UK Social Enterprises for Sustainability

Abstract

Social enterprise is a dynamic and sustainable business model of choice which is able to bring social, economic and environmental benefits to the UK. It operates across all sectors of the economy, serving individuals in the private, public and third sectors. Through out this research will identify the increase levels of understanding of the role and value of Social Enterprise, given that a lack of understanding of the role and value of social enterprises was cited as a major barrier to the acceleration of the use of the business model. I will further state that social enterprises compete in the marketplace like any other business, but they use their business skills to achieve social aims. The purpose of this research will identify the key barriers faced by Social Enterprise and explore how these barriers have/could potentially be overcome to achieve sustainability. There is also a need to recognise that some social enterprise activity will need an element of finance through public funds, particularly because they are operating in areas of market failure or a non-commercial market such as providing services to vulnerable people, including supported employment in many cases. This paper is intended to create an environment which will lead to opportunities for social enterprise to grow successfully in the future.

Chapter 1: Introduction

A brief overview of social enterprise is introduced in the first chapter. Then, the purpose of the study will be next discussed which will end with a specific research question. In the end of this chapter the contribution of this research and limitation of the study are also presented.

1.1 A Brief Overview of Social Enterprise

Social enterprises are organisations that supply goods and services as part of the social economy sector; this group constitutes a collection of organisations that exist between the traditionally private and public sectors and has a stronger relationship with the Community and Non-profit sector. This sector has a key role to play in achieving many of its goals, including overcoming social injustice and exclusion

Today’s completive business world defining social enterprise is a challenging task, according to OECD (1999, p.10) “there is no universal, commonly accepted definition of Social Enterprise.” However, the OECD (1999, p.10) has defined social enterprise as:

“any private activity conducted in the public interest, organised with an entrepreneurial strategy but whose main purpose is not the maximisation of profit but the accomplishment of certain economic and social goals, and which has a capacity of bringing innovative solutions to the problems of social exclusion and unemployment”.

Social enterprises are becoming a recognised part of the local and national economy in the UK, and the organisations operating in this sector are aware that becoming sustainable businesses is the path to independence both financially and in mission. However, social enterprises, in common with many small businesses, find growth difficult, and this could impact negatively on their sustainability. These should be supported and encouraged to grow – both as a sector and as individual organizations – so as to become more sustainable organizations.

1.2 Purpose of the Study

My paper has been developed to explore how the term social enterprise has acquired meaning in England and to illustrate how practitioners, policymakers and academics influence each other in the development of new sustainable ideas, given that a lack of understanding of the role and significance of social enterprises was cited as a major barrier to the acceleration of the use of this business model.

These challenges come in many forms. Some are the same as those affecting any other business including access to business support and finance, a lack of affordable premises and finding skilled staff. However, social enterprises also face one huge barrier that seriously affects their ability to assume a position within the market. That barrier is a lack of understanding of how social enterprises work and of their potential value. This lack of understanding exists across the public, private and voluntary and community sectors. The confusion and conflict about what the model could or should be for results all too often in misrepresentation and exaggeration of its potential, fragmentation in the provision of support and real and perceived barriers to accessing contracts and mainstream funding opportunities.

So my dissertation will identify the key barriers faced by Social Enterprise and explore how these barriers have/could potentially be overcome in order to achieve sustainability. It examines critical incidents that have shaped the meaning of social enterprise in England and reflects on these incidents to draw conclusions about the future sustainable development of social enterprise practice. Through out this paper I will also examine the potential conditions for the growth of social enterprise through a set of outline scenarios. The aim is to inform both policy-making and the wider debate about social enterprise: what its potential might be and how that potential can be realised in different settings. So my research question is:

To explore how the social enterprise is potential for sustainability in the UK.

1.3 Limitations of the Study:

During conducting the research I came across certain limitations and among them the

foremost one is time constrain. The interviewed person could not provide all necessary

information due to lack of time. The research timeline also reveals that time constrain was actually a barrier as there was plenty to find about this research topic. A huge portion of the report is based on primary data collected through interviews which is very lengthy process.

The key point here is that social enterprise cannot be identified solely by legal form or pre-set categories. Social enterprises can often see themselves as belonging to more than one category, leading to problems of double counting. For example, a social enterprise may be a charity registered with the Charities Commission or an ‘exempt’ charity which is also an Industrial and Provident Society. There is also much variation in the categories which have been used in studies to date, making aggregation and comparison very difficult.

1.4 Structure of the Report:

This research is divided into five chapters: the first chapter is an introduction with purpose and limitation of the study. In the second chapter, literature based review of definitions of social enterprise, roots of social enterprise, discussion relevant to the sustainability of social enterprise, the nature of their contribution and their sponsors and sources of funding. The third summarises the background information of social enterprise in the UK and the fourth and fifth chapter contain the methodology and the summary of the main findings of the study with implications for policy.

Chapter 2: Literature Review

This chapter will give an overview of literature and models that are related to the research problem presented in the previous chapter. This chapter will introduce the roots and concepts of social enterprise in order to give a clear idea about the research area.

2.1 Roots of social enterprise

Scott specified (Market, Schmarket : Building the Post-Capitalist Society,2006, p50) “The roots of social enterprises and community enterprise overall can be found in the mutual, self help and co-operative sector which goes back, in the UK, at least to the Fenwick Weavers in Ayrshire 1769 and Dr William King of Brighton in the 1820s (Trimingham, 2007), with earlier antecedents.” Within the development of this movement there has always been an important strand which has focused on the local community-based nature of these organisations and also on the economic development of poorer communities including the need to maintain paid work. For example between the two world wars, local community activists such as Harry Cowley campaigned for housing and work for returning service people and support for small local businesses. He organised marches to demand public works ‘job creation’ programmes from the local council for unemployed people with some success.

2.3 General Discussion on Social Enterprise

Social Enterprises combine the need to be successful businesses with social aims. This is a competitive business, owned and trading for a social purpose. They seek to succeed as businesses by establishing a market share and making a profit and emphasise the long-term benefits for employees, consumers and the community.

Bob Doherty and John Thompson mentioned in the journal ‘The diverse world of social enterprise stories’ (p.362) that social enterprises are organizations which are seeking business solutions to social crisis. These are needed to be differentiated from other socially-oriented organizations. These also need to take initiatives that can promote to communities but which are not wanting or seeking to be “businesses”. In this esteem these latter organizations remain dependent on endowments and donations rather than build up true paying customers.

According to DTI report ‘A Progress Report on Social Enterprise: A Strategy for Success’ (2003, p.6), social enterprise is such a business which reinvests its surpluses in the business or in the community rather than increases profit for shareholders or owners.

Peter Drucker argues that social entrepreneurs “…change the performance capacity of

society” (Gendron, 1996, p. 37) while Henton et al. (1997: p.1) speak of ‘civic entrepreneurs’ as “…a new generation of leaders who forge new, powerfully productive linkages at the intersection of business, government, education and community” .

Ali B. Somers (Shaping the balanced scorecard for use in UK social enterprises, p.46) stated “Social enterprise emphasise creating social and/or environmental value at all stages of their production process, as an intrinsic part of their identity”. Figure:1 describes the production process of social enterprise.

_Inputs

Production Process

Outputs: Goods and Services

Labour Employee/ Client

Raw Materials: from Environmental Sources

Can Include: Democratic Governance or training for employee/ client Base

Goods and services sold to market: Economic Profit, Social Profit and Environmental Profit

Economic Profit flows back to Social Enterprise and Ethical Investors

Social and Environmental profit flow to Community

Indicates environmental and social motives affect production

Figure: 1 Production of Social Enterprise

Source: Somers, A.B., 2005. Shaping the balanced scorecard for use in UK social enterprises. Social Enterprise Journal, 1(1), p.46

2.4 Discussion Relevant to the Sustainability of Social Enterprise

There has been an unprecedented wave of growth in Social Entrepreneurship globally over the last ten years (Bornstein 2004, pp.3-6). For Example, as part of the 2004 Global Entrepreneurship Monitor (GEM) report a survey was conducted of social entrepreneurship activity in the UK; these data suggested that new ‘social’ start-ups are emerging at a faster ate than more conventional, commercial ventures (Harding and Cowling, 2004, p.5)

There are three sides to sustainability in business activity: environment, economy and community. When aiming for sustainable practice all three factors must be given equal consideration from a local through to a global level.

Environment – Ensuring that business engages in the proper and careful use of finite resources and the management of waste so as to minimize the negative and maximize the positive impact of human activity.

Economy – Ensuring that business is financially viable, engages in good employment practice and is of benefit to the economy as a whole.

Community – Ensuring that business is overall of benefit to communities, their culture & heritage and does not endanger them.

Figure2: Sustainable Social Enterprise

Schulyer (1998: p.3) describes social entrepreneurs as “…individuals who have a vision for social change and who have the financial resources to support their ideas….who exhibit all the skills of successful business people as well as a powerful desire for social change”

Greater flexibility in the use of public resources to respond to innovative community proposals, and venture investments from foundations and the private sector could be used to stimulate innovation in areas thought to be too risky for government as the sole investor. As Catford (1998, p. 96) argues that “…social entrepreneurs…will only flourish if they are supported by the right environment, which will be created largely by governments together with the private sector”.

Social Enterprise seeks surplus generation in order to achieve financial sustainability. The need to financial sustainability is fundamental to social enterprises. Emphasizing financial sustainability in addition to profit distribution becomes a way to account for all activities the organization engages in, including advocacy and in support of bono work. Sacrificing one cause and effect chain for another can have significant implications for both the quality of work and social enterprise’s financial sustainability.

Profit Distribution

(Increase Income)

Increase Revenue

Use Resource Efficiently

Trading Revenue

Non Trading Revenue

Manage Cost

Track Advocacy

Financial: Promote Sustainability of organization

Social: Increase value to target community

Whilst many may rely on combination of grant and trading income, ultimately, if an organisation is not financially sustainable, it cannot deliver its social and environmental impact. Fig3. shows how the profit of social organisation is distributed to the organization itself and community.

Figure: 3 Financial Sustainability

Source: Somers, A.B., 2005. Shaping the balanced scorecard for use in UK social enterprises. Social Enterprise Journal, 1(1), p.50

2.5 Policy Reform and Good Governance

DTI report ‘A Progress Report onSocial Enterprise: A Strategy for Success‘ (2003, p.6) describes the three key goals for government as creating an enabling environment, making social enterprises better businesses and establishing the value of social enterprise.

The danger in not supporting social entrepreneurship is obvious to Reis (1999: p. 4) who calls for systematic intervention to accelerate and improve philanthropic efforts. Without this he argues that substantial numbers of potential donors and social entrepreneurs could be “…discouraged, turned-off, and lost from philanthropy and social change work”.

So, in recent years, the boundaries between the private sectors (in term of market thinking and managerial practices) have impacted the public and voluntary sectors and started to blur traditional distinctions between them (Bull, 2006, 2007). The emergence of radical business alternatives with a strong social orientation, democratic organisation, and positive attitude to ‘profitable’ trading has led to formal recognition and academic scrutiny (Seanor, Bull and Ridley-Duff, 2007).

Brown, H and Murphy, E (2003: p.57) mentioned on Bank of England report that “Social enterprises, like all businesses, need access to a range of financial products appropriate to their activity and stage of development”

An HM Treasury report on Enterpriseand Social Exclusion (1999, p 108) came to the

conclusion, arguing that social enterprise was “less understood and rarely promoted in a consistent way by the existing infrastructure for business support”.

Thompson et al. (2000: p. 328) describe “…people who realize where there is an opportunity to satisfy some unmet need that the state welfare system will not or cannot meet, and who gather together the necessary resources (generally people, often volunteers, money and premises) and use these to ‘make a difference’”.

It is more useful to consider and develop social enterprise capabilities rather than skills and capacity building. The fact that social enterprises need to combine commercial objectives with social mission as well as internal governance, means that a “capabilities approach” is more comprehensive. This is a useful way of recognising factors additional to individual skills that inter-play to determine the effectiveness and impact of a specific enterprise. It also moves away from limited considerations of a key person or group within the organisation, and their specific skills, towards a more holistic view of what the organisation is capable of doing, irrespective of the location of particular skills.

Laville and Nyssens (2001: p 325) argue that while the origins of social enterprises are based in reciprocity and thus form part of the third system, their strength is based in their ability to tap into all three economic principles and systems. They are different from private enterprise in that their goal is not the maximization of profit to benefit owners, although they do develop market activities and generate profits. They are also different from the public sector in that they are independent from direct control by public authorities. But they benefit to a greater or lesser extent from public subsidy. Thus they mobilize market relations to sell services or goods, and can use redistributive relations by utilizing government funding to finance their services. Their long-term sustainability depends on their ability to ‘continuously hybridise the three poles of the economy so as to serve the project’. Their complementary use of monetary and non-monetary relations guarantees autonomy of service based on their connections within communities and economic viability. This view of social enterprises offers an insight into their complexity in terms of the roles they must juggle and of the many forms – from cooperatives, community enterprises, social firms, fair-trade companies and more – that they take.

Dees (1998: p.4) identifies five criteria that social entrepreneurs possess: adopting a mission to create and sustain social value; recognizing and relentlessly pursuing new opportunities to serve that mission; engaging in a process of continuous innovation, adaptation and learning; acting boldly without being limited by resources currently in hand; and exhibiting a heightened sense of accountability to the constituencies served and to the outcomes created.

Catford (1998, p.97) who articulates the issues and one possible solution most eloquently: “Traditional welfare-state approaches are in decline globally, and in response new ways of creating healthy and sustainable communities are required. This challenges our social, economic and political systems to respond with new, creative and effective environments that support and reward change. From the evidence available, current examples of social entrepreneurship offer exciting new ways of realizing the potential of individuals and communities…into the 21^st century”.

The Progress Report on Social Enterprise: A Strategy for Success(2003, p.68) concludes that there is little hard evidence to demonstrate the impact and added value of social enterprise. The report points out that one of the reasons for the lack of statistical evidence is that social enterprises create a range of social and environmental impacts, beyond their financial return (the ‘double’ or the ‘triple’ bottom line) that are hard to measure (even by the social enterprises themselves). Limited information on their social and environmental, as well as financial, impact also means that policy makers, business support providers and finance providers find it difficult to assess the value of targeting social enterprises or of including them in their activities.

2.6 Concluding Remarks

Academic writing about modern social entrepreneurship skills is relatively limited, compared to mainstream business or charities. The concept of ‘social enterprise’ has been rapidly emerging in the private, public and non-profit sectors over the last few years. Currently, the non-profit sector is facing increasing demands for improved effectiveness and sustainability in light of diminishing funding from traditional sources and increased competition for these scarce resources. At the same time, the increasing concentration of wealth in the private sector is promoting calls for increased corporate social responsibility and more proactive responses to complex social problems, while governments at all levels are struggling with multiple demands on public funds.

Chapter 3: Background Information of Social Enterprise

This chapter will give the idea about the social enterprise types and size in the UK along with the impact, barriers and sources of fund in this organizations.

• Social Enterprise in the UK

The UK government has been at the front position of enabling and encouraging the increase of social enterprises as part of both welfare services delivery and community regeneration at the policy level. The impacts and influence of public, private, and citizen are empirically proven and exhibit that these conventional sectors of society are playing a part in re-evaluating the value creation opportunities offered by market (or quasi-market) mechanisms.

[Brief overview of types]

According to the UK policy-making community, social enterprises play a vital role in the creation of economic and social value.

• It has been claimed that, there were some 15,000 social enterprises in the UK SBS(2005, pp.1-2), accounting for around 1.2% of all employing enterprises in the UK. These social enterprises generate around £18 billion in annual turnover and employ over 775,000 people (475,000 paid employees and 300,000 volunteer staff).

• Government’s Survey and existing data for the social enterprise sector estimated that there are at least 55,000 social enterprises in the UK, with a combined turnover of £27billion per year which is raised to over £800 million from the preceding year. This corresponds to 2% of the UK’s GDP . The number of registered charities rose from around 120,000 in 1995 to more than 164,000 in 2005, and there are also hundreds of thousands of small community groups.

• According to Government estimates, social enterprises account for 5% of all businesses with employees and contribute approximately £8.4billion to GDP (HM Treasury and Cabinet Office, 2006, p.29), around 0.7% of the total economy.

• The data obtained from the cabinet office website in social sector showed that in the year 2003/04, 56% of third sector organisations reported an increase in activity in the previous year, and 67% of them expected activity to grow in the next three years.

• Positive aspects of social enterprise:

Social enterprise is a varied activity and can include a range of organisations working on different scales and at different levels of trading. Some work at community level, while others work nationally. They can work in public services or commercial markets. They often work in the most disadvantaged areas and work with the most disadvantaged groups. Some organisations work only as a social enterprise while in other organisations social enterprise is often a part of their activity. This most commonly applies in a voluntary organisation or a housing association.

According to Bob Doherty and John Thompson (The diverse world of social enterprise stories, p.362) the common characteristics for a Social Enterprise are:

• They have a social rationale and yields and surpluses are not shared out to shareholders.

• Reinvested profit can be used to provide training and development opportunities for staff.

• They use assets and capital to generate community benefit.

• They pursue this with (at least in part) trade in a market place.

• Members or employees can also take part in decision making.

• The enterprise is responsible to both its members and a wider society.

• Citizenship participation and volunteering are encouraged within the local community

• The social enterprise model could create new forms of entrepreneurship and employment within a community

• The model is ideally placed to meet new needs within a community, if supported sufficiently at start up

• Social Enterprises can offer goods and services to poor and disenfranchised communities

• The potential of a profits and revenue stream could liberate organisations from the tyranny of fundraising and grant applications

• Organisations could flourish effectively and creatively under this model

• There is either a double or triple-bottom line concept. The assumption is that the most effective social enterprises exhibit healthy financial and social returns rather than high profits in one and lower profits in the other.

Social enterprise makes an important contribution to the social, economic and environmental development of Scotland. This can be summarised as follows.

Fig 4: Beneficiaries of Social Enterprise

Source:

Social enterprise is extremely varied but, importantly, it works in a number of key priority areas for the UK economy- these include:

• employment and training;

• childcare;

• health;

• adult care services;

• recycling;

• renewable energy;

• transport;

• financial inclusion;

• community regeneration; and

• rural development.

• In particular, social enterprise contributes to regenerating our most deprived communities in both urban and rural areas. It often works with the people who have least opportunity in our society, including those outside the labour market, and so it has a major role to play in developing employability and supported employment and ensuring equal opportunities to those people.

• Social enterprise can add value to many of its activities by focusing on social, economic and environmental benefits, importantly linking these aims in a positive way, which in other business models may sometimes cause conflict.

• Social enterprise can offer goods and services to its customers in a flexible and innovative way. It can focus on their needs to deliver better public services. Often this is in areas where the market has failed – areas where the private sector does not want to go.

• Social enterprise can make sure resources give value for money where a public-sector contract is needed for the activity. This includes working with very marginalised groups, where the enterprise activity helps reduce the amount of public funding needed. Through encouraging social entrepreneurship in communities, levels of public subsidy and grant dependency can be reduced.

• Barriers of social enterprise

“…often have boards of directors or trustees who come from a voluntary sector rather than a business background. This can lead to a lack of business focus and prevent social enterprise from truly reaching their potential (DTI 2002, p.62)

Several challenges remain before the full potential of the third sector can be realised. First, the Government must carry through its commitment to provide a constructive partnership with the sector and resist the temptation to treat it as one of the instruments for the marketisation of the Welfare State. Amicus, a trade union with workers in the public, private and third sectors, is concerned that an expansion of the third sector will be a ‘stepping stone’ to the privitisation of the public sector (Maskell quoted in Little, 2007, p.31). Second, the majority of third sector organisations are small and under-capitalised and they are constrained in the growth aspirations by limited access to capital (Bank of England, 2003; SQW, 2007).

Insufficient capital can lead to either under-investment, or a re-orientation towards market objectives in order to obtain finance, and the consequent re-prioritisation of economic over social and environmental outcomes. To enable third sector organisations to maintain the balance between economic, social and environmental outcomes, the Government must ensure that a pragmatic and realistic assessment of the financial costs of service delivery is incorporated into their policies and strategies (HM Treasury, 2006).Third, a curse of successful activities in the third sector is that they themselves are prone to being privatised and consequently turned into capitalist ventures that adopt orthodox business practices, as has been the case with the demutualisation of the Building Society movement in the UK.

According to UK Government and various literatures review shows that there are mainly four significant barriers to accessing appropriate business support and finance for social enterprises throughout the region.

1. Cultural barriers between those setting up social enterprises and mainstream business advisors. 2. Lack of clarity about where to access business support at the local level, largely due to the huge diversity of routes into starting up social enterprises.

3. Limited numbers of accredited technical specialists in key business advice areas where social enterprises require specialist support, for example on legal structure, potential investors or taxation.

4. Limited sources of affordable equity and loan finance of all sizes.

All of these barriers inhibit the use of available business support by social enterprise. Many of the issues are cultural, but there are also skills issues, with mainstream business advice agencies not being adequately equipped to address more technical aspects of social enterprise business development. Specialists do exist within the region but many of them are funded through short-term grant finance. This enables the free provision of services but a lack of long-term sustainability for the advice services themselves.

To grow and develop social enterprise in UK, we must tackle a range of challenges and issues which have been highlighted by the research and consultation carried out to develop this strategy. Tackling these challenges, which are summarised into five key areas in this chapter, will be a major part of this strategy:

• Use of the social enterprise business model.

• Business opportunities.

• Finance and investment.

• Business support for social enterprise.

• Raising the profile and demonstrating value.

• Sources of Finance

The key factor in an enterprise’s development is access to appropriate sources of finance. Social enterprises are more likely than SMEs to have been rejected for finance, although the majority of those rejected by one lender appear subsequently to be successful with another. In addition, a large minority of social enterprises perceive access to external finance as a major barrier to expansion, including some of those that have successfully accessed finance in the past. While there is no one, clear reason to account for the higher rejection rates among social enterprises than SMEs, this report explores possible contributory factors, which