Managing the double bottom line: quantifying social costs in your enterprise

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The Cost of Doing Good Defining and Tracking
Social Costs National Transitional Jobs
Network April 2, 2008
Karen Goore Grant Writer, Stanford Law
School Former Director of Business Enterprises,
CVE, Inc. Esther Kim Portfolio Manager, REDF
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Introductions
CVE provides opportunities, training, and support
to individuals with mental health disabilities,
empowering them to fulfill their employment
potential
REDF
REDF creates job opportunities and pathways to
employment for people with the greatest barriers
to work
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About CVE, Inc. (Community Vocational
Enterprises)

• History
• Non-profit established in 1986 to provide
  employment opportunities to individuals with
  mental health disabilities through innovative
  vocational training programs and employment in
  its businesses.

Program Overview
CVE (2006)
Program Services Intake, Classroom Training,
Group and One on One Life Skills Training,
Occupational Therapy
Business Enterprises Paid transitional jobs with
CVE
Employment Services Resume and cover letter
writing, job search assistance, interview
preparation, post-hire job coaching, partnerships
with employers
Director of Business Enterprises
IME Janitorial Company
Clerical Services
Cafe

• Business Manager
• Area Supervisors
• On-Site Supervisors
• Job Coach

• Supervisor
• Non-CVE On-Site Supervisors
• Job Coach

• Supervisor
• Assistant Supervisor

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Agenda for session

• What are social costs?
• Why define and track social costs?
• How to identify and track social costs?
• How to use social costs to manage a social
  enterprise?

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Social enterprises have both business- and
mission-related costs
Business-related revenue or cost
Mission-related revenue or cost
For-profit businesses generally run like this
Revenue or Sales
Cost of goods sold (COGS)
Business expenses
Net profit
Gross profit
-

-

but social enterprises are a bit more complex
Business revenue
Business COGS
Business expenses
Net profit without social
Gross profit
Social benefit
-
-



Subsidies
Mission-related COGS
Mission-related expenses
Net profit with social
e.g., less efficient direct labor
e.g., case-workers
e.g., grants
This presentation focuses on quantifying
social costs only it is assumed that subsidies
and grants are easily quantified Admittedly
hard to quantify see previous REDF work on SROI
(social return on investment)
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REDFs definition of social costs
?
?

• What it is
• Any cost incurred by a social enterprise (above
  and beyond ordinary business costs) in order to
  fulfill its mission
• Rule of thumb if all social costs are
  subtracted, the resulting financials should
  reflect the true cost of the enterprise as if it
  were a for-profit

• What it isnt
• General inefficiencies some inefficiency is
  inherent in all businesses
• All training costs most businesses require some
  training
• General overhead
• An additional cost. They are already being
  incurred we are just identifying them
  separately
• Revenue opportunity costs (i.e., potential
  revenue lost due to mission)

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Why is it important for social enterprises to
identify social costs?

• Managing business costs and social costs are two
  very different activities. Separating these
  costs will help you figure out how each one needs
  to be managed

• Determine social costs necessary to achieve
  social goal
• Target population? Efficiency?
• Job coaches? Case managers?
• Serving the underserved?
• Determine how to cover social costs
• Fundraising
• Agency allocation
• Determine how to measure social impact (and how
  cost-effectively you are achieving social impact)

• Increase revenue
• Sales and marketing
• Pricing
• Decrease cost of goods sold
• Purchasing, inventory management
• Direct labor wage management
• More efficient processes
• Decrease business expenses
• Re-organization
• Investment in technology

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REDF methodology for quantifying social costs
SOCIAL COST FORMULA Social cost current
cost X of cost related to social mission

• PROCESS TO IDENTIFY AND REPORT SOCIAL COSTS
• STEP 1 Understand your current enterprise costs
  and cost drivers
• STEP 2 Select the most important cost categories
  and drivers to estimate social cost
• STEP 3 Estimate, for each of the costs selected,
  what is due to your mission
• STEP 4 Calculate your social cost by multiplying
  each cost by its social
• STEP 5 Report the enterprise performance before
  and after social costs
• STEP 6 Review and revise your social cost
  calculations regularly

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STEP 1 Understand your current enterprise costs
and cost drivers

• Identify ALL current revenues and costs

and the main drivers of costs, e.g.

• direct labor employees
• Wages, benefits for direct labor
• Employee efficiency (productivity)
• Employee hours worked
• Cost of goods per unit produced or sold
• units produced by type
• Sales and marketing costs per contract
• Supervisor-to-employee ratio
• Training, coaching, case management
• Administrative, fundraising needs
• Others?

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STEP 2 Select the most important cost categories
and drivers
Use the 80-20 approach - you dont need to
account for every social cost, just the most
important ones

• Focus effort only on social costs that are
• big enough to matter, and
• easy enough to estimate

High

• Expected magnitude of social cost

Low
Low
High
Ease of estimating social cost
The idea that for any given project, 80 percent
of the impact comes from 20 percent of the effort
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STEP 2 Example tool Social cost identification
worksheet Cost of Goods Sold (COGS)
Mark if relevant
How big is this cost factor?
Cost category
Potential social cost

• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L
• S / M / L

• Difference in efficiency between target
  population and industry average
• Slower pace of work
• Increased ramp-up time
• Quality of work - mistakes/rework
• Absenteeism, tardiness
• Additional paid training time
• Paid time spent on casework
• Higher wage/benefits paid due to mission
• Other _____________________________
• Wastage of supplies due to inefficiency
• Spoilage of inventory due to inefficiency
• Higher cost of purchased supplies due to social
  mission (e.g. green products)
• Higher cost of supply chain due to social mission
• Other _____________________________

1) Direct labor
2) Supplies
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STEP 2 Example tool Social cost identification
worksheetBusiness Expenses
Mark if relevant
How big is this cost factor?
Cost category
Potential social cost
S / M / L S / M / L S / M / L S / M / L S / M /
L S / M / L S / M / L S / M / L S / M / L S /
M / L S / M / L S / M / L S / M / L S / M / L

• Case management, reporting of outcomes
• Additional supervisory time
• Additional coaching/mentoring
• Additional rework by supervisor
• Other _____________________________
• Additional training costs for target population
• Training for management/supervisors on how to
  work with target population
• Other _____________________________
• Additional sales, marketing to niche markets
• Fundraising time, cost related to enterprise
• Development time
• Giving tours, meeting with funders
• Extra admin time and for target population
• Admin for case management
• Managing social revenue (e.g., reporting)
• Other overhead (rent for training space, etc)
• Other _____________________________

3) Management
4) Training
5) Fundraising, admin, other
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STEP 3 Estimate what of your major costs are
due to your mission

• Collect internal enterprise data
• Determine employee efficiency
• Time studies, observations
• Compare payroll to billing
• Attendance records
• Staff interviews
• Determine average wage paid
• Track inventory turns
• Observe average wastage
• Raw material unit cost
• Self-reported estimates of time
• Basic time studies
• Salaries for training personnel
• Salaries for case management
• Case management records

• and compare externally (if needed)
• Industry average efficiency
• Time spent per job
• Average re-work rate
• Industry average wages
• Managerial experience at comparable for-profits
• Industry average inventory turns
• Industry average wastage
• Industry average cost of materials
• Average management or supervisor-to-employee
  ratio
• Average training cost per market employee
• Average marketing cost per unit
• Industry average overhead

Cost category
1) Direct labor
2) Supplies
3) Management
4) Training
5) Fundraising, admin, other
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STEP 3 Example tool Supervisor interviews

• Supervisor interview form
• Name of supervisor Date of interview
  
• In an average day, how do you spend your time?
• Supervising employees
• General supervision
• Employee training and coaching
• Case management
• Transit / drive time
• Meetings (e.g. one-on-one team agency-wide)
• Sales / marketing / bids
• Fundraising (giving tours, time with funders)
• Purchasing / inventory
• Other administrative
• Emailing, phone calls
• Payroll, HR
• Filing, work planning

Hours spent on social mission
Total hours spent
1
2
OF TIME DUE TO SOCIAL MISSION
1
2
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STEP 4 Now you have the info you need to
calculate your social cost
SOCIAL COST FORMULA Social cost current
cost X of cost related to social mission
1) Direct labor
For each relevant category, compare your
enterprise cost to industry average
2) Supplies
3) Management
social cost
4) Training
5) Fundraising, admin, other
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STEP 5 Report your enterprises financial
performance
Now that youve quantified your social costs, you
are ready to report your enterprise performance
in double bottom line (DBL) format. Below are
two examples of DBL formats from our portfolio
Business-related costs, revenues
Horizontal format
Vertical format
Social costs, subsidies
1
2
Traditional income statement (without social
costs)
Social costs and subsidies
Income statement
Social costs, subsidies
Combined income statement
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STEP 6 Review and revise your social cost
calculations regularly

• Managing your double bottom line is a continuous
  process
• Use the double bottom line income statement to
  continually manage both the business and the
  mission performance of your enterprise
• We recommend you review and revise your social
  cost methodology regularly. Why?
• Your business cost structure may change over time
  (e.g., growth may provide scale benefits)
• You may revise your social mission (e.g., hiring
  people with different barriers to employment)
• External conditions may change (e.g., regulatory
  changes, funding)
• Clearly document your current methodology and
  rationale for social cost allocations in order to
  make future revisions much easier

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Who should be involved in quantifying social
costs?

• Dont do it alone! Involve your organization in
  the process
• Often its the folks closest to the front line
  that best understand where the social costs may
  lie
• Different people may have different perspectives,
  and the discussions to resolve these differences
  are as useful as the final estimate
• A third party can be helpful too
• Brings a neutral perspective in interviewing
  personnel and in estimating costs
• Ensures that the process stays disciplined and
  rigorous
• Ensures that you stay 80-20 in the time spent
  only focus on areas that are most important to
  the organization

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Contact information
Karen Goore Grant Writer Stanford Law
School kgoore_at_law.stanford.edu Esther
Kim Portfolio Manager REDF (www.redf.org) ekim_at_red
f.org