Articles of resilience

The popular notion (without the social enterprise lobby) that social enterprises are better equipped that conventional businesses (or charities) to survive the current economic downturn (and presumably others) is explored in  New Philanthropy Capital‘s report Are social enterprises more resilient in times of limited resources.

The starting point for the report is a wider  evaluation of the work of the School for Social Entrepreneurs (SSE). While that evaluation clearly provides valuable and statistically meaningful data on the impact of SSE’s work on its students – and their impact on the wider world – the attempt to compare experiences of SSE students to those UK businesses and charities without usefully comparable data is statistically flimsy. The ideas are interesting, though.

Writing on Guardian Social Enterprise Network, the report’s author, Eibhlín Ní Ógáin, suggests that social enterprises are more resilient (less likely to go bust) in times of hardship because “social enterprises have a diverse mix of funding. Yes, they rely on commercial income but substantial proportions come from public sector grants and contracts as well as grant-making trusts.”

She adds that: “It is interesting that it is not the commercial activity per se that lies at the heart of their success but their ability to balance commercial income with traditional charitable sources of funding, particularly in the start-up phase.”

One reality that this alludes to is that it’s easier for a (not-for shareholder profit) social enterprise to generate, for example, £100,000 a year than a conventional small business if that social enterprise gets a £25,000 grant to support its work. Despite the fact that the days of organisations getting grants simply for turning up and doing good work are mostly behind us, it’s still true that if a funder pays upfront for you to do lots of activity you’re usually – though not always – in a better position than a company that has sell all its goods and services to commercial clients.

This is really a point about a socially enterprising approach, though, as opposed to the characteristics of self-styled social enterprises or social enterprise model (in the unlikely event that social entrepreneurs could come anywhere near agreeing on what that model might be). Charities that take a socially enterprising approach, whether or not they choose to call themselves social enterprises, have the option to trade, access a bigger range of grants than CICs or companies limited-by-guarantee and also to get gift aid on donations.

There are, though, a few clear advantages – in terms of surviving a recession rather than in terms of general effectiveness – that organisations with non-charity social enterprise structures are likely to have.

One is that social enterprises are more likely to have executive directors (and are often very small companies, most of whose employees are executive directors). In that situation, it’s far easier to stave off short term financial problems by delaying wage payments. And, even when wages are being paid, in many cases social enterprise directors are (relatively) happy to take lower than voluntary sector market rate wages in exchange for the extra autonomy afforded by not having to answer to a volunteer board of trustees.

A second factor – connected to the first – is that in a social enterprise the outlook of the people taking the decision about whether the company continues to trade is different. It’s a caricature to suggest that charity trustees are conservative and terrified of risk but their responsibilities (as custodians rather than active participants) are different and, clearly with many exceptions, they’re more likely to prioritise an orderly winding down of a charity over a period of months than to keep battling away until they’re forced to stop.

For executive directors of (particularly small) social enterprises, who risk losing both their job and their hopes of delivering the social mission which caused them to start their business in the first place, the incentive to carry on through the pain for as long as they possibly can is much greater. The job factor also applies to the directors of conventional small businesses but they don’t have the added emotional pull of the social mission to contend with – so may be more likely to go off and start another business that sells things that people do want to buy.

On that basis, there clearly are logical reasons why social enterprises might be more likely to battle through the economic downturn than conventional businesses or charities. I’m not sure if those reasons necessarily do much to promote social enterprise as a career choice, though.

 

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9 responses to “Articles of resilience

  1. David, For us there was no question of grant funding. Ours was a self-sustaining approach of a business investing in the community and in 2004, I verified with the DTI that the approach of investing at least 50% of profit into the community met their definition of a social enterprise, or one form of the same.

    This ironically came from the paper which in 1996 had warned of the unsustainable nature of capitalism and inevitable debt crisis. It reasoned that rather than charity spent once and gone, investing in helping to create wealth by means of seed funding others who wished to to likewise. It was a concept which would reappear 15 years later under the new banner of ‘revolving funding’.
    We survived in the first instance because we were able to graft the model onto a going concern which supplied both the private and public sector including several NHS trusts.

    As with many who’d gone before us as small business supplying government we began almost immediately to have problems with public sector payment. In 2007, I’d raised a petition on the Downing Street website, pointing out that government were harming small business and social enterprise through failure to pay on time and asking for stronger regulations. They responded by rejecting my petition saying it didn’t request anything when clearly it had.
    As you suggest, we were able to survive by deferring payment of wages. I did this for myself to ensure out Eastern mission survived. We’d invested for 7 years in efforts to leverage investment for childcare reform.

    By this time our modest revenue had halved, but some important progress had been made which would result among other things to a 40% increase in the number of domestic adoptions in Ukraine, after the childcare reforms described in our social enterprise strategy plan were put into practice.

    We sought investment for business with a social return, primarily from US government. The local USAID foundation would not respond so it was escalated to the Senate, forcing a response from USAID which would say that there were insufficient funds in their budget to deal with this group of ‘retarted children’. There’s something for the ‘impact investor’ to mull over, when it’s time for government to pay up on social return, they may well say they’ve got no money to pay.

    I tried in my own right to gain support from politicians. Edward Davey MP I leaned had raised concerns about the social and economic deterioration in Ukraine and I tried to relate our efforts to him, among others.

    Finally we were to discover the major obstacle. The British Council (one of our tardy customers) had been making plans with USAID to replicate our social enterprise project and strip out the social objective.

    How, we reasoned, could government so critical about intellectual property violation as a barrier to investment, act the same way toward its own citizens, undermining self-funded efforts with public money. It couldn’t have done more to assist organised crime and I have no qualms about telling them so.

    http://forestofdean.socialgo.com/magazine/read/my-message-to-a-lib-dem-mep-_56.html

    One may perhaps find a clue to this behaviour in current talks over the EU Free Trade Zone.

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  2. Yes, I think you are right to point out the ‘personal’ element of the entrepreneur with respect to resilience, David. That personal, emotional commitment can help achieve ‘survival’ longer than might otherwise be the case (I’d wager sometimes this persistence is a good thing, and on other occasions less so). In the full NPC report, there is a look at what we really mean by “survival” in this context: survival as per a small business, or mere ‘existence’.

    Also, given the various types of organisations that SSE Fellows start-up, it might be a little more accurate to title the article “Are social entrepreneurs more resilient…”….; as you say, it’s about an enterprising approach (always the bedrock of SSE’s work) rather than “social enterprise” as a noun / entity per se.

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  3. Today, just moments after I describe how it began for us, I discover the long tail of impact in a new initiative which sets out the same argument made 15 years ago, this month:

    They appear to have no idea where this came from:

    http://www.socialenterpriselive.com/section/the-business/csr/20110920/the-business-intelligence-landscape-changes-january-2012

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  4. We have really lost the plot here! Do you really think that directors of ‘for profits’ don’t regularly delay or forego payment in order to keep the show on the road? Do you believe that commitment to a ‘social purpose’ creates greater resilience than a desire to feed ones family? Do you really think that those of us working in ‘for profits’ aren’t also driven by ‘social purpose’.

    And the advantage that socent has in terms of accessing other sources of revenue? Where do you think that ACTUALLY comes from (quantitative easing fairy put to one side). Essentially we use revenue derived from the private sector to increase ‘resilience’ of socents that increasingly compete with the private sector. I look at socent in Leeds for example. Doing some great work, but enjoying a range of benefits that their for profit counterparts cannot access and increasingly use it to compete with them.

    Or am I missing something?

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  5. admin

    Well, Mike, the answer to the first question is “no”. I’ll discuss the issue of ‘for profits’ below but the foregoing payment point is a distinction I was drawing between social enterprises and charities – and I specifically pointed out that it was factor that also applied to conventional small businesses (‘conventional’ as it what most people would refer to as ‘a small business’).

    My answer to the second question is also ‘no’. I think for most people – including most self-styled social entrepreneurs – pursuing a social purpose is a lesser motivating factor to get up and go to work than the desire to feeds their family.

    But my hypothesis is that often those motivations would lead people to take different decisions and that – in situations where, on balance, the financial interests of the family would be better served by closing the business and trying to get a job or starting a new business (if either is a realistic option) – self-styled social entrepreneurs are probably more likely to try and keep their existing business going.

    My answer to the third question is also ‘no’. I’m not suggesting particular business structures necessarily make anyone more or less likely to motivated by a social purpose. I’m saying (as above) that people who are motivated by a social purpose – beyond running a successful business and creating employment – are more likely to continue keep their business going beyond the point of commercial rationality than those who aren’t.

    I think you’re right that there’s a potential issue if ‘not for profit’ social enterprises are receiving grants that put them at an advantage when competing with small businesses who can’t access those grants. I don’t think it’s necessarily wrong. It depends what, specifically, those grants are supporting the social enterprise to do.

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  6. I am frequently witnessing socents compromising their social objectives in order to survive. Pressures of balancing responsibilities towards community and family play out exactly the same regardless of sector or ambition.

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  7. admin

    What (broadly rather than specifically) are some of the examples you’ve come across of social enterprises ‘compromising their social objectives in order to survive’?

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  8. @Mike/ David,

    I have less responsibilities than most and realise those with families would not be able to do likewise. I sold my home in London to yield some capital after clearing toe mortgage and hence could depend on a survival income outside social enterprise. We had to be austere but never reneged on our suppliers

    Otherwise, there would have been no way I could keep funding a mission and yet I compromised in that although providing a colleague with a living income for local conditions, there was no contingency for medical treatment and the consequence was death.

    I’ve described one instance above of public funds being used to compete with us. It wasn’t the first, but it was the most extreme in undermining 12 man years of work and invested intellectual property.

    Was that my compromise, or that of the government agency who used our work to create a competing project and deny us income? .

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