Numerical figures, charts, and metrics have defined the business world for centuries. The language of revenue, profit margins, and return on investment serve as universally understood indicators of a company's success or failure. As our world evolved, a growing emphasis on the broader effects businesses can and should have on society and the environment led to the emergence of terms like 'social impact' and 'environmental impact'.
These concepts hold great promise as they call on businesses to be accountable for their financial performance and influence on communities, employees, and the world at large. However, the overuse and misuse of the term 'impact' is a growing concern. When used as a catch-all term, 'impact' risks losing significance, diluting its transformative potential, and threatening its transformative role within our society.
The Business Metrics Legacy
As we understand them today, business metrics development has been a long journey grounded in trade, commerce, and innovation history.
Companies began developing accounting systems, marking the birth of modern financial metrics. For instance, the concept of double-entry bookkeeping, first codified in 1494 by Luca Pacioli, enabled businesses to keep track of their assets and liabilities more accurately. These systems allowed businesses to measure revenue, costs, profit, and return on investment - the cornerstones of business metrics we still use today.
As businesses expanded and the need for outside investment grew with the onset of the 20th century, it became crucial to establish trust between companies and potential investors. The Great Depression in the 1930s highlighted the necessity of regulation to prevent the misuse and manipulation of financial information. In response, regulatory bodies like the U.S. Securities and Exchange Commission were established, and independent auditing practices were institutionalized. This marked a significant milestone in the evolution of business metrics, solidifying their role as dependable, transparent financial performance indicators.
By the end of the 20th century, business metrics had become highly sophisticated, incorporating concepts such as gross margin, EBITDA, net present value, etc. The adoption of these metrics by businesses worldwide brought about a new level of precision and comparability, setting the stage for the rigorous standards of accuracy, honesty, and transparency we see today.
As we look to the future, specifically towards the burgeoning social and environmental impact field, we must aspire to apply the same level of discipline and professionalism that has shaped the evolution of business metrics. It is time to extend this legacy to the realm of 'impact', giving it the respect and precision it deserves.
The 'Impact' Conundrum
The term 'impact' 's ambiguity extends beyond its flexible use. It also reflects a tendency to mask inexactitudes and validate self-proclaimed 'good deeds'. It's common to find entities using the term 'impact' to describe their well-meaning activities without having any rigorous means to measure or quantify their results. Aspiring to do good, having a mission, or having noble intentions are not the same as achieving measurable, tangible change. A self-ascribed title of 'good guys' is not automatically merited by good intentions alone.
In this respect, 'impact' risks becoming a buzzword bandied about to project an image of altruism and social responsibility without the requisite accountability and evidence of effectiveness. This sort of self-aggrandizement is a particularly dangerous pitfall. Without concrete data to back up these claims, they become hollow proclamations. The misuse of 'impact' to denote vaguely defined, well-intentioned activities devalues the term and undermines its potential as a transformative tool for social change.
Many NGOs, charities, and social enterprises consider themselves ethically superior to businesses. They can, at times, look down on businesses as purely profit-driven entities with little regard for social or environmental outcomes. Yet, regarding transparency, honesty, and accuracy in metrics - critical values for accountability and efficacy - businesses often perform much better. This is a stark contradiction that needs to be addressed.
Consider, for example, an organization claiming to have 'impacted' 8,000 individuals. Upon closer inspection, we found that this figure represents the number of participants at their events. However, participation does not necessarily equate to meaningful change or improvement in people's lives, which is what impact should fundamentally represent. By overgeneralizing and oversimplifying what 'impact' means, we risk losing the transformative essence of the concept.
Indeed, a strong moral stance alone won't change the world. Results do. The ethos of a social enterprise should be about creating quantifiable change for the better rather than merely posturing about intentions or potential. After all, the reality of making a difference lies in the measurable improvement in the lives of individuals and communities or the tangible environmental benefits. The results of actions, not the intentions behind them, truly matter.
This brings us to a critical juncture in the discourse around 'impact'. It is a concept with great potential to drive positive change, but only if we elevate its measurement to the same level of rigour, transparency, and professionalism as traditional business metrics. We must move from well-intentioned but vague impact claims towards concrete, measurable, and verifiable impact metrics.
To truly claim impact, businesses and organizations should be able to demonstrate a measurable change, improvement, or influence as a direct result of their interventions. Impact reporting should be subjected to the same scrutiny, validation, and regulation level as financial reporting to ensure credibility and transparency.
While impact measurement - compared with the methodology of business metrics - is still in its infancy, plenty of methods and tools exist to approach impact measurement professionally.
Here are a few examples:
Social Return on Investment (SROI) measures and communicates the social, environmental and economic value created, assigning a financial value to these outcomes.
The Balanced Scorecard provides a balanced view of performance that includes financial metrics, customer, business process, and learning and growth metrics.
The Impact Value Chain breaks down the process of achieving social impact into inputs, activities, outputs, outcomes, and impact, providing a clear pathway from resources to impacts.
The Triple Bottom Line accounting framework includes three performance dimensions: social, environmental and financial, offering a more comprehensive view of a company's performance.
The Donabedian Model, widely accepted in health care for evaluating the quality of care, looks at structure, process, and outcomes to measure impact.
It's time to give 'impact' the respect and precision it deserves. The potential for businesses to bring about positive social and environmental changes is enormous. Still, we must guard against the misuse and dilution of the concept that embodies this potential. By adopting more rigorous standards for what qualifies as 'impact', we can move towards a world where businesses are as accountable for their influence on society and the environment as they are for their bottom line.
If you want to learn more about impact measurement methods, you can complete our online course and apply any of them to your social enterprise or startup. Participants can also send us their solutions; our mentors will give detailed feedback.