7 !{ArticleDetails-ReadTime} 20 Feb 2019
bubble burs

How to cut through the noise of outcomes measurement

!{LinkedContent-author-by}

EY Global

Multidisciplinary professional services organization

7 !{ArticleDetails-ReadTime} 20 Feb 2019

!{ResourceList-Close}

The concept of outcomes measurement is simple: in a complex world, organizations should better understand how they create value.

Long-term value (LTV), integrated reporting, the six capitals (financial, manufacturing, human, social and relationship, intellectual and natural), expanded reporting, creating shared value — these are all concepts that are changing the way companies and investors consider the value of organizations.

Although these concepts are all slightly different, they are also overlapping. What they have in common is that they are all underpinned by the desire to measure a broader range of the outcomes of an organization’s activities and, subsequently, to value these measured outcomes.

What is outcomes measurement and why is it getting so much focus?

The concept of outcomes measurement is simple. It is the recognition that in a complex world, organizations should develop a better understanding of how they create value for stakeholders and society at large, in order to be able to develop a long-term, viable strategy and to keep their license to operate.

Outcomes measurement is shifting the view that value creation is only about generating financial returns from financial and manufactured (capital) inputs. It recognizes that other forms of capital, such as social, human, intellectual and natural capital, can be critical to an organization’s long-term success, yet these are only partially, or not at all, visible in its financial accounts.

Since these forms of capital often remain invisible, the question arises as to whether companies, and their stakeholders, have the right information base to make decisions and mitigate risks that could affect their overall value creation. EY member firms’ collaborative efforts to help build a better working world have given us an opportunity to observe the emergence of these new forms of value recognition. This has subsequently helped us begin the process of building an infrastructure to support measurement that includes: 

  1. A universe of typical outcomes that is constantly expanding and evolving
  2. A defined set of techniques to measure the outcomes
  3. A range of typical financial proxies to measure the value of the identifies outcomes
cutting through the noise of outcomes measurement

Historically, we have seen businesses and investors focusing on financial value creation while governments and the not-for-profit sector deal with the social and environmental impacts, or market externalities. In the emerging economic environment, there is a realignment of resources to support the co-creation of financial and nonfinancial value by organizations.

Businesses and commercial organizations, in particular, have improved the art of performance management in pursuit of the principle of profit maximization. But, in the past few decades, this limited perspective of “value recognition” has been challenged by a growing number of purpose-led organizations that have begun to take notice of a growing body of evidence that supports integrating intangible value, expressed through alternative nonfinancial valuation techniques, performance measurement models and reporting frameworks. These pioneering organizations, led by disruptors, are reaching a tipping point in making outcomes measurement a mainstream management consideration.

At a fundamental level, the term “outcomes measurement” refers to the measurement of the difference that an initiative, program or organization makes to its stakeholders. It provides evidence on whether initiatives and programs are making a difference, and shows organizations what works and what doesn’t work. 

How outcomes measurement is currently used

The rise in interest in outcomes measurement has been consistent across organization types including businesses, not-for-profits, donors and development aid agencies, a wide spectrum of investors, government and social enterprises, to name a few.

The growing language around “purpose” and “shared value” and the convergence of global reporting standards and frameworks supporting organizations as they evolve from one-dimensional financial reporting to include other forms of capital and value, are significant trends driving the uptake of outcomes measurement.

In addition to the need for organizations to be accountable for their outcomes and impacts, recent versatile and bespoke models are gaining ground and are steadily fueled by their use as a basis to value a previously unvalued set of organizational assets. These values can be used to design and monetize innovative investment models. The combination of the convergence of new organization models and purpose-led agendas, the maturity of outcomes measurement and the attention of capital markets demanding a wider definition of capital performance calls for a market approach augmented by an outcomes focus.

Community-sector organizations and their funders have a growing interest in outcomes measurement. This is leading to more of them implementing systematic outcomes measurement frameworks for their organizations and their funding programs. They are also beginning to use the outputs from outcomes measurement to inform strategy development and performance improvement.

For decades, the international development community has used the principles of outcomes measurement to inform program design, delivery and evaluation. Similarly, governments have increased their reliance on the outcomes approach to evaluate investments in public spending to ensure greater transparency and returns are achieved.

The biggest shift in the users of outcomes measurement has been in the business community. Capital-market-driven, for-profit enterprises, both large and small, have begun to use the outcomes evaluation techniques and leverage a richer, deeper analysis of value drivers to support better decision-making.

Four ways outcomes measurement is likely to evolve

1. Outcomes measurement is increasingly likely to drive investor sentiment

The shape of value has changed. The social and international development sectors have long appreciated the importance of measuring complex intangible value. As the majority of market value is now defined as “intangible value,” corporate reporting should catch up and review many of its traditional metrics to prove to investors that they are investing in resilient companies with a purposeful proposition. It is no longer plausible to leave a gap between short-term commercial decision-making and the wider impacts on society.

Consumers and regulators are punishing those who deplete social and environmental value, more than ever. On the other hand, investors are increasingly rewarding those who provide credible outcomes data on how they have not only considered sustainability risks, but are actively growing their value by strengthening the human and natural resources underpinning their markets, as well as other measures.

2. Agreement on a common view of all of the elements of outcomes measurement is unlikely at any time soon

The heightened levels of engagement and interest among wide-ranging stakeholder groups and their influence on the evolution of outcomes measurement have resulted in many divergent views and bespoke outcomes frameworks. This has also made it harder for organizations to navigate this space and determine the most appropriate and credible measurement option for their needs. This phenomena has prompted many organizations to adopt a wait-and-see approach until a dominant trend toward one comparable standard emerges.

The issue is unlikely to be resolved in the near future. The field of financial accounting has evolved, with standard practice emerging after decades of refinement and ongoing development by academics, professionals and practitioners. The field of outcomes measurement in comparison is in its infancy. Development and evolution in the digital era are bound to be on much shorter, exponential development curves backed by new technologies that provide a way forward at a much faster pace than before.

In this new era of rapid change, first movers will likely be at a distinct advantage in shaping the future of outcomes measurement and also in building the culture within their organizations to meet the challenges and opportunities that this future brings.

3. As outcomes measurement frameworks have common elements, organizations can start their journey now

The concept of outcomes measurement is not new. Its origins have been linked back to the first use of logic models and Theory of Change frameworks in the US by the United States Agency for International Development (USAID) in the 1950s. Despite the long history, the rapid growth in popularity and faster adoption rates among businesses, in particular in recent times, augur well for the future of broader value measurement.The concept of these logic models used more than five decades ago is still consistently applied across all outcomes modeling and frameworks, and while details differ, the fundamental logic remains the same. Organizations can start the journey now to trial the most appropriate framework for their organization and operating context to stay ahead of their competition.

4. Outcomes measurement is here to stay

The world has changed since the turn of the millennium — this is evidenced by the rising importance of the intangible aspects of an organization’s business model; technological revolutions supported by the internet (the emerging internet of things and associated prevalence of big data); issues of governance and trust, equity and fairness in society; increasing income differentials and consolidation of wealth; social unrest; and political upheaval.

There are actions organizations can take now to start their outcomes measurement journey. Today, an increasing number of businesses are moving toward an integrated vision of value creation, including the dimensions of shared value and externalities. In order to achieve an integrated view of their impacts, organizations should first be able to measure the shared value and externalities they create. Recently, some companies have worked toward an environmental profit and loss (P&L), a social P&L or even “integrated P&L” statements in order to do so.

 

!{ArticleSummary-Heading}

Businesses are moving toward an integrated vision of value creation, including the dimensions of shared value and externalities.

!{AboutThisArticle-Heading}

!{LinkedContent-author-by}

EY Global

Multidisciplinary professional services organization