The difference the third sector makes

You don’t know what you’ve got ‘till it’s gone: how to make judgements about the value of the third sector to economy and society

Social and economic value

Currently there’s keen interest, at national level, in finding ways to account financially for the value of the third sector’s work. This is driven by a recognition that the third sector is insufficiently credited (or is simply overlooked) when using conventional metrics such as GDP. It’s a well-intentioned objective, but measuring sector value is never going to be easy to do.

There’s already been a ton of work on the evaluation of practice interventions (such as programmes to address homelessness, teenage pregnancy, recidivism); organisational or partnerships interventions (such as mental health recovery college programmes, young people’s employability programmes); and, place-based interventions which attempt to strengthen or revive local economy and society (such as Local Trust programmes or interventions to tackle declining coastal towns).

Such work draws on variations of techniques such as cost-benefit analysis and social return on investment. And some impact-focused approaches to evaluation use theories of change to test programme achievements.  None of these approaches are perfect, but if carefully used in the right contexts, they can throw light on the benefits that interventions brought about.

But these techniques cannot be transplanted directly onto an enquiry about ‘whole sector’ impact because the situation is just too complex. This blog argues that it is better to go with the flow and accept that it is too hard to pin down in statistical terms much of what the sector achieves and instead find other ways of making clear-headed judgements about the added value produced.

An exploratory study on the value of the local third sector

In June 2020, I was commissioned to help estimate the value of the third sector in three localities in Yorkshire and Humber (see more detail on the commissioning partnership at the end of the blog).  The idea was to build a convincing picture of sector structure and dynamics and then think about how to weigh up the balance between the ‘energy’ the sector puts into its work and the ‘added value’ it produces as a consequence.

The purpose of the study was to build a shared understanding of how to assess sector value and involved direct and intensive participation with commissioners and consultation with sector stakeholders to test the plausibility and usefulness of the results. That process is not yet over – the report is published this week (September 2nd 2021) and a lot more consultation and reaction is expected over the coming weeks and months.

The full report can be accessed here. This blog tries to capture the main points about how to value the work of the third sector in localities which is replicable in other areas. It’s quite a long read – but it’s a tricky subject and not easily condensed into attractive soundbites. I hope you can get to the end!

How much energy does the third sector produce?

Let’s side-step the issue of ‘added value’ for a moment and think instead about how much energy the third sector produces. This is quite easy to do by estimating levels of the third sector’s financial expenditure in a given area and then adding plausible proxy financial values for the contribution of volunteers, in-kind support from the public and private sectors and the value of self-generated income (that has not already been included in expenditure – such as the value of retailing pre-used goods).

In West Yorkshire, for example, sector expenditure is about £1.2bn, while the proxy replacement value of volunteer time is around £97m, in-kind support about £30m and the value of additional self-generated income about £10m. The third sector therefore invests around £1,396m of energy into its work. Few commentators are likely to be satisfied with such a limited account of sector value. What’s needed is a way of explaining how this energy is converted into additional social and economic impact.

Converting sector energy into added value

The energy the third sector puts into its work produces ‘added value’. But the third sector is a pluralistic entity which is composed of groups and organisations with different structures, skills, interests and aims. So it’s a bit daft when commentators get over excited about the idea that the third sector is a ‘system’ and then conceive of sector energy as something that can be strategically directed.

As illustrated in the diagram below, sector activities are characterised by inherent tensions and aspects of complementarity. It is a complex problem because the inherent value of the activity may be defined differently, depending on the point of view of, for example, the people who lead and manage an organisation, their employees and volunteers who engage in hands-on delivery of services, those people who are the recipients of support, and from onlookers (in the private or public sectors or the general public) who make their own ‘value judgement’ about whether the activity is worthwhile.  As I argue in more detail below, if you feel that ‘added value’ can be defined as a constant – think again.

Defining ‘added value’

‘Added value’ is an imprecise term that gets thrown around in debates. So in this exploratory study in Yorkshire and Humber, we tried to whittle away at different aspects of value. They are shown in the diagram below. 

Figure 2    Realms of added value

Bear with me, because it’s worth taking time to think about each of these types of added value.

  • Economic added value is the contribution that the local third sector makes through ‘multiplier effects’ driven by: organisational expenditure on local businesses; the spending of employees in the local economy; and, productivity from self-generated trading activities (though not all expenditure will remain in the local economy). Some multiplier-effect calculations use several rounds of impact assessment, where it is assumed that when money is spent in one company, that company will in turn spend this money again, and so on. That was avoided in this study because it is not appropriate for the third sector to take credit for multiplier effects produced by other sectors. On balance, we estimated that about 55%-75% of sector expenditure will be retained and recirculated in the area.
  • Fiscal added value: is defined as the savings gained by local public sector agencies and government departments because of third sector activity (either by delivering services under contract more efficiently or cheaply, or by reducing service need via third sector generated activity).  There have been some useful studies on likely fiscal benefits in, for example, reduction in usage of police, health and social services, social services resource because of the activities of local third sector organisations. Defining, in precise terms, the origin of such benefit is difficult because the value of sector activity accumulates from the actions of many types of third sector organisation which are involved in a wide array of activities that directly or indirectly benefit public sector bodies. For example, in the field of health care, contributions have been identified from third sector organisations which engage in sporting, recreational, artistic and cultural activities. On balance, we agreed that at least an additional 45-65% of the value of third sector energy can be set against direct fiscal savings to the state through the processes of prevention, replacement, additionality or deflection from public service use.
  • Use value: is defined as the direct and more immediate personal or social benefits gained by third sector service users which in turn incentivises, empowers and facilitates greater socially, economically or environmentally beneficial activity by the resident population in employment, self-employment, running private businesses/social enterprises and volunteering.  Multiplier effects of use values cannot easily be calculated on a case-by-case basis, let alone at sector level. But this does not mean that such value does not exist. For example, the recipients of third sector support to tackle financial insecurity can bring immediate benefit (such as access to loans from credit unions, groceries from food banks; mentoring, employability support and borrowing clothes to attend job interviews; support to recover from illness or personal setbacks which facilitate a return to employment, and so on). It would be unrealistic to argue that the full cost of producing use values can be translated into economic multipliers. It is known, for example, that employability support programmes have mixed levels of success for a multitude of reasons. Similarly, support to tackle issues such as drug or alcohol use can help produce attitudinal and behavioural change – but not always – and especially so when beneficiaries face a range of other insidious or unpredictable pressures. On balance, it was agreed that use values translate into an additional 25-45% of sector energy into economic value.

Each of the above multipliers deal with direct and immediate sources of economic benefit. They are easy to understand and do not require complex calculations that involve far-fetched estimates of things that cannot be known.

It’s tempting to exaggerate the economic added value the third sector produces. Everyone likes, after all, to have a pat on the back. But our multiplier estimates are purposefully ‘conservative’ compared with some other assessments about the multiplier effects of discrete aspects of sector activity. When impact assessments are overblown – they do more harm than good. Plausibility is important.

Intangible aspects of added value

The final step is to think about how to value those aspects of third sector activities that cannot easily be defined, let alone measured. While it may not be possible accurately and consistently to measure value which is created through the individual and accumulated action of third sector organisations, this does not mean that the existence of such value is not recognised by sector insiders or stakeholders in the public sector, business community and the people the third sector helped.

An attempt was made to parcel-up three types of intangible added value to help us make good judgements on the contribution of the third sector.

  • Social value: refers to the alleviation of the impact of specific social problems and investment in personal and community wellbeing to generate or embrace new opportunities to strengthen economy and society locally.
  • Community value: means the strengthening the quality of life, enriching culture, and encouraging cohesion, tolerance, trust and belief in civil society through the collective contribution of the third sector working in neighbourly, complementary or cooperative ways.
  • Existence value: a term borrowed from environmental economics, refers to third sector activity which is valued by the general population though not necessarily used personally. Existence value also includes extant third sector capacity and latent potential to produce energy and momentum to tackle unforeseen local challenges or crises – such as the current coronavirus pandemic.

None of these definitions make much sense without a clear understanding of third sector dynamics. And so, judgements about value need to be tempered by the realities of sector activity: four reasons why this is the case are offered below:

Value produced by third sector organisations is shared: only very rarely, if ever, could a single organisation claim to produce all the value that is required by its beneficiaries. Other organisations or groups also play a part as do people in private life (family, friends and neighbours), the private sector (local businesses) and public sector (health, education, police, fire and rescue and the local authority, etc.). While this might constitute some duplication or overlap at times, this is not necessarily a problem as social and personal needs require support of a multifaceted and continuous kind. 

Value produced by the third sector accumulates: because the responsibility for the production of added value is shared, it is likely to accumulate. But it does so in unpredictable ways, depending on the circumstances facing beneficiaries. For example, support from one third sector organisation may not produce benefit immediately, but can be realised later – perhaps in tandem with other forms of support or encouragement.

Value is not a constant: it should be expected that the value the sector produces cannot always be ‘targeted’ or ‘fully utilised’. Just as is the case with education or health systems, people make their own choices on what they want to take or leave from the advice or support they may receive. Or other factors beyond their control may increase or limit the extent to which value can be utilised. This makes it hard to determine the value of service or support given – relative to the energy invested.

Value does not last forever: the value of the work undertaken by third sector organisations will disperse and dissipate over time. These processes occur as other interventions are established to tackle issues in new ways which often come about in response to social change and shifting social priorities. The work of the third sector is rarely finished – so activity must continually be renewed.

What’s best, measurement or judgement?

Getting too fixated on the monetary value of third sector activity can be unhelpful because it leads to an under-estimation of the benefit produced by less tangible aspects of added value. Isn’t it better, sometimes, simply to make a judgement that activity is worthwhile?  

A while ago, I was involved in a study which took me to see a volunteer-led and run library in an isolated former industrial village. The library had come under community ownership due to an asset transfer from the local authority.

For fun, we tried to pin down the ‘economic’ value of the library. For example, we calculated the financial cost of each book loan. The results were not promising because the pro-rata cost was enormous. We repeated the exercise on the kitchen/café and space rentals for small community clubs and societies. Again, the financial appraisal failed to produce promising results. According to strict economic measures, the library was ‘losing’ money.

And yet, the library produced a great deal of intangible added value for local individuals and the community in general. Substantive social value arose from its use by a group of secondary school children who, after getting off the bus each evening, used the kitchen and library as a place to socialise and do their homework before parents arrived to pick them up later in the afternoon. The children benefitted because they had a place to go with friends, their parents were happy that they were safe and under quiet supervision, and neighbours and older relatives were relieved of the pressure of looking out for them.

From a community value perspective, the library was quite literally ‘the only place in town’ for people to arrange to congregate in clubs and societies, or to drop in to read, drink coffee or have a chat. The kitchen/café was free to use because it was uneconomic to run as a social enterprise – though there were some items that people could buy if they chose such as biscuits, sweets or crisps. It was also a place where people could volunteer and keep themselves busy, socially connected and intellectually stimulated.

Arguably, the library’s existence value was just as important as its more direct social and community value. Most people in the former industrial village did not use it, many probably never would, but they knew it was there and could value the fact that help may be at hand if ever they or their families or neighbours needed to use its services. At the most fundamental level, it was a visible symbol that village still had an association to civil society rather than just being a collection of private households.

This case study provides just one example of how intangible forms of value make a difference.  In the study from which the example was drawn, there were just 14 detailed case studies in spatially isolated and economically challenged communities: each made its contribution in entirely different ways.

Keeping things simple

The principal purpose of this discussion is to demonstrate that it is possible to make an informed judgement about the value of intangible forms of impact that cannot be measured.  But it also shows that the prospects for collating hard evidence on such value on even a relatively small sample of third sector organisations would be substantial and for the whole sector prohibitive.  Furthermore, even if that evidence could be collected – it would be the challenge of a lifetime to devise a way to quantify it and persuade others that the results were intelligible, useful and valid.

There is a better way to address the problem of intangibility. Instead of looking for ‘data’ to collate, categorise and count – surely it is best to recognise that the process of making good judgements about the value of sector activity has already happened. There are two simple ways of recognising this.

Firstly, by recognising that a majority of third sector organisations are awarded grants and gifts from time to time, by trusts and foundations, local public bodies which operate small community grants, local parish councils, faith organisations, businesses or philanthropists and the general public. This shows that through the use of trust and judgement, much of the work of the sector has already been assessed.

Secondly, and as importantly, the relatively low levels of closures among third sector organisations indicates that continuity and sustainability is the norm, not the exception. What this shows is that third sector organisations are robust, relevant, purposeful and produce social and community activity that people contribute towards and use. It is a simple point to make: if the work of the third sector was not valued – it would not exist.

Okay, so how much is intangible value ‘worth’? Surely, most would agree at least in principle, that the relatively intangible social, community and existence value that the third sector accumulates is at least of equal value to the energy the sector invests. Perhaps that is far as financial evaluation exercises on intangible impact needs to go? As an illustration, the results for West Yorkshire are presented in Figure 3.

You don’t know what you’ve got ‘till it’s gone

Civil society is strong in the UK compared with many other nations. The hard-won rights which underpin civil society, some of which have been in place for centuries, make its existence fundamental to our culture.  When something is so deeply embedded in society, there is a tendency to take it for granted – perhaps even see it as ‘normal’ and thereby diminish its visibility and value.

The ownership of a strong civil society is, of course, anything but ‘normal’ when observed from an international perspective. But in the UK, it is virtually impossible to conceive of a situation where civil society could cease to exist. It is simply assumed that people will continue to come together, of their own volition, to tackle social, economic or environmental issues that are important to them.

By recognising the ‘presence’ of civil society as unusual, rather than normal, it is possible to think about the consequences for state and society if a strong third sector no longer existed. It may be difficult to come to clear conclusions on the total value of the third sector to society when it exists, but in its absence, it would be all too easy to recognise what had been lost – and soon after, the cost to the state of the consequences of that loss.

Notes on the commissioning partnership and principal source of data:

This research project was initiated and commissioned by West Yorkshire Combined Authority, together with the Health and Care Partnerships for West Yorkshire and Harrogate, and Humber, Coast and Vale, Yorkshire Sport Foundation, Community First Yorkshire, and Two Ridings Community Foundation commissioned this study to improve understanding of the structure, dynamics and economic and social value of the regional voluntary, community and social enterprise (VCSE) sector.

The study draws heavily upon findings from the Third Sector Trends study. The study was conceived and originally commissioned by Northern Rock Foundation with research conducted by the Universities of Southampton, Teesside and Durham. The Community Foundation Tyne & Wear and Northumberland was a co-founder of the research and is now responsible for its legacy. The Community Foundation has collaborated with partners including St Chad’s College at the University of Durham, Power to Change, Garfield Weston Foundation, IPPR, Charity Bank, ESRC and Joseph Rowntree Foundation to expand and continue the research. All publications from the Third Sector Trends study are available free to download at this address: https://www.communityfoundation.org.uk/knowledge-and-leadership/third-sector-trends-research/

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