The Everymans Guide To Social Enterprise Business Essay

This chapter is included to give a brief overview of social enterprise. It is not critical to the use of the social enterprise blueprint and therefore could be skipped. The chapter is focused largely on the United Kingdom but attempts to demonstrate the global impact of the business model. While I have attempted to offer you the facts I feel it important to point out that if there is one thing that my eighteen years leading a social enterprise has taught me it is that the truth is virtually impossible to find. This chapter should be taken as a starting point for you to find the truth, if you think it important. What is significant is that social enterprise is becoming important on a global stage and the facts, such as they are, are constantly changing. Economic regeneration is more than simply wealth creation. It is about creating socially and environmentally effective communities. Establishing social enterprises is seen by many as one of the more effective tools in achieving this.

What is Social Enterprise?

Economic systems traditionally are discussed in term of three main sectors, namely the;

Public Sector: the government and publically funded organisations

Private Sector: commercial business

Third Sector: Community groups, voluntary groups and social enterprise

Some people now argue that there is now a fourth sector and that this sector is comprised of social enterprises. For what it is worth I think this is a good idea for the development of the business model and I support its use.

Social enterprises operate in the social economy which is often defined as the trading of goods and services as a not-for-profit exercise to meet some social need or purpose. Organisations in the social economy operate primarily for social or community benefit. However it is arguably that it is the economic value of the social economy that has given it current prominence within government policy in the United Kingdom.

For me social enterprise is about change. It is about doing business in a more fair and equitable way. It is about a passion within individuals or groups to engage with commercial activities in a way that builds strong and inclusive communities. When you investigate organisation that consider themselves social enterprises you will find immense differences in scale and impact. You will find a vast array of activities across which they operate. You will find significant differences in legal identities and organisational structure and ownership. In Wales we have large organisations like Welsh Water and social housing associations which have been created out of previously public sector bodies while we also have small organisations running a local cafe in run down town centre offering a much needed local service and employing one or two people and a couple of volunteers. These organisations are miles apart but all are social enterprises. To further complicate the issue you will need to attempt to find clarity between social enterprise and the role of the social entrepreneur. Generally social enterprise is seen as a group activity so what therefore is the role of the social entrepreneur? Often social enterprise is a membership organisation driven by a volunteer board of directors chosen at the Annual General Meeting. There is much debate at present as to the role of the Managing Director or Chief Executive Officer and whether or not it is good practice to allow this person a vote at director’s level. Generally this person, the social entrepreneur if there is one, has the most knowledge with regard to the business yet many people, in particular funders, do not support a voting input at board level.

All of the above are of great academic value and happily engage the minds of those of us working in the sector to various levels of enjoyment and frustration, however one of the major problems with the lack of a universally accepted definition is the inability to accurately measure the impact of the business model. There is a saying in business ‘if you can’t measure it you can’t manage it’. There is some truth in this but the problem is exacerbated when it is impossible to pin down what it is you want to measure.

I am a dogged researcher of the truth and am constantly attempting to find out how many social enterprises exist in Rhondda Cynon Taf, Wales or the United Kingdom however as with the matter of definition, and largely because of it, the truth is impossible to find. My advice to you is not to get too concerned about this and rather to ask the question – What does it matter?

Over recent years I have seen a mad rush by organisation to call themselves social enterprises. All sorts of support agencies now want to support social enterprises. I’d like to think it had something to do with the value of the business model but as political support increases and investment becomes available it is interesting to note how company mission statements become updated. What is important to you, and what does matter, is what funding and investment bodies consider is an appropriate definition – if you want their money you must fit their definition. On that note I will now take you through some discussion on the definition of social enterprise.

A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. (UK Department of Trade and Industry, 2002 and a definition accepted by the Welsh Government since the original Social Enterprise Strategy for Wales 2005)

An alternative UK definition is that ‘Social enterprise is a business driven by social and/or environmental purpose. They are trading organisations (their main income streams are revenues for goods and services provided, not grants or donations). Successful social enterprises generate surpluses or profits which are reinvested towards achieving their social mission. Their assets are often locked for community purpose’ (Source: Social Enterprise UK, 2011) 

The concept of social enterprise in the United States is generally much broader and more focused on enterprise for the sake of revenue generation than definitions elsewhere. For example, the Social Enterprise Magazine Online defines social enterprise as, “Mission oriented revenue or job creating projects undertaken by individual social entrepreneurs, nonprofit organisations, or nonprofits in association with for-profits.” The Social Enterprise Alliance, a national membership organisation, more narrowly defines it as, “Any earned income business or strategy undertaken by a nonprofit to generate revenue in support of its charitable mission.”

Like many of you reading this I am sure you will be motivated to solve the impossible so after 25 years of work within the community and lifelong learning sectors I have found no more powerful tool to personally develop people so my definition is people based and therefore to me social enterprise is ‘a predominately community owned economic wealth creating tool to develop people and the community by serving both with the products or services otherwise absent’.

It is no worse, nor any better, than the above but is a definition I am happy with and ultimately I guess that is the best we can all hope for. Please take the time out to write your own and then run your social enterprise to your definition. However as a pragmatist when looking for investment in a welsh context I always use the Welsh Government’s definition. You may consider me misguided but I’m no fool!!

While there is no fully agreed definition, a number of unifying features can be identified. John Peace (2003) suggests the following;

social purpose is the principal driver of activity

social purpose is achieved primarily through entrepreneurial or trading activity

organisational sustainability is a core objective

surplus is invested in the enterprise or community

governance is democratic via membership

there is accountability to a defined community

Just to add to the debate, and make it current, I suggest that consideration is taken of the following;

economic objectives are the principal driver of activity in a modern social enterprise

social enterprises must create employment and wealth

social enterprises are about people controlling capital for the benefit of other people

ownership and governance need not be democratic or by membership

accountability can be to a person, organisation as well as a defined community

board members can be remunerated for their role as directors

shareholders can take equity stakes and gain dividends

leaders of social enterprise can be full board members and have a vote at board level

With regard to legal structures a variety of forms may be chosen to serve the enterprise’s core purpose and values, such as Community Interest Company, Company Limited by Guarantee, Charity or Industrial and Provident Society. The Community Housing Mutual model developed by the Welsh Government offers an additional option for co-operative ownership for housing associations. Social enterprises may also adopt different non-legal organisational models such as social firms, development trusts, co-operatives or community enterprises

In many ways organisations and institutions are merging in terms of social, economic and environmental objectives. Most organisation pay some regard to all three bottom-lines, and the differences are often simply a matter of priority. Social purposes, ownership and governance of social enterprises locate them distinctively within the broader third sector. They can be mirrored within the public sector where service delivery is being transformed, as with the creation of new housing mutuals. Private sector organisations can start demonstrating features of social enterprise where there is commitment to corporate social responsibility and environment regulations.

A brief historical overview of social enterprise in the UK would indicate that;

The UK has a strong tradition of social enterprise

The cooperative movement was established in 1844

Industrial and Provident Society Acts of 1852 and 1862 gave SE a robust legal framework including limited liability. This period saw the emergence of 43,000 friendly societies, 1,400 local co-operatives and almost 3000 building societies.

The 1970s saw a new wave of consumer based social enterprises in response to the social movements of the time

The 1980s saw a variety of community enterprises initiated & supported by local authorities, with the aim of creating jobs

The 1990s saw the creation of the Social Exclusion Unit (Blair)

2002 saw the creation of the Social Enterprise Coalition and a 3 year action plan, ‘Social Enterprise… a strategy for success’. The document recognises for the first time the value of social enterprise to the country’s economic health.

2010 creation of the coalition government and the concept of the Big Society where Prime Minister David Cameron describes social enterprise as ‘the great institutional innovation of our times’.

The Political Landscape: UK and Beyond

State of Social Enterprise 2009 found that:

Social Enterprises are recession-busters: 48% are confident of future growth and 56% have increased their turnover

Social Enterprises are profitable: 66% are making a profit and 20% are breaking even

Social Enterprise vary widely in scale: Average turnover is £2.1m and Median turnover is £175,000

Scale is important: SE become less grant dependant after they reach a £1m turnover or more

Profit re-investment is a reality: 70% reinvest profits into development activities

Social Enterprise is a natural home for women entrepreneurs: 41% of board members are women and 26% are women led (14% for SME)

The public sector is already a key customer: 39% of SE’s report that over 50% of their income comes from local and central government

Finance is vital and possible to access

Finance is the oxygen of social enterprise

SE is as capital-hungry as SMEs

Finance is mainly for growth

Business Support is not fully meeting SE needs

The State of Social Enterprise Survey 2011 found that:

The median annual turnover of social enterprises has grown from £175,000 in the 2009 survey to £240,000 in the 2011 survey

58% of social enterprises grew in 2010 compared with 28% of SMEs

Smaller enterprises are the most confident of growth – 73% predicting an increase in growth

70% of social enterprises earn 76% of their income through trade

82% of social enterprises reinvest profits back into the communities where they are earned to further their social or environmental goals

Women in social enterprise leadership teams are challenging the glass ceiling, with 86% of leadership teams boasting at least one female director

39% of all social enterprises work in the 20% most deprived communities in the UK

Research released by Delta Economics (July 2008) found that:

Almost 1.3 million people consider themselves to be social entrepreneurs, representing a significant part of the UK’s labour force

35% of all entrepreneurs who have been involved in start-up activity for less than three months in the UK are social entrepreneurs

Other research found that:

One in five social enterprises in the UK has an annual turnover of over £1 million (Source: DTI Annual Small Business Survey, 2005)

Over 60% of the British public would prefer their local services to be run by a social enterprise – instead of the government, private profit businesses or traditional charity (Source: YouGov Poll, 2007)

The same survey polled 2,000 people and asked them what kind of company they would like to work for. A clear majority, 30%, picked social enterprise, with only 16% of respondents saying they would like to work for a traditional business, 13% choosing a government institution and 13% a traditional charity (Source: YouGov Poll, 2007)

According to a DTI Survey in 2005, health and social care services is the largest category of trading activity for social enterprises as it was the principal trading income source for 33% of respondents, followed by education at 15%. Social enterprises are also extremely active in the energy, transport and recycling markets. However a social enterprise can be successful in any market (Source: DTI Survey, 2005)

Around 10 million people in the UK are members of a co-operative, which is a form of social enterprise (Source: The Co-operative Group – Annual Report 2006)

For the UK as a whole, women are more likely than men to be involved with a socially orientated start-up 5.8% of women compared to 4.9% of men. (Source: Global Entrepreneurship Monitor Focus on Social Entrepreneurs, GEM 2004)

I in four of the UK regions women are more likely than men to be setting up a socially orientated venture or activity – the East Midlands, London, the North East and the South East. (Source: Global Entrepreneurship Monitor, GEM 2004)

Women are more likely than men to think that social, ethical and environmental considerations in business are important. (59% compared with 48%). (Source: A Survey of Social Enterprise Across the UK, DTi, 2005)

The gender gap for social entrepreneurship activity is far narrower than for mainstream enterprise activity (Source: Stairways to growth: supporting the ascent of women owned businesses in the UK, Prowess/GEM 2006)

The Welsh Government was quick to reflect this support from national government and have produced a number of documents the latest two being the The Social Enterprise Action Plan for Wales (SEAP) and the The Role of Social Enterprise in the Welsh Economy 2010. The latter report was particularly important in that it recommended a move of the portfolio of social enterprise to the Department of Transport and Economy away from the Social Justice portfolio, thereby recognising its economic value.

It is interesting to look at some of the comments from the SEAP:

‘In the current economic climate, social enterprises are more not less relevant’

‘Accelerating the number, scale and impact of social enterprises in Wales is a key priority’

‘the social enterprise model has reached its journey from innovation into the mainstream’

In a mapping exercise entitled ‘Mapping Social Enterprise in Wales: (WAG 2009)’ the Key Findings were detailed as;

3056 social enterprises identified

Turnover estimated at £2,183m (07/08) – 2.6% of all enterprise in Wales

28,533 full time jobs; 20,451 part-time; 104,677 volunteers

Main areas of activity

small SE’s are: Training and education; the arts and the welsh language; Voluntary sector or business support; Health & social care; Sports and leisure

larger organisations are more likely to be involved in: Housing; Healthcare; Recycling

Scotland is a very active area for social enterprise and political support is driven by a Cross-Party Group on Social Enterprise in The Scottish Parliament. This unique forum brings together MSPs, Scottish Government Ministers, intermediary bodies and grassroots social enterprises into a powerful networking and action group. The aim is to raise the profile of the movement, help it expand and examine issues such as public service delivery, innovation, procurement, regulation and social investment. There are many opportunities in Scotland for the further growth and development of the movement, with a supportive government that backs up words with actions. They have Just Enterprise, a consortium of sector support organisations in partnership with government that delivers comprehensive advice, training and development. Crucially they have a sector that feels supported by all political parties from across Scotland, not just the one currently in power.

In fact the UK is recognized as having one of the most highly evolved social enterprise sectors in the world. This has been achieved through the hard work of many people in creating a fertile policy environment where social enterprises can thrive. Many individuals and organisations are becoming increasingly involved in helping the social enterprise movement grow internationally. They help develop the social enterprise ecosystem in locations as diverse as Turkey, Japan, China, Africa and New Zealand. Social enterprise is truly a global and fast developing business movement.

For over two decades, social enterprise movements in and outside the United States have taken on growing importance. Broadly defined as the use of non-governmental, market-based approaches to address social issues, social enterprise has become an increasingly popular means of funding and supplying social initiatives around the world. Yet while the trend and its ultimate objectives are similar, there remain vast differences in the conceptualization of social enterprise among different world regions. Research has found that while definitions of social enterprise tend to vary within world regions themselves, even broader divisions exist among regions in terms of understanding, use, context, and policy for social enterprise.

As far back as 2003 Hudson in his book entitled ‘Social Enterprise (Non-Profits) in America’ found that total income to the US nonprofits sector exceeds $486 billion, accounting for 6.7% of national income. Its revenue then was greater that the total economic activity of most countries of the world including India, Australia, Canada, the Netherlands and Spain’.

They are responsible for:

50% of the nation’s hospitals; 33% of its health clinics; 25% of its nursing homes

46% of its higher education institutions

80% of its individual and family service agencies

70% of its vocational rehabilitation services and 30% of day care services

90% of its orchestras and operas

70% of its foreign disaster assistance

Over $212 billion is given to these non-profits annually by individuals, foundations and corporations

Social enterprise in America continues to flourish and when elected in 2008 President Obama in one of his early speeches stated that “The second thing I’ll do is invest in ideas that can help us meet our common challenges, because more often than not the next great social innovation won’t be generated by the government.”.

With these words, Obama promised to create a Social Entrepreneurship Agency within the Corporation for National and Community Service. He proposed $3.5 billion a year for social investment, paid for by ending the war in Iraq and eliminating corporate tax loopholes. The idea is still conceptual, but it was accompanied by words that indicate that President Obama – a former community organizer – understands the importance of the NPO sector and the role of social entrepreneurs in the economy stated that.

“The non-profit sector employs 1 in 12 Americans and 115 nonprofits are launched every day. Yet while the federal government invests $7 billion in research and development for the private sector, there is no similar effort to support non-profit innovation. Meanwhile, there are ideas across America – in our inner cities and small towns; from college graduates to folks making a career change – that could benefit millions of Americans if they’re given the chance to grow”.

This was the first time any American President has uttered the words “social entrepreneur” much less promised an agency to invest in social enterprise. Obama said that the new agency would help small NPO startups get federal grants.   

The Social Enterprise Alliance in the United States provides a directory that identifies approximately 30 sectors of activity with the vast majority in services ranging from advocacy to disaster assistance, health, homelessness and housing, poverty and immigration, civil and human rights, substance abuse, sports and recreation, to name a few. Regarding scale the SEA state that No comprehensive data available on Social Enterprise however estimates may be made on the basis of the following information

Over 195,000 organisations filed as public charities (non-profit organisations involved in the arts, education, health care, human services, and community service, etc.) with the IRS in 2002 (Salamon & Sokolowski, 2005).

Over 100 million Americans are members of a cooperative organisation (Aspen Institute, 2005)

Credit unions are the most widespread cooperative with $629 billion in assets (represents a 100-fold increase since the 1960s)

Aspen Institute refers to the growth of other types of cooperatives with assets of $263 billion.

While the social entrepreneurship field has been around for several decades in some countries, it has only begun to emerge in China in the last decade. So there is little understanding about the current organisational structures, origin, size, scope of work and impact of social enterprises in China. To fill the void the Foundation for Youth Social Entrepreneurship (FYSE) has conducted an annual survey among social entrepreneurs in China for the past two years. Since around 2004 the concept has begun to gain supporters, advocates, incubators, impact investors, the media and academic researchers – have expanded across the country. 95% of respondents to FYSE’s annual Chinese Social Enterprise Survey got involved in social entrepreneurship after 2006, with the Sichuan earthquake of 2008 being a major driving force for participation. The recent interest in social enterprise is reflected in the youthfulness of enterprises: 54% of them are under three years old and 38% are older than five years. One notable development is that of an inverted pyramid with fewer new social enterprises compared to the number of mature social enterprises. The number of mature social enterprises who were older than five years rose from 15% in 2011 to 38% in 2012. On the flipside the pipeline of early – state social enterprises is drying up, with the number of enterprises up to two years of age and again aged 3-5 years are notably decreasing, indicating that a large proportion of social enterprises are not graduating to the next level and size of operations.

The above is but a small flavour of the global appetite for the social enterprise business model and I daily receive information on exciting and innovative developments in the sector. My main hope for this book is that it fuels this movement by encouraging new people into the sector.The Triple Bottom Line; A Business model for social enterprise

In practical terms, triple bottom line accounting means expanding the traditional reporting framework to take into account performance in three areas namely;

Ecology – relates to the Environment objectives

Social – must have very clear social objectives

Financial – refers to traditional & commercial financial objectives

Most social enterprises strive to achieve triple bottom-line benefits. Social enterprises often thrive where private businesses are weak, such as in areas of urban deprivation or rural isolation, and they can play a critical role in community regeneration. They can help:

create jobs and wealth on a local level

address social issues

make public and community services more affordable and accessible

spread new ways of working

prepare people for the world of work

promote community safety and

generate local wealth in marginalised communities.

Social enterprises can develop in a number of ways. For instance:

some emerge from an identified need in the local community and start looking for new and innovative ways of increasing their income such as through trading or contracting

some are created from the outset like traditional businesses driven by the need to make a profit, but where the profits are then invested in its social purpose

others spin out of major regeneration, housing or economic strategies at a local, regional or national level

Social enterprise must be based on a strong business case, that is it must be established with financial sustainability based on trading activity as a given. Jerr Boschee, the Institute of Social Entrepreneurs suggests that it can take up to ten years before social enterprises (non profits) are sustainable via generated income.

MOST

Non-profits

Incremental gains

(can cover greater % of costs with earned income)

1 to 3 years

SOME

Non-profits

Self-sufficiency

(can reach break-even through earned income alone)

3 to 7 years

A FEW

Non-profits

Profitability

(can generate excess revenue from earned income alone)

7 to 10 years

However this expectation is changing as with the increased profile of the social enterprise business model. Community organisations no longer look to employ ‘development workers’ or ‘funding officers’ rather they are looking to employ individuals with business and entrepreneurial skills. Most current social enterprise plans aim for full financial sustainability by year three or four.

The table below is a simple analysis that indicates the larger the business turnover the greater the income generated from trading activity.

Trading

Vs Non-trading

Total

£0

–

£10k

£10,001

–

50k

£50,001

–

£100k

£100,001

–

£250k

£250k

–

£1 mill

Over

£1 mill

Base

821

48

125

125

182

164

144

Trading

50% +

72%

63%

66%

72%

69%

73%

86%

Combination

5%

6%

6%

3%

7%

6%

6%

Non-trading 50% +

23%

31%

29%

25%

25%

24%

8%

Sustainable Funding

All new social enterprises should create the business on sustainable funding principles. Sustainable funding;

isn’t about locating one ever-lasting source of income, it is an approach.

begins with strategic planning and takes account of opportunities for diversification across the spectrum of income streams available to the voluntary and community sector.

is about exploring all the available options.

involves thinking about what is the most appropriate way to fund your organisation. This is because the funding an organisation needs comes down to what it does, who its users are, and what stage it’s reached in its developmental lifecycle.

is about using the appropriate income stream(s) to drive development

The diagram below offers funding options to community and voluntary organisations

The diagram is the National Council for Voluntary Organisations (NCVO) options suggested to their members for generating income. It outlines a continuum from donor to consumer and details four main income sectors, namely

the gift economy: where money is given to the organisation via philanthropic donations and usually offer with no restrictions on its use

grant funding: usually restricted money given by the public sector or funding bodies typically for project delivery

structured market: income generated via service contracts with external organisations either private, public or voluntary sectors

open market: income generated through commercial trading activities

Most social enterprise survive on a cocktail of funding linked to Core Activities and Projects. Social enterprises could of course access all of the above options.

Finance, funding or investment is in my experience often the biggest barrier to new social enterprises creation. To be more precise it is the lack of finance, funding or investment. Most of the clients I have helped over the years while running the social enterprise incubator want funding to start the business and the lack of it is the main barrier to start-up. I have not found a shortage of ideas and certainly there are many social problems that need addressing. My work therefore usually involves helping people attract the investment to seed fund the business. I have to say that if we fail in this then the business usually does not start and the potential social enterprise is lost.

My thoughts on this are that there is a time for accessing grant funding and there is a time for accessing loans. Social enterprises are generally group activities initiated by a desire to address a social need. Generally the individuals in the group take the role of volunteer directors. Usually resources are needed to capitalise the enterprise and I believe that for it to be successful a fulltime paid manager is required. The economic objectives of a social enterprise in my mind must be to create jobs and wealth in communities. Taking all this into account the use of public funding in the form of grants is an excellent use of taxpayer’s money. To my simple economic mind supporting people through welfare payments when they want to create a business, and therefore a job for themselves, and maybe others, makes no sense. If it costs the welfare state £10,000 p