Tag Archives: craig dearden-phillips

The social impact of profit – part one

Two quotes on the recurringly vexed issue of profit in the social economy:

1.2  Regardless of its legal form, the constitution of a SE will include the requirement  that profits are reinvested in the business or in the beneficiary community – and not distributed to owners/shareholders/investors.” – from Senscot’s new Voluntary Code of Practice for Social Enterprises, launched at Social Enterprise Exchange last month.

… we also seek, quite unashamedly, to make a profit and we focus hard on this too. Partly because this allowa us to be successful, live reasonably well and grow our founding mission. And partly because this does create a meaningful surplus which we can share with others through the Stepping Out Foundation. I suppose what I am getting to here is that our being a for-profit organisation doesn’t in any way detract from our primary mission – to change public services.” – From former social enterprise ambassador, Craig Dearden-Phillips of Stepping Out explaining why he chose to launch his current company as profit-making venture:

All businesses attempt to make profit*.  This includes charitable businesses that describe profit as ‘surplus’. The big arguments in the social enterprise movement at the moment are mainly about profit distribution and, specifically, shareholder profit (where the shareholders in question are individual directors and owners rather than members of a co-op).

It’s comfortable for one-wing of the social enterprise movement to declare themselves as being opposed to shareholder profit, and for another to say that there’s nothing wrong with shareholder profit as long as the organisation concerned makes a positive social impact. Comfortable because both positions avoid engagement with the more complicated question: ‘what is the social impact of shareholder profit?’ or, more usefully ‘what is the social impact of shareholder profit in this situation?’

It’s a question for social entrepreneurs and, in markets that are dictated or dominated by the state, it’s also a question for politicians. This initial post (briefly and in no way comprehensively) considers some of the complicated issues around shareholder profit from public service delivery. Part two will look at the equally complicated issues about how shareholder profit affects organisations that consider themselves to be social enterprises (or some variant of the term).

In recent months, there’s been (widely perceived) outrage that Emma Harrison, the boss of back-to-work provider A4E, pocketed £8.6 million in dividends from her business that receives almost all its income from public contracts.

It seems unlikely that the cause of this outrage is not that people, as represented by the Daily Mail, believe that shareholder profit from the spending of taxpayers’ money is a bad thing in itself.

Large numbers of private companies supply goods – for example, chairs** – to the public sector. Directors of companies selling chairs may make even more money in dividends than Harrison. While many of us might support a positive decision by a public sector agencies to buy chairs from a social enterprise, there’s not a sense of moral outrage when they (hopefully) chose the best chairs the market has to offer based on their available budget.

Public sector agencies buy a lot of chairs but, they’re not a single customer, and if even they were they wouldn’t buy enough chairs to fundamentally dictate the shape of the market. It is unlikely that anyone in the UK is running a successful chair-making business based solely on their ability to convince a few public sector commissioners that they should buy their chairs.

The ability to generate shareholder profit drives people to start businesses selling chairs. Part of the profit generated is spent on making cheaper and/or better chairs. Or if isn’t, new businesses enter offering chairs that are better and/or cheaper.

Attitude to shareholder profit from chair manufacture does have a social impact. If distributed-profit from making chairs goes to a few rich people, it increases economic inequality. If most distributed-profit making chairs goes to all the employees or members of a co-op, it reduces economic inequality. If profit is not distributed at all but is spent on delivering services into the community that is also likely to reduce inequalities.

As social entrepreneurs, we might want to see more companies in social ownership – I’m not assuming this is true for all social entrepreneurs – but we probably wouldn’t argue that private profit from chair manufacture is fundamentally wrong in principle. Even it were legally possible to ban private investment and profit from chair manufacture – or stop public sector agencies buying chairs from companies generating private profit – we’d end up with worse, more expensive chairs.

The situation is different when private companies, charities and social enterprises are delivering public services – services that they deliver to the public on behalf of the public. In many instances – as with back-to-work provision delivered by A4E and others – the government is the only customer. It decides on the size of market (including deciding whether or not the market even exists).

As with chair manufacture, the fact that profit from delivering public services leaves the social economy and goes to a rich individual (or, as in other markets, groups of rich investors or foreign government’s sovereign wealth funds) has a negative social impact in itself in terms increasing wealth inequality.

The question is whether that negative social impact is outweighed by the positive impact of profit-distributing providers in the market. If, for example, shareholder profit-distributing providers such as A4E got 25% more people (or even 10% more) back into work than the job centre (or civil society providers who don’t distribute profit) then it would suggest that the shareholder profit motive was generating positive social impact in the back to work market.

And the positive social impact of hundreds of thousands more people finding work would be far greater than the negative social impact of some rich people getting richer. Unfortunately, that isn’t what’s happened so far.

In a situation where the government is taking money off the taxpayer and giving to some organisations in order to get things done, politicians clearly need to consider the overall social impact of that decision. It may that there’s a clear argument, in the particular instance of back-to-work provision, as to why their shareholder profit motive will ultimately contribute to better overall social impacts (even if it hasn’t so far). The point is that politicians have a responsibility to make that argument – to make clear that it’s not just a case of giving our money to some people who are already very rich.

Part two will look at how shareholder profit – support for, and objections to, it – affects organisations that consider themselves to be social enterprises.

*With the exception of organisations that are engaged in a deliberate process of winding down their operations

**This post is not drawing on any specific knowledge of or interest in chair manufacture

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Defined benefits

“While I can’t contest the social enterprise legal definition, I will say now why I think enterprises like mine should be allowed Guest Passes to the fold.” 

So says former Social Enterprise Ambassador, Craig Dearden-Phillips, in a recent blog about the need for the social enterprise movement to ‘throw open its doors’ to socially conscious businesses. With electoral reform temporarily on the back-burner, lovers of nerdy but passionate debate may now have more time to concentrate on issues of social enterprise structure.

Dearden-Phillips’ argument is a fairly simple one. In order to get his new business, Stepping Out, up and running, he had to put a significant chunk of his own money on the line and it wouldn’t be worth the risk without the prospect of a decent return on his investment. In order to (have the potential to) get that return he has set the company up as a ‘for profit’.

The stipulation that the company will put up 20% of net profits to  ‘invest in early stage social entrepreneurs working at community level’ does not alter the fact that, based on current definitions, it is not a social enterprise.

Dearden-Phillips calls on the social enterprise movement to find a place for companies likes his explaining: “I have said this before – there are thousands, possibly tens of thousands of firms in the UK just like ours which are, in essence, privately held but which subscribe to a broader view of their existence and indeed have the track-record to demonstrate this… At the moment, these companies have nowhere to go.”

There is a widely held view, cogently explained here by Ben Metz, that the use of the term ‘social enterprise’ to describe a type of organisation is on the way out and that, given the wide range of organisational structures under which socially enterprise activity takes place, social enterprise is best understood as what we do rather than what we are.

This is a neat conceptual shift that I broadly sympathise with but it does leave plenty of problems unsolved. One is that, while it’s not as important as what we do, organisational set-up does matter – even to people who object to the current definitions. If it didn’t matter then Dearden-Phillips would argue ‘I’m a good bloke with a great track record of achieving positive social change, clearly I’m not in this just for personal profit’ rather than actively stating that “20% – of both the company and the net profit will go to invest in early stage social entrepreneurs working at community level“.

People who know Dearden-Phillips would mostly accept the former statement but customers and the wider public – if they’re interested in the wider social value that a company provides beyond delivering a good service – need more than that.

In a recent interview with this blog, Social Enterprise Coalition chief executive, Peter Holbrook, cited the examples of The Body Shop and Ben & Jerry’s to illustrate some fundamental difficulties with straight for-profit structures – in terms of both of financing growth and embedding social ideals once the founders of the business are no longer in charge: “We shouldn’t get hung up on it but I think protecting against the dissolution of your social commitment is quite important to get right at the outset. It’s important that leaders recognise that at some point, whether they die or change jobs, they will move on and the values that they set up the organisation with, may or may not be lost. Is that a risk people are willing to take?”

This is an issue that supporters of ‘social enterprise as a verb’ cannot ignore. There is a risk that a for-profit social business could continue to benefit from its past social commitment long after that social commitment has ceased to be a reality. There’s also a connected risk – particularly in the current climate – that companies that deliver services in social sectors but have no wider connection or responsibility to communities could be mislabelled as social enterprises.

I don’t think, though, that these risks should prevent the social enterprise movement from attempting to bring together a wide range of people and organisations to deliver a more socially sustainable economy. On a practical level, finance is not currently available to deliver enough scalable social enterprises to make a major impact on the mainstream economy. On a more philosophical level, it would be counter-productive to actively exclude millions of people – such as Craig Dearden-Phillips – with a mixture of social commitment and desire for a financial return from the movement.

The question of social enterprise definition isn’t one that’s likely to be answered soon – and the issues of profit distribution and the asset lock are only two of many areas where there’s currently a wide range of views – but that’s not necessarily a big problem if we can accept that it doesn’t need to be. The challenge is to become more comfortable with our diversity – accepting that for the foreseeable future there will be both organisations that describe themselves as social enterprises and socially enterprising activity carried out by a wide range of different organisations and individuals. And get on with creating positive social change.

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On the Beanbag #2 – Craig Dearden-Phillips

Following on from our first interview with Tokunbo Ajasa-Oluwa of Catch 22, next on the beanbag is another social enterprise ambassador, Craig Dearden-Phillips. Craig is best known as the founder and former Chief Executive of the advocacy charity, Speaking Up, as well as being the author of an exceptionally good practical guide to starting a social enterprise. Having left his day-to-day role at Speaking Up following its merger with Advocacy Partners, Craig is now taking up the challenge of helping public sector workers ‘spin-out’ their services into new social enterprises with his new business, Stepping Out.

On the Beanbag #2:

Name: Craig Dearden-Phillips

Social Enterprise’s Name: My new business is called Stepping Out

Website: We don’t have one just yet

Where are you based?: Bury St Edmunds, deepest Suffolk!

What is your annual turnover?: Nil – but about to win first five figure order

How many staff do you employ?: None –  I am working unpaid too

Define ‘social enterprise’ in 50 words or less: `Doing business with an equitable balance between profit and social/environmental outcomes.’

What does you social enterprise do? I don’t fit the official definition but I help to create social enterprises out of parts of the public sector.

Who is your social enterprise for? For everyone who wants or needs better public services

Why did you start your social enterprise? Because I believe with my whole heart that public services can be delivered better, faster and cheaper by social enterprises.

How did you start your social enterprise? Out of my head, in my spare room (where all the great businesses begin)

What is your social enterprise’s greatest achievement? Hopefully winning its first contract in September!

What do you hope will be your social enterprise’s greatest achievement? Changing the public sector forever.

What’s the biggest mistake you’ve made as social entrepreneur? Employing people who just want a job

How do you measure your social impact? By what I see

Why did you start a social enterprise and not a charity? Because I am not doing something charitable

How is your social enterprise a bit like The Big Issue or The Eden Project? Not at all

What’s the best thing about being a social entrepreneur? The freedom to be about more than just a profit

What’s the worst thing about being a social entrepreneur? People thinking you are full of shite

Where do you get your money from? I am borrowing it

Grants or Loans or Equity? Discuss. Grants are good to get you going or to do something completely new. But they are like heroin and bring you down. Loans are good if you want to stay in control.  Equity is fine as long as there are shared values and agreed expectations

What’s your advice for someone who’s thinking of starting a new social enterprise? Think about the business just as much as the social

If you knew then what you know now, what would you do differently? Take on fewer, better people

Which other social entrepreneur/social enterprise do you admire most and why? I admire Peter Holbrook (now at the Social Enterprise Coalition) and the team at Sunlight.  Real achievement.  No egos.  Proper community involvement.  No bullshit

What should the Social Enterprise Coalition do to promote social enterprise? Push our public services potential

Is the Social Enterprise Mark a good thing and why (or why not)? Not sure yet. I think some private businesses that can prove social outcomes should be able to get it

What should politicians do to promote social enterprise? David Cameron should say he wants every public service to be a social enterprise by 2020

Thanks a lot to Craig for doing the interview. Comments on any of the points raised in this interview are, as always, much appreciated. Craig does occasionally read this blog so he may chip in to any discussions that get going.

If you’re a social entrepreneur and you’d like to do an interview, send me an email and I’ll send you the relevant info.

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Private matters

An interesting contribution to the ongoing debate about where the social enterprise ‘sector’ ends from former Speaking Up Chief Executive and Social Enterprise Ambassador, Craig Dearden-Phillips.

The issue for Dearden-Phillips is that the likely income from he’d get from a new social enterprise, even if highly successful, does not justify the risks that he would have to take in getting the venture off the ground but it is his perception of the way that his move will be viewed by others in the movement that is most worrying: “In my own eyes, I remain somewhere on the sliding-scale between pure-white and red-claw, but so far we can’t accommodate this in our language – I’m either social or not. End-of. So great is our fear of assimilation that we have drawn the bridge high, meaning all those not like us are viewed as the same.”

This perception is a problem for the social enterprise movement. I object to narrow definitions of social enterprise from several different directions. I don’t think it’s useful to arbitrarily decide that entrepreneurs who set up businesses with a conventional limited-by-shares structure are necessarily not social enterpreneurs. Nor do I think it’s useful to suggest that there’s a similar arbitrary level of trading income that a not-for-profit organisation needs to achieve before it can be considered a social enterprise.

For me, the social enterprise movement should be about promoting socially responsible ways of doing business and innovative, enterprising ways of delivering social change. Both means and ends are important but neither are fundamentally determined by company structures or funding sources.

On a purely practical basis, if social enterprises are going to deliver in sectors where they need lots of start-up investment and that investment isn’t going to come from the government or grants, they need to be set up in a way that enables investors to make a decent return.

The social enterprise test for me is the extent to which these companies achieve positive social change and the way that they behave towards their customers, their staff and the wider community in doing so.

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The costs of full recovery

I don’t always agree with Speaking Up boss and Social Enterprise Ambassador, Craig Dearden-Phillips, but his column in this week’s Third Sector is spot on. He firmly demolishes the umbrella-body sponsored nonsense that is ‘full cost recovery’ (FCR).

FCR isn’t an entirely bad idea in principle. It’s a positive alternative to those situations where grant funders want to give organisations money to do a project but specify that none of the money can go towards your ‘core costs’. The intention of this method of grant-funding is to ensure that grant money is spent on the projects that it’s meant to fund.  The practical result of it is that it discriminates against any organisation that has a staff team but doesn’t receive an ongoing grant for those staff members to just turn up.

They have the choice between taking responsibility for a project which their permanent staff team do not manage and play no role in – which reduces the arguments for undertaking it at all and possibly raises the question of whether it can be covered under their insurance – or cross-subsidising the work their staff do with funding from other activities.

So FCR is better than the active and artificial exclusion by funders of costs that you would take into account if you were pricing a job in the market place.

But – as Dearden-Phillips outlines – FCR has no place whatsoever in the world of trading and tendering for contracts, however much the eternally ludicrous Compactites (the Compact, it’s like a legal agreement that’s not enshrined in law and which nobody agrees to) suggest it does.

As a company tendering for a contract your questions are:

(a)   what are requirements of the contract?

(b)  what is the price you are willing to fulfil them for?

The abstract idea of ‘full cost’ is utterly meaningless in a market system. In industries where the main cost is labour, your full costs are whatever you decide they are.

If a commissioning organisation won’t meet your full costs, you either reduce costs, do the work at a loss on the basis of its wider value or you don’t do the work.

And, of course, this is already the reality for most small organisations trying that are trying to establish themselves. You go to some commissioners with a tender for some work. They say “that’s great but will you do it for £75,000 instead of £110,000”.  You say “what about my full costs?”  They say, “well, we’ve got a budget of £75,000 and some work that needs doing, do you want it or not?”

If you’re a small, unknown start-up organisation local dignitaries are indifferent to this slight against your full costs. And you definitely do want it because £75,000 is a lot more use to a small start up organisation than nothing. So you make it work by finding ways to do things more efficiently and/or working later.

As Dearden-Smith points out, this also works the other way and – once you’ve developed your services and your reputation and can do things well for less money than what commissioners are prepared to pay – you can make a profit.

For larger charities and established local providers there’s more scope to insist on your right to your full costs but it’s not clear who benefits from this.

I think it’s completely reasonable for contracts and funding to be awarded on the basis of factors other than the lowest price. And none of this is an argument in favour of commissioners underfunding contracts to the extent that the only way they can be done within the budget is badly. Organisations who deliver better services at a higher cost can and should make the case for being paid to do so but, as Dearden-Smith says, it’s not an organisation costs that are of interest to the purchaser (or the wider public), it’s the value that the organisation offers for the money.

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