Impact In a Nutshell

Like many new coming words, impact today is surrounded by a heap of opinions and interpretations. Innovations, social responsibility, sustainable development, impact… uhh… so let’s learn what is what in the world of impact.

— Can we see it in a simple example?

Sure. Imagine, we have a furniture factory in a town. And, to make a comparison, another furniture factory in a neighbor's town. Both making similar wooden tables, chairs and doors.

First one decided to use expensive chemicals to make wood resistant to moisture, dirt and the sun, provide employees with a comfortable, effective and safe working place, good recreation, join reforestation programs and find good ways to recycle filings and sawdust.

Another one decided to hire cheapest woodworkers and carpenters, pay them less, work more and force them to use their own tools, leave safety to their own discretion, buy illegally cut down forest with no charge back to restore it and drop the refuse just somewhere.

Imagine also that their laws even allow to do that, and products are so simple that both factories make things that are hard to distinguish. Let’s call those factories Good and Bad.

When we look only at numbers, the margin of a Bad factory is much higher. So it can earn more than a Good, or sell products with lower prices. The first thing we obviously see here is that the Bad factory is a much better business. When it comes to investors or the market, it will have a preference.

Let us for example have such numbers:

By having expenses near halved, Bad has the 10x margin.

Using this preference to grow and compete with Good factory Bad starts to lower prices. And we see that it simply can make them lower than Good’s profitability. Keep delivering pretty the same tables, chairs and doors to the market. So now Bad things price is 90 and Bad still has 45 margin.

Good is trying to tell customers that it’s furniture is made according to good standards… but who cares? “Same table for 10 less? I buy it!”

— Oh damn… so looks like we have to go and tell everyone about what is going on?

Wait, it’s not yet an impact.

Numbers we see are just externalities, which are “the costs or benefits that affect a third party who did not choose to incur that cost or benefit”, say:

It costs 15 per product to plant a tree in return for one being cut; or we get a desert without animals and soil in several decades. So citizens should pay it through NGO or via taxes to let the government fix it (or conduct a reforestation program somewhen later which is much more expensive).
It costs 10 per product to make chemicals safe for babies and children's health; or we get severe diseases of the immune system and psyche in several decades. So parents should varnish their furniture for those additional 10 (or heal their children somewhen later which is much more expensive).
It costs 25 per product to let employees come back from work with no injuries, health disorders and chronic stress (or heal themselves somewhen later which is much more expensive). So they have to buy medical treatment on their own to keep working.

So what we see here is that the cost of Bad factory’s products is the same 95, but now someone else pays for half of it. Bad factory just lends this amount from employees and citizens without asking for permission, because citizens did not make this exercise.

— Gosh… now we definitely have to go and tell everyone about all this.

Give me several more minutes. We’re just starting to talk about impact now.

Actually, I already hinted at it in those brackets a little earlier. Of course not all of those employees would donate for planting trees back, varnishing their furniture and pay for proper medical treatment to restore the Bad’s balance. So in time those consequences will come into play: forests would be decreasing and becoming swamps or deserts, children will become ill and nervous, employees themselves will become disabled after severe injuries while working with wood, and live less due to constant stress. Crime and domestic violence will start to grow in this town, kids will learn worse and lose their chance to college. And in several decades this town will become a criminal and sick slum in the middle of a logged forest.

— Oh. My. Gosh…

And let me tell you one more thing. Do you still remember the neighboring town with a Good factory? I understand that comparison is quite obvious now, but you can remember that Bad was able to set prices lower than Good’s profitability. So Good has been bankrupted in several years and sold to Bad. You now know what this meant to that town in several decades. It became the same too.

So impact is the overall integral longterm systemic consequences of an organization existence on the environment and society.

Now we see what impact in a nutshell is, in a simple example. I would say, a very simple, but not an oversimplified.

Andy Done, founder of Impctfl.io

2020-06-20 19:15