Sustaining a Social Enterprise to Serve Mission

Tom Aranow, Senior Advisor
Harrington Daniels Advisors, LLC

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While social enterprise—simple, direct, short term, and altruistic enterprises in which clubs and social organizations raise revenues to be used for the public good—may seem like a fairly new prospect, charity bake sales and Girl Scout cookie sales, two obvious examples, show that social enterprises have actually been around for a long time.

From a practical perspective it would seem that key elements of social enterprise that seem new to us rest in the realization that they look so much like businesses and they involve risks, motives, and goals that are unfamiliar to most nonprofit managers.

It’s not that nonprofits don’t "sell" their efforts in the nonprofit world. In fact, we present our various cases to donors and supporters every day. In turn, they give us money and resources to provide goods and/or services to benefit the common good, individuals and families, and the greater community.

As much as some charitable organizations might not like the connotations of business and profit, in their present forms, social enterprises are businesses that have been developed to serve the missions of their nonprofit "owners or investors." In our experience, we see them evolving in three common forms or "models," each with its own strengths and weaknesses.

Newer aspects of social enterprise involve some nonprofits taking substantial risks by developing complex long-term organizations designed to earn revenues by selling goods and services to the general public. When the funds nonprofits spend on producing and delivering those goods and services is less than they take in through sales, that looks a lot like profit, and in many ways is business.

When any of the funds generated through these enterprising acts of creating, promoting, distributing, selling, and delivering goods or services is used to promote a social need or cause, or when the operations of the "company" serve the public good, that’s social enterprise—there is no getting around it.

Three Social Enterprise Models

Pure business. The first and perhaps most challenging model for a social enterprise is one in which almost all of the operational and managerial characteristics are consistent with best practices in the business world.

These ventures are designed to generate sufficient cash to pay all of their business expenses and to generate profits and cash flow that can be used to support the social mission of their parent organization. While some supporters of social enterprise would argue that the goods and services provided by the enterprise should, in and by themselves, enhance the social good, others would argue that it doesn’t matter as long as their products and services meet a need, do no harm, and generate cash. These enterprises typically pay market rates to both labor and management and are not subsidized by grants or donations beyond their nonprofit’s initial investments in start-up costs. Their greatest strength is in the demand for their products and services.

As a social enterprise, their greatest advantage rests in the ability of their governing bodies to decide where and how to best use the cash they generate. Their greatest risks are those experienced by any business: They are subject to market pressures, competition, and economic trends, and can fail, leaving the parent organization with substantial unrecoverable losses. FEI Behavioral Health, a successful employee assistance company governed by Families International is a strong example of a pure business model in action.

Modified business. These social enterprises serve a social good by generating cash and or profits which are used to provide jobs for the disadvantaged or handicapped. Profit in the form of cash is less important than profit re-invested in operations and jobs. As such, the nonprofit parent organization may be willing to make compromises in efficiencies, productivity, and profitability that would be unlikely in a pure business model.

These ventures are often self-sustaining, but they may take donations in the form of goods or services which are then sold to other businesses or the general public. These may be low risk enterprises in the sense that they can develop very slowly over time with minimum cash outlays and can more easily reduce costs in the face of economic slowdowns. Unlike their pure business counterparts, they are not designed to produce a lot of excess cash. Goodwill Industries and other consignment shops run by nonprofits are fair examples of a modified business approach to social enterprise.

Subsidized blend. Unlike both of the models described above, there are many social enterprises that never expect to be able to pay their own way through sales. Instead, they may look to their enterprise for some of their revenues. The rest is expected to come from donors or grants. This is especially true of two types of social ventures that will always require donor support: those that provide essential goods or services to people who can’t afford to pay market rates (rates that would cover the cost of the goods or services they receive) and organizations that engage in what has been called "substitution of demand," which means their donors, stakeholders, and other supporters have decided certain goods or services for which there is little actual demand are essential to the common good. A nonprofit cultural group that offers subsidized artistic and theatrical performances would serve as a just example.

These organizations often pay less than market wages and salaries and are dependent on significant numbers of part-time workers and volunteers to keep costs down. Organizational controls and structure are often minimal. The result is that the quality of services they provide is often unpredictable. Effective budgeting is almost impossible since it’s very difficult to accurately predict the portion of operating revenues that can be produced by sales. There is likely to be a constant juggling act between the use of sales revenues and contributions to cover direct costs and there is rarely sufficient earned cash to be used in enhancing the ability of the parent agency to pursue its mission. Key donors will also come and go.

The strengths in their approach rest generally in low or modest operating costs which in turn lower the risk that the limited enterprise will incur substantial unrecoverable losses. In some cases, a social enterprise supported by blend of sales and donations can simply retreat to being a simple charity.

The Bottom Line

Clearly, real social enterprises rarely represent the ideal types we’ve described here. Instead, they tend to develop their individual traits, structures, and cultures. Some are organized as businesses from the start. Others suffer continuing identity crises and frequent debates about the proper role of sales and profit motives in the nonprofit community. For many of our nonprofit clients who are nurturing social enterprises and for those considering an enterprise experience, we offer the following:

• There need be no shame in selling. When it comes to most successful businesses, sales are really about connecting people with goods or services that are useful and of value to them. In that sense, it’s a positive effort that actually benefits the buyers and consumers and the entrepreneur.

Finally, there need be no shame in earning the revenue we direct to serve the public good. Most of us are rightly and justly proud when we’ve finished a productive bake sale, charitable car wash, or community chicken dinner. In some ways social enterprises are just large scale examples of a time honored tradition.

Alliance for Children & Families Magazine
Summer 2008, Vol. 8, No. 3