Valuing benefits: what value are we trying to capture?

‘How do you value benefits?’. I will introduce this fascinating topic in a webinar hosted by APM Benefits Management SIG on 25 January 2018. In this article we first ask the question ‘Why value benefits?’. Although my opinion is not hidden here, it’s a genuine question - we want to know what you think; so, I end with a question for you.

Valuation is how we estimate the worth of something, be it a product, service, or attribute of something. There are alternative means of valuation, as highlighted by the Social Capital Protocol: “In financial accounting terms, valuation is understood to mean an estimation or determination of worth in monetary terms, but in welfare/wellbeing economics... valuation means more than just monetary valuation. It includes qualitative, quantitative, and monetary.”

Common approaches that include valuation are Cost Benefit Analysis (CBA) (HM Treasury Green Book), and Social Return on Investment (SROI) (Guide to SROI, Social Value UK). They both follow processes of mapping benefits that we would recognise, and then go on to also value benefits. They are, therefore, a natural place to start our thinking on adding values to a benefit map. But although the valuation techniques used can be the same, the purpose of these two approaches is not the same (and not always explicit). This leads to some valuation techniques being more or less useful. So, we should first consider our purpose for valuation.

As a method rooted in welfare economics, CBA adopts the theoretical position that changes to people’s wellbeing (utility) should be valued from the perspective of those experiencing the changes. However, in practise, it is mostly used to achieve the most pre-defined benefit (or objectives) for the least cost through options analysis and evaluation. The changes and their value are, therefore, often limited to decision-makers’ perspectives of pre-defined outcomes, objectives, or policies. This can lead to situations of material misstatements, where the value attributed to changes is not necessarily the value the stakeholder would place on changes to their lives.

In contrast, SROI’s starting point is better considered as being closer to that of financial and management accounting: regardless of objectives, all (material) changes should be accounted for (identified, measured and valued). Central to its principles is that the changes and their value are understood from the perspective of those experiencing the changes. Its purpose is, then, to maximise value for all stakeholders through management of activities (design and delivery). A priority (through 7 principles) is placed on accounting for all changes and that they should be valued from the perspective of those experiencing the changes.

So, although these approaches may appear similar (in the process), they arrive at different practise of valuation for different purposes (principles). A significant difference in these approaches is who decides how valuable a benefit is?

Is our purpose for valuing benefits to find the best way to deliver objectives? If we identify the benefits that contribute the most to achieving objectives, we can focus management priorities or select the best delivery options. It would be possible to go beyond a prioritisation exercise in benefit mapping to put a monetary value on each benefit and so compare the cost of enablers with the value of benefits that results, to produce a cost benefit analysis. In doing this though, we start with pre-defined changes we aim to realise, and, in most cases, the value of the benefits will be prescribed by whoever set the objectives.

Alternatively, our purpose may be to maximise benefits during delivery. This brings us back to the question above of ‘who decides on the value?’, or ‘whose benefit is it?’. This purpose would also raise the issue that there are potentially benefits outside of the objectives that result from our activities. Linked to this it will also raise the question of perspective in indicators as well as value, and ultimately the definition of the benefits. And so, we open a can of worms: what value are we trying to capture?

If, for example, a benefit is ‘improved public health for the local community’, is this a benefit to the local community that we want to understand from their perspective? Or a benefit to a funder, investor or client who is responsible for improving public health in the local community that we need to understand and demonstrate our achievement of their definition from their perspective.

In an ideal world, the two are the same. In reality, practise of SROI has shown this is rare. This definition, or perspective, of what appears to be the same thing is crucial in valuation and can result in wildly different conclusions about how to maximise value.

There is not necessarily a right or wrong answer to this question, it could be both (indeed SROI enables both to be accounted for alongside each other), but clarity and transparency of purpose is vital to effective valuation and communication of value to achieve the purpose. Value is subjective. ‘Value to whom?’ is therefore fundamental to valuation. In our example is our purpose for valuing benefits to maximise priorities for the community or the commissioner, or both?

Further Reading