Outputs and outcomes are core ideas in the integrated reporting movement. It was through this movement that I had my first formal exposure to the concepts. That’s because I have a business and finance background. I came to integrated reporting through an interest in tangible and intangible assets. I’m newer to the environmental and social perspectives which is where, it turns out, the output/outcome vocabulary is quite common. It takes some work to understand how the two approaches fit together (at least it has for me!) so I thought I’d share some background and thoughts on a different model.
One of the most clearly written resources on the concept is on a site from the government of South Africa (SA is also leading in integrated reporting):
- “INPUTS are everything we need to accomplish a task. This could be in terms of finance, human resources, infrastructure etc.
- ACTIVITIES describe a collection of functions (actions, jobs, tasks) that consume inputs and which deliver benefits and impacts.
- OUTPUTS can be immediate and intermediate. These are the direct products and services generated through processes or activities without specific reference to their ultimate purpose.
- OUTCOMES refer to a changed state of being. They describe the effects, benefits or consequences that occur due to the outputs of programmes, processes or activities. The realisation of the outcomes has a time factor and can be in either the medium or long-term.”
The sustainability community (ESG, CSR and more) is an important stakeholder in integrated reporting. This approach is familiar to them. But it’s harder for those of us from more traditional businesses to understand how this applies in a business and financial context. The IIRC Framework explains it like this:
2.23 At the core of the organization is its business model, which draws on various capitals as inputs and, through its business activities, converts them to outputs (products, services, by-products and waste). The organization’s activities and its outputs lead to outcomes in terms of effects on the capitals. The capacity of the business model to adapt to changes (e.g., in the availability, quality and affordability of inputs) can affect the organization’s longer term viability
Here’s an HBR article that also translates the concept to business.
For me, there’s still something missing when you apply these ideas to the Integrated Reporting Capitals. Take human capital. People bring their ideas to work every day. I guess that makes their thoughts an input. And their work product an output. That’s about last year’s activities. Outcomes would be longer term effects of their work.
But the reason for calling people “capital” is that there is lasting value that remains. So you also want to understand if your human capital is strong going into the coming year, how competent and how engaged the employees are.
The challenge is that while the capitals can provide inputs to value creation, they are more than that. They hold their own value. The integrated report capitals represent a foundation, an infrastructure that a company builds and maintains to create value for its stakeholders and shareholders over the long term. Measuring the capitals requires two kinds of measurements: the value created today using the capitals and the value creation infrastructure itself. The first is a flow, the second is a stock.
It’s helpful to compare the need for these two views with traditional financials. The income statement measures flow, the inputs and outputs. It keeps score to determine whether the financial flows in (revenues) exceed the flows out (costs) which would yield a profit. But the financials also recognize that some of the money flowing in and out also creates/relates to stocks of value in the form of assets and liabilities. The balance sheet measures of these stocks of value are meant to document the strength and sustainability of the infrastructure. Finally, the cash flow statement highlights changes from one period to the next in the balance sheet.
In my way of thinkng, the inputs and outputs are like an income statement. The outcomes are like the cash flow statement. We also need a balance sheet that says, “here’s the capacity of the company’s capital today and going into the future.” Some will suggest that a valuation is the only way to do this. Other alternatives are cost or stakeholder assessments. In practice, the most common way of getting there is to suggest the underlying health of the capitals through a multi-year data set like those in Southwest’s One Report. This report includes a combination of metrics that together tell a story about the continuing strength and management of human capital by the company. It’s the closest thing I’ve seen to a balance sheet view in a public report.
Alternate definitions of value, the capitals and sustainability are explored in greater detail in our briefing paper, The Three Big Ideas behind Integrated Thinking and Reporting: How to start measuring, managing and communicating about your business in an integrated way.
Image from Wikimedia.org, author unknown, public domain in U.S.