used as complement to other evaluation work. The Trust will discuss with fundees where they think economic evaluation would be useful and agree on approach and funding.
Why economic evaluation?
Economic evaluations help organisations and their funders compare the value of the impact created by an organisation or project with 1) the cost of creating that impact, 2) the cost of not acting, and/or 3) the cost (and value) of a different action.
Public authorities and funders allocate increasingly limited resources where they can achieve most value. This means choosing between competing priorities, and usually involves trade-offs between alternative courses of action. Economic evaluation can be very helpful to identify what is likely to be most cost-effective, and is consistent with the way that the central government conducts evaluation and appraisal.
In its latest publication on the topic – Economic Evaluation: What is it good for? – New Philanthropy Capital (NPC) has produced a comprehensive and accessible guide to deciding whether to conduct economic evaluation. They caution that conducting an economic evaluation may not always the right thing to do, and if it is, it must be done robustly to ensure results are not misleading and do not lead to unintended negative consequences.
Types of economic evaluation
The NPC guide outlines the most relevant techniques for the third sector. Two of the most familiar arecost-benefit analysisandsocial return on investment(SROI).
The Big Lottery has produced a guide to Cost Benefit Analysis. This is a method of evaluating if the benefits of a project or activity are greater than its costs.
- All costs of the project, including in-kind contributions such as volunteer time, are measured in monetary terms.
- Benefits would include tangible ones, e.g. increased economic activity of individuals, and less tangible ones, e.g. improved quality of life.
- For less tangible benefits,proxymeasures should be used to assign a monetary value.
- Any additional costs as a result of the project will also need to be factored in (e.g. increased uptake of other services).
The HM Treasury Green Book outlines the government approach to economic evaluation. It is quite technical but does have an annex discussing how to value non-market impacts such as health, housing and education.
Social return on investment (SROI) has emerged as a 'quasi' economic evaluation method closely related to cost-benefit analysis. It focuses on listening to stakeholders and identifying the outcomes that are important to them, and then putting a financial value on these outcomes.
SROI has been widely examined by organisations such as The Third Sector Research Centre and New Philanthropy Capital. Carried out effectively it can produce interesting and compelling evidence about the value organisations’ create. The full potential of SROI has not yet been fully realised and a number of main limitations exist, not least the complexity and cost of use by third sector organisations.
Further information on SROI is contained in A Guide to Social Return on Investment first published by the Cabinet Office in 2009, and from Social Value UK (formerly the SROI Network).
There is continuing innovation in the field and the boundaries between the measurement of economic and social value are becoming increasingly blurred.
Considerable steps forward are being taken to develop consistency and quality in relation to the valuation of social outcomes. Well-being Valuation – a promising valuation technique – has now been used to create the Social Value Bank a methodologically consistent and growing set of social values to be used within full Cost-Benefit Analysis or SROI evaluation. The Global Value Exchange has emerged as an interesting crowd-sourced attempt to build a standardised database of outcomes,indicatorsand values. The Trust will also be publishing an Insight Briefing on standardised quality of life and well-being measures relevant to our beneficiary groups.
A word of caution!
The use of economic evaluation techniques to assess social impact and measure social value is work in progress.
Despite the many benefits of using economic evaluation methods, the position paper introduced earlier from NPC sets out a number limitations and potentially negative consequences where misuse occurs.
As in all research, it is important to be open about the assumptions made when attaching values to both costs and benefits. These will be vulnerable to challenge and different interpretations. This approach may also focus attention on those things that can be measured monetarily rather than other things which may be more important to the individual project, activity, or beneficiary.
When considering economic evaluation it is important that the right approach is used, used well, and draws on specialist expertise where required.
There are a number of research consultancies which specialise in economic evaluation. Evaluation Support Scotland have a consultants database to help you identify and choose external evaluation support.
- New Philanthropy Capital (NPC) Economic Evaluation: What is it good for?
- The Big Lottery guide to Cost Benefit Analysis
- The HM Treasury Green Book
- Social Value UK A Guide to Social Return on Investment
- Third Sector Research Centre The ambitions and challenges of SROI
- New Philanthropy Capital (NPC) SROI Position Paper
- The Global Value Exchange
- The Social Value Bank
- More information on how central government conducts evaluation and appraisal: HM Treasury, The Green Book: Appraisal and Evaluation in Central Government
- Social Impact Scotland offers a range of information and guidance on SROI