3rd Volume SEJ

Social Enterprise Journal
VOLUME NUMBER 3, ISSUE 1 MARCH 2007

A new model for supporting social enterprise through sustainable investment Zia ul Islam Using human resource management tools to support social enterprise: Emerging themes from the sector Maureen Royce Recent reforms to corporate legal structures for social enterprise in the UK: Opportunity or confusion? Ian Snaith Social Return on Investment and social enterprise: Transparent accountability for sustainable development Neil Rotheroe and Adam Richards Balance: The development of a social enterprise business performance analysis tool Mike Bull Social enterprise a solution for the voluntary sector? Sinad McBrearty They have God on their side: The impact of public sector attitudes on the development of social enterprise Tony Chapman, Deborah Forbes and Judith Brown Making sense of social enterprise Pam Seanor and Julia Meaton So you like to play the guitar? Music-based social enterprise as a response to economic inactivity Molly Scott Cato, Len Arthur, Russell Smith and Tom Keenoy Understanding social enterprise: A case study of the childcare sector in Scotland Paul Hare, Declan Jones and Gemma Blackledge
Social Enterprise London (SEL) is a specialist agency that promotes community, best practice and skills development for the social enterprise sector. SEL is an agent for change. We work with individuals, enterprises, organisations and local and national governments to make social enterprise happen across the Capital. A dynamic, customer focused development agency, SEL is supported by a Board consisting of some of Londons most innovative social entrepreneurs. Supported by the London Development Agency (LDA), SEL has developed a Network of over 300 social enterprises. The Network offers the UKs first social enterprise directory, Londons most widely read social enterprise news bulletin - Update!, networking events, technical support and sector-wide promotion. SEL is working on the ground to help social enterprises make a difference. The Social Enterprise Journal (SEJ) offers the very latest thinking from leading social enterprise specialists and is a fantastic resource for anyone looking to develop a deeper understanding of the complex issues associated with social enterprise. The SEJ is available for download from the SEL website, www.sel.org.uk which continues to be a leading social enterprise resource not just for London, but also for communities around the world.
Disclaimer: Support for this publication was provided by the LDA. Any opinions, findings, conclusions, or recommendations expressed in this Journal are those of the authors and do not reflect the views of the LDA or SEL.
2007 Report to readers
It is with great pleasure that I introduce to you the third Social Enterprise Journal (SEJ). Since Social Enterprise London (SEL) started publishing the journal in 2005, we have received considerable interest from both academics and practitioners; including submissions from both groups has enabled us to create links between theory and what is happening on the ground. Today we are pleased to report that SEJ 2005 and 2006 have been downloaded more than 28,000 times. This is a three-fold increase on last year and is a clear indication of the growing interest in both social enterprise and the Journal. Social entrepreneurship, social capital and social impact are some of the terms that are commonly used in the public, private and third sectors, demonstrating that social enterprise has achieved mainstream status. Discussions around the development of social enterprise have encompassed topics as varied as defining the sector, exploring the challenges it involves, and the triple-bottom line impacts that are being generated. It is a very interesting time for research into social enterprise and the submissions in the journal are testament to this. SELs policy and research work will continue to engage with decision makers and third sector stakeholders to ensure that policy reflects the needs of social enterprises. We at SEL feel that research should be intrinsically linked to policy, because information uncovered by research, in other words the facts about social enterprise, should inform governmental policy towards social enterprise. SEJ serves as a key platform for disseminating knowledge about the active role played by social enterprise in the Capital. The creation of The Office of the Third Sector in 2006, whose role it is to steer policy, marked a step change for social enterprise. The foreword for this Journal is written by none other than Ed Miliband, the new Minister for the Third Sector, who endorses the Journal as a key source of information for the development of relevant policy. I would like to thank the team at SEL who helped co-ordinate the publication and editing of this Journal. I would also like to thank the 26 peer reviewers and our esteemed authors without whom SEJ would not be possible. I hope that the arguments in this journal instigate discussions and debates about the latest emerging issues in social enterprise that, as recently as three years ago, were not on anyones radar.
Sabina Khan Director of Policy and Research & Editor of SEJ Social Enterprise London
Foreword by the Minister of the Third Sector

Ed Miliband, MP Inspiring ideas need hard evidence: because of our belief in the inspiring work of social enterprise, because we are ambitious for what it can achieve, it is doubly important that we can support it with robust foundations. From meeting social entrepreneurs first hand, I have no doubt that enthusiasm about social enterprise is justified. It is striking how there is a common can do spirit: no barrier is too big to be overcome, no person should be written off and no challenge is too enormous. Some of that entrepreneurial spirit is in other parts of society, including the conventional private sector. But its strength, and its partnering with a strong belief in social justice, stand out in the field of social enterprise. People who have seen social enterprise for themselves see the effect it can have on public services how it can reshape services around the user, and find new solutions to old problems. People who have seen social enterprise realise how it challenges much of the private sector, putting ethics at the centre of a business, not just as an add-on. I believe there can be a lot more social enterprises operating in mainstream consumer markets, like Caf Direct and others; and I also believe the impact of social enterprise can be felt in the rest of the private sector. It sets a benchmark for what needs to be done, competing on the basis of ethical values. But if the impact is so striking at first hand, what about those who have not and cannot see social enterprises for themselves? Can we take our claims, our contentions that social enterprise can shake up public and private sectors, and back it up with hard evidence? Can we provide the undisputable facts that will convince the harshest of critics, and ensure that every local commissioner, every lender, and every ethical consumer knows what social enterprise can do? I believe this is one of the big tasks for social enterprise as a sector. I believe it is one the sector can rise to. I believe journals such as this can play a vital part. By testing out assumptions, providing conceptual tools for social entrepreneurs, and pushing back the known frontiers of the possible, it is helping to strengthen and expand the evidence base. It is arming the advocates at the grass roots, and bringing the voice of social enterprise into government policy-making at all levels. But government, too, must play its part. We have already conducted the first ever national survey of social enterprise, and placed social enterprise questions in the mainstream business survey. These gave us the hard numbers we need, such as the existence of 55,000 social enterprises across the country, and their 8 billion addition to GDP. We are now commissioning a series of short papers to improve the analytical base.
But evidence alone is not enough. It must have impact. The Action Plan, launched by Gordon Brown in November, builds on what we have done in the past the establishment of the Social Enterprise Unit, actions in the 2002 strategy to push forward governments role as catalyst, customer and champion. As a catalyst, the state can take the evidence and apply it to policy, helping shape a better environment for social enterprise. Government doesnt create the inspiration of social enterprise, but can help it or hinder it. We know that business support can improve in some areas, which is why we are investing more money in it, and why we are talking to the sector, specialist support agencies and the Regional Development Agencies so that the right advice is on offer. We know access to finance can be made easier, which is why we are setting up a new 10 million fund to lever in private sector money particularly by catalysing quasi-equity products. And we know we can improve tax incentives, which is why the government is reviewing the Community Investment Tax Relief. As a customer, the state can make sure government at all levels is a good partner to work with, and services are adequately funded. Resolving issues around contracting and commissioning will not be done overnight but we are working to shift the culture. That is why we are developing a way to train the 2,000 most important commissioners in the country, so that they understand what social enterprise can contribute and how they need to commission in a way which is oriented towards the needs of social enterprise. That includes understanding, for example, the role of social clauses. That process is going to be led not just by central government and local government, but by the sector as well. And as a champion, the government can help to bang the drum for social enterprise and take its evidence and insights to every corner of the country. Only one in four people know what social enterprise is. That is a collective challenge. We have a role in this. It starts in the schools, which is why we are going to change the business studies curriculum. We are going to recruit 20 social enterprise ambassadors, who are going to spread the message all round the country so that people know about social enterprise. With the energy and commitment of the sector, with vibrant and challenging centres of debate such as this journal, and with government playing its role as an enabling partner, I believe social enterprise can have an enormous impact. It can be not just a business model, but a social movement.
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socialenterprisejournal
contents
VOLUME NUMBER 3, ISSUE 1 MARCH 2007
ORGANISATIONAL DEVELOPMENT
A new model for supporting social enterprise through sustainable investment ZIA UL ISLAM 01
This paper takes a practitioner approach to describe the experiences of a not-for-profit organisation (NPO) based in Karachi, Pakistan. This organisation attempted to set up social enterprises in a city slum to help the impoverished, and after several experiments, arrived at a practicable model of a social enterprise based on NPO-Private Partnership. The paper starts by discussing firstly the issues surrounding micro-credit endeavours. It then looks at the problems in setting up social enterprises in a market with minimal regulations and numerous distortions. The conclusion proposes a solution in the form of sustainable partnerships between NPOs and private entrepreneurs. The paper also describes a new model by which an NPOs modest investment in a small business creates jobs, better profits and a small return to sustain its work. Lastly, the paper examines how changes at public policy level and individual level could help establish the NPO-Private Partnership model. Using human resource management tools to support social enterprise: Emerging themes from the sector MAUREEN ROYCE
10
Managing people is a complex business in any organisation. The challenge of enterprising while focusing on social objectives creates a complex environment for those managing people in social enterprises. Traditional HRM (Human Resource Management) strategies may seem to offer little to those organisations staffed predominantly by volunteers, wishing to support a vulnerable workforce, or excluded from the mainstream. However, the need to establish clarity about staffing levels, patterns of work, culturally aware recruitment and selection processes, motivational performance and reward options, an energising work relationship and progressive development policies are common strands linking the HRM agenda to social enterprise. This paper categorises emergent themes connecting HRM strategy to the management needs of the social enterprise sector. Recent reforms to corporate legal structures for social enterprise in the UK: Opportunity or confusion? IAN SNAITH
20
This paper reviews the changes made in the 21st century to the range of UK legal structures available for social enterprise. The paper analyses the reforms of the legal rules governing industrial and provident societies in 2002 and 2003, and the development of the community interest company structure around the same time. In addition, the impact of the European
Co-operative Society (SCE) structure and of the Companies Act 2006 is analysed. By examining the origins and rationale for these developments and considering their likely impact, the paper considers whether the UK legal scene is now better equipped to facilitate the growth of social enterprise and examines the issues that need to be addressed in further law reform.
IMPACT MEASUREMENT
Social Return on Investment and social enterprise: Transparent accountability for sustainable development NEIL ROTHEROE AND ADAM RICHARDS
31
This paper presents a case study of social return on investment (SROI) in a Liverpoolbased social enterprise, the Furniture Resource Centre (FRC) Group, in order to explore the relationship between the social enterprise business model and the concept of sustainable development. Action research was the method adopted in this study. Active participation allowed greater insight into the stakeholder involvement and learning styles used in SROI performance measurement techniques. The authors question the capability of social enterprise to progress towards sustainable development. They argue that social enterprises need to develop transparent accountability mechanisms in order to legitimise their existence in the long term. Moreover, those mechanisms need to reflect improved knowledge and understanding of sustainability. Balance: The development of a social enterprise business performance analysis tool MIKE BULL
49
Social enterprise managers are challenged to constantly adapt to ever-changing environments; a balancing act requiring strategic reflection and analysis to achieve ongoing sustainability. Performance measurement through management analysis tools may offer organisations help in managing this process. This paper outlines the development of a sector-specific business analysis tool Balance, grounded in the business practices of social enterprises. Drawing on Kaplan and Nortons Balanced Scorecard, and Kolb and Frys organisational learning cycle as the conceptual framework, the paper explains how the tool was designed. The paper analyses results of a pilot phase where 30 social enterprises used the Balance tool. The research findings provide a snapshot of the business capabilities of social enterprises and by highlighting both strengths and areas where greater support may be required the research has both policy and practitioner implications. It is envisaged that such a tool may therefore be a catalyst in generating stronger social businesses that capitalise on opportunities and generate change through offering viable alternatives to the private sector.
STRATEGIC DEBATE
Social enterprise a solution for the voluntary sector? SINAD MCBREARTY 67
This paper assesses the practical issues arising from voluntary organisations attempts to utilise social enterprise models to achieve their objectives. Within an action research framework, the author evaluates findings from projects within five separate organisations. Success and failure factors are identified across the group. A number of observations are
also made about the impact of commercialisation on the values and missions of voluntary organisations as well as the reach of services across the most disadvantaged communities. They have God on their side: the impact of public sector attitudes on the development of social enterprise TONY CHAPMAN, DEBORAH FORBES AND JUDITH BROWN 78
Britains Labour government is committed to the development of social enterprise. Based on interviews with key stakeholders in the public sector in a sub-region of North East England, this article shows that social enterprises are not yet fulfilling their potential because they lack the support and trust of key decision makers. The article shows that this emanates from a deeply embedded discourse in the public sector. On the one hand, the public sector is sympathetic to the social enterprise sectors willingness to affect change in communities facing multiple deprivations, but on the other, is mistrustful of such organisations capability to deliver services in a professional and businesslike way. These pervasive views arise from an assumption that because social enterprises are value led their ability to become sufficiently professional and businesslike in their organisational practices is weakened.
Making sense of social enterprise PAM SEANOR AND JULIA MEATON
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The Government, social enterprise academics and practitioners are all advocating social enterprise as the way forward for delivering goods and services. This paper seeks to understand and then develop a model of the ways in which participants in a social enterprise network are making sense of social enterprise in their projects. Grounded by data collected from semi-structured interviews, the paper addresses the following questions: What are the shared meanings and sense of shared identity that individuals use to make sense of social enterprise? How are these related to actions and projects within the social enterprise sector? In responding and adapting to changes, does the network have integrity? If so, is this creating a foundation for sustainable and flexible social enterprise development? In presenting participants views on their projects and the support they receive, the paper presents an alternative story to that of the heroic social entrepreneurial leader.
INDUSTRY SECTORS
So you like to play the guitar? Music-based social enterprise as a response to economic inactivity MOLLY SCOTT CATO, LEN ARTHUR, RUSSELL SMITH AND TOM KEENOY
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Recent political attention directed towards the social economy has focused on its role in addressing the particular problems of social exclusion and labour-market inactivity. The cultural industries have been proposed as playing a particularly positive role. The focus of the research is the music industry in Wales. This paper questions how the nature of the organisation promoting and distributing the music affects the social and economic value derived from it, and how it may ensure more equal distribution of the rewards of work and creativity. The research asks whether the structure and governance of a cultural industry organisation affects its ability to support socio-economic development. By engaging with the literature about the music industry, the authors attempt to show how a particular form of management may be required to derive the maximum well-being for the community. The authors find that young musicians may be encouraged to build their own careers by translating their passion for music into economic activity. However, since many young people would resist the label entrepreneur in favour of that of a self-employed creative artist, it may
be necessary to extend understanding of entrepreneurship and to use the social enterprise form to stimulate the music industry, especially in marginalised economic areas. Understanding social enterprise: a case study of the child care sector in Scotland PAUL HARE, DECLAN JONES AND GEMMA BLACKLEDGE
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Defining social enterprise is a challenging task. It is even harder doing so in a way that would enable a commercial bank to offer credit to businesses in the social enterprise sector. In this paper, we examine this issue through a discussion of the findings from 80 questionnaire responses to a survey of childcare businesses in Scotland. Issues discussed include the diverse legal forms of childcare businesses and staff perceptions; the management and governance of these businesses; and their pricing and credit management strategies. In addition, the study investigated the policy environment within which these businesses operate. The study findings should be capable of generalisation across the social enterprise sector.
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socialenterprisejournal
E DITOR Sabina Khan, Social Enterprise London
The Social Enterprise Journal would not be possible without the commitment and hard work of our peer reviewers. They provide not only the information needed for publication decisions but also valuable critiques for authors. We offer our sincerest thanks to the following reviewers who served as referees for the 2007 edition of SEJ. P EER R EVIEWERS
Abbie Rumbold Bates Wells & Braithwaite Professor Alex Murdock London South Bank University Dr Alex Nicholls University of Oxford Barbra Wallace University of East London Bob Doherty Liverpool John Moores University Bren Romney Goldsmiths College Christopher Peacock A Moveable Feast Dave Kilroy Social Enterprise Outcomes Ltd Declan Jones Heriot Watt University Dr Diane Holt Middlesex University Business School Doug Foster University of Surrey Geof Cox The Common Cause Foundation Ian Snaith University of Leicester Jas Syed Ahmad Middlesex University Business School Jeremy Taylor Social Enterprise Coalition Jon Griffith University of East London
Dr Fergus Lyon Mike Bull Middlesex University Business School Manchester Metropolitan University
S OCIAL E NTERPRISE L ONDON S TAFF R EVIEWERS

Gustavo Arnaudo Director of Finance Joyce Francis Director of Human Resources and Training Lesley Miller Senior Business Manager Lorraine Baer Intern Mei Yee Hui Business Research Manager Robin Harris Project Manager Sabina Khan Director of Policy and Research Wan Saiful Wan Jan Project Assistant
Cover skyline design Social Enterprise London. Insert cover photos were taken by Rob Farrar. Designed and produced by TBD Enterprise Social Enterprise Journal (SEJ) Volume 3, Issue 1, March 2007 is an annual publication that is produced by Social Enterprise London (SEL) and funded by the London Development Agency (LDA). Disclaimer: Any opinions, findings, conclusions, or recommendations expressed in the SEJ are those of the individual authors and do not necessarily reflect the views of the LDA or SEL. The LDA and SEL are not responsible for the accuracy, completeness, or timeliness of the information contained in the articles herein. Web-link: The SEJ is available for download on the SEL website www.sel.org.uk Hardcopy: To receive an additional hard copy of the SEJ please send your address and a cheque for 10 for postage and handling to Social Enterprise London, Third Floor, Downstream Building, 1 London Bridge, London SE1 9BG.
Social Enterprise Journal Volume 3, Issue 1 2007 Social Enterprise London
S E J
A new model for supporting social enterprise through sustainable investment

Zia ul Islam* is Chief Instructor at the National Institute of Public Administration, Karachi, Pakistan. He also manages HELP Foundation. A graduate of Cambridge University and the University of Southern California, he works for the Government of Pakistan in which he has served in senior management positions, including that of Permanent Secretary. He has authored five books.
INTRODUCTION HELP Foundation is a not-for-profit organisation (NPO) formed by a group of professionals, businesspeople, industrialists and public servants to develop a replicable model for povertyalleviation through social enterprise. The scope of this paper is essentially to present a practitioners view on HELPs experience in finding practicable ways and means of setting up sustainable institutions to help people in poverty lift themselves out of the poverty trap. It studies the mixed results of micro-finance, examines the difficulties faced in setting up social enterprises in a poor locality and describes how HELP arrives at a novel model for a workable partnership between NPOs and slum-level entrepreneurs. The paper goes on to examine the availability of funds for implementing this model and explores the changes required at public policy level and individual level to establish sustainable institutions based on the new model. METHODOLOGY The paper relies upon the experiences of HELP, the various experiments conducted and obstacles incurred in the different approaches it has used to generate social enterprises. Research materials used include surveys, interviews with clients, staff and benefactors of HELP and forms completed by clients and interviews with beneficiaries of the various schemes. Literature was reviewed on fund availability and public policies. MICRO CREDIT EXPERIENCE From 1996 to 2001, HELP provided financial assistance to people in poverty with specific financial needs such as for a daughters marriage, childrens school fees and hospital expenses. As word spread, the number of people asking for help became unmanageable and it was apparent that a formal system was required. Based on advice from experienced non-government organisations (NGOs), it was decided to limit the operations to a single poor locality and, more importantly, to establish a permanent presence in the community.
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The locality selected was Azam Basti with a base-line population of about 150,000. HELP first opened its doors there in 2002. The characteristics of Azam Basti that were fundamental to its selection included: 1. It is inhabited by poor people belonging to several ethnic and religious backgrounds. 2. The level of poverty varies from the poorest to the least poor. 3. It is close to affluent localities and easily accessible. As a first step it was decided to try micro-finance and a policy was laid down for providing loans. The policy is still in use. Applicants are required to: 1. have a successfully running business, 2. be permanent residents with a sufficiently long stay in the locality so as to be well known by many people, 3. produce two guarantors permanently resident in the area, who take responsibility for repaying the loan in case of default. Typically, none of the loan applicants are eligible for loans from commercial banks. HELP does not expect applicants to provide any collateral against the loan. Although applicants and their guarantors are asked to sign papers regarding their liability to pay, no coercive action through police or courts has been taken until now. The only persuasion used being that provided by the community. Funding Besides an initial contribution of Rs.10,000 from each of the ten founding members and a fee of Rs.300 per annum by ordinary members, HELP has no other sources of income. Although government and international donors may be able to provide funding, the procedures are so cumbersome that HELP decided not to ask for any such grants. Members of the Managing Committee raised a further Rs.500,000 from personal resources. Administrative expenses were kept to a minimum: a small three room apartment at Rs.3,000 per month was rented to serve as office premises and two staff a supervisor and a clerk-cum-receptionist were recruited at Rs.7,000 per month. Utilities and other overhead expenses averaged around Rs.5,000 per month leading to a total fixed overhead of Rs.15,000 per month. Even these minimised administrative expenses proved to be too much in the early years. In 2004, after two years of operation, funds began to deplete fast, and HELP had to vacate its premises and share a single-room office rented at Rs.500 (inclusive of electricity). The supervisors salary had to be reduced to just one-fifth of the initial amount. Circumstances have improved since then, and in the beginning of 2006 a better office was rented at Rs.1,000 per month from where HELP still functions. To ease temporary funding constraints, five loans amounting to Rs.524,850 were taken from the Orangi Micro-Credit Trust (OCT) from April 2003 to September 2004. All of these loans were repaid with interest. Along with financial aid, OCT also provided technical assistance by visiting and interviewing applicants and training the staff at HELP. Results of micro-credit The micro-credit experience has been divided into three broad categories as follows: Loans of Rs.6000 and below: A total amount of Rs.97,000 was disbursed to 24 persons,
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out of which 11 persons defaulted and the amount now considered unrecoverable is Rs.32,850. Thus 45% of the debtors defaulted and the ratio of repayment was 67%. The loans were interest-free. Such loans have been discontinued. People who took these loans did not have proven skills to run a trade. Moreover, return on the small investment was so low that they spent all the sale proceeds on bare essentials for the family, leaving nothing to buy new stock. In many cases, it turned out that the people who took loans were habitual loan-takers. They remained constantly in debt, borrowing small sums from whoever was willing to show sympathy, never returning loans on the plea of poverty. They just stay around, asking for more, and their pitiable condition makes it impossible to use coercive methods. The important conclusion is that in spite of the funds and energy spent on trying to help this category of people, their plight remained exactly as it had been before the intervention. Standards of living did not even improve for those who used and repaid the loans. Loans of Rs.10,000 per person: In total, Rs.566,000 was loaned to 49 persons, out of which 8 defaulted. The unrecoverable amount is Rs.38,340, constituting a repayment ratio of 93.23%. Although many of the borrowers had to be given several extensions, the recovery rate of over 93% was encouraging. Lending had to be discontinued because HELP was quickly running out of funds due to the administrative conditions mentioned earlier. All loans were essentially interest-free, but borrowers were asked to make donations out of the extra income earned from the loaned amount. Disbursement was carried out in group meetings during which it was explained that continuation of the project in their community depended upon a reasonable amount of donation. Most of the people who took (and repaid) Rs.10,000 donated amounts in the vicinity of Rs.1,000. Some even donated up to Rs.1,500 at the end of the year, yet donations from clients could never come close to offsetting the expenses. The conclusion here is that donations and other similar forms of income from clients cannot make a micro-credit project self-sustaining. Clients who benefited from loans of Rs.10,000 were engaged in a wide variety of trades including small teashops; retail shops selling chicken, childrens eatables, sanitary-ware, shoes and other items; a pop-corn machine; dry-cleaners; repair workshops for small automobiles and electronics; public call centers; tailoring and an internet caf. Exhibit 1 shows the results of a survey of loan-related extra income and job creation for 34 clients who took and repaid loans from May 2002 to June 2004. While extra income produced by the loan seems quite substantial, only 9 new jobs were created, because of the nature of trades. For most retailers, income increased because they were able to (a) buy additional stocks and, (b) pay less for the goods bought since they were paying cash instead of credit. However, it soon became clear that almost all the clients who gained from the loans wanted to continue taking loans in order to sustain the gains. It is evident that these loans lessen poverty and create jobs only while the funds remain with the borrowers.
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In absolute terms, the incremental income is minuscule. Even though clients who took the 10,000 loan were conducting some business, they were still living hand-to-mouth. As such, the extra 200-odd rupees that they earned on account of the loan were consumed before the day was over. Theoretically, they should have been able to save all the additional income, accumulating enough working capital in a year to sustain growth without the need for loans. Practically, it is very difficult to save in these circumstances. The survey also found that many of the clients who did not receive a second or third loan, are back to the same economic position where they had started. Only a few clients continue to earn more than their original earnings. Most of the workers hired for the expanded businesses have been fired. The main reason why these clients could not sustain growth was lack of capital, which in turn was caused by their inability to save during the better-returns period. In short, therefore, loans of Rs.10,000 are not sufficient for an economic take-off. Although the model is suitable and can be replicated, it requires billions of rupees to be invested permanently or at least for several years. Two other lessons are drawn from this experience. Firstly, in a vast majority of cases, repayment would not have been possible without wholehearted help from local residents. Since there is no collateral, normal banking procedures are never successful; only informal persuasion and community pressures can help. Moreover, frequent and significant departures from rules and regulations have to be made in keeping in mind the problems faced by clients. In some cases, for instance, clients delayed repayments for months, even years and still they were not penalised. In a conventional bank, this would amount to a major irregularity. However, if HELP had instituted legal proceedings against the clients, the loan would never have been returned, despite causing distress to the underprivileged clients. It is fair to conclude, therefore, that government-owned organisations, run by bureaucrats who are bound by rules and regulations and are neither sensitised nor authorised to relax rules to suit the needs of the poor cannot help alleviate poverty through micro-credit. Secondly, experience in collecting repayments from clients shows that as the number of clients increases, the marginal cost of collection rises. Keeping track of repayment becomes difficult and the percentage of recovery drops. Thus a local NPO should keep its circle of activity limited, unless it has the means to expand its own capacity. Loans of Rs.15,000 to Rs.50,000 per person: A total amount of Rs.995,000 has been loaned to 31 persons, out of which only one defaulted an amount of Rs.1,000 out of a loan of Rs.20,000. As such repayment of loan in this case is 99.9%. Obviously, this has been the most successful category of clients. Besides being efficient in repayment, they often donated as much as Rs.10,000 over a period of 12 to 15 months. These clients were always asking for more loans. This led HELP to scrutinise the enterprises of these clients more closely. The results of this inquiry are discussed below under the heading Partnership with Private Entrepreneurs. SETTING UP A SOCIAL ENTERPRISE By mid-2002, many people were coming to HELP for loans, help and charity. A majority of them were destitute women, including widows, divorcees and wives who were beaten by their drug-addicted husbands. Most of these women are illiterate and work for meager wages in the houses of rich people in nearby affluent neighborhoods, washing, cleaning, cooking and doing other menial work. A woman who does the entire housework and spends around 8 hours a day earns about Rs.3,000 per month. Some work for more than one household
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in order to enhance their earnings. However, there is no guarantee of permanence at any of these jobs. HELP decided to set up a business where these women could be empowered by giving them permanent employment. Two projects were initiated. The first project was set up in the rooms then available in HELPs office. A multinational firm taught the first group of women how to mix different ingredients to make washing powder. Since no industrial or heating process is required in the process, it was decided to use the office of HELP to manufacture washing powder, package it in plain paper bags and sell it in the locality. The quality of washing powder so prepared is almost as good as the branded product but has a much lower price. However, despite the best efforts of the women to sell washing powder in the locality, they could not make headway. A house-to-house survey by teams engaged by HELP revealed that the market was flooded with spurious packets of washing powder being sold at even lower rates. Further investigations unearthed that there were quite a few back street houses where washing powder was being illegally manufactured using fake ingredients. The second project, attempted with another group of women, entailed making and bottling a type of sherbet, which is a popular drink among people who cannot afford carbonated cold drinks manufactured by known companies. Here again proliferation of the market with fake and dangerously adulterated drinks stood in the way of success and sherbet made by HELP could not be sold. HELP then decided to conduct a detailed feasibility study before starting the next project. It was decided to choose a field where competition with spurious products was likely to be minimal. After studying various options, HELP narrowed down the investigation into checking the viability of a sewing and stitching business. Ultimately, it was found that the locality already had enough tailors. Most poor women who cannot afford to buy fancy clothes from the market make simple clothes for themselves and their families in their own homes. Some institutes were already providing sewing lessons at nominal fees and at least one charitable institution was donating sewing machines to individuals on completion of ther training. In spite of all this, the participating women continued to remain poor and unempowered. Although it may be possible to run a social enterprise in sewing and stitching, such endeavour appeared to be of little use to the impoverished people. It would not help them improve their lives. Thus, in setting up a social enterprise, it is important to bear in mind that simply setting up a social enterprise does not necessarily equate to lifting people out of poverty. PARTNERSHIP WITH PRIVATE ENTREPRENEURS Providing loans to set up social enterprises is sometimes not sufficient. This was discovered especially following HELPs analysis of the third category of borrowers (i.e. loans of Rs.15,000 to Rs.50,000 per person) referred to above. The analysis showed that there are circumstances where a partnership between HELP and the entrepreneur would be more appropriate. One such case is Mr. Fida Hussain. He is poor, though not one of the poorest people living below the poverty line. He and his family are skilled in shoemaking. Fida is also good at marketing. With raw material worth about Rs.6,000 (US$100 or 60 Pounds Sterling), he and his family members can make about 80 pairs of shoes at their house in one day. At an average sale price of Rs.120 each, the retail value of these shoes is Rs.9,600. In theory, if all goes well, Fida could be making a profit of around Rs.93,600 per month and could be living comfortably. Overheads are minimal. However, the economy does not work as such because purchasing power is limited to the rich few who do not buy cheap shoes. Fida has
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to leave his shoes with the retailer, receiving no more than Rs.2,000 to Rs.3,000 per week as partial payment, which is not enough to feed the family as well as to buy material for more shoes. Fida continues to make as many shoes as he can afford with the little capital he is able to scrounge from different sources and keeps supplying them to the retailer, getting enough to get by. On average, around Rs.150,000 of his own money remains invested as working capital and he is just able to maintain his house, family and a motorcycle which he uses to transport shoes to the market. Sales pick up sharply every year during the month of Ramadan and stocks are sold out by the evening before the Eid festival. During this time of the year, seasonal sales increase by such a large extent that Fida collects all his backlog payments and is able consequently to repay loans, carry out repairs and fulfill other obligations to the family that are kept pending for a year due to working capital constraints. Fida and other small entrepreneurs like him do not qualify for loans from commercial banks because they have no property or other assets to mortgage or offer as collateral against the loan. In this scenario, with a loan of Rs.50,000 from HELP, Fida and his family currently make additional shoes worth about Rs.90,000 and deliver them to their regular shops. During Eid, he earns an extra profit of Rs.40,000, out of which he pays Rs.10,000 as donation to HELP. More importantly, this injection of Rs.50,000 helps him in maintaining a continuous business cycle, which gains him extra creditworthiness to buy additional raw material on credit for even more shoes. In addition to his family members, he has to employ 3 to 4 skilled workers at an average salary of Rs.300 per day for most of the year. The problem Fida faces is the strict condition of returning the installment of Rs.5,000 per month to HELP because this reduces the money he could use to buy more raw materials and increase production, consequently subverting his production cycle. Since the annual profits depend largely on the amount of stock collected to sell during the days leading up to Eid, loan repayments and lower production severely hamper profitability. It was apparent that his business needed significant investment, other than that provided by a loan. After considering all aspects, HELP decided to act as an investor and entered into a formal partnership with Fida: instead of monthly instalments, they ensured return of the total amount by monitoring Fidas business closely and obtaining an annual post-dated cheque for Rs.60,000 at Eid. A joint venture social enterprise between an NPO and a private individual was thus born. HELP is now working closely with Fida to inject more capital and to introduce modern technology into the enterprise, which would not only increase quality, production and profits but would also make it environmentally friendly. Importantly, some respected members of the locality remained closely associated with the entire process. Thus it can be said that where it is not feasible to set up a social enterprise, an NPO can enter into a joint venture with a successfully running business which has the capacity to expand. Of course, as in the case of micro-credit, there is need for substantial amounts of credit in the beginning, but since the return is also quite large, the joint ventures have the capacity of becoming self-sustaining after a few years. AVAILABILITY OF FUNDS FOR POVERTY ALLEVIATION Having determined that large funds are required for any poverty alleviation programme, whether through micro-credit or joint-venture social enterprise, HELP carried out research into the availability of funds for this purpose. It was found that contrary to conventional belief,
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there appears to be no paucity of funds for poverty reduction, especially at (a) government level and (b) individual level. At government level, billions of rupees are available for poverty alleviation. World Bank, IMF and international donors are ready to give large amounts to poor countries, even though they come with conditions. Some examples of funds available with governments are given below: Government of Pakistan has allocated Rs.7.36 billion from 2003 to 2005 for its Poverty Reduction Strategic Plan (PRSP) (Government of Pakistan 200506). Government of Pakistan spent Rs.1.33 trillion on poverty related and social sector programmes to cater to the needs of the poor and vulnerable sections of society (Government of Pakistan 200506). Khushali (Prosperity) Micro-credit Bank has more than Rs.5 billion to give out as small loans (Khushali 2005).
Unfortunately only a small fraction of these funds actually materialise and an even smaller fraction find their way into the correct channels. At the individual level too, surprisingly, there is no dearth of money for the poor. Affluent citizens of the community are in general more than willing to donate to the impoverished. However, due to an unenlightened interpretation of religion and an ingrained distrust of notfor-profit organisations, most donors prefer personal charity to poor individuals rather than an investment in the community in the form of social enterprises. Even some commendable charitable institutions such as the Edhi Trust are working to help the poor survive rather than trying to reduce their poverty through institutional means like social enterprises. Developed countries have a large number of institutions and ample funds for charity. The UK alone has over half a million non-profit organisations and 6,000 new charities are registered every year. Total income from registered charities is over 27 billion pounds sterling (Miliband 2006). According to a recently released report, Corporate Philanthropy in Pakistan, the corporate sector in Pakistan is giving barely 0.33 percent of its profit to charity (Mustafa 2006). Even this amount is given as direct charity and not for the development of sustainable institutions which help people come out of poverty. Funds distributed as charity to individuals rather than as loans or capital to facilitate investment in social enterprises have more negative consequences, as already mentioned. Impoverished individuals realise that charitable funds can be acquired from affluent people on simple demonstration of need. This is a cycle that is further strengthened by the distrust of not-for-profit and similar institutions among the affluent donors. Once this cycle is established, a begging-mentality becomes pervasive among poor people, whereby they resort to reliance on charity, and abandon pursuits of entrepreneurial activities that would eventually pull them towards self-sustenance. It is this dampening of entrepreneurial ventures which is built into the current system of donating to poor rather than to institutions that assist poor people and it creates the largest negative externality of all. It is safe to conclude that public policy on poverty alleviation requires changes to encourage the formation of social enterprises. Changes are also required at the individual level to divert funds from direct charity towards the setting up of sustainable institutions to give permanent relief to the poor.
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CHANGES REQUIRED AT PUBLIC POLICY LEVEL During its micro credit experience, the HELP Foundation learnt that rules and regulations might have to be relaxed when making recoveries from poor clients. While NPOs are flexible in this regard, bureaucracies are inherently ill equipped to deviate from laid down procedures. This is probably why little headway is being achieved in poverty alleviation in spite of the fact that large sums are being allocated for this purpose. Not-for-profit and community-based organisations are better suited to communicate with and to help the poor because they are motivated by this very purpose and can work closely with the community in a relaxed atmosphere based on trust. It may be true that not all NPOs claiming to be not-for-profit or socially motivated are actually so. However, it is the task of the government to carefully pick out genuine organisations and then to work with them on the basis of trust. A monitoring system should be worked out to make sure funds are not misused. Pakistan has set up the Pakistan Centre for Philanthropy (PCP), which, among other functions, has a programme of certification of not-for-profit organisations. It will also supply details of institutions which it considers qualified for receiving donations. PCP is promoting the concept of philanthropy and corporate social responsibility. On 27 May 2006, PCP launched the Gateway to Giving, which is a directory of 84 certified, effective and credible NPOs in Pakistan (Mustafa 2006). While this is a step in the right direction, the government has no plans to give any kind of incentives to NPOs or social enterprises. International donors and institutions that wish to alleviate poverty in poor countries need to go deeper into the communities rather than carry dialogues with high-level government officials who have no interface with real life in the slums. They need to search for wellmeaning NPOs and community-level organisations and to work directly and closely with them at the community-level. NPOs and other associations of well-meaning citizens should convince their governments that if they wish to take up the challenge of poverty alleviation, they must work jointly with the NPOs who are located within poverty-stricken areas. CHANGES REQUIRED AT INDIVIDUAL LEVEL Pakistan is a Muslim majority country. Muslims believe that zakat, the mandatory charity amounting to 2.5 percent of wealth per year, is to be given to the poor as cash or in the form of grocery, clothes, etc. They need to be made aware of the fact that in this age and time, contributing towards a factory making artificial limbs is a far greater charity than giving funds to a man who has lost a limb. Similarly, numerous rich and middle-class people who give out cash, grocery and clothes to the poor regularly and in large numbers every month need to be persuaded to divert these funds towards social enterprises which aim to provide steady income and jobs to the poor. Here again, the required change in the attitudes of alms-givers can be best brought about by NGOs, NPOs, and other associations of well-meaning people through the media and other means of communication. CONCLUSIONS AND RECOMMENDATIONS Social enterprises can be set up in urban slums through joint ventures between an NPO funder and small businesses that have the capacity to expand. Such joint ventures should
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be entered into only after trust has been established between the businessperson and the NPO. Involvement of respected members of the locality, transparent processes and close monitoring are all necessary for the success of such a social enterprise. Public policy in poor countries requires drastic changes in order to ensure a smooth and fruitful relationship with NPOs. Governments should set up committees or teams at the local community level to work jointly with NPOs and members of the locality to establish social enterprises. They should seek out genuine NPOs and route funds through them to social enterprises and joint ventures with small businesses and industries in slums. International donors and institutions, instead of limiting themselves to governments, need to work directly with genuine NPOs and local organisations at the slum-level. Money meant for poverty alleviation should be spent as close to the people it is destined for as possible. NPOs, NGOs and associations of well-meaning citizens need to create awareness among the people regarding new tools like social enterprises. The task of sensitising governments to bring about changes in public policy and persuading individuals to divert their money from charity towards social enterprise must be performed by the NPOs themselves. Most governments and many individuals need to be prompted in order to change. It is the NPO that has to act as the agent of change. REFERENCES
Government of Pakistan, Pakistan Economic Survey 2005-06; Ministry of Finance, Pakistan. Khushali Bank (2005) Annual Audited Accounts. Obtained from State Bank of Pakistan, December. Miliband, D. (2006) Putting people in control, 2006 Annual Conference. Keynote Speech website www.ncvo-vol.org.uk (March, 2006). Mustafa, Z. (2006) Business and Charity, Dawn newspaper, Pakistan, May 17th, p.6. *Contact details: Zia ul Islam, Chief Instructor, National Institute of Public Administration,University Road, Karachi, Pakistan.Telephone: +92 21 9244053,Email: zia@nipa-khi.edu.pk
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Using human resource management tools to support social enterprise: Emerging themes from the sector
Maureen Royce* is a Senior Lecturer at Liverpool John Moores University teaching HRM in management programmes including the MA in Social Enterprise. Her research and consultancy interests include HRM in social enterprise and equality and diversity. Maureen has experience of volunteering and board membership in social enterprise organisations.
THE CONTEXT OF HUMAN RESOURCE MANAGEMENT Torrington, Hall and Taylor (2005) define Human Resource Management (HRM) as a distinctive philosophy for carrying out people-oriented organisational activities. Simply, HRM is about managing people in an organisational context. The history of HRM reveals a social justice theme with origins in the work of social reformers and paternalist Quaker family firms such as Rowntree, Cadbury and Lever Brothers. Such firms held both a business and an ethical view towards the welfare of their workers. Similar to social justice origins, the stakeholder approach of some models of HRM (Harvard model Beere et al. 1984) with their emphasis on individual and societal well-being suggests a theoretical connection at least between the aspirations of social enterprise and identifiable strands of HRM thinking. The stakeholder approach to HRM evident in the Harvard model suggests a very real bridge to the social enterprise sector. The involvement of multiple stakeholders is a frequently occurring feature of governing social enterprises. They must find suitable ways to manage their key assets, including their social mission and efficiency constraints, committed volunteers and employees and enlarged governance structures (Borzaga & Solari 2004). Current mainstream thinking in HRM (Guest 2000; Pilbeam & Corbridge 2006) supports the view of Borzaga and Solari (2004) that internal people-management challenges, constitute the key competitive advantages of organisations. CRITICAL ISSUES FACING SOCIAL ENTERPRISE ORGANISATIONS Social enterprise organisations must balance short term, objective-driven funding regimes with the desire to provide job security, progression and creativity in the work environment. Additionally, managing a board of trustees with variable levels of skill and ability to commit time and reach out to volunteers creates the need for a strong, diverse and inclusive communication culture. As the sector moves towards sustainability and funding bodies demand detailed reporting of project management, the pressure is on for it to respond with professional strategies, policies and processes. Lyon and Ramsden (2006) identify gaps in management provision within social enterprise. Although not labelled as such, the gaps align themselves with traditional HRM functional areas, such as performance management in the
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Using human resource management tools to support social enterprise
delivery of quality, employment relations in managing job insecurity, and human resource planning in effectively balancing a workforce composed of both paid staff and volunteers. However, the social enterprise literature warns that social enterprises are essentially different from the private sector, public sector and traditional not-for-profit sectors. An understanding of such differences must underpin the development of appropriate models of good practice for the social enterprise context (Borzaga & Solari 2004; Borzaga & Defourny 2004). While accepting the need for contextualisation of models and practice, social enterprise managers find themselves facing challenges familiar to those of front-line managers in other sectors. Areas of commonality between social enterprise and other sectors include a requirement to understand and take ownership for recruitment, performance, pay, attendance, training and welfare issues. Some of these complex skill areas take time to evolve and may not have been part of the skill-set required for social enterprise managers at the time they were recruited. Indeed, the multi-layered nature of social enterprise can make it hard to define culture and requirements. This lack of definition significantly impacts the ability of the social enterprise organisation to make decisions when appointing staff, volunteers or board members. When identifying the success factors associated with management in the sector, it is useful to be aware of the difficulty recognised by Fowler (2000), reported in Low (2006), of having the human capability to manage the interplay between potentially competing sets of values social action set against the demands of market behaviour. Within the social enterprise sector, contradictions exist where responding to the greatest need competes with the need for regular sustainable income. Procurement opportunities have raised the profile of performance issues, with private sector approaches (Paton 2003) being favoured regardless of their cultural fit with the values of the organisation. Social enterprise managers need to make highly sophisticated judgements about the use of company assets. These strategic judgements may be more difficult to make without the development of HRM tools that can support the decision-maker. METHODOLOGY Interest in identifying HRM related issues facing social enterprise organisations and how these relate to established HRM theory and practice grew out of class discussions from 2002 2006 on the MA Social Enterprise Programme at Liverpool John Moores University. The students were aware that views expressed might be used in a research environment, and they welcomed the opportunity to have a voice. Consistent themes emerged from those classroom discussion sessions which were similar to those that emerged from two case studies tracing the development of social enterprise organisations in the northwest of England. Secondary data sources include literature from the HRM and social enterprise sectors and data collected by the CIPD (Chartered Institute of Personnel and Development). Primary data has been collected using case study, class observation and pilot questionnaire data. While there are objections to the case study method being used to discuss HRM issues, which included questions about its generalisability, limitations of perspective and bias, alternative views of qualitative social research (Bryman 2004) recognise the richness of the approach. The case studies were compiled using informal, unstructured interviews, notes and board discussions over a five-year period. The themes were identified by examining the frequency with which issues were cited as significant. Drawing on the secondary data, classroom and case analysis, the pilot questionnaire was designed to construct a framework around these themes to investigate the extent of HRM
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practice in social enterprise organisations. The pilot was conducted in 17 social enterprises, in the northwest of England. It provided guidance on future questionnaires structure and tested the relevance of the themes identified by other research methods. The categorisation questions focused on the size of the organisation, its revenue and length of time in existence. When considering size, numbers of both paid workers and volunteers were measured. Revenue was calculated as totals received from funding sources and other generated income. Questions were also asked about human resource planning activity, recruitment and selection of staff and volunteers, and induction and training of both staff and volunteers. The next section of the paper reviews some introductory HRM concepts and their relationship and applicability to social enterprise. LABOUR MARKET RELATIONSHIPS WITHIN SOCIAL ENTERPRISE All organisations must make the critical strategic decision whether to focus externally and recruit the skills and knowledge required or to take an internal view and grow in capacity. For social enterprises, the relationship with the labour market may be more complex due to the positioning of volunteers within the organisation. The very reason for the social enterprises existence may be to encourage into the labour market those who may normally be excluded from it. The ability to provide the organisation with the skills it requires is at the heart of the Human Resource Planning (HRP) process. HRP is defined by Foot and Hook (2005) as a process that takes a long-term view and estimates what will be required in terms of both skills and numbers of people to achieve the goals of the organisation. Within the social enterprise sector, the long-term view may present difficulties if contracts or funding are secured only for the short or medium term. Planning also involves the development of retention tools and includes patterns of work and flexibility (Pilbeam & Corbridge 2006). In their process model of human resource planning, Foot and Hook (2005) show the integrative nature of HRP, as well as the need for accurate and current market information in the efforts to balance the demand for human resources with the supply. Data collected since 2005 by the CIPD (Chartered Institute of Personnel and Development) suggests that the demand for skills in the third sector is not balanced with the supply. A snapshot of the external market conditions in which social enterprise organisations operate is provided by the CIPD Survey on Recruitment, Retention and Turnover (2005). This survey suggests that 90% of organisations classified as voluntary, community and not-for-profit reported themselves as experiencing difficulties in recruiting for one or more categories of vacancy. Given that not all of those organisations selected would be classified as social enterprises, it is still reasonable to assume that the ability to recruit the skills required is a critical element in organisational success and survival. This data shows that a lack of social enterprise sector experience is the main concern of recruiting organisations, suggesting that the sector as a whole may need to work harder at developing staff into the new roles required. Additional data from the survey suggests that the voluntary, community and not-for-profit organisations undertake very limited succession planning compared to the rest of the economy. Only 5% of the sector reported themselves as undertaking planning on a formal and regular basis. Although 48% reported succession planning as happening on an ad hoc basis, this was lower than the overall survey average of 61%. Similarly, 46% of organisations in the sector claimed not to undertake succession planning at all, compared with 20% of overall survey respondents. This would suggest
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that they need to engage more directly with medium term and longer term planning and highlights the dangers of short-term responses to funding and initiative requirements. Wright et al. (2005) discuss the importance of individual competencies to overall organisational performance and argue that the HRM literature does not always recognise that this human capital must interact with social and organisational capital to explain high quality organisational performance. It is this integration of human, social and organisational capital that would be attractive to the social enterprise sector in developing its longer-term sustainability. RESOURCING AND SKILLS TO SUPPORT SOCIAL ENTERPRISE Fowler (2000) recognises that social enterprise calls for a specific type of capability to manage a profitable enterprise in a not-for-profit organisation. Entrepreneurial leaders in social enterprise often mobilise efforts from both paid and unpaid workers which are disproportionate to their resources (Young 2006). There may be a struggle for boards of directors or trustees who come from a voluntary sector or a commercial business background. This can lead to a lack of focus on the combined social and entrepreneurial goals of a social enterprise and may prevent it truly reaching its potential. The reported lack of HRM skills in the sector (Borzaga & Solari 2004) suggests that organisations may struggle with expertise to help them to resolve their difficulties in appointing key members of staff. HRM advice may be available via voluntary board members or only on an ad hoc basis. Where support networks have been established on a local basis, the networks themselves are dependent on funding and may not have the longevity to build trust and partnership with the enterprises that they serve. Acquiring appropriate skills and resources may be a concern at board level as well as at the point of delivery. Reviewing the behaviour of social enterprises during recruitment and selection, they appear, in common with other sectors, to use traditional methods and processes. However, the social enterprise sector, as defined by CIPD, is more likely than other sectors to appoint on the basis of candidates having a broader range of qualities and skills. This might be expected from organisations with a social mission (CIPD report on Recruitment and Retention 2005). In developing processes for identifying skills requirements to support recruitment, Foot and Hook (2005) suggest that the development of competency frameworks can assist effective resourcing practice. Cornelius (1999) advocates the use of competency, which is a more focused definition of the skills, required to complete a particular task. By analysing the job description or by gaining evidence through interviews, diaries and recording critical incidents (Corbridge & Pilbeam 2006), it is possible to identify behavioural characteristics, such as verbal communication skills, which differentiate between effective and non-effective performance. There may be real advantages to this approach for a social enterprise struggling to find appropriate skills in the labour market. Cornelius (1999) recognises that competence identification in recruitment and selection provides additional benefits such as the assessing of competencies rather than qualifications or education. The competencies can be more focused on organisational need and less discriminating against candidates who do not have a standard education or career background. It is argued that the development of competency frameworks would support both the social and commercial aims of social enterprise organisations. Overall, the methods used to select candidates in the social enterprise sector (CIPD Recruitment and Retention survey 2005) were broadly similar to manufacturing, private and public services. This indicates that while not formalised, some knowledge transfer on the skills of selection had taken place within the sector. The links to HRM go beyond the successful appointment of a suitable candidate. In a competitive labour market, social
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enterprise must seek to retain the talent chosen and that will involve induction techniques to integrate new recruits into the organisation. In order to ensure that the new employee feels comfortable in the organisation, Kandola and Fullerton (1998) recommend the use of a mentoring process. Networks may be used to supplement this process. Kandola and Fullerton (1998) also highlight the importance of training in induction techniques for all those in contact with new recruits. The addition of support networks can be crucial. These may consist of formal mentoring schemes or unstructured buddying activities that offer friendship and advice. Increasingly, organisations are reflecting on the importance of skills and creativity within the workforce. This interest in knowledge and skills places HRM at the centre of organisational strategy. Therefore, it follows that the progression and development of individuals is linked directly to the progress of the organisation (Sisson & Storey 2000). Organisational objectives seek quality, productivity and high levels of service. To meet these objectives, organisations require skilled human resources capable of performing effectively in this environment. Social enterprise organisations have recognised that board skills and board development are essential to their future well-being. The necessity for efficient boards requires HRM skills to identify core competencies and gaps. Social enterprises must select board members with the capacity to balance the complex requirement of an effective business agenda with social and environmental priorities. Boards may become stagnant over time, depriving the social enterprise of much needed skills and advice. Low (2006) suggests that board membership may only change when board members have proved themselves to be unable to manage the situations developing within the organisation. The extent to which skills development in board members, staff and volunteers has been evaluated within the social enterprise sector is poorly documented to date, but it is an area which may prove to have a profound influence on the effectiveness and sustainability of social enterprises. LEADERSHIP AND OPERATIONAL STRATEGY WITHIN SOCIAL ENTERPRISE Social enterprises vary in their origins and leadership. Highly participative, organically grown organisations may be part of community networks alongside autocratic organisations led by charismatic, energetic leaders but also resistant to the time and resources required for participative management. Norris and Turner (2005) suggest three main types of leadership transactional, transformational and inspirational. However, there is currently a lack of evidence about the most prevalent leadership style in the sector or indeed the one that is most appropriate for it, although it is unlikely that one model of leadership would fit the sector overall. However, social enterprises would benefit from the skills to build sustainable growth and meet the development needs of employees and volunteers. For an organisation seeking to become a preferred service provider, win public sector contracts and expand its client base, measuring provision and performance of individuals within the organisation inevitably becomes part of its strategy. The Balanced Scorecard (Somers 2005) offers one tool for managing and guiding strategy but there has to be commitment to the process from the leaders and decision makers. Examining a small part of the extensive literature on HRM strategy and delivery, similarities appear between some sections of the literature (stakeholder approach, corporate responsibility, equitable process) and the aspirations of the social enterprise sector. Additionally, there appears to be evidence from the social enterprise literature which suggests a need in social enterprises for the tools or philosophy of Human Resource Management. Further similarities between social enterprise sector requirements and the
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claims made by HRM theorists and practitioners have been observed through case studies. These are presented in summary form. CASE STUDIES Case study one: Treasuring the treasurer This case describes an inner city credit union in the northwest of England. It entails community stakeholder involvement that was not strong enough to provide a flow of volunteers (Beere et al. 1984). The provision of HRM support in terms of volunteer training and recruitment was hit by the removal of the support programme provided by a Poverty Action team. This reflects Hines (2005) observation that lifelines can be withdrawn with little notice, leaving social enterprises vulnerable and possibly unable to cope. Reliance on a small group of key people and a lack of succession planning confirms the concern expressed by Pearce (2003) that a disproportionate amount of community responsibility tends to be concentrated in a small number of active individuals. In this case a relatively small geographic, family or work-related shift produced a major impact on the viability of the organisation. This case also raises the importance of capacity building, which ensures that skills exist in the community so that social enterprises are not vulnerable in their reliance on external organisations as they develop. In this example, HRM support in stakeholder development, recruitment, training, progression planning and participation would help to stabilise and build sustainability into this example. For further discussion of this case, please refer to Royce (2006). Case study two: Surviving success The second case study considers an inner city after-school club that began in 1998 at a kitchen table. The original idea was to run an ecumenical play and education service for two hours each school evening and a one-week summer scheme in an area where religious sectarianism was evident. Initially, funding success followed funding success, but the organisation outgrew its mainly volunteer structure. It soon found itself struggling to develop an infrastructure to manage paid workers performing increasingly diverse roles. Conflict and tension between the leader and founder and other members of paid staff ultimately drained the resources of the organisation, which became less successful in attracting funding and delivering to clients. In this case, the issue of stakeholders, the board members rather than the community, is once again of paramount importance. Recognising contributions of time is important for social enterprise organisations and is also an essential part of the framework for management. The Balanced Scorecard approach recognised by Somers (2005) would have helped this organisation to manage its competing priorities. The case also raises the issue of training for board members (particularly the chair) and the importance of accurate and timely information provision to the board. The speed of growth also caused some difficulty, and particular attention should be paid to the skills required to line-manage a growing and changing group of volunteers with varying skill levels and competencies. A further issue raised by this case study is that of the effective communication between leadership and workers, whose motivation is primarily instrumental. Again, this is further discussed in Royce (2006). PILOT QUESTIONNAIRE A pilot was undertaken in April 2006 focusing on the strands identified by the earlier research, namely labour market issues, resourcing and skills and the links to operational strategy and leadership. The pilot suggests a heavy reliance on volunteer labour with
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almost all organisations working with volunteers. However, when asked whether volunteers were crucial to the running of the organisation, only 59% felt they were. The remaining 41% were uncertain or felt that volunteers were not crucial. Only a small proportion (12%) had more volunteers than paid workers. The picture of HRM support is an interesting one, with the greater number of organisations relying on the expertise of a board member to provide support and advice in the HRM field: Neither dedicated support nor board membership: 35%; No dedicated support but board member expertise: 41%; Both dedicated support and board member expertise: 24%.
If the pilot study were found to have transferability across the sector, then the role of board members filling a skills gap would be a recurring issue for the provision of HRM expertise and advice. Support from board members and the ability of such a structure to support coherent HRM practice for paid staff and volunteers are issues that have yet to be researched. Significance testing (t-Test) was used to determine whether size, revenue or longevity affected the responses given to questions about organisational behaviour in HRM areas. Although it would not be possible to generalise the sector overall from such a small sample, the evidence from the pilot suggested that there was no statistical difference in behaviour or responses to questions about HRM from social enterprises differing in size, revenue or longevity. It is possible, therefore, that organisational diversity may not affect the need for professional HRM business models to support sustainability in social enterprise. Certainly there is less evidence for the existence of formalised HRM support in small enterprises in the private sector, but from the pilot it was unclear whether organisational size was a factor in the level of HRM practice in the social enterprise sector. The tests did show that larger organisations and those in existence for more that five years were more likely to use preapplication training for volunteers wishing to apply for paid vacancies. This suggests that, given time, social enterprises may develop their internal sources of labour through capacity building with their volunteers. Relationships between variables relating to known HRM practice in social enterprises, identified through the qualitative methods discussed above, were investigated using tests appropriate for small samples of data. The strongest relationships were found in the following areas: a) Supervisory staff trained in line-management skills linked with the existence of formal interviews with volunteers prior to voluntary work commencement; b) Supervisory staff trained in line-management skills linked with the existence of a formal induction programme for staff and volunteers; c) Organisation reporting itself having difficulty in finding suitably qualified candidates linked to all volunteers having a training and development plan; d) Managerial staff having received management training or having prior managerial experience linked to the existence of formal training and development plans for all staff. These findings indicate that where formalised managerial and supervisory training has been carried out, some building blocks of HRM (i.e. the retention of staff and development of volunteers) tended to be present. HRM skills among board members were found to be undeveloped in more than half of the sample. Interventions to manage labour market issues and skills development in the internal market appear to be more focused in organisations where those responsible for
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managing people have supervisory or managerial training. The pilot reflects the findings of the CIPD survey that social enterprises may work harder, perhaps through necessity as well as mission, to develop staff and volunteers to provide future resourcing needs. Drawing evidence from these four sources together, it is possible to identify themes and areas of commonality between the needs and aspirations of social enterprise organisations and interventions from the HRM tool bag. PRELIMINARY IDENTIFICATION OF HRM ISSUES IN THE SOCIAL ENTERPRISE SECTOR The scarcity of skills and sector-based experience within the labour market, along with the difficulties associated with accessing those with relevant expertise either in a paid or voluntary capacity, was a consistent theme across the four areas of the research. Classroom discussion suggested that risk was a factor. Prospective employees were discouraged from working in the sector because of short-term employment options and a lack of other security indicators such as pensions. Both case studies highlighted the danger to sustainability of overdependence on small numbers of people, while the pilot study confirmed that developmental planning was a feature only of those organisations where management training or past managerial experience was evident. The pilot study linked formal recruitment, induction and training of volunteers to the existence of line management training within social enterprise organisations. Given the professed shortages in the labour market, the ability of the sector to grow its own expertise through initiatives with volunteers would be a coherent planning strategy. Although secondary sources suggest the use of competency frameworks to extend social inclusion, there was little evidence of this development through the classroom, case or pilot studies. Developing competency frameworks that enable opportunities to be extended to a more diverse range of potential employees and volunteers would be a strategy to support social enterprises in planning to meet resourcing and skills shortages. The availability of board members with the appropriate skills, knowledge and expertise was seen as a major issue across three of the four research areas. Classroom, case study and pilot studies also revealed the need for customised management and supervisory skills to support and strengthen the day-to-day management of staff and volunteers. A lack of knowledge in performance management, discipline and grievance and employment law matters was an expressed concern within the classroom sessions, and it appeared also in the analysis of case study two. There are two HRM-related issues here. The first is again linked to the ability of social enterprise to access skills and knowledge in the labour market. The second is about developing people management and supervisory skills in those already employed in the sector. However, there is a concern that such training would need to be customised, and that the social enterprise support networks play a role in developing and coordinating this type of intervention. The importance of retaining rare sector-specific skills was identified as a concern both by secondary sources and the board in case study one. The pilot study indicated that all organisations surveyed undertook some form of induction, but there was no statistical significance found between induction training and the ability to attract and retain employees or volunteers. All the research areas pointed to a lack of strategic planning. The classroom discussions on this subject focused on the knowledge and time requirements to customise standard
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models of strategic management and planning to the organisation. The students questioned the relevance of professional and business advice to the sector, while the case studies indicated the fragility of support networks. As the networks themselves are usually funding dependent, the main source of professional advice and support to an enterprise can disappear almost overnight. The case studies and class discussions highlight leadership styles and communication skills as factors in the success of sustainable growth in social enterprises. Although the enterprising nature of organisations such as those depicted in the case studies has been recognised (Thompson & Doherty 2006), there is presently insufficient evidence about the characteristics of founders and leaders of social enterprises. INTERIM CONCLUSIONS The infrastructure to support coherent people-management systems in social enterprise would not, from this evidence, appear to be robust. Piecemeal support and advice through a raft of well-meaning board members, fragile networks and higher education institutes do not provide a strong framework for growth and sustainability in managing human resources in the social enterprise sector. Labour market relationships, resourcing and skills, and leadership and operational strategy have been recurring themes in this research which suggests that, in these areas at least, there may be a very real opportunity for HRM tools and expertise to support social enterprise organisations in achieving their business and social goals. REFERENCES
Beere, M., Spector, B., Lawrence, P., Mills, Q. & Walton, R. (1984) Managing Human Assets, New York, Free Press. Borzaga, C. & Defourny, J. (2004) The Emergence of Social Enterprise, Routledge. Borzaga, C. & Solari, L. (2004) Management Challenges for Social Enterprises, The Emergence of Social Enterprise, Routledge. Bryman, A. (2004) Social Research Methods, 2nd edition, Oxford University Press. CIPD Annual survey (2005) Recruitment, retention and turnover, CIPD. Cornelius, N. (1999) Building Workplace Equality ethics, diversity and inclusion, Thomson. Foot, M. & Hook, C. (2005) An Introduction to Human Resource Management, 4th edition, Prentice Hall. Fowler, A. (2000) NGDOs as a moment in history: beyond aid to social entrepreneurship or civic innovation?, Third World Quarterly, Vol. 21 (4). Guest, D. (2000) Human Resource Management, employee wellbeing and organisational performance, paper presented at CIPD Professional Standards Conference, University of Warwick. Hines, F. (2005) Viable Social Enterprise an evaluation of business support to social enterprise Social Enterprise Journal, Vol. 1 (1).
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Using human resource management tools to support social enterprise Kandola, P. & Fullerton, R (1998) Managing the MOSAIC, CIPD. Low, C. (2006) A framework for the governance of social enterprise, International Journal of Social Economics, Vol. 33 (5/6). Lyon, F. & Ramsden, M. (2006) Developing fledgling social enterprise? A study of the support required and the means of delivering it, Social Enterprise Journal, Vol. 2 (1). Norris, G. & Turner, S. (2005) Managing and leading people, CIPD. Paton, R. (2003) Managing and Measuring Social Enterprises, Sage, London. Pearce, J. (2003) Social Enterprise in Anytown, Calouste Gulbenkian Foundation, London. Pilbeam, S. & Corbridge, M. (2006) People Resourcing contemporary HRM in practice, 3rd edition, Prentice Hall. Royce, M. (2006) Managing People delivering change. A study of management practice in the Social Enterprise sector. Research paper presented to 3rd Annual UK Social Enterprise Research Conference, London South Bank University, June 2006. Sisson, J. & Storey, K. (2000) The Realities of Human Resource Management, Open University Press, Buckingham. Somers, A. (2005) Shaping the Balanced Scorecard for use in UK social enterprise. Journal of Social Enterprise, Vol. 1 (1). Thompson, J. & Doherty, B. (2006) The diverse world of social enterprise, International Journal of Social Economics, Vol. 33 (5/6). Torrington, D., Hall, L. & Taylor, S. (2005) Human Resource Management, FT Prentice Hall. Wright, P., Dunford, B., & Snell, A. (2005) Human Resources and the Resource Based View of the Firm, Strategic Human Resource Management, ed. Salaman, G., Storey, J. and Billsberry, J. Sage and OUP. Young, C. (2006) Have you faced the leadership challenge?, Social Enterprise magazine, May 2006. *Contact Details: Maureen Royce, Liverpool John Moores University, School of Management. John Foster Building, 98 Mount Pleasant, Liverpool, L35 UZ, Telephone: +44 (0)151 231662, E-mail: m.a.royce@livjm.ac.uk
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S E J
Recent reforms to corporate legal structures for social enterprise in the UK: Opportunity or confusion?
Ian Snaith* is a Senior Lecturer in Law at the University of Leicester and a Consultant Solicitor with Cobbetts LLP of Manchester. He is the author of the Handbook of Industrial and Provident Society Law published by Holyoake Books (an imprint of the Co-operative College), a leading reference work in the area. Ian has lectured and consulted widely on legal structures for social enterprise both in the UK and other parts of the European Union and has been involved in co-operative and mutual law reform in the UK for the last twenty years.
This paper examines the legal underpinnings of the definition of social enterprise; the problems with the corporate legal structures available in the late twentieth century and the reforms of the early twenty first century. It then examines whether further reforms are needed to facilitate the growth of social enterprise. DEFINITIONS AND IMPLICATIONS FOR LEGAL STRUCTURE The broad UK definition of a social enterprise is: a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders or owners. (Cabinet Office/Office of the Third Sector 2006:10). The wide range of legal structures that can be used for social enterprise is referenced in the work of IFF Research (2005). They conclude that their survey of companies limited by guarantee and industrial and provident societies underestimated the total population by omitting those organisations using other legal structures (Cabinet Office/Office of the Third Sector 2006:12; and IFF Research 2005). The UK definition of social enterprise places less emphasis on democratic control than that developed by the European Commission (GHK, Johnson & Spear 2006; European Commission 2007). When listing and describing social economy organisations, the latter omits reference to equal voting rights from its texts on both foundations and social enterprises but does refer to them in its description of co-operatives, mutual societies, and associations. GHK, Johnson & Spear (2006) point out, that in the case of the European Commission, it is desirable for it to maintain maximum flexibility in legal structure and important that it move structures as the needs of the organisation change over time. The three key policy goals identified for social enterprises in the UK are economic development, social cohesion and public service delivery. The policy focus on legal structures for social enterprise is well expressed in the Cabinet Offices 2006 social enterprise strategy
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Recent reforms to corporate legal structures for social enterprise in the UK
document: What social enterprises all have in common is a commitment to delivering both financial and social or environmental objectives (Cabinet Office/Office of the Third Sector 2006:10). PROBLEMS WITH TWENTIETH CENTURY STRUCTURES A number of commentators have highlighted the problems with the corporate legal structures that are available in the UK for co-operatives and other social economy organisations and these are discussed below (Mills 2002; Snaith 1996, 1999, 2001, 2002, 2004; United Kingdom Co-operative Council (UKCC) 1995). In the twentieth century, the company law regime did not provide a cheap and easy way of preventing a company that has been set up to operate as a co-operative or another form of social enterprise, from converting to a business owned and controlled by investors to whom profits and assets could be distributed. Entrenchment in a company constitution was legally possible but members trying to maintain that had to go to the courts to object a costly and time consuming business. That was also unlikely to happen if they had no substantial financial stake in maintaining the co-operative nature or social purpose of the business. Legal objection might be impossible if a more sophisticated means of transferring the business or assets out of the company and into another entity that allowed distribution and gave power to investor owners were used. This did not apply to sectors, such as housing associations and charities, in which a regulator, in those cases, the Housing Corporation and Charity Commission respectively, had statutory power to prevent such changes. However, a non-charitable community benefit social enterprise, or a co-operative that allowed limited distribution of assets or profits would only be protected if it was, for example, a housing association. This made it necessary to use a structure other than a simple registered company to ensure that non-charitable social enterprises would maintain their identity and not be converted out of the social enterprise format. The company structure could be made impregnable and effectively unchangeable by the use of one or more trust or contractual devices, which prevented those with the power to make the change from doing so. While being expensive and cumbersome, that is unlikely to facilitate the development of social enterprise and is ill suited, without careful adaptation, to stakeholder participation. For those co-operatives and businesses set up for the benefit of the community, the other available business structure remains that of the industrial and provident society (IPS). This form of legal structure is policed so that only co-operatives or community benefit societies can register and remain registered. The regulator up to 2001 was the Registrar of Friendly Societies. Since then it has been the Mutual Societies team in the Financial Services Authority (FSA) (Financial Services Authority 2007). Company law has been the subject of frequent and substantial revisions in order to develop and update it. Areas of company law that have been revised include: accounting requirements including substantial exemptions and relaxations for small business; technical, but troublesome, issues about the capacity of the company to do business and the role and powers of its agents; improved informality in respect of meetings and other procedures in small companies; better procedures for the protection of minority shareholders;
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the reform insolvency rules with a view to rescuing more businesses and penalising delinquent directors; and addressing problems about corporate governance and self-dealing by directors.
Meanwhile, IPS law has fallen behind, with none of those changes being extended to industrial and provident societies. The Industrial and Provident Societies Act 1965 (IPSA 1965) remains the main legislation in that field, consolidating earlier legislation into a legal framework little changed since the 1870s governing industrial and provident societies. Most of the company law reforms in the late twentieth century were designed to make life easier for businesses. However, industrial and provident societies were not included in these reforms. As a result, they have suffered real or perceived competitive disadvantage. Even the policing element that prevented conversion out of a co-operative or community benefit (bencom) format was imperfect. The majority required, without reference to the turnout, to convert a society into a company was 75% of those voting and the mechanism of the decision was left to the societys own rules. If the majority were apathetic, this allowed a minority to convert the society to a shareholder owned, profit distributing company. The society was not regulated by agencies with the power to prevent such a conversion, such as the Housing Corporation or the Charity Commission. By the late twentieth century, major problems included the fact that up-to-date business structures did not secure the social enterprise nature of the business and the structure that did achieve that was less useful for business purposes. Additionally, an IPS was also more expensive to register than a company. SOLUTIONS, 2000 TO 2006 Three major developments changed that situation and paved the way for continuing reform and development: Two Private Members Bills: the Industrial and Provident Societies Act 2002 (Office of Public Sector Information 2002a) and the Co-operatives and Community Benefit Societies Act 2003 (Office of Public Sector Information 2003). The publication of the PIU Report Private Action, Public Benefit (Cabinet Office/ Strategy Unit 2002) and the resulting Companies (Audit, Investigations and Community Business) Act 2004 (Office of Public Sector Information 2004); and Charities Act 2006 (Office of Public Sector Information 2006).
Industrial and Provident Societies Act 2002 This Act and its 2003 successor were the direct result of the work of the Co-operative Party, the political wing of the UK Co-operative Movement (Co-operative Party 2007). These Acts dealt with some of the problems surrounding the IPS structure. The Gareth Thomas Bill, which became the Industrial and Provident Societies Act 2002, achieved two things. First, it amended section 52 of the IPSA 1965. The conversion of an industrial and provident society into a company required both the existing 75% majority of those voting and a turnout of at least 50% of those eligible. That plugged the most
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obvious loophole that had been enjoyed by social enterprises using the IPS form to protect themselves from conversion. However, it maintained the possibility of conversion for any IPS, whether a co-operative or a bencom. The Bill, as originally proposed, would have empowered the Treasury to use regulations to ensure that value was locked into the community benefit purpose, if the societys rules provided for this. That part of the Bill was dropped on the basis that the government awaited the PIU Report (Private Action Public Benefit) and would prefer to deal with the issue in the light of its findings (Hansard 2001-2002; and Snaith 2004). The second achievement of the Act, as it emerged from the legislative process, was to allow the use of regulations to update IPS legislation (apart from core definitional provisions), which would bring it into line with company law after any change in company legislation. This power was used to relax the accounting rules applicable to IPSs with limited turnover (Office of Public Sector Information 2006b). The consolidating and reforming Companies Act 2006 provided further possibilities for its use. In order to ease the passage of the 2002 Bill, it was conceded that the availability of an asset lock was appropriate for a bencom IPS dedicated to pursuing the interests of a community other than its own members but not for a co-operative. The rationale was that members who controlled a co-operative must have the right to change its legal form to an investor-controlled business. Now that a model for a Co-operative Community Interest Company exists, this argument is less convincing in the IPS context. Co-operatives and Community Benefit Societies Act 2003 The 2003 Act empowered the Treasury to develop the asset lock for bencoms but not for co-operatives. It achieved a number of improvements in the legislation governing the IPS structure and benefited from the fact that it was introduced at a time when the government were ready to accept the asset lock principle in the proposed community interest company (CIC) structure and also to apply it to the IPS bencoms. The 2003 Act also dealt directly with some of the areas in which IPS law had fallen behind company law. It brought the IPS provisions about the capacity of the society and its agents to act and the formalities for executing documents into line with those that exist for companies. In that respect, this levelled the playing field for the IPS sector. From 6 April 2006 the new asset lock regulations for bencom industrial and provident societies have been in force and available for use (Office of Public Sector Information 2006c). They allow a lock in of the value of assets and resources of those IPS registered as bencoms to benefit groups other than their own members. By amending their rules or incorporating a rule from the time of registration, they allow any bencom, except a registered social landlord or a charity, by unalterable rule, to prevent the payment of any amounts, beyond the nominal value of shares or limited interest on capital, to members or others. Otherwise any surplus has to go to another society with a similar restriction, such as a community interest company, a registered social landlord, or a charity all of which lock in value for their own purposes. The Financial Services Authority (FSA) is given power to enforce such restrictions on surplus distribution by enforcement notice and can order restitution from society officers if the society suffers loss. It can also seek a court order to prevent or end violation of such a rule. Private Action, Public Benefit and the Community Interest Company The publication of Private Action, Public Benefit represented an important development and rationalisation of government policy in this area (Cabinet Office/Strategy Unit 2002). Its unifying theme was public benefit and took the form of both a redefinition of charity for legal
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purposes to require some element of public benefit (reflected in section 3 of the Charities Act 2006) and proposed reform of the legal structures available both for charities and other not-for-profit enterprises (Dunn & Riley 2004). The report recommended that IPSs be renamed as co-operatives or community benefit societies, and that the imposition of an asset lock should be allowed for the latter. It also suggested that IPS law should be modernised to bring it in line with company law as envisaged in the 2002 Act. The re-naming and main provision of the 2003 Act developed these proposals but, as Dunn and Riley point out, they fall short in certain areas; for example they do not ensure that there will always be an asset lock for bencoms, or prevent the shrinkage or marginalisation of the IPS structure in light of the creation of the CIC. The CIC uses the familiar company structure and, as recommended, is available only to noncharitable social enterprises. To date, the CIC has been the most significant outcome of Private Action, Public Benefit. The legislation, guidance and information provided by the regulator fully detail the operation of this structure. In outline, it involves the use of the existing company structure with the added assurance from the regulator that the assets and profits are to be dedicated to community benefit (CIC Regulator 2007; Cross 2003; Hammill & Madge, 2004; Office of Public Sector Information 2004; Office of Public Sector Information 2005). The CIC structure is not the main one available for use by a charity but can form part of a group, which includes a charity for example their trading wing. To establish a CIC, it must be shown that it will serve to benefit the community and not party political purposes, the financial interests of a small, defined group such as its own employees, directors or the members of a particular organisation. It can use all the available company forms of public limited company (PLC), private company or company limited by guarantee. Dividends or interest can be paid to those who invest capital but there is a cap on the amount of such return. The intention is that this will allow capital to be raised from those who support social enterprise with the assurance of the familiar company form and that the gains from the business will not be returned purely or mainly to investors. Surplus value on dissolution can only be transferred to another asset-locked body. A CIC is set up by assuring the regulator that the company is not owned or controlled by a political campaigning organisation through issuing a statement of community benefit purpose. The companys constitution must meet the requirements of the regulator on these issues and on the issue of limited return on capital. An annual statement published to stakeholders by the CIC will show how it has carried out its purpose and allow stakeholders to complain to the regulator if they feel the rules have not been followed. The regulator has enforcement and investigation powers to ensure compliance with the CIC rules. The company has to comply with rules as to accounts and reports and other matters applicable to any other company of its size and type, e.g. PLC, private company or SME. This means that very similar devices for the maintenance of assets within a particular social enterprise form are now available whether a bencom (but not co-operative) IPS or a CIC is used. Detailed choices can be made between the two structures which each have their own separate regulator (FSA and CIC Regulator respectively). A particularly interesting development has been the Co-operativesUK model constitution for a co-operative CIC (Co-operativesUK 2006). This is rich in irony because an IPS registered as a bona fide co-operative is not permitted to use the asset lock under the 2003 Act and 2006 Regulations. The Co-operativesUK model is for a company limited by guarantee. It includes a commitment,
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in the objects of the company, to abide by the ICA Co-operative Values and Principles. An explicit link is also made between the co-operative principle of limited return on capital and the cap imposed by the CIC Regulations. A membership is contemplated which is; involved in the co-operative by virtue of using its services or by participating in its activities and with whom the company will actively engage (Co-operativesUK 2006: Model Articles paras 7(a) and 8). Election of directors, and therefore control, is by one member, one vote. The model emphasises the importance of a participating membership base while acknowledging the roles and claims of other stakeholders. At the time of writing, Co-operativesUK is working on a model for a Co-operative CIC company limited by shares. Other developments Regulatory Burden: Since 1996, the general power conferred on government has been used to reduce or relax the regulatory burden imposed on the IPS sector. This has been used for credit unions. In 1996, it was used to reduce the minimum number of members required to form an IPS, introduce some relaxation of the accounting requirements for small societies and extend the time within which annual returns were to be submitted and charges on a societys assets registered (Office of Public Sector Information 1996, 1996a and 2003a). Thomas Power: More recently, the power to update IPS law was used to bring it in line with company law under the IPSA 2002 (the Thomas Power) and relax the accounting and audit requirements for I&P societies with a modest turnover with effect from 6 April 2006 for accounting years ending two months or more after that date (Office of Public Sector Information 2006b). This means that non-charitable industrial and provident societies need not appoint an auditor to have their accounts audited if their assets do not exceed 2,800,000 and their turnover does not exceed 5,600,000. This does not apply to credit unions, registered social landlords, insurance societies or societies holding deposits other than withdrawable share capital. Where turnover is more than 90,000 per annum, they will have to have an accountants report (cheaper than a full audit) prepared on their revenue accounts and balance sheet. Under this change, charitable societies for which a full audit is unnecessary are those with up to 2,800,000 in assets and up to 250,000 turnover. That will rise to 500,000 turnover when section 32 of the Charities Act 2006 comes into force. European Co-operative Society: The European Unions European Co-operative Society Statute (SCE) Regulation and Directive affects UK law both directly and indirectly. The SCE bears considerable resemblance to the European Company (SE). The direct effect of the EU legislation is that since 18 August 2006 existing co-operatives or individuals with links in one or more other EU member states have had the right to establish a European Cooperative Society (European Union 2003; Schmidt 2006; Office of Public Sector Information 2006d). The detail of this is beyond the scope of this paper. However, it is perhaps more interesting to consider the indirect influence of this European legislation and legal structure on domestic UK legal forms. For example, the SCE can have either a unitary or a two-tier board structure the latter is possible in the UK by adaptation of the constitution of an IPS or a company but is built into the SCE. Will this make more people consider the use of the two-tier structure? EU regulation also allows for the constitution of the SCE to provide for non-user investor members who could have limited voting rights as well as a capital stake and return. This is controversial within the co-operative movement. It is allowed for an SCE if national law permits it for national co-ops. In the UK, it is for the FSA to decide what constitutes a bona fide co-operative under IPSA 1965. In 2006, the FSA engaged in consultation on the possibility of this for IPSs and seems willing to consider the possibility on a case by case basis (Financial Services Authority 2007a).
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This could lead to greater flexibility in investing in co-operative IPSs and is an important development in the light of possible dividend and interest on investments, within limits, in the CIC structure. That may allow some of the technical unevenness between the IPS and CIC structures to be ironed out and therefore improve the level of flexibility, comprehension and ease of use that applies across the two legal forms. Company Law Reform: The Company Law Reform Bill, as originally presented to Parliament in November 2006, would have replaced about two thirds of the existing UK company legislation. The Companies Act 2006, as it has emerged from the legislature, consolidates almost all of the existing companies legislation as well as implementing those changes. Most of its provisions are expected to come into force in October 2007. The codification does not include the CIC provisions in the Companies (Audit, Investigations and Community Enterprise) Act 2004. However, the 2006 Act allows widespread use of the Thomas power to assimilate IPS Law. This might open up extensive reform of IPS Law by regulations and an opportunity to iron out unnecessary or inconvenient differences between IPS rules and those applicable to CICs. It is in this context that the announcement in late 2006 by a relevant Treasury minister that there is to be a review of the law governing industrial and provident societies should be seen (HM Treasury 2006). It also raises the issue of whether the newly codified general duties of company directors might also apply to IPS directors. Are they appropriate and would they in fact apply or will IPS directors still be subject to the previous case law-based duties? Duties which, for example, seem to give less emphasis to considering the interests of a range of stakeholders? Finally, the Companies Act 2006 makes the entrenchment of provisions in a company constitution easier. Although, that would still leave those outside the CIC sector to enforce such provisions in the courts without the aid of a regulator. The Act also allows unanimous removal or abolition of the entrenchment, at least for new companies formed under the 2006 Act. Charitable Incorporated Organisation (CIO): Section 34 and Schedule 7 of the Charities Act 2006 establish a new legal form for charities namely the Charitable Incorporated Organisation (CIO) as recommended in Private Action, Public Benefit. This is intended to allow a form of incorporation which reflects the foundation structure without separate trustees and members and allows incorporation with the Charity Commission in order to reduce the range of regulators involved (Office of Public Sector Information 2006). DO THE SOLUTIONS WORK AND WHAT IS NEEDED NEXT? The UK Governments definition of a social enterprise emphasises that they are businesses with primarily social objectives and surpluses principally reinvested in the business or the community. This presents a convenient twofold division with which to analyse the effectiveness of the current UK legal forms, which may throw up some lines for further research and reform. Business needs Some potential issues that might be raised by the remaining differences between the company and IPS forms include: aspects of the accounting rules which remain less stringent for small companies. governance issues including dealing with director self dealing. capital maintenance rules and the 20,000 shareholding limit for IPS shareholders who are not other IPSs.
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Should co-operatives be able to have non-user investor members? If so, on what terms? An answer to this based on a case-by-case application of discretion taking into account some guidance seems to have emerged without the need for legislation (Financial Services Authority 2007). How liberal should the IPS regulator be about classes of share capital and the rights attached to them? How much of the improved company law package reflected in the Companies Act 2006 is consistent with a social enterprise whether it be a co-operative or community benefit organisation? How should the duties of social enterprise directors be defined? Are different rules needed from those found in the Companies Act 2006 codification?
Subject to these issues great progress has been made since 1997 towards acknowledging and dealing with the business needs of social enterprises using the IPS or company structure. The aim of the review of IPS Law, announced in November 2006, should be to deal with these issues in order to bring a Victorian IPS system in line with twenty-first century needs (HM Treasury 2006). Social purpose Under this heading we have two issues. Firstly, that of brand assurance and preventing the misuse of assets dedicated to community or co-operative use. Secondly, the more detailed matter of the distribution of profits and reward for loan or share capital. In addition, there is the need to define the difference between the service model and the stakeholder model and the relationship between those factors in a case in which more than one is involved. In that respect, the CIC and the asset lock now available for bencom IPSs are very helpful. They acknowledge the need to prevent the use of the assets for private gain or benefit if they are dedicated to public or community benefit. However, differences remain between the two forms. For the IPS, it is an option and is exercised by amending or initially drafting the rules to include the lock. For the CIC it is a defining aspect of the form. Bencom IPSs will exist with a prohibition on distributions of assets or profits but no asset lock rule. Similarly, some companies limited by guarantee will not be registered as CICs but will prohibit distributions. Indeed, some may already have entrenched this under the existing law or will do so under the Companies Act 2006 when it becomes law. Of these, charities have a regulator to enforce this, the others do not. This arises from the desire to make forms available for use but not to impose them, which is probably a sound approach but one that leads to complexity, differences in approach according to the quality of legal advice or other information received and potential confusion in the public mind. Add to that differences between the approach of the FSA to IPSs and the CIC Regulator on CICs, not to mention the Charity Commission for CIOs or other charities, and the complexity grows. Around the subject of stakeholder involvement, there are interesting questions about how this affects the division between a co-operative and a benefit of the community organisation in the IPS context. This is again interesting for CICs especially with the emergence of the Co-operative CIC model. If we are to understand the difference between serving members and serving a wider cause or constituency, it is important to avoid sterile debates about terminology without losing sight of the importance of clarity. The role of democratic control and one member one vote could be quite central. Does the combination of different structures in groupings bound by contract or cross holdings have a role?
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While the range of forms is complex, comfort can perhaps be taken from the undoubted diversity and flexibility of choice available. As GHK, Johnson and Spear suggest, flexibility and fluidity are important, and perhaps the most urgent area for research on policy development and reform to consider is the need to stimulate innovation by providing pathways for conversion between various legal forms (GHK, Johnson & Spear 2006: 15). Exploration is needed into the legal and fiscal processes and options involved in changes to or from bona fide co-operatives, community benefit IPSs and similarly to or from CIC or non-CIC companies. That should be borne in mind in any review of IPS Law. The role of groups and contractual or other arrangements also needs to be explored in that context while preserving the security of the social purpose and the assets devoted to it. Complexity can give rise to flexibility, confusion or both in equal measure. It is important to make the system flexible, rational and user-friendly. That challenge should inform future research agendas, policy development and law reform in the field of legal structures for social enterprise. REFERENCES
Cabinet Office/Office of the Third Sector. (2006) Social enterprise action plan: Scaling new heights http://www.cabinetoffice.gov.uk/third_sector/documents/social_enterprise/se_strategy_2002.pdf Cabinet Office/Strategy Unit. (2002) Private Action, Public Benefit: A Review of Charities and the Wider Not-For-Profit Sector, London: Cabinet Office. (January 2007) http://www.cabinetoffice.gov.uk/strategy/downloads/su/voluntary/report/downloads/strat-data.pdf CIC Regulator. (2007) http://www.cicregulator.gov.uk/guidance.gov.uk/guidance.shtml (January 2007). Co-operative Party. (2007) http://www.party.coop/images/theprivatemembersbills.pdf through http: //party.coop/ (January 2007). Co-operativesUK. (2006) http://www.congress.coop/live/welcome.asp?id=1003 (January 2007). Cross, S. (2003) Community Interest Companies: A Tangled Corporate Web 19 Scots Law Times 157. Dunn, A and Riley, C. (2004) Supporting the Not-for-Profit Sector: the Governments Review of Charitable and Social Enterprise 67 Modern Law Review 632 especially at pp 647-657. European Commission (2007). http://ec.europa.eu/enterprise/entrepreneurship/coop/index.htm (January 2007). European Union. (2003) Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) OJ L 207, 18.8.2003, p. 124 and Council Directive 2003/ 72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees OJ L 207, 18.8.2003, p. 2536. http://eurex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!DocNumber&Ig=en&type_ doc=Regulation&an_doc=2003&nu_doc=1435; and http://eurex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!DocNumber&Ig=en&type_ doc=Directive&an_doc=2003&nu_doc=72.
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Recent reforms to corporate legal structures for social enterprise in the UK Financial Services Authority. (2007) http://www.fsa.gov.uk/Pages/Doing/small_firms/MSR/index.shtml (January 2007). Financial Services Authority. (2007a) Investor Membership of Co-operatives Registered under the Industrial and Provident Societies Act 1965: A policy Note by Michael Cook and Ramona Taylor, London http://www.etribes.com/node/72240. GHK, Johnson T, and Spear R. (2006) Social Enterprise, An International Literature Review. London: Small Business Service/Social Enterprise Unit. Hammill M, and Madge E. (2004) United Kingdom - Corporate Entities - Social Enterprises 15 International Company and Commercial Law Review N31. Hansard. (2001-02) House of Commons Debates, Vol 383, Col 813-52, London. HM Treasury. (2006) Speech by the Economic Secretary at the Treasury, Ed Balls MP, to the Building Societies Associations Annual Lunch, London (January 2007). http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2006/press_88_06.cfm. IFF Research. (2005) A Survey of Social Enterprise across the UK. London: Small Business Service. Mills, C. (2002) Protecting Public and Community Assets 35 Journal of Co-operative Studies 147. Office of Public Sector Information. (1996) The Deregulation (Industrial and Provident Societies) Order 1996 SI 1996/1738 http://www.opsi.gov.uk/si/si1996/Uksi_19961738_en_1.htm (January 2007). Office of Public Sector Information. (1996a) The Deregulation (Credit Unions) Order 1996 SI 1996/ 1189 http://www.opsi.gov.uk/si/si1996/Uksi_19961189_en_1.htm (January 2007). Office of Public Sector Information. (2002) Enterprise Act 2002 http://www.opsi.gov.uk/acts/acts2002/ukpga_20020040_en.pdf (January 2007). Office of Public Sector Information. (2002a) Industrial and Provident Societies Act 2002 http://www.opsi.gov.uk/acts/acts2002/20020020.htm (January 2007). Office of Public Sector Information. (2003) Co-operatives and Community Benefit Societies Act 2003 http://www.opsi.gov.uk/acts/acts2003/20030015.htm (January 2007). Office of Public Sector Information. (2003a) The Regulatory Reform (Credit Unions) Order 2003 SI 2003/256 http://www.opsi.gov.uk/si/si2003/20030256.htm (January 2007). Office of Public Sector Information. (2004) Companies (Audit, Investigations and Community Business) Act 2004 http://www.opsi.gov.uk/acts/acts2004/20040027.htm (January 2007). Office of Public Sector Information. (2005) Community Interest Company Regulations 2005 SI 2005/ 1708 http://www.opsi.gov.uk/si/si2005/20051788.htm (January 2007). Office of Public Sector Information. (2006) Charities Act 2006 http://www.opsi.gov.uk/acts/acts2006/ukpga_20060050_en.pdf (January 2007). Office of Public Sector Information. (2006a) Companies Act 2006 http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.pdf (January 2007). Office of Public Sector Information. (2006b) The Friendly and Industrial and Provident Societies Act
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Recent reforms to corporate legal structures for social enterprise in the UK 1968 (Audit Exemption) (Amendment) Order 2006 http://www.opsi.gov.uk/si/si2006/20060265.htm (January 2007). Office of Public Sector Information. (2006c) The Community Benefit Societies (Restriction on Use of Assets) Regulations 2006 SI 2006/264 http://www.opsi.gov.uk/si/si2006/20060264.htm (January 2007). Office of Public Sector Information. (2006d) The European Cooperative Society Regulations 2006 SI 2006 2078 http://www.opsi.gov.uk/si/si2006/20062078.htm (January 2007). Schmidt, J. (2006) SE and SCE: Two New European Company Forms and More to Come 27 Company Lawyer 99. Snaith, I. (1996) Co-operative Principles and UK Co-operative Law Reform 29 Journal of Cooperative Studies 48. Snaith, I. (1999) Regulating Industrial and Provident Societies: Cooperation and Community Benefit in D. Milman (ed.) Regulating Enterprise: Law and Business Organisations in the United Kingdom, Oxford: Hart Publishing. Snaith, I. (2001) What is an Industrial and Provident Society? 34 Journal of Co-operative Studies 37. Snaith, I. (2002) The Co-operative Movement in the United Kingdom in W. Harbrecht (ed.) The Future of Co-operatives in the European Union at the Threshold of the 21st Century Forschungsinstitut fur Genossenschaftswesen an der Universitat Erlangen-Nurnberg. Snaith, I. (2004) Mutuals and Co-operatives: property, obligations, business and dedicated assets in A. Hudson (ed.), New Perspectives on Property Law, Obligations and Restitution, London: Cavendish. United Kingdom Co-operative Council (UKCC). (1995) Proposal for a Co-operatives Act for the United Kingdom: Final Report of the UKCC Legal Working Group, Manchester, UKCC. *Contact details: Ian Snaith, Law Faculty FJB, University Road. Leicester LE1 7RH, United Kingdom. E-mail: isn@le.ac.uk, Telephone +44 (0)116 252 2337
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Social Return on Investment and social enterprise: Transparent accountability for sustainable development
Neil Rotheroe* joined Liverpool John Moores Business School in December 2004 where he is joint programme leader for the MA in Social Enterprise. Neils background includes senior professional, Chartered Environmentalist (CEnv), registered Principal Environmental Auditor and Member of the Green Alliance. His career was originally established in the environmental field but has developed into areas of Sustainable Development. Adam Richards joined Liverpool John Moores Business School in November 2004, as a Teaching Assistant and PhD researcher after completing his first degree at the same institution. Adams research interests centre on the social enterprise business model and the use of performance management systems to prove sustainable value creation.
INTRODUCTION Social enterprises undoubtedly add value beyond that of traditional economic measures, and therefore they have a role in sustainable development. However, attention is now focused on the need to operationalise performance management systems that prove and improve the value created by social enterprise organisations. The philosophy of social enterprise offers many parallels to the understandings that are emerging from sustainable development, the process by which institutions can progress toward the state of sustainability (Bebbington & Gray 2000). Sustainability is a dynamic concept. It is crucial that those social enterprises and organisations that want to maintain legitimate positions in society understand that. Therefore as knowledge increases, so does the necessity to embed transparent accountability mechanisms. Having established a theoretical framework for its discussion, this paper outlines the implementation of social return on investment (SROI) analysis in a Liverpool-based Furniture Resource Centre. Founded upon conventional accounting principles, the technique demonstrates many qualities of sustainability. Stakeholder inclusion is critical in allowing connected thinking from which a framework for increased transparent accountability can be created. A social constructivist paradigm guided the research process. Action research was chosen as the most appropriate research method. Such a participatory and reflective research process facilitates learning and supports the commitment to embed accountability measures within the social enterprise.
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Social Return on Investment and social enterprise
CONTEXT This section discusses the value of social enterprises and the importance of identifying their social returns and measuring and reporting on them in a way that is transparent and accountable to stakeholders, and which guides organisations in achieving economic, social and environmental objectives. Proving the value Social enterprises are acknowledged as contributing significantly to the fabric of the UK economy and society as a whole (Shaw 2004). Yet there is a lack of understanding about both the business models they use and the value that they create. Indeed, establishing the value of social enterprise was identified as one of three key desirable outcomes by the DTIs Social Enterprise unit (2002: 8). Performance management According to Eccles (1991) a revolutionary shift has taken place which views financial figures as one element in a broader system of measures. This creates the requirement for a more comprehensive and ultimately more complex appreciation of multi-faceted value. Generally a consideration of management requirements has evolved beyond traditional input-output thinking to include wider/soft issues related to a range of outcomes. This is of particular significance to social enterprise. A lack of clarity about performance measurement has been described as the maxim of what gets measured gets managed (Bryde & Robinson 2005). What is more, performance measurement lends itself to those areas of the organisation that are perceived as important, therefore perceivably anything that is not measured will simply be ignored as irrelevant or unimportant (Beckford 2002). The big question for social enterprises, owing to a re-conception of value and a natural predisposition to create value beyond the traditional remit of the private enterprise, is how is this best measured, managed and ultimately divulged? Pearce (2003) argues that accountability to the organisations constituents and the wider community shall be a fundamental principle of social enterprises. Prove and Improve In order to establish the value of social enterprise and dispel any lingering reservations over managerial capacity, social enterprises have increasingly adopted performance measurement practices from the private sector. This genericist approach is intended to satisfy the requirement for improved management of their economic system (Paton 2003). It employs tools and techniques that create opportunities to prove value creation that is part of a wider agenda of continuous improvement. Paton (2003) classifies this adoptive stance among social entrepreneurs as one of a reflective approach to performance measurement one that embraces the requirement yet maintains a degree of sceptical reflection on each method and its limitations. The need to illustrate change as an element of continual cyclical improvements in performance and learning has been described as the need to prove and improve (Sanfilippo 2006). Measure, simplify and communicate The use of indicators to measure, simplify and communicate is key to social enterprises ability to unlock the door that currently restricts their development (Groundwork et al. 2000). However, Friedmans ideal of shareholder capitalism still persists within legislation, which requires merely the reporting of legally attained financial returns on investment for the benefit of the measurable few. Yet the opinions and rights of the often overlooked majority
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are beginning to find their place on the business landscape. This relates to the social, environmental and economic aspects which are fundamental imperatives of sustainability. The sustainability debate Arguments emerging in the sustainability debate parallel those in Rawls theory of justice, such as the significance of both inter- and intra-generational equity and the consideration of sustainable development as not only a global concern but one by which individual institutions must address inequalities (Bebbington & Gray 2000). Sustainable development is incontrovertibly associated with economic growth, environmental protection and social progress (Department of Trade and Industry 2006). There are similarities between the interpretation of sustainability and the raison dtre of social enterprises, such as applying business acumen for the achievement of primarily social objectives. In order to achieve institutional sustainability there must be an embedded commitment towards full transparency and accountability. The resultant effect of such practices is that organisational legitimacy is maintained. Therefore, societal approval is acquired for the continued existence of the organisation. This description aligns with the drivers of sustainable development identified by Hart and Milstein (2003), which includes the requirement to serve the needs of those experiencing social/economic exclusion, through the use of innovative, inclusive and improved accountability processes. Sustainable disclosure Sustainability reporting is the vehicle by which social enterprise and all forms of organisations can deliver the requirement for transparency and full accountability to stakeholders. Although there is significant guidance surrounding such voluntary disclosure, Pearce (2003: 126) comments that No one can yet claim: This is how it should be done. This observation emphasises the challenge that exists to create agreed standards through the sharing of knowledge, experience and best practice. Elkington defines true sustainability reporting as triple bottom line (TBL) reporting (Elkington 1994). Adams et al. identify the organisational win-win-win strategies possible in using TBL reporting, arguing that it offers an inspiring metaphor that challenges contemporary corporations to simultaneously deliver the triple bottom line (TBL) of economic prosperity, environmental quality and social equity (Adams et al. 2004: 17). However, the concept of the triple bottom line is not without its critics. Indeed Norman and MacDonald (2004) question the appropriateness of a bottom line that cannot yield a final figure of performance, owing to the lack of a consistent unit of measurement. The same authors assert the use of bottom line terminology as familiarly endearing to management practitioners, yet nothing more than misleading jargon. Corporate triple bottom line reporting has a reputation for being poor quality and little more than a public relations exercise (Doane 2004), a belief supported by the Global Reporters Survey (2002). Doane asserts that commensurate accountability mechanisms should manage reporting and should be viewed not as ends in themselves but merely a means to the end. As discussed above, such arguments support the need to continually prove and improve (Sanfilippo 2006). Social Return on Investment Non-normative approaches to wider performance management employ established accounting principles which address any criticism of reliance on anecdotal evidence and the production of non-quantified bottom lines. One such approach is the social return on investment (SROI) analysis. Developed by the Roberts Enterprise Development Fund (REDF) and tested by the New Economics Foundation (NEF 2004), the technique is based upon traditional cost-benefit analysis. Assigning monetary values to social and
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environmental returns provides an opportunity to demonstrate wider value creation. Initially developed as an investment tool, it uses a familiar, conventional managerial approach, which has obvious advantages for social enterprises, as they are inherently predisposed to deliver wider social benefits. The SROI measures the value of social benefits created by an organisation, in relation to the relative cost of achieving those benefits, as illustrated below: SROI = Net Present Value of Benefits Net Present Value of Investment It is a sophisticated technique that allows the projection of results, therefore capturing the value of accrued benefits which when compared to the level of investment produces the SROI ratio. The result of the SROI is a ratio of monetised social value. However, there is much more to the story. The technique is designed to present a framework for exploring the social impact of an organisation, combining both quantitative and qualitative approaches (NEF 2005). It can therefore be used as the starting point in a debate on the creation of social value. The NEFs adapted approach is designed to be as widely applicable as possible. It focuses on four areas: Stakeholder engagement Stakeholders objectives identified and central to the SROI process, mirroring sustainability reporting. Materiality Focusing the analysis on those areas determined as important by the stakeholders. Impact map Using a cause and effect chain from inputs through to outputs, outcomes and impacts. Develops a pathway to understand how the organisation enacts change, thereby achieving its mission. Appreciation of deadweight Calculating the proportion of outcomes that would have occurred regardless of the organisations inputs.
The approach to the SROI analysis espoused by the NEF is designed as a ten-stage progression and was developed as a self-administered analysis to be promulgated across the social enterprise sector. The ten stages are as follows: 1. Understand and plan the scope of the study. 2. Stakeholders identify and gain inputs to understand their goals and objectives. 3. Boundaries prepare background information; learn more about the main target group. 4. Analyse income and expenditure is financial information reported in a way that links it with economic, environmental or social objectives? 5. Impact map and indicators understand stakeholder participation through inputs, outputs, outcomes and impacts. 6. SROI plan summary to date. Determine the timetable for collecting the remaining data, completing calculations, writing report and sharing findings with stakeholders. 7. Implementing the plan and data collection. 8. Projections determine for how long, if at all, projections can be justified. 9. Calculate SROI create discounted cash flow. Use sensitivity analysis to identify areas that would yield improvements in social value. 10. Report present results in a manner that reveals the studys subtleties, limitations and assumptions.
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The following section provides an overview of the Furniture Resource Centre (FRC) Group and more specifically the Bulky Bobs logistics operation, before discussing the process and results of the SROI analysis implementation. CASE STUDY ORGANISATION Furniture Resource Centre Group The FRC Group is based in Liverpool and was established in 1989 owing to a need for quality affordable furniture for low-income households. It exemplifies the notion of Westalls (2001) values-led operation, with four core values of bravery, creativity, professionalism and passion (Furniture Resource Centre 2005). These are embedded and shared within the Group and are the driving force in providing business solutions to social problems. Their values culture is typified by regular rewards to those individuals and teams that demonstrate one or more of the core values. Sharing success and consulting their stakeholders is central to the FRC. It is demonstrated through an annual anonymous feedback process with tenants, customers and employees. Its values culture is expressed in their commitment to deliver triple-bottom line benefits. They identify the following four objectives needed to achieve this: To be great to do business with; To be a great place to work; To be great for people; To be great for the planet (Furniture Resource Centre 2006).
The FRC Group has charitable status, whilst a number of business operations circulate funds for its collective benefit. One of these is the Furniture Resource Centre, which provides furniture to social landlords whilst also recycling and reusing the results of Bulky Bobs free collection service of unwanted domestic bulky furniture. Revive is the Groups retail outlet and provides high-street access to good-quality furniture for low-income individuals and families. Other interests include FRC Solutions, the groups consultancy arm, and a moving experience (trade name), which offers a complete moving service. Like many social enterprises, the FRC Group provide intermediate labour market (ILM) employment opportunities to those experiencing difficulties in the employment market. During a period of twelve months, trainees are supported back into a culture of work, gaining valuable experience and qualifications that are designed to offer sustainable employment opportunities upon the completion of their training. The FRC Group has a history of innovation in addressing social and environmental challenges. It has worked with a number of partner institutions and maintains a significant presence in dynamic, ever increasing and highly competitive industries. The social enterprise acknowledges an overriding obligation to prove their value to various stakeholders in order to legitimise their operations (Gray et al. 1995), thereby meeting the obligations of their social contract (Donaldson & Dunfee 1999). The necessity for innovative practices is the motivation for conducting the SROI analysis, further demonstrating the value created by the organisation on all three elements of sustainable development. Bulky Bobs Bulky Bobs is the contract-based logistical element of the FRC Group, operating within a number of local authorities in the Northwest of the UK to collect unwanted bulky domestic furniture. Prior to this free collection service, it was assumed that the overwhelming majority
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of this furniture was destined for landfill. The contract with the local authority is based upon the recycling and reuse rates of the collections. Performance measurement and target setting is an integral part of the FRC Group, addressing all three areas of sustainability. The Group intend that the SROI will further enhance Bulky Bobs ability to obtain new contracts from a number of local authorities. In the short term, the SROI is to be included on a mailed information leaflet to Liverpool City Councillors to highlight the range of benefits created by Bulky Bobs. With existing local authority contracts approaching their conclusion and one recent contract non-renewal, this is of particular significance to the ongoing success of Bulky Bobs. In the longer term, the technique is viewed as a vehicle that can roll out to all areas of the Groups activities. The aim is to embed the SROI within the organisational culture and to communicate it widely through, for example, the use of sustainability reports. The FRCs Director of People and Learning is one element of the Groups triumvirate leadership team and is considered the conscience of the organisation, demonstrating a commitment towards continual improvements in accountability practices that demonstrate the value creation of the company. The FRC has again been nominated for the Association of Chartered Certified Accountants (ACCA 2006) award for sustainability reporting. However the organisation recognises a need to continually evolve and disclose information in order to maintain a legitimate place in society, involving an increasing range of sustainability accountability mechanisms. We will now detail the process by which the SROI analysis was implemented in FRCs Bulky Bobs furniture collection service. Research perspective on the RFC case study This case study used an action research approach, described as a participatory, democratic process concerned with developing practical knowing in the pursuit of worthwhile human purposes, grounded in a participatory worldview (Reason & Bradbury 2001:1). It aimed to take advantage of the virtues of action research, facilitated by having a researcher in situ within the organisation, to embed an impact measurement created by stakeholders and to develop learning in the organisation. The SROI requires the use of a case study approach to gather enough information about a particular person, social setting, event or group to permit the researcher to effectively understand how it operates or functions (Berg 2001:225). It enables a range of informational sources (FRC stakeholders) to be consulted. The case study approach is particularly suited to this inquiry, with Yin (1994) stating that it has the capacity to provide unique insight into contemporary real-life phenomena. Stake developed three classifications of case studies, one of which is instrumental. This study uses this type of case study, selecting an organisation in order to improve understanding of a particular issue and to develop understanding on an emerging discipline (Stake 1996). Constructing the truth The ontological position is one that does not desire pure objectivity (or even consider it a possibility). Instead, the role of the researcher creates situation-specific subjective findings, and knowledge is considered as inextricably linked with the interaction between investigator and participant (Guba & Lincoln 1996). The investigator is seen as paramount to the very creation of knowledge and truth. The study uses social constructionist methodology in emphasising the collection of interpreted meanings influenced by language and other social systems. Indeed Schwandt continues to state that knowledge is created through the interaction of those with an understanding of the subject. This creates a pluralistic
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system whereby often conflicting, yet meaningful constructions are apparent. The resultant creation of truth is relative to the situation and subject to the dynamic nature of knowledge creation. This requires the social constructivist inquirer to be a facilitator of the process (Guba & Lincoln 1996). Reason and Bradbury (2001) identify five characteristics of action research, as follows: Human flourishing; Practical issues; Knowledge-in-action; Participation and democracy; Emergent developmental form.
The emergent developmental form is the central characteristic of action research in which constituents engage in a two-way continual flow of refinement and improvement. Reason and Bradbury (2001) argue that such participatory research has the ability not only to inform practice but also to empower participants to utilise their own knowledge. Indeed Devins and Gold (2002) discuss the significance of the researcher as facilitator rather than an external expert. The authors state that this methodological stance is particularly suitable when considering support for managers of SMEs. This approach was demonstrated by the interdependent nature of the relationship between the researcher and FRC Group, with both parties combining their knowledge and experience to elicit the required analysis. Reason and Bradbury also argue that a broader aim of action research is to increase the holistic well being of individuals and communities, explicitly aligned with the desire to establish global sustainability. This offers clear parallels to the philosophy of social enterprise, and the rationale for improved accountability. A major strength of participatory research is that cyclical separation between theory and practice is eased by the enrichment of knowledge through direct participation (Fals Borda 2001:29). Similarities are evident between this understanding and that of Kolbs learning cycle, whereby concrete experiences (feelings) inform reflective observation (watching), subsequently allowing abstract conceptualisation (thinking), concluding with the active experimentation (doing) (Kolb & Kolb 2005). The mutual learning required to successfully implement and embed the SROI process was crucial. Devins and Gold (2002) argue that meaning creation cannot be the sole reserve of the researcher but also that of the manager. They assert that the researcher must adopt a position attuned to the management requirements of the investigated organisation. Employing a flexible approach allowed the researcher to be guided by the requirements of the FRC Group, a position that ensured external agendas did not cloud the core rationale for the research. This included having a co-operative relationship between the researcher and FRC to ensure that the process was controlled. This flexible and positive relationship was sustained throughout the research. It was essential for the successful realisation of the SROI analysis. IMPLEMENTATION Having discussed the capacity of the research to create a shared learning experience for all participants, it is clear that continual communication is pivotal to achieving this objective. It ensures not only that knowledge is created and shared, but also that accuracy is maintained, integrating the theoretical and practical perspectives of the research participants.
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The next section of the paper outlines the NEFs ten-stage progression model for implementation of SROI analysis. Understand and plan the scope of the study The internal champion (Director of People and Learning) of the process provided much of the preliminary information required for the first stage, thereby providing a basis for the plan and scope of research. This investigation would focus on the total activities of the Liverpool Bulky Bobs operation, with projections for two years beyond a trainees completion of the ILM programme (based on the present length of time that the FRC Group maintains contact with past trainees). In order to successfully implement SROI analysis, the relationship between the researcher and the FRC Group needed to include knowledge of the process required to conduct the investigation and an understanding of the organisations operations. To facilitate mutual learning, the researcher produced a document summarising the process and benefits of the analysis, whilst the Director of People and Learning led the process regarding internal expectations and organisational activities. The requirement for a dialogue-based relationship was acknowledged. The external researcher was responsible for the practical implementation of the analysis, while the dialogue-based approach ensured access to the required internal resources. One issue that required careful consideration was that of the analysis audience. Although initially for internal purposes, the result was to be included within marketing literature and in the Groups Sustainability Report. Furthermore, it was imperative to ensure that the methodology was structured in such a way as to allow for replication and embedding within the organisation, whilst maintaining academic merit. Stakeholders In order to identify the most significant stakeholders for the analysis, the SROI process requires a comprehensive list of all possible stakeholders. As discussed, the FRC Group has an embedded commitment to engaging with a wide range of stakeholders. As part of their sustainability reporting process, it regularly communicates with those stakeholders and therefore a list of them was readily available. They included, staff, trainees, Board of charity directors, customers, suppliers and the environment. However, the external researchers identified a number of additional stakeholders: The local community; The state (local and national Government); Partner organisations; Local employers.
Having outlined all stakeholders, the requirement was to determine those that are key to the analysis. Such stakeholders are identified based upon the previously established scope of the study. Thereby those that are most affected or can directly affect the investigated area are considered of key importance to the analysis. For the purposes of this investigation, ILM trainees, FRC staff and the state (regional and national government) were considered most significant. This is because the analysis centres on the social objectives of the organisation, those of creating sustainable employment opportunities for the ILM trainees.
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Having identified stakeholders for the analysis, it was crucial to understand their aspirations. These focused on two levels: Goals beyond the scope of the ILM programme. Objectives whilst involved in the ILM programme.
Although inferences were made about the goals and objectives of the stakeholders, it was necessary to include an element of reality checking (NEF 2005), thereby ensuring that desires are fully and accurately understood. Organisational objectives and policy agendas were used to identify FRC group goals and objectives. However for the ILM trainees it was decided that further reality checking dialogue was required. An informal approach was employed to improve understanding, as recommended by the NEF. Discussions were then arranged with the trainees. The conversations were carried out in a relaxed atmosphere, where the trainees felt comfortable discussing the wider impacts upon their lives that have resulted from participating in the ILM programme. The reality checking process proved to be extremely useful. As stated, certain objectives and goals were assumed prior to discussions with the trainees, and many were confirmed. However, the trainees continued to outline the benefits, discussing with great satisfaction the improvements in their lives and career prospects, particularly beyond the scope of the training period. Many referred to completing the ILM programme and moving on with a heavy-heart, but being extremely grateful for the support and opportunity to improve their chances of finding and maintaining sustainable employment. Exhibit 1 demonstrates the key stakeholder engagement plan utilised for this element of the investigation, highlighting the approach to gathering the required information and the resultant goals and objectives.
Boundaries Having established the goals and objectives of the key stakeholders, the next stage focused the investigation on those elements determined to be material, thereby excluding information that will significantly misrepresent the conclusions a person comes to about the organisation (NEF 2005: 26). This is an illustration of a potential weakness of the SROI technique, namely failing to fully capture all indications of sustainable development. It must, however, be acknowledged that proponents of the technique cite it as improving
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the understanding of sustainable value creation. There is the continual need to improve upon capturing such information. For instance, the value of social capital creation provides opportunities to progress understanding and attaches further rigour to sustainability performance management systems. Analyse income and expenditure The Groups Finance Team Leader provided regular information and support in understanding company income and expenditure, again crucial to ensuring accuracy of the analysis. The Group had a sophisticated approach to financial management, and standard practice identified the costs associated with the trainees (and all other business aspects). Income streams were clearly identified, in line with the organisations values, and were made transparent to stakeholders in the annual sustainability reports. Such an approach to financial management aided the SROI analysis. The process revealed the need for a pool of financial acumen that identified costs associated with the scope of research recognised in the previous stages. Impact map and indicators Understanding how value is created for identified stakeholders was crucial to the development of the SROI analysis. It was essential to determine required inputs that lead to the direct outputs of the ILM programme and subsequent longer-term outcomes, whilst appreciating the impact of the organisation (those outcomes Bulky Bobs can take credit for). This further demonstrates the importance of previous stakeholder engagement and correctly identifying their objectives and goals for the Bulky Bobs operation. A stakeholder impact map was constructed (Exhibit 2), detailing the cause and effect chains that lead to value creation. This stage of the investigation requires consideration of Bulky Bobs impacts. However, as the construction of the stakeholder impact map precedes the data collection stage, it was unfeasible to include any considerations of deadweight. Exhibit 2 does, however, include a deadweight assumption of 8.6% when considering the proportion of trainees that would have gained employment without the FRCs influence. Like many of the documents within the SROI analysis, the stakeholder impact map is dynamic and will require re-visiting to complete at a later stage in the investigation. Such practices are extremely useful as they allow cause and effect relationships to be established as they become apparent. At present the social enterprise does not target a specific group (age, gender or duration unemployed) for the ILM opportunities. Therefore statistics regarding employment rates were extremely difficult to identify. After much consultation with the Director of People and Learning, Bulky Bobs Business Development Manager and external bodies, it was agreed that a deadweight assumption of 8.6% would be applied, based on Council statistics reporting this as the change in employment levels for Liverpool for the years 1998-2004 (Liverpool City Council 2006). Indicators captured the necessary information, and where possible, monetised proxies were established. Having completed the impact map, it became apparent that different stakeholders shared a number of impacts. For example, both the trainees and staff have a shared output of the number of items collected, and they are both concerned with the outcome of developing trainees skills and employment potential. Therefore in order to avoid double counting, the researchers and the Director of People and Learning opted to omit FRC staff from further analysis. Despite being key stakeholders, the identified indicators would mirror those of the trainees, whilst those concerned with their personal/career goals/ objectives would not be considered in this analysis.
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The identification of suitable indicators follows logically from the impacts, although in some cases data was unavailable. In these instances proxy values deemed close to the actual requirement were employed. Such assumptions were underpinned by trainees development of personal skills leading to increased self-worth, which are equally significant to the practical aspects of experience and qualifications. In this case projected future earnings represent a valid proxy for self-worth. A number of such assumptions were required during the analysis, again relying on the participatory nature of the technique that allows knowledge to be shared in order to create agreed standards (Pearce 2003). The imperative of stakeholder inclusivity ensures that all outcomes and impacts are considered. This not only allows for improved accountability but also addresses the intra-generational equity requirement of sustainable development, thereby providing a voice to those suffering social/economic exclusion (Hart & Milstein 2003). The state is a stakeholder at both regional and national government level with clear cause and effect pathways. Initially whilst focusing on national government, the increased revenue (tax and national insurance) and reduced expenditure (income support and welfare benefits) did not require proxies. Statutory bodies and trainees themselves provided all of the relevant information. When considering regional government, the long-term goal of the project is to improve the local environment. The operations of Bulky Bobs have clear environmental impacts (diverting furniture items from landfill). The impact of this was calculated using the alternative landfill costs for the tonnage of recycled and reused items as a suitable proxy. SROI plan This stage of the investigation is particularly important when external researchers complete the analysis, presenting a summary of completed work and establishing a timetable for further work. Mutual reference to the plan provided a point of focus for all involved to clarify any assumptions.
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Implementing the plan and data collection A data table (Exhibit 3, left) for future use was constructed in order to illustrate all data collection methods, assumptions and proxies to be illustrated. It was important during this stage to establish deadlines for information collection, thereby avoiding time-consuming delays searching for a piece of information that may be unavailable. In such cases stakeholder dialogue was again crucial in creating suitable assumptions that accurately reflect that which is required. One example of an assumption employed relates to the average starting salary for trainees after leaving the FRC Group. Although information was located detailing average salaries for the Liverpool area, it was felt by internal actors that this would over represent the true value. Therefore, an assumption of 15,000 was utilised, based on the knowledge of those most directly involved with the trainees. Projections It had previously been established through discussions with members of the FRC Group that projections would be calculated for two years beyond the completion of the ILM training programme. Therefore, consideration of the time value of money was necessary in order to calculate the present value of benefits. In order to determine the present value of benefits, the HM Treasurys Green Book recommendation of 3.5% was used as the discount rate. Calculate SROI Having collected all of the required information and established suitable assumptions and proxies where necessary, calculations were arrived at for the total value added, the investment payback period and the social return on investment ratio. The value added reports the value that is created by Bulky Bobs in financial terms, over the total three-year period. Simply, it is the difference between the net present value of benefits created and the net present value of investment, as below: [Value Added] = [Net Present Value of Benefits] [Net Present Value of Investment] This analysis indicates that Bulky Bobs created substantial benefits over the period under investigation. In order to calculate the payback period on the investment, the following expression was used: Payback Period in Months = Net Investment __________________________ Aggregate Annual Net Benefits 12
The result for Bulky Bobs indicates that the investment made for the benefit of the trainees is paid back in terms of social value creation after 14.60 months. Within three months of completing the ILM programme, the ex-trainees create enough value to pay back in full the investment made on their behalf. The social return on investment calculation for Bulky Bobs returned a positive result of 1.99:1. Thereby indicating that for each 1 invested in the trainees, 1.99 of social value is created. [SROI] = [Value of Benefits] ________________ [Value of Investment]
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Sensitivity analysis was utilised at this juncture in order to assess the extent to which the assumptions made within the investigation affect the ratio result. Such an analysis reveals which assumptions have the greatest impact upon the investigation. Those assumptions can then be tested, altering in both a positive and negative manner to indicate a range of possible results. Exhibit 4 illustrates the sensitivity analysis conducted for Bulky Bobs.
Report The final stage of the implementation process required that the limitations and assumptions inherent within the SROI technique were presented suitably for all interested stakeholders. However, the process does not necessarily stop there. Refinement and clarification was the subject of further discussions, ensuring that all involved understood the purpose, outcome and significance of the analysis, and thereby setting the context for future orientation. The analysis is to be communicated to other stakeholders of Bulky Bobs, namely existing and potential local authorities that utilize the service. This demonstrates the social enterprises requirement to seek legitimacy through embedding transparent accountability mechanisms.
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SUMMARY Although the philosophy of social enterprise addresses many imperatives of sustainable development, it remains necessary to operationalise performance management systems in order to prove the value they create. The SROI analysis, based upon conventional accounting practices, provides both a quantified ratio of social return on investment and qualitative evidence providing a framework for increased transparency and accountability. The SROI technique was found to demonstrate many qualities of sustainability. With stakeholder inclusiveness pivotal to the innovative process, it allows for truly connected thinking that reveals advancements in sustainable development. The work has stimulated ongoing dialogue that has formed the basis of an iterative process in line with the dynamic concept of sustainability. The NEFs approach to conducting the SROI analysis incorporates stakeholder engagement to determine the areas deemed of material interest. From this process an impact map of cause and effect relationships is formed to develop an understanding of how the organisation creates value. Further facets of the technique include consideration of attribution, whereby other individuals/ organisations are accredited a proportion of the benefits. Displacement considers the substitution effect, whereby benefits claimed are at the expense of others outside of the organisation. Such measures are designed to improve the accuracy of the result and to confirm the transparency of the enterprise. The nuances of the SROI analysis also demonstrate a level of sophistication, acknowledging that although sustainable development must be an organisational objective, the issue is of much wider consequence. Therefore the technique considers the net value created with acceptance of the interconnected nature of value creation between institutions. The current round of discussions into the subtleties of the analysis has resulted in a SROI ratio of 1.99:1, indicating a positive social return on investment. However it must be acknowledged that this may underestimate the true social value creation, because one cannot monetise certain impacts. To generalise, if supportive qualitative evidence is explicitly taken into account, thereby complementing the ratio of return, then it provides a platform to better understand the creation of social value. Consistent with the methodological approach of this research, the technique also displays an ethos of reflection, refinement and participation that ensures mutual interdependent learning. Improvements to the sustainability performance management policies and practices of social enterprise are the desired outcomes of the research, whilst the aim of the FRC is to embed and maintain the use of the SROI analysis technique across the Group. As discussed, the concept of sustainability is dynamic. Therefore, there is inherent dynamism in knowledge and understanding of the requirements for sustainable development. The maintenance of organisational legitimacy for social enterprise (and other organisations) necessitates a commitment to continually increasing the ability to prove and improve value creation by using transparent accountability mechanisms indicative of the sustainability process. The SROI analysis is not the definitive answer to management of sustainable development, nor does it claim to be. However, it does advance progress in the debate on how best to operationalise sustainability performance management.
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REFERENCES
ACCA. (2006) ACCA announces UK Sustainability Reporting Awards shortlist http:// uk.accaglobal.com/news/releases/uk/. Adams, C., Frost, G. & Webber, W. (2004) Triple Bottom Line: A Review of the Literature, In The Triple Bottom Line; Does it all add up? Ed. Henriques, A. & Richardson, J., London, Earthscan, pp. 1725. Bebbington, J. & Gray, R. (2000) An Account of Sustainability: Failure, Success and a Reconceptualization, Critical Perspectives on Accounting, vol.12, pp. 557 587. Beckford, J. (2002) Quality, 2nd Edition. London, Routledge. Berg, B.L. (2001) Qualitative Research Methods For The Social Sciences, London, Pearson Education, vol. 4, pp. 225. Bryde, D. & Robinson, L. (2005) Client versus contractor perspectives on project success criteria, International Journal of Project Management, vol. 23, pp. 622629. Department of Trade and Industry (2002) Social Enterprise: A strategy for success, Department of Trade and Industry website www.sbs.gov.uk/content/socialenterprise/documenta.pdf (20/12/05). Department of Trade and Industry (2006) Sustainable Development, http://www.dti.gov.uk/sustainability/sus/index.htm (07/04/06). Devins, D. & Gold, J. (2002) Social Constructionism: a theoretical framework to underpin support for the development of managers in SMEs? Journal of Small Businesses and Enterprise Development, vol. 19 (2), pp. 111119. Doane, D. (2004) Good Intentions Bad Outcomes? The Broken Promise of CSR Reporting. In The Triple Bottom Line; Does it all add up? Ed. Henriques, A. & Richardson, J., London, Earthscan, pp. 8188. Donaldson, T. & Dunfee, T.W. (1999) When Ethics Travel: The Promise and Peril of Global Business Ethics, California Management Review, vol. 4 (41), pp. 4559. Eccles, R.G. (1991) The Performance Measurement Manifesto, Harvard Business Review, vol. 69 (1), pp. 131137. Elkington, J. (1994) Towards the Sustainable Corporation: Win-Win-Win Business Strategies for Sustainable Development, California Management Review, pp. 90100. Fals Borda, O. (2001) Participatory (Action) Research in Social Theory: Origins and Challenges. In Handbook of Action Research; Participative Inquiry & Practice. Ed. Reason, P. & Bradbury, H., London, SAGE Publications, pp. 2737. Furniture Resource Centre (2006) Sustainability Report 20052006. Liverpool, Furniture Resource Centre. Furniture Resource Centre (2005) Who we are and what our values are. http://www.frcgroup.co.uk (12/02/06). Global Reporters Survey (2002) Trust Us; The Global Reporters Survey of Corporate Sustainability
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Social Return on Investment and social enterprise Reporting. http://www.resourcesaver.org/file/toolmanager/CustomO16F37189.pdf (7/11/06). Gray, R. (2002) The social accounting project and accounting organizations and society privileging: Engagement, imaginings, new accountings and pragmatism over critique? Accounting Organizations and Society, vol. 27, pp. 687708. Gray, R., Kouhy, R. & Lavers, S. (1995) Corporate social and environmental reporting; A review of the literature and a longitudinal study of UK disclosure, Accounting, Auditing and Accountability Journal, vol. 8 (2), pp. 4777. Gray, R. & Bebbington, J. (2005) Corporate Sustainability: Accountability and the Pursuit of the Impossible Dream. Centre for Social and Environmental Accounting Research. Groundwork, The New Economics Foundation and Barclays PLC, (2000) Prove It! Measuring the effect of neighbourhood renewal on local people http://www.neweconomics.org/gen/uploads/doc_208200094213_Provelt.doc (21/01/06). Hart, S.L. & Milstein, M.B. (2003) Creating Sustainable Value, Academy of Management Executive, vol. 17 (2), pp. 5673. Heron, J. & Reason, P. (2001) The Practice of Co-operative Inquiry: Research with rather than on people, In Handbook of Action Research; Participative Inquiry & Practice. Ed. Reason, P. & Bradbury, H. London, SAGE Publications, pp. 179188. Liverpool City Council (2006) Liverpool Economic Briefing, January 2006. www.liverpool.gov.uk/ Images/tcm21-62114.pdf (30/07/06). New Economics Foundation (2005) Measuring value creation in Social Firms: a do-it-yourself training manual for SROI. New Economics Foundation (2004) Social Return on Investment: Valuing what matters; findings and recommendations from a pilot study, London, New Economics Foundation. http:// www.neweconomics.org/gen/uploads/ck3oqu4515ubcv55e1xhminn21042004165114.pdf (15/08/05). Norman, W. & MacDonald, C. (2004) Getting to the Bottom of Triple Bottom Line, Business Ethics Quarterly, vol. 14 (2), pp. 243262. Paton, R. (2003) Managing and Measuring Social Enterprises, London, SAGE Publications. Pearce, J. (2003) Social Enterprise in Anytown, London, Calouste Gulbenkian Foundation. Rawls, J. (1999) A Theory of Justice; Revised Edition, Oxford, Oxford University Press. Reason, P. & Bradbury, H. (2001) Introduction: Inquiry and Participation in Search of a World Worth of Human Aspiration. In Handbook of Action Research; Participative Inquiry & Practice. Ed. Reason, P. & Bradbury, H. London, SAGE Publications, pp. 114. Sanfilippo, L. (2006) Proving and improving: a quality and impact toolkit for social enterprise. London, New Economics Foundation. Schwandt, T.A. (1996) Constructivist, Interpretivist Approaches to Human Inquiry. In The Handbook of Qualitative Research. Ed. Denzin, N.K. & Lincoln, Y.S. London, SAGE Publications, pp. 118137. Shaw, E. (2004) Marketing in the social enterprise context: is it entrepreneurial? Qualitative Market
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Social Return on Investment and social enterprise Research: An International Journal, vol. 7 (3), pp. 194205. Stake, R.E. (1996) Case Studies. In The Handbook of Qualitative Research. Ed. Denzin, N.K. & Lincoln, Y.S. London, SAGE Publications, pp. 236247. Westall, A. (2001) Value-Led Market-Driven Social enterprise solutions to public policy goals, London, The Institute for Public Policy Research. Yin, R.K. (1994) Case Study Research; Design and Methods, 2nd Edition, London, SAGE Publications. *Contact details: Neil C. Rotheroe, Liverpool John Moores University, School of Management John Foster Building, 98 Mount Pleasant, Liverpool L3 5UZ, email: N.C.Rotheroe@ljmu.ac.uk, telephone: +44 (0)151 231 3261
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Balance: The development of a social enterprise business performance analysis tool

Mike Bull* is a Research Fellow at the Centre for Enterprise, Manchester Metropolitan University Business School. Mike began his research on social enterprise in 2004. He has a Masters of Research from Manchester Metropolitan University Business School, a Postgraduate Diploma in Management from Leicester University and is currently working towards his PhD.
INTRODUCTION Performance measurement and analysis conjures up visions of quantitative data, spreadsheets of financially derived statistics and images of managers getting hot under the collar juggling numbers. This paper outlines the development of Balance, a tool that provides an alternative approach where the analysis incorporates an array of issues, mainly non-financial, involving self-reflection of managers own perceptions of where their organisation is now and where it wants to be in the future. This paper is based on a research project, part funded through European Social Fund (ESF). The project sought to investigate the higher-level skills needs and learning provisions for Small Medium Social Enterprises (SMSEs) in the northwest of England in order to support strategies for lifelong learning and organisational development. The project particularly focuses on understanding learning that occurs through experiential routes that are grounded in the day-to-day activities of the enterprise. It is felt that small business managers prefer to learn as informally as possible, and therefore this was believed to be the most appropriate vehicle for delivering skills development within the social sector. The paper builds on previous research (Bull & Crompton 2006) and outlines the current understandings and shortcomings of SMSE management knowledge. This paper adapts the Balanced Scorecard (Kaplan & Norton 1996) performance measurement and management tool, integrating the notion of incremental learning development, and utilises Kolb and Frys (1975) organisational learning cycle as the basis of the tool development. Drawing on small business sector literature, the paper makes a case for an alternative approach to business analysis, where a qualitative approach is put forward. Whilst utilising an established framework, i.e. the Balanced Scorecard, the Balance tool was developed to differentiate in design from: (a) quantitative (numerical/statistical) tools; (b) bottom line/financial measurement; and (c) the standpoint of large, rational and resource-rich organisations. What Balance offers SMSEs is an easy to use diagnostic that collates managers subjective opinions over objective facts in order to simplify the analysis process and provide a reference point for discussing management skills needs. The paper discusses the findings of piloting the tool in 30 social enterprises, and provides a snapshot of the business capabilities of the sample of SMSEs. By highlighting both
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strengths and areas where greater support may be required the research has both policy and practitioner implications. The findings from the Balance business analysis tool reveal that the sample has similar organisational issues to that of private sector small to medium enterprises (SMEs). However, some SMSEs in the sample are found to be more sophisticated and strategic than SMEs. As expected, participative cultures exist, and enterprises are strongly mission focused. Many in the sample are slow to develop marketing strategies and are reactive to stakeholder needs, rather than proactively marketing their social values or demonstrating their organisational effectiveness through quality marks such as ISO. Fundamentally, these SMSEs are experiencing the upheaval of changes to the funding opportunities within the market. Many are experiencing organisational change, where social performances are becoming more critical to the sustainability of their organisations. There appears to be a spectrum of social enterprise, at one end the social driven organisation, and at the other the enterprise driven organisation, with a multitude of businesses somewhere in-between. The findings add to the development of the knowledge base of social enterprise. The tool provides insight and sheds light on the business practices of SMSEs, and it is envisaged such tools may therefore be a catalyst in generating stronger social businesses, which offers further discussion for support agencies and academics alike. SHORTCOMINGS AND PERFORMANCE MEASUREMENT IN SOCIAL MANAGEMENT Enterprising Communities: Wealth Beyond Welfare (The Social Investment Task Force 2000) states that the UK is enjoying more material wealth than ever before. Unemployment is at its lowest rate for 25 years, yet, conversely, the UK is challenged by concentrations of social isolation, worklessness, poverty and inequality in some areas. Social enterprises are heralded as catalysts for revitalising disadvantaged communities through employment, training and countering welfare dependency throughout the UK (OECD 2003). However, despite the agenda for the sector, the Social Enterprise Unit (SEU DTI 2002) identified some major barriers to the growth of the social business sector including poor understanding of value amongst stakeholders, tensions and conflicts in meeting both the financial and social bottom lines. Research for the Small Business Service by Smallbone et al. (2001) evidenced managerial shortcomings of social enterprises, stating that management skills in particular, marketing, finance and decision making, amongst others were difficult issues for the sector. Furthermore, research undertaken as part of the Government work on neighbourhood renewal, PAT (Social Exclusion Unit - Policy Action Team 3 for Business and Team 16 for learning), recommends that business skills, business support and sustainability are critical factors for successful social enterprises. Whether serving social or environmental interests, social enterprise businesses will not necessarily thrive naturally and need structures to nurture and support them (PAT3:112). The Social Investment Task Force (2000), states that a lack of capital and managerial expertise is stifling entrepreneurialism within socially excluded communities, and that these barriers need to be addressed in order to realise the potential of the people within these communities. Whilst knowledge of the social sector is growing, business failures are reportedly a feature (Hines 2005). Hines explains the problems; for instance, the plethora of enterprises and business legal models contained under the social enterprise model are complex (some of which may be alleviated by new legal structures in time), and that there is still a gap between the theory and the practice of social enterprise. Concurrently, Haugh (2005) suggests the sector is under-researched and that robust evidence of the value of social
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enterprises contribution to society remains illusive, while management practices, skills and performance and business models are unclear. This paper seeks to address the latter point, highlighting management practices in the sector through the design and development of a business analysis tool. PERFORMANCE MEASUREMENT Social enterprise managers are challenged to constantly adapt to ever-changing environments a balancing act requiring strategic reflection and analysis to achieve ongoing sustainability. Performance measurement through business analysis tools may offer organisations help in managing this process. However, according to the Social Enterprise Partnership (2003), many social enterprises see impact measurement as a burden, rather than a source of competitive advantage or a useful management tool. Fundamentally, performance measurement tools have been brought over from the business world, designed and created from the perspectives of profit-based businesses (Speckbacher 2003). Such tools focus on large business models, where rationalization, resource maximisation, market growth and financial measures are highly sought-after (Garengo et al. 2005). However, much has been made of the differences between large and small businesses (Storey 1994; Scase & Gofee 1980; Jennings & Beaver 1997). Small businesses are, more often, centred round the aspirations and ambitions of the owner/managers, are less driven by formality and lack the resources and requirement for structures as they employ less people. Dandridge (1979) and Wynarczyk et al. (1993) suggest small business owner/managers have less tolerance for inefficiency than larger organisations, and they may adopt different business ideologies, ethics and organisational structures. Therefore, the transferability of business tools is a major consideration for SMSEs where the vast majority of performance tools have been designed through the lens of large organisations. A second problem lies in the differences in social enterprise approaches. One of the inherent difficulties in the transferability of performance tools is how to include the measurement of social value, what it is, and indeed how to score or articulate social objectives in measurable and accountable ways. For many SMSEs, performance measurement and quantification are either economic indicators or unexpressed social values that are quite often intangible and difficult to quantify (Dees & Anderson 2003). The social return may be reliant on notions of trust and mission value, unexpressed, immeasurable and unaccountable (Paton 2003). So how can SMSEs be expected to demonstrate their success through homogenous business models? Speckbacher (2003) comments, profit as a single valued measure for success does not work because other output dimensions that profit measures do not capture are as important (Speckbacher 2003). A third issue is a question of resources; Thomas (2004) notes that the development of a comprehensive and reliable performance measurement system is potentially expensive, both in terms of generating data, staff time and investments in information technology. There are therefore both financial and human resource issues for social enterprises in instigating, analysing and implementing performance targets. There are the time constraints of busy managers and the instant access to information that organisations need in order to input data into such systems, which can be off-putting and laborious. All of this may not necessarily be seen to be essential to the success of the organisation, thus reasons why performance measurement is considered a hindrance. Fourthly, as Holloway (1999) points out, there is little empirical evidence to suggest
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that performance analysis tools have any real impact on the actual business practices of organisations. One of the issues here is in the objective/subjective standpoint in conducting business analysis. Thomas (2004) indicates inherent problems of perception and interpretation, the performance captured by a particular set of measures will always be partial and contextual, reflecting the fact that the measures have been selected, analysed and interpreted through the lenses of the organizations and individuals involved with the process (Thomas 2004:11). A fifth point as outlined by Pestoff (1998) suggests, performance is a multifaceted, fluid, problematic, ambiguous and contested concept, all further complicated by different sector and stakeholder perspectives the case in point within SMSEs. Paton (2003) adds that the relevance of mainstream management ideas and their adaptation to social enterprises demonstrates that performance measures are not the universal solution promised. Yet he offers some hope to those of us interested in analysis, suggesting that performance tools are useful, but only in loose and variable ways. An understanding of performance measurement is not as straightforward as hoped. The heterogeneity of small business and social enterprise add complexities and ill fit many concepts of performance measurement systems. This may go some way to understanding the limited use of business tools across the sector. It would also appear that little work has been done to alleviate the fears and provide thought-provoking tools that are not only specifically designed for the sector but that address the issues of time, resources and stimulation to engage managers in taking management tools seriously. BALANCED SCORECARD Kaplan and Nortons (1996) Balanced Scorecard (BSC), as shown in Exhibit 1, has all the baggage of a business analysis tool brought over from large business. Designed for 1990s manufacturing organisations, the tool requires vast amounts of resource and management time and is highly complex. However, the BSC is one such business model which may come some way to alleviating the inherent profit focus of measurement tools; hence, the BSC is a multicriteria strategic management tool. The holistic approach to performance measurement steers away from economic indicators and incorporates various business issues within the framework. These are multi-criteria perspectives: financial, customer, internal processes, learning and growth and vision and strategy. Figge et al. (2002) state that The concept of the BSC is based on the assumption that the efficient use of investment capital is no longer the sole determinant for competitive advantages, but increasingly soft factors
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such as intellectual capital, knowledge creation or excellent customer orientation become more important (2002:3). Furthermore, Kaplan and Norton have suggested that the BSC could be easily transferable to non-profit organisations. Morrison et al. (2002) have also suggested that the BSC could be used as a learning pathway to shape strategy and the process of financial management practices in the SME sector. Deakins et al. (2002) also calls for a modified balanced scorecard approach, refined for the small firm, to represent dynamic financial decisionmaking processes influenced by environmental factors such as customers, creditors and suppliers. They present arguments that a more balanced and evolutionary approach needs to be taken that accounts for the qualitative aspects of decision-making behaviour and learning by SMEs. In light of the adaptability issues, two sector specific projects have provided some way towards progress. Firstly, Social Firms UK constructed an on-line Dashboard intended as an integrated management performance tool based on the principles of the BSC, but designed to be more practical and user-friendly. However, it appears to be much more of an operational level tool than a strategic tool and is time consuming to initiate. Secondly, the New Economic Foundation in conjunction with SEP (Social Enterprise Partnership) GB Limited piloted the BSC to social enterprises. This research highlighted that the BSC needed to be adapted to the social enterprise sector by incorporating social goals, broadening financial perspective to focus on sustainability and customer perspective being widened to capture the larger group of stakeholders (Somers 2005:8). The developments of the BSC highlighted above provide an understanding of how importing business models into social enterprise can often be challenging. The literature does however indicate that the BSC is a potentially suitable tool for modifying an adaptation that incorporates the business approach of social enterprises: the multi-bottom line, multistakeholder and social objectives within a multi-criteria model (Somers 2005). For the purpose of this research, the BSC model was selected, as it provides a baseline analytical framework that has the potential flexibility for adaptation and has an holistic/inclusive approach to business development, as noted by Deakins et al. (2002); Morrison et al. (2002) and Figge et al. (2002). In order to address the issues outlined above, the development of Balance began with a thorough investigation of the sector, the business practices and issues experienced by social enterprise business managers (Bull & Crompton 2006). The essence of this investigation summarised in the next section formed part of the grounding process in building a tool from the bottom up (stage 1). The second and third stages of the research are the focus of this paper and are described here in detail. RESEARCH DESIGN Step 1 The first step of the design began with a qualitative investigation of the business practices of social enterprises (see Bull & Crompton 2006). This time was used to build knowledge of the sector, meeting with managers of social businesses, social enterprise stakeholders and sector support agencies at local, regional and national levels. Concurrently, a review of the current literature through academic and sector-generated publications was carried out. The literature review highlighted the use of management tools in establishing business practices within SMSEs. Evidence suggests that quantitative business analysis tools do not capture the heterogeneity of social enterprises and so are not readily transferable for SMSEs.
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The task at hand was to reflect on the issues that were challenging for small firms (outlined in the previous section: human and financial resources, perception and ambiguity) and design an alternative business analysis tool. Taking on board the differences in small firms to those larger (Scase & Gofee 1980), the interpretation made from the literature was for a more qualitative, soft analysis tool, which would be as robust as a statistically driven tool, but be more aligned to the sector and more user-friendly. Value would be added where users would get direct benefit in a relatively short timeframe of engagement with the tool. Using a qualitative approach to developing a business analysis tool represents a move away from linear quantitative approaches in recognition of the complexities of organisational forms such as that of SMSEs. Step 2 The literature search had identified the Balanced Scorecard (BSC), as discussed, which was chosen as a loose framework to be adapted, whilst addressing the criticisms raised above and recognising the need for an easy to use business analysis tool. A grounded theory (Glaser & Strauss 1967) type process of coding and re-coding took place where incidents were identified and categorised. This thorough analysis identified key issues and emerging theory. Coding allowed the grouping of concepts and the identification of themes, which were triangulated with the BSC framework. Utilising a qualitative analysis software package, NVivo, to aid in the analysis of the data, concepts were massed around the business areas of the BSC framework (financial, customer, internal processes, learning and growth and vision and strategy). These groupings are referred to as nodes in the software. Having massed a number of issues around the five nodes, causal mapping software (Decision Explorer) was used to filter, link, structure and visually analyse the data into patterns. Key subject areas were identified as critical factors for social enterprises across
all the sections of the framework, and the tool began to take shape. The development took us back to the literature and to further discussion within our networks before finalising the issues that we included in the tool. The final topics within each section of the tool are shown in Exhibit 2.
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The following provides an overview of each of the sections and the issues and topics targeted by the tool: Return: The Multi-Bottom Line: This section was renamed from financial in the BSC. The motivation or return for effort and investment by the private sector is recorded by various means, return on investment (ROI), market share or shareholder value, but fundamentally in financial terms of profit margins. However, in social businesses the motives and objectives for being in business are very different; the philosophy of profit maximisation and market exploitation is replaced with an approach that strives towards strategies providing social or environment benefits. Social enterprises therefore exist to provide help and support for a wide range of social and environmental reasons that give back to society hence, the multi-bottom line. The essence of this section asks organisations, To achieve our vision, how can we demonstrate to our stakeholders that we can deliver what we say we can? Some critical indicators that encapsulate the issues which the interviewed social enterprise managers feel are indicative to the performance of their organisations include: social, environmental and financial sustainability; budget and expenditure management; performance indicators combining social and economic accountability; and systematic approaches to articulating social accounting. A Learning Organisation: This section explores the social capital and knowledge of organisations. The title changed from learning and growth, as in the BSC, to move away from correlating growth with performance per se (evidenced in the small firm literature that not all small firms want to grow Storey 1994). The essence of this section asks organisations the same as in the BSC: To achieve our vision, how will we sustain our ability to change and improve? This section questions the difficult to measure learning culture, creativity, participative decision making, team working, leadership and continuous improvement as a means of assessing the capacity to capitalise on knowledge and learning opportunities, which were the critical factors fleshed out of the interview data analysis. The Stakeholder Environment: This section was renamed to replace the customer section in the BSC, as the term stakeholder is more representative of social enterprise, as many firms serve and satisfy multiple groups of people. This section includes customers, end users, funders, communities and society as a whole. The essence of this section asks organisations, To achieve our vision, do we really know our stakeholders and how do we appear to them? The section is essentially about marketing. The critical factors unearthed from the interview data analysis were an awareness of the stakeholder, competitor identification and awareness, image and identity, promotional activities, marketing budgets and importantly, the evaluation of the effectiveness of each of these practices. Internal Activities: This section was slightly changed from internal business process from the BSC to move away from processes, leaving it much more open as activities that are involved within businesses. The essence of this section asks organisations, To achieve our vision, do we have the right business practices and systems? The section is concerned with the working practices, structure and systems of organisations. Critical issues to social enterprise managers were the internal structure, managing internal communications, quality, management systems, flexibility and adaptability. And finally, Visioning: This is the last section in the model, which brings aspects within the tool together into a vision for a business. Critical issues for social enterprise managers were concerned with how managers strategically engaged with business tools such as missions and business plans, and essentially how these plans are communicated to the various stakeholder parties.
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Step 3 The third step of the development built on experiences from previous business diagnostic tools that were designed in the Centre for Enterprise, Manchester Metropolitan University Business School. Previous analysis tools were found to be beneficial to organisations in identifying weaknesses, but the tools did not indicate how managers could take their businesses forward and make improvements. The challenge lay in an innovative approach of linking diagnostic tools and learning. The development of the tool drew on literature that suggests that organisations evolve in cycles and patterns of development around incremental learning stages. Kolb and Fry (1975) state that the stages are passed through in a learning sequence; each time an organisation develops and implements actions, a plateau is reached where reflection on what actions were successful or unsuccessful takes place. This provides an opportunity for learning, followed by development and a move to the next learning cycle. Critical to this development sequence at each juncture is an internalisation or settlement period of change. Change is brought about by many agents internal and external factors, some crisis, others more incremental. One such incremental change agent may be provided by new knowledge. New knowledge is one of many agents that provide the impetus for taking actions and development within organisations. Taking both the learning cycle stage model and providing the change agent, i.e. new knowledge, the concept of the tool design evolved. Therefore, for the tool, managers are provided with scenarios in order for them to reflect on where they feel their organisation is along the 1 to 5 scale. Through descriptive guidance and number scale at each scenario, the manager chooses the description that most suits their situation. Exhibit 3 provides a scenario and the stages with guidance text. For example, at stage 2, Its quite informal and unspoken, suggests an awareness of the issue but nothing that has been strategically managed. This stage covers firefighting. Or at stage 4, Our vision is common knowledge within our organisation or outside our organisation, to say that the issue is formally managed by systems and structures in place, yet there is some way to go to the system being best practice.
On completion of the assessment, the software is developed to then show a histogram bar chart of the strengths and weaknesses across the 5 areas of the assessment (an example is shown in Exhibit 4). This not only provides instantaneous results but also the notion of balance across the areas of the tool. The learning sequence steps then offer managers knowledge, guidance, actions and potential solutions, at each stage, in the shape of an action plan in order to provide assistance in developing business practices. This action plan was guided by identifying best practice in the social enterprises interviewed, triangulated with management theory and sector specific literature. The complete action plan is approximately 30,000 words long. However, it is envisaged that managers would
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dissect the full plan and use sections, and single out relevant issues, using the plan as a resource to bring into discussions the information as and when.
Usability: In essence the tool is an adaptation of the BSC framework that provides knowledge and learning opportunities in incremental learning cycles. Bespoke to the social sector, the tool takes into account the heterogeneity of the sector, for example, the multi-bottom line objectives (social, environmental, stakeholder, financial) and the participative management styles of leadership. Whilst having the structure of an assessment, the tool benefits from offering managers self-diagnosis, a qualitative approach to business analysis and space for critical reflection, without the time-consuming need for quantitative assessment through financial inputting and in-depth statistical analysis. This is why the name for the tool is Balance (without the scorecard). The tool is also based on a strategic level, as opposed to the BSC, which is at a more operational level. The action plan is therefore more pertinent to higher management needs and the strategic direction and development of the organisation. Through the tool, the gap between actual business practice and management theory is bridged by a three-step approach: 1. Critical reflection: business analysis self-assessment by the managers, based on their own perceptions of where the organisation is. 2. Organisations are provided with an instant snapshot of their particular strengths and weaknesses across the BSC performance concepts (finance, customer, learning, internal activities and visioning), generated by the software of the tool. 3. An action plan offering stage-specific knowledge and suggestions for business development, growth and sustainability is provided. It was foreseen that managers would either self assess in isolation, or in consultation with their staff, management team, board of trustees or sector support agents or advisors. With the tool being accessible via the Internet, it was also envisaged that managers would engage with the tool better through their own computer systems, formats and layouts (self ownership) rather than the imposing structure of an advisors laptop, or other more cumbersome paper format. Thirty social enterprises were approached to take part in the research, where two thirds elected to have the researcher present partly to fulfil the task, with busy businesses to run, and partly to ease the confrontation of attempting to assess their business within an
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hour. Some organisations gathered the board of trustees together for the assessment, but the majority elected either a single representative manager or management team. THE FINDINGS Thirty interviews were conducted with organisations using the Balance tool; findings drawn from these interviews are outlined in this section. Conclusions are then drawn about the critical issues for social enterprises and the strengths and weaknesses of the sector. The sample The 30 pilot organisations were drawn from a cross section of social businesses across Greater Manchester and Lancashire. Of the sample, 14 considered themselves Social Enterprises, 8 Community Enterprises, 5 Charities, 2 Co-Operatives and 1 a Social Firm. The vast majority of our sample businesses were service orientated (see Exhibit 5), and they operated across many sectors in many ways. The categories here represent each organisations main focus, but many businesses crossed sectors. For example, one organisation provided therapeutic arts-based courses for local people with mental health problems, linking their main activity (arts) with health care, disability and community. The enterprises were categorised as: Health and Social Care (4), Community (3), Environment (3), Arts (3), Food and Drink (3), Employment (3) and Education (3).
Business Size, Income and Profile The business size of our sample of social enterprises was established using various measures: the number of years the social enterprise has been established, its annual income, number of employees (or full time equivalent), and number of volunteers. The profile represented in Exhibit 6 indicates that the pilot included a diverse range of established, traditional social businesses and younger social enterprises. The diversity of income ratio to the number of employees and volunteers to the number of years these businesses have been operating is also representative of a range of low asset base businesses and some more successful enterprises. Drawing on discussions within key networks suggests this is a true reflection of organisational diversity of the social enterprise sector in the North West region.
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The findings of the pilot study are discussed around the topic areas and sections of the adapted balanced scorecard (The Multi-Bottom Line, Stakeholder Perspective, Learning, Internal Activities and Visioning). The results are indicative of the opinions of a small sample of managers to these issues, the analysis generalises to paint a picture of the social enterprise landscape (conscious that the sample may not be totally representative of the scene across the whole of the UK). The assessments were also based solely on the subjective opinions of the managers taking part. No objective quantitative data was involved, so in no way was there any triangulation with the two, or any requests for justification of answers drawn (this was deliberate by design and was explained in the previous section).
The Multi-Bottom line This section assessed the financial and non-financial approaches to measuring return/ multi-bottom line in SMSEs. Exhibit 7 shows the responses by managers. Many SMSEs suggested they were at an advanced stage in terms of these issues (mean values 24% of social enterprises at stage 3, 24.5% at stage 4 and 24.8% at stage 5 for stage explanation see Exhibit 3). Most SMSEs here focus on: controlling budgets, conforming to funding-led accountability and sustaining their funding. Managers felt they had reached higher stage level (4 and 5) in responses to Q1 on sustainability (47% at stage 4), Q2 on budgets (53% at stage 5) and Q3 on aims (37% at stage 5). This compares with the final two questions: Q5 on financial and non-financial organisational performance (23% at stage 2) and Q6 on social accounting (33% at stage 1). A third of managers skipped Q4 as their business focus was more socially than environmentally directed (double bottom-lining, rather than multibottom lining).
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The situation suggests these SMSEs comply with funders requests for social impacts, prompted in order to comply with funding and contracting obligations. As opposed to concerted proactive, strategies are developing for their own systems for measuring and reporting their social return for their investments. So the more sophisticated techniques of measuring financial and non-financial organisational performance and social accounting have yet to be taken up, or more so, taken forward to the stage where publishing both the social and financial elements of the multi-bottom line are standard practices. This may be an issue of higher skills needs, or other resource issues beyond the scope of this section of the tool. This picture is informed by other sections and is discussed later in the paper. Ultimately, neglecting to demonstrate social returns lacks transparency in business practice. Issues need to be addressed in the future climate for sustaining enterprises beyond immediate horizons, where the sector will inevitably have to become more market driven to survive in an open marketplace. Learning This section assesses the commitment of organisations to learning through training, knowledge and organisational culture. Exhibit 8 indicates managerial responses to questions about learning. The results from Balance indicate the spread of formality in training and developmental issues (Q1): Many social enterprises have informal ways in which they manage this from ad-hoc practices, for example, on the job training (17% at stage 2) through to informal development plans (33% at stage 3). Very few managers indicated they had formal development plans (13% at stage 4), yet 33% (at stage 5) of managers suggested their approach to staff development encouraged a learning culture in the organisation through the provision of a wide variety of training opportunities. Overall, social enterprises suggested they were at an advanced stage across these issues. Higher
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levels are seen in Q2 (participative decision-making) and Q3 (learning through external knowledge) but lower levels were recorded for Q4 (creative and learning culture) and Q6 (continuous improvement philosophy). The informal nature of the sector and the nature of learning within social enterprises are apparent. Social enterprises place an importance on networking and collaborations with other like-minded organisations tapping into external knowledge avenues (Q3, 53% at stage 4) and other participative learning cultures (Q2, 37% at stage 5). Although it was suggested by many managers that they encouraged team working and participative decision-making (Q2, 37% at stage 5), the Balance results are therefore somewhat inconclusive. Although many managers attitudes are assuring and convincing, when it comes to the detail, there is less confidence and many are reluctant to reflect too deep for too long, ill at ease with the thought of the actual practices differing from their ideologies. Looking to Q4 (creative and learning culture) where the majority of scores recorded were quite evenly spread between levels 2 (33%), 3 (20%) and 4 (33%) supports the previous argument, in that a creative and learning culture is somewhat undeveloped and a challenge (33% at stage 2, 20% stage 3), and something in which few SMSEs are totally proficient (14% stage 5). Organisations are suggesting participative environments exist, yet the learning environment is somewhat left to chance and unknown (Q6 continuous improvement philosophy 33% at stage 2). The findings indicate barriers to the learning environment in some social enterprises. Yet, conversely, on mean average 62.3% of responses were recorded at stage 4 or higher for the overall averages of this section, which is a strength area for the sector. Stakeholder perspective This section assessed the stakeholder or marketing issues: stakeholder focus, image and promotional strategies. As per Exhibit 9, the results indicate a wide spectrum of opinions. In Q1 (stakeholder focus) 40% (at stage 5) of our sample indicated that they were focused on
stakeholder needs, suggesting that they are constantly knowledge sharing, changing and innovating in consultation with stakeholders. Q2 (competitor awareness) shows that this type of knowledge is mainly informally gathered (47% at stage 3). Q3 (image) provides a further indicator of the general sense of informality to marketing; stage 2 (30%) and stage 3 (47%) demonstrate that image and visual identity procedures and processes are informal. In Q4, 47% at stage 3 indicates organisations engaged with their market in a variety of ways printed matter, websites, face to face, focus groups and conferences, etc. Managers point out that resources were usually available for these activities. Yet in Q6 (evaluation) managers reveal little reflection or any measurable indicators of how their marketing methods are successful. The results indicate that marketing is an informal practice within SMSEs. This is comparable to how small businesses act towards marketing (Carson 1990; Carson & Cromie 1989; Hill 2001; Coviello et al. 2000). Furthermore, the small business literature also indicates that many managers perceive marketing to be what big businesses do (Brouthers et al. 1998). It could also be that social enterprises perceive marketing as acting too business-like. A
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further argument also points, as in small businesses (Carson & Gilmore 2000), to the fact that marketing skills are scarce, and that these SMSEs need to develop their knowledge around the concepts and practices of what it is to do marketing. Ultimately, marketing activities link so many business practices. This low engagement with marketing also relates to other areas of the tool: promoting the social value (Multi-Bottom Line, Q5), producing social accounts (Multi-Bottom Line, Q6) and seeking accredited internal standards (Internal Activities, Q4) tools that are generally used to market and promote organisations. This issue presents a barrier to these SMSEs in a competitive environment where it is important to gain recognition, promote the right image, offer concise information and demonstrate a positive impression to all the stakeholders. Internal Activities Internal activities, or operations, are concerned with the management of working practices and the structure and systems of the organisation. In Exhibit 10 we see that in terms of internal communications many managers suggested they had informal systems (Q2, 33% at stage 2). In terms of quality (Q3) the sample inferred basic quality policies (33% at stage
2 and 27% at stage 3). In terms of investing in accredited standards (Q4), these SMSEs felt ambivalent towards attaining these types of standards (43% at stage 2). Although there were exceptions (20% at stage 4) these were predominantly Practical Quality Assurance System for Small Organisations (PQASSO) or Investors in People (IiP) accreditations, as opposed to International Standard Organisation (ISO) standards of operations. Conversely, the sample indicated they were more fluid than structured; scoring high on adaptability, (Q6, 50% at stage 3, 23% at stage 4) and flexibility (Q5, 33% at stage 3, 30% at stage 4 and 27% at stage 5). The results indicate that social enterprise internal operation systems are similar to those of small firms, they are not driven by formal business structures the same as large businesses, and adapt and flex to market demands. The informality within SMSEs may, however, be an advantage, stimulating innovation, flexibility and adaptability key strengths of businesses in environments that are in a state of constant change. There are issues here which cross over with the multi-bottom line section and the stakeholder perspective section where monitoring and performance management systems are under-utilized and may not be seen as strategically important to offering competitive advantage and market differentiation as would be expected of the private sector, as previously mentioned. Visioning Visioning is concerned with the future: planning, strategy building and the communication of those visions. Exhibit 11 indicates the responses by managers for this section. Overall these SMSEs see themselves as being well organised (mean = 41% at stage 4). The results from this section support the literature that suggests social enterprises are focused on vision
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(Understanding Social Enterprise Social Enterprise London 2001). High scores are seen in the questions on mission statements and strategies Q2 (43% at stage 4) and Q3 (50% at stage 4) communicating those visions. However, business planning (Q1) was something that many felt was either informal or that their plans were out of date (23% at stage 2). Yet over 60% of managers suggested they were either at stage 4 or 5 using business plans and dovetailing strategically across the business. Finally, the Balance analysis concludes with a question offering balance as an approach to managing organisations. The scenario is, We strive for balance across the organisation? Interestingly, 43% (at stage 3) and 37% (at stage 4) of managers felt there was some truth in striving for balance so coming some way towards a notion of balance. The conclusion picks up this point and reflects on the notion of balance being a concept worth taking forward for social enterprise organisations. SUMMARY Overall, the findings suggest that many SMSEs scored their organisations around levels 3, 4 and 5 for most questions, peaking at, on average, 28% of the answers at stage 4. These findings imply that many of these SMSEs see themselves as well run and organised. In terms of businesslike practices, these SMSEs vary from some very rationally structured and formal organisations to the majority which are more informally organised. Whilst the businesses in the study were found to be at an advanced stage of the Balance tool, more needs to be done in these SMSEs in terms of proactively utilizing the communication tools, marketing, promoting values and accountability. Hence, if social enterprises are to be competitive in growing sectors, they have to demonstrate to stakeholders value in pounds and pence, and also added value of the social/environment impacts. In terms of general strengths of this sample of SMSEs, we see that learning is consistently high scoring across these businesses. Training and development, participative decisionmaking and accessing and utilising external knowledge are generally evident here. There is also evidence to suggest that vision and strategy is another area of key strength within the sample, suggesting businesses see themselves as being entrepreneurial and constantly focusing their organisations on the missions and aims of their existence. In terms of general weaknesses and threats to these SMSEs, we see that there is a low uptake of management systems, from quality standards (internal activities) through to social accounting (multi-bottom line). There are a number of potential barriers or causes for such weaknesses. There may be resource issues in terms of time, finances and/or human resources. There may be skills shortages or managers may not feel it is appropriate for the size of organisation to attain such systems, structures and rational business practices, much like their small business counterparts from the private sector (Jennings & Beaver
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1997). Further research is therefore required that seeks to understand the development, growth and maturity of SMSEs, their challenges and aspirations. CONCLUSION In conclusion there appears to be a spectrum of social enterprise, where at one end of the continuum is the need or social driven organisation and at the other the more enterprise driven organisation. The social led business tends to focus on an informal, organic organisational system, utilising a loose business framework purely as a means to meeting the social/environment need. The enterprise led focuses on a structured business organisational system, embracing business logic and businesslike methods and discourse to meet the social/environment/business need. The sector is challenged by competition and a performance driven environment. The barriers many face are financial resources, capability and skills needs (especially management skills, particularly people who have the skills to manage the social return on investment), leadership of the management/board of trustees and the drive they have for the organisation, market sector needs, communication and presentation skills, resources and marketing knowledge. Just how far business analysis tools can aid these challenges is interesting and something that requires further research. Balance (similar scores recorded across each of the issues within each organisations response to the questions) results indicate that most organisations were well balanced (+/19.7% mean average Balance between the highest and lowest results). This appeared to be the case whether social enterprises were at a maturity level of say, stage 2 or 3, or whether they were at levels 4 or 5. Therefore the majority of these SMSEs have balance tendencies across the range of activities. Now whether this is inevitable, appropriate, sought after or desirable is something that requires further research and cannot be evidenced at this stage of the research project. Further research is also required to look at the users experiences of business tools such as Balance. This work is beyond the scope of this paper but feedback is currently underway, where the initial response looks interesting. All in all, social enterprises are challenged to take up the business challenge and wear the enterprise hat and portray firstly, who and what they are (mission and marketing), and secondly, to demonstrate that they can do what they say they can (accountability and transparency). The dichotomy that spans the social to enterprise spectrum is a challenge that is being met, as seen in the Balance results. Just how far, or how more sophisticated and accountable social enterprises will become may be decided by market forces where finances and competition will dictate. REFERENCES
Brouthers, K.D., Andriessen, F. and Nicolaes, I. (1998) Driving Blind: Strategic decision making in small companies, Long Range Planning, 31:1, pp. 130138. Bull, M. and Compton, H. (2006) Business Practices in Social Enterprises, Social Enterprise Journal. 1:2, pp. 4260.
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Balance Carson, D. (1990) Some exploratory models for assessing small firms marketing performance (a qualitative approach), European Journal of Marketing, 24:11, pp. 851. Carson, D. and Cromie, S. (1989) Marketing planning in small enterprises: A model and some empirical evidence, Journal of Marketing Management, 5:1 pp. 3349. Carson, D. and Gilmore, A. (2000) Marketing at the interface: not what but how, Journal of Marketing Theory and Practice, 8:2, pp. 17. Coviello, N.E., Bodie, R.J. and Munro, H.J. (2000) An investigation of marketing practice by firm size, Journal of Business Venturing, 15:5/6, p. 523. Curran, J. and Blackburn, R.A. (2001) Researching the small enterprise, 1st Edition, Sage Publications. Dandridge, T.C. (1979) Small business needs its own organisational theory, Journal of Small Business Management, 17:2, pp. 5357. Deakins, D., Morrison, A., Galloway, L. (2002) Evolution, Financial Management and Learning in the Small Firm, Journal of Small Business and Enterprise Development, Vol. 9:1, pp. 716. Dees, J.G. and Anderson, B.B. (2003) For-Profit Social Ventures. In Social Entrepreneurship, Eds. M. L. Kourilsky and W.B. Walstad, Birmingham, UK: Senate Hall Academic Publishing. Figge, F., Hahn, T., Schaltegger, S. and Wagner, M. (2002) The Sustainability Balanced Scorecard linking sustainability management to business strategy, Business Strategy and the Environment, Vol. 11:5, pp. 269284. Garengo, P., Biazzo, S. and Umit S. Bititci. (2005) Performance measurement systems in SMEs: A review for a research agenda, International Journal of Management Reviews, Vol. 7:1, pp. 2547. Glaser, B.G. and Strauss, A. L. (1967) The Discovery of Grounded Theory, Chicago, IL: Aldine. Haugh, H. (2005) A Research agenda for Social Entrepreneurship, Social Enterprise Journal. Vol. 1:1, pp. 112. Hill, J. (2001) A multidimensional study of the key determinants of effective SME marketing activity: Part 1, International Journal of Entrepreneurial Behaviour and Research, Vol. 7:5, pp. 171204. Hines, F. (2005) Viable social enterprise an evaluation of business support to social enterprise, Social Enterprise Journal, Vol. 1:1, pp. 1328. Holloway, J. (1999) A Critical Research Agenda For Organisational Performance Measurement, First International Critical Management Studies Conference, Manchester, 1416 July (Draft). Jennings, P. and Beaver, G. (1997) The Performance and competitive advantage of small firms: A management perspective, International Small Business Journal, Vol. 15:2, pp. 6375. Kaplan, R.S. and Norton, D.P. (1996) The Balanced Scorecard Translating Strategy into Action, Boston, MA: Harvard Business School Press. Kolb. D.A. and Fry, R. (1975) Toward an applied theory of experiential learning, in C. Cooper (ed.) Theories of Group Process, London: John Wiley.
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Balance Morrison, A., Deakins, D. and Galloway, L. (2002) Financial Management in the SME: Using the Balanced Scorecard to Develop a Learning Pathway, PBS Working Paper 2002/04, University of Paisley. OECD (Organisation for Economic Co-operation and Development). (2003) The Non-profit Sector in a Changing Economy. Paton, R. (2003) Managing and Measuring Social Enterprises, London: Sage. Pestoff, V.A. (1998) Beyond the Market and State: Social Enterprises and Civil Democracy in a Welfare State, Aldershot: Ashgate. Policy Action Team Report 3. (2003) Business, www.renewal.net. SBS. (2005) Social Enterprise Survey Across the UK, www.dti.gov.uk/socialenterprise. Scase, R. and Goffee, R. (1980) The Real World of the Small Business Owner, London: Croom Helm. SEP (GB) Ltd. (2003) Social Enterprise Partnership (GB) Ltd Quality and Impact Project, Project Briefing Note, www.neweconomics.org. Smallbone, D., Evans, M., Ekanem, I. and Butters, S. (2001) Researching Social Enterprise Final Report to the Small Business Service Centre for Enterprise and Economic Development Research, London: Middlesex University. Social Enterprise Partnership UK Ltd. (2003) SEP Project Overview, October, www.economicpartne rships.com. The Social Investment Task Force. (2000) Enterprising Communities: Wealth Beyond Welfare, http: //www.enterprising-communities.org.uk. Social Enterprise Unit (SEU) DTI. (2002) www.sbs.gov.uk. Somers, A B. (2005) Shaping the Balanced Scorecard for use in UK social enterprise, Social Enterprise Journal, Vol. 1:1, pp. 1-12. Speckbacher, G. (2003) The Economics of Performance Management in Nonprofit Organizations, Nonprofit Management and Leadership, Vol. 13:3 Spring, pp. 267281. Storey, D. (1994) Understanding the Small Business Sector, London: Routledge. Thomas, P. (2004) Performance Measurement, Reporting and Accountability: Recent Trends and Future Directions, The Saskatchewan Institute of Public Policy, Public Policy Paper Series (23). Wynarczyk, P., Watson, R., Storey, D., Short, H. and Keasey, K. (1993) Managerial Labour markets in SMEs, London: Routledge. *Contact details: Michael Bull, Centre for Enterprise, Manchester Metropolitan University Business School, Manchester Metropolitan University, Aytoun Street, Manchester M1 3GH, E-mail: m.bull@mmu.ac.uk, Tel: +44 (0) 61 247 6043
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Social enterprise - a solution for the voluntary sector?

Sinad McBrearty* is Deputy Chief Executive of Social Enterprise London (SEL). She studied English at Trinity College Dublin and Economics and Technology at the Open University. She is a qualified PRINCE2 project manager and holds a Chartered Institute of Marketing Diploma and an MSC in Social Policy and Planning from London School of Economics. This paper forms a part of her MSC dissertation.
INTRODUCTION This paper makes an initial attempt to identify the factors affecting the success and failure of voluntary organisations attempts to utilise social enterprise models to achieve financial and/or social objectives. There are two reasons to address this question. Firstly, there is little commentary on the topic evident in existing literature. Secondly, policy is moving in a direction that encourages the adoption of the concept of social enterprise as a mechanism for modernising the voluntary sector. As an advocate of the concept, the author of this article is concerned that social enterprise has been hijacked as part of a modernisation agenda and that ultimately the concept may become discredited if it is inappropriately utilised. While there are numerous examples of excellent social enterprises (DTI 2002) there is much less evidence of the limitations of the model. These considerations led the author to seek to understand why social enterprise models do and do not work in the voluntary sector. To tackle this question, this paper evaluates the findings from five separate consultancy projects with voluntary sector organisations. The consultancy work comprises feasibility assessments of new business ideas for each organisation and projects that were carried out by Beehive Promotions Ltd., a wholly owned subsidiary of Social Enterprise London (SEL). The research was undertaken within an action research framework. DEFINITIONS Kendall and Knapps (1995) characterisation of the voluntary and community sector (VCS) as a loose and baggy monster is perfectly apt. The organisations studied in this paper vary in nature. The smallest has an annual turnover of 140,000 and five full-time staff; the largest has a turnover of 3 million and 35 staff. Two organisations operate in health and social care, one in the green economy, one in community development and one in employment and training. The term social enterprise is a contested one; space does not permit review or contribution to that debate, but agreement about the nature of social enterprise is difficult to locate (Nicholls 2006). Jamess definition of commercialism is more helpful for the purposes of this
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paper. She defines it as, the degree of reliance on sales revenues rather than donations or government grants, the production of goods for sale that compete with goods produced by for-profit organisations, collaborations and partnerships with for-profits, and, ultimately, conversion into for-profits (James 1998: 217). Pearce offers a helpful distinction between voluntary organisations and social enterprises: those voluntary organisations which trade in order to raise funds remain essentially voluntary organisations, while those for whom engaging in trade is the way in which they achieve their social purpose may redefine themselves as social enterprises (Pearce 2003: 50). The five organisations in this study are, as Pearce describes, essentially voluntary organisations seeking to generate funds through trading activity.
SUCCESS AND FAILURE OF TRADING VENTURES There is limited UK literature explicitly highlighting factors affecting the success or failure of voluntary organisations attempts to utilise social enterprise models. However, there are some points of reference from the US which are highlighted below: Tuckman (1998) identifies the four factors that he believes lead to a successful move toward commercialisation. Firstly, the non-profit must identify a need for additional revenue and must believe that commercial activity will allow it to realise its goals. Secondly, the governing board must decide that the activity is consistent with, or at least does not interfere with, the organisations mission. Thirdly, the organisation must have products suitable for sale in the market. Finally, consumers must be willing to buy the products offered. Without meeting these conditions, Tuckman argues that sustained for-profit activity will not result. Research undertaken by consultants from the Bridgespan Group, a US non-profit consulting firm, concluded, Simply put, there is every reason to believe that the lions share of earnedincome ventures do not succeed at generating revenues beyond their costs (Foster & Bradach 2005: 96). The consultants identified four factors limiting the success of such ventures. Non-profits struggle to manage conflicting social and financial priorities. They lack business perspective and management skill. They are reliant on indirect customers since often the service users cannot afford to pay. Finally, philanthropic capital is poorly used. They argue that it supports fashionable trading activities without really understanding the complexity involved (Foster & Bradach 2005). Although their work is focused on the US, it is still relevant to developments in the UK. As noted by Kendall and Almond (1999): In operating alongside, and sometimes competing directly with, the private sector in a turbulent and competitive environment, the U.K. third sector does seem to resemble its U.S. cousin more than its continental neighbours. Frumkin (2002) makes a useful point to be considered alongside the Bridgespan findings, however. He suggests that non-profits can choose to offset the tax burden on trading profits by reallocating costs from the charitable parent to the trading arm. This creative accounting is not supposed to happen, but it is unclear how much such activity suppresses the apparent profit in trading arms.
ACTION RESEARCH METHODOLOGY Methodology overview The research focused specifically on VCS organisations seeking to utilise social enterprise models. These organisations were not working to become full social enterprises. Rather,
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they were seeking to utilise social enterprise models in a limited way within their existing not-for-profit structures. The research was conducted through an action research framework. Action research lends itself to collaborative inquiry with a client, and this strategy is consistent with SELs consultancy approach. For the purposes of this paper, Brymans definition (1989:178) of action research will be used: an approach to applied social research in which the action researcher and a client collaborate in the development of a diagnosis of and solution for a problem, whereby the ensuing findings will contribute to the stock of knowledge in a particular empirical domain. Action research operates in cycles, with iterative loops through the key activities, namely: plan, action, observation, reflection (Mcniff, Lomax & Whitehead 1996). A three-cycle approach was used for this project, and is described below. Implementation of research approach Three cycles of research were carried out. In the first cycle, consultancy projects were delivered to each of the five clients. In the second cycle, senior managers at those client organisations were interviewed, six to twelve months after the consultancy work was finished. In the third cycle, the author facilitated a focus group of colleagues to test the findings. Outlined below is a summary of how this research was carried out: First cycle of action research: In the first cycle of research, five consultancy projects were undertaken. Four were completed and one was abandoned by the client. Throughout each project, SEL maintained close communication that enabled clients to participate in the process, guiding and challenging the SEL team. Second cycle of action research: The intention of this cycle was to understand the success or failure, and the drivers for that success or failure, across the client projects after the SEL engagement concluded. Four interviews were conducted. Third cycle of action research: As a validation check, a peer group was asked to challenge the findings in light of their experience both as consultants in the field and as senior managers trying to affect the same commercialisation process within SEL. To maintain confidentiality, the five organisations studied are labelled as Organisations A, B, C, D and E. An overview of these organisations in terms of sector and background (size, scope and funders) can be found in Exhibit 1 (see over, page 70). FINDINGS Organisation level findings This section will start by presenting the critical success factors and critical failure factors affecting third sector organisations implementation of social enterprise models before commenting on the broader context. John Rockart (1979: 85) defined critical success factors in the late 1970s as, for any business, the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. Critical failure factors are used here to describe those factors that will ensure unsuccessful competitive performance for the organisation. Critical success factors: Perhaps the most obvious success factor evident from this research is that organisations wishing to trade must have a product or service that can be
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sold. Organisation A simply did not have a marketable service to sell. The absence of a product or service made social enterprise activity practically impossible to establish. A second success factor is the need to identify a market that has resources and inclination to pay for the service or product offered. As noted in Exhibit 1, Organisation As market is comprised of the local community. This community is one of the most deprived in the country and did not have financial resources to pay for services. In this case, it was impossible to see how that market could be commercially viable. For Organisation B, the local authority was their client. This worked well initially, but the local authority pulled out of the commercial arrangement, and, in the absence of other clients, the social enterprise model collapsed. The ability and desire to change organisational culture is a third success factor. In the case of Organisations A and C, the desire was evident, but the capacity for change was unclear. Organisations B and D demonstrated both ability and desire to change. Organisation E demonstrated neither the capacity nor the desire. A fourth success factor is significant commitment from internal and external stakeholders. Organisation B was let down by its local authority funder and client. Organisation D continues to make progress, in no small part due to the ongoing support of its stakeholders, particularly the Board and senior management. The lack of commitment from internal stakeholders at Organisation E appeared to have a significant negative impact on the project. The fifth, and final, success factor identified through this work is the need for organisations to have the requisite management skills to deal with the additional complexity involved in pursuing social enterprise models. Although Organisation D is pursuing its strategy with some success, it is hindered by the difficulty it has encountered in finding the right skill set to lead the social enterprise project. Up until the point that the local authority closed the contract, Organisation Bs success could be strongly attributed to the strength of the internal project team and their ability to handle complexity. The senior team at Organisation
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E seemed to genuinely struggle with the difficulty of drilling down through operational data and developing a detailed management information system. Critical failure factors: It is helpful to think through the hindrances and obstacles to clients objectives identified in this study. Three particular points emerge. Firstly, underestimating the development time required caused a significant problem to Organisation C. The same issue was evident at Organisation E where the senior managers could not understand why it would take so long to move the project forward and why they had to spend so much time developing internal management information systems. Even though a significant likely cost saving was identified, Organisation E was unable to make the time available to complete the work. Even at Organisation D, perhaps the most successful of the cases in this study, the time required to implement the social enterprise model is considerably more than was originally envisaged. The second failure factor is the bureaucratic burden carried by third sector organisations. This burden is made up of multiple revenue and reporting streams as well as the resource management approach traditionally used by the sector, where staff are recruited to posts funded by a single project. This often results in the organisation carrying a high overhead burden with little or no flexibility about how resources are deployed. This lack of flexibility can cripple any start-up aspirations, making it hard to cross-fertilise knowledge across the organisation and encouraging silo working. To varying degrees, this factor was relevant to the outcomes at three of the five cases. Finally, it appears from this work that organisations driven toward social enterprise for reactive reasons, often a fear of waning grant income, are less likely to succeed. The success of Organisation D thus far can be correlated to the strategic decision-making of the Board rather than simply a reactive response to a tough funding climate. Whilst there was an element of opportunism driving Organisation Bs decision to use a social enterprise model, their decision was relatively more strategic than those made at other organisations, and consequently less likely to fail. The Executive Director at Organisation A commented on this lack of strategy. He pointed out that the Board remained unwilling to consider an exit strategy for the organisation, although in his view they have no reason to be holding on. Peer reflections on success and failure factors: Two particular findings from the third cycle are helpful here. Firstly, the policy context indicates that government wants the sector to pick up public service delivery, but without any real acknowledgement or support for the difficulties this raises on the ground. Those difficulties are many and varied, not least those caused by low pay within the sector, bureaucracy associated with government contracts and grants and the difficulty inherent in running commercial activity with a volunteer workforce. Colleagues shared this authors surprise at government and opposition parties embrace of this agenda in the absence of an evidence base. Secondly, colleagues considered their jobs as senior managers in an organisation (SEL) that is itself trying to make a shift toward more commercial working practices. They commented that the move toward commerciality was a lot tougher in practice than it appeared on paper. This was a particularly apposite comment given that the senior management team at SEL has considerably more corporate experience than the average voluntary organisation. Even with this abundance of experience, the commercialisation proposition is a difficult one. Sector level findings Armed with findings from the action research cycles, the issues highlighted in the literature are discussed here.
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Success and failure factors: Returning to the work of Tuckman (1998) and Foster and Bradach (2005), there is certainly overlap between their findings in the US, and those articulated above. Findings from this study agree with Tuckmans on the importance of products and markets, the significance of strategic rather than reactive decision-making, and the importance of alignment between mission and trading activity. The findings from this research also agree with Foster and Bradachs view that there is a lack of business perspective and management skills in the sector. Although the organisations studied did not experience any significant disconnect between social and financial objectives, there was evidence that such tensions provide an underlying theme as not-for-profit organisations seek to commercialise. Unlike Foster and Bradach, this author found no evidence that philanthropic capital was being used to experiment with unprofitable ventures. The author also disagrees with Foster and Bradachs view that the sector is limited to trading with indirect customers. In four of the five organisations studied, genuine market opportunities existed where customers confirmed, through the market research phase, that they were prepared to pay for services. This suggests that genuine market opportunities do exist for not-for-profits. Impact of existing funding arrangements on future commerciality: Three observations are pertinent here. Firstly, the significance of local authorities to the not-for-profit sector was highlighted. In all five cases, one or more local authorities played a key role as either grantmaker or client for these organisations. This can be interpreted in at least two ways. Either the strategies, behaviours and values of local authorities have a fundamental impact on the survival of not-for-profit organisations, or those not-for-profit organisations that have close relationships with local authorities are more likely to experience pressure to develop social enterprise models. This area would benefit from further exploration. Secondly, where grant dependence is entrenched in an organisation, it requires significant time and support to orient that organisation toward a market approach, if such a change can be accomplished at all. Where such a change cannot be achieved, it seems likely that organisations will continue on a scaled-down basis, or will cease activity altogether. Of the two most highly grant-dependent organisations in the study, Organisation C has closed down and Organisation A, in the words of a local stakeholder, is dying. This observation echoes concerns of a number of commentators (Frumkin 2002; Anheier 2005; Salamon 2003). Thirdly, there is some evidence to suggest that organisations with contracting experience, however limited, may be better able to handle a shift to for-profit trading. Of the three organisations in this study with contract experience, two seemed the best equipped to deal with the management challenge at hand. The absence of contracting experience, however minimal, seems likely to be a limiting factor, if not an outright failure factor. Positive outcomes associated with trading: In terms of the positive outcomes of trading discussed in the literature (Anheier 2005), a greater resource base, diversified revenue and greater flexibility looks achievable for only one of the five organisations in this study. Serving disadvantaged communities: One of the key concerns raised by commentators is that once organisations begin to commercialise, they may no longer be able to afford to reach the most disadvantaged and marginalised communities (Frumkin 2002; Weisbrod 1998; Ferraro 2003). This point was relevant to four out of the five organisations reviewed in this paper. Of those four, two organisations (Organisations B and C) developed trading models that allowed them to use commercial ventures to achieve their mission and support marginalised clients. In the case of Organisation A, the only feasible commercial models
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would have been those that served more affluent communities outside the deprived neighbourhood in which the organisation was situated. It is unclear what the impact in Organisation E would have been, although there was a suggestion that increased surplus would have allowed the organisation to reach even more economically disadvantaged users. The fact remains though that of the four organisations where the issue of reach was significant, no organisation managed to successfully implement a social enterprise model. Organisation B succeeded until the local authority pulled the plug. Organisation E was unable to implement a social enterprise model. Organisation C has closed and Organisation A is greatly downscaled; both these organisations directly serve marginalised communities. In both cases, deprived communities are losing their services. This loss doesnt result from the move to more commercial activity; rather it arises because the only option left to those organisations is to commercialise. When they cant successfully do so, they grind to a halt. Values and ethos: On the question of whether or not utilisation of social enterprise models leads to change in the character and ethos of voluntary organisations, this author would argue that the answer is overwhelmingly yes. This research suggests that culture change is a critical success factor for organisations seeking to commercialise. In the third cycle peer-group meeting, SEL colleagues commented on exactly this shift within SEL itself: the organisation no longer gives stuff away and it is now internally understood that everything has a financial cost. This represents a shift away from the voluntary origins of the organisation. There may be lessons to be learnt from the housing sector here. There is limited research on how increased commerciality has affected housing associations, but a couple of interesting points are noted in existing literature. In a study of Residential Social Landlords (RSLs), Manzi and Smith Bowers (2004:72) quote a local authority officer with strong views on the RSLs: Housing associations are social enterprises but they put enterprise before delivery of social capital. In that sense there is not much difference between their management and that of a private landlord. David Pages (1993) report, Building for Communities, highlighted difficulties that arise from housing associations over-reliance on local authorities. His view was that associations would do a better job by returning to their roots and focusing on communities. The issue of values and ethos is difficult to pin down, but it does appear to be important, and commentary is evident in the literature (Salamon 2003; Anheier 2005; James 1998). Mission drift: Does commercialisation lead to conflict between organisational missions and financial objectives within VCS organisations? To a greater or lesser extent it does. Even though there are no overt ideological clashes between financial objectives and social missions in this sample, the author thinks there is evidence that the development of commercial ventures consumes immense amounts of senior management time. This time can certainly be rationalised as an investment in future growth, but it is important to note that in every case the potential profit to be generated from trading activities remains low relative to organisational turnover. In other words, the organisations need to contribute a significant amount of senior sweat to achieve a very limited financial return. If the alternative is the cessation of activities because no grant or contract funding can be found, it may be in the interest of the organisation to take the sweaty route to achieve its social mission. But, if the idea were to create excess surplus to invest in additional activity, the author would suggest that, as with small businesses, it would take seven to ten years to achieve any significant level of surplus. As such, it is important to ask whether there are alternative strategies for achieving the overall social goal. This observation is
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very much in line with Foster and Bradachs critique (2005) of the efficacy of non-profit trading ventures. Competition from the private sector: On the question of the fitness of third sector organisations to deal with private sector competitors, the author believes that only one of the five business models developed by these organisations would be able to withstand private sector competition. Interestingly, it is the model that is being developed from the outset to compete with for-profit organisations (Organisation D). In the other cases it is certainly possible that organisations could compete, but based on their relatively high cost bases, it could be argued that they would only succeed in a context where their social contribution is genuinely recognised and valued. Their cost base is higher because they are trying to go about their business in a socially responsible way, in these cases by investing considerably more than a private sector competitor in training marginalised people to deliver the service. Funding for voluntary organisations: The work undertaken here supports the view that funding regimes are becoming tighter. All five organisations expressed strong views that it is becoming harder and harder to survive as a not-for-profit entity. Many expressed the view that this is because both government and philanthropic funding is harder to secure. Reviewing the data on funding sources, the increase in the number of third sector organisations appears to be driving increased competition between those organisations (NCVO 2006). At the same time, both philanthropic funds and government appear to be moving toward an investment rather than grant-making approach (Evers & Laville 2004). The net effect of these trends is indeed an ever-more competitive funding regime. From a business perspective, one can argue that those organisations with the most talented fundraisers and marketers will be most likely to succeed in attracting scarce resources. It is of course questionable whether business logic applies to the sector in quite that way, but it does appear that the future viability of small voluntary organisations requires some urgent consideration.
CONCLUSION Voluntary sector transformation is well underway in the UK, as indeed it is in the US and Continental Europe. Politicians see social enterprise as something of a cure for the sector: a mechanism that allows organisations to generate their own sustainable funding so that the Treasury will ultimately give out less in grant aid. Commercialisation of the VCS is widely promoted by policymakers and financiers of the sector as a good thing. There is little evidence to support or challenge this assertion. There is virtually no information about the circumstances or context in which commercialisation strategies are likely to fail. This research suggests that commercialisation is not always a good thing. In reality, voluntary organisations struggle to build businesses while maintaining a focus on their core social mission. A number of specific factors affecting the success or failure of ventures have been identified, and this knowledge is likely to be useful to voluntary organisations considering such strategies. More broadly, some policy implications arise from this work. These are outlined below.
POLICY IMPLICATIONS These suggestions are tentative given the limitations of this research; while the sample of five organisations provides much useful learning, it is small to provide reliable findings for the broader field. Nonetheless, it does provide some directions for further investigation.
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Values and ethos: There is a need to think about the impact of changing culture and ethos across the VCS. This paper argues that commercialising trends absolutely affect the values and ethos of voluntary organisations. As policies encourage more and more commercialisation, those values seem vulnerable. Where those values are considered important to society at large, strategies should be devised for protecting that ethos. Voluntary organisations often operate in areas where markets fail (Weisbrod 1975). If those organisations are encouraged to become more like private sector operators, it is difficult to avoid the logical conclusion that such a transformation will lead to failure in service delivery. The markets in questions are not suddenly going to become profitable or commercially viable. Organisations that need to make a profit will not engage. Marginalised communities: This research hints that marginalised communities may be more likely than middle-class communities to lose services currently delivered by voluntary organisations. This arises in situations where voluntary organisations try to commercialise but where there simply is no market for their services. Marginalised communities are less likely to be able to afford to pay a fee for services than better-off members of society. Their inability to pay a fee may mean that the voluntary organisation is not commercially viable which in turn makes the organisation less able to offer services under squeezed funding. As such, at a policy level, it seems likely that strategies and options need to be devised for either providing ongoing grant support to organisations serving marginalised communities or for managing the impact of reduced or closed services in these neighbourhoods. Even if the assumption is that self-help models will pick up the slack, a minimum of seed funding will be required to support such initiatives.
FINAL THOUGHT There are a lot of issues arising from this research, many of which are not particularly positive. Considering the social enterprise lineage to Schumpeter, it is difficult not to dwell on what Robert Heilbroner terms the Schumpeterian contradiction (1999:302), namely, that capitalism may be an economic success, but it is not a sociological success. This may hold true to some extent in the context of voluntary organisations and trading activity. Certainly viewing social enterprise as a white knight for the VCS leaves the door wide open to such assertions. If, however, social enterprise can be wrestled free from its celebrity status as panacea, it may actually prove that economic success can be combined with sociological success. Just not in every case.
REFERENCES
Anheier, H. (2002) The third sector in Europe: Five theses, Civil Society Working Paper 12, London: Centre for Civil Society, London School of Economics. Anheier, H. (2005) Nonprofit Organisations Theory, Management, Policy, Oxford: Routledge. Bryman, A. (1989) Research Methods and Organization Studies, London: Unwin Hyman. Cabinet Office (2006) Partnership model promises public service tailored to individual needs, http: //www.cabinetoffice.gov.uk/newsroom/news_releases/2006/060622_threesectors.asp, accessed on 1 August, 2006. Defourny, J. (2001) Introduction: From third sector to social enterprise in The Emergence of Social
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Social enterprise - a solution for the voluntary sector? Enterprise, Borzaga, C. and Defourny, J. (eds) London: Routledge. Department of Trade and Industry (DTI). (2002) Social Enterprise: A Strategy for Success, Social Enterprise Unit, London: DTI. Evers, A. and Laville, J-L. (2004) The Third Sector in Europe, Cheltenham: Edward Elgar. Ferraro, E. (2003) From Pavement to Piazza: Grassroots Social Work to Counteract the Globalization of Marginality, Social Policy & Administration, Vol. 37, No.2, pp.198217. Foster, W. and Bradach, J. (2005) Should Nonprofits seek profits? Harvard Business Review, Feb 2005, pp. 92100. Frumkin, P. (2002) On Being Nonprofit: A Conceptual and Policy Primer, London: Harvard University Press. Heilbroner, R. (1999) The Worldly Philosophers, The Lives, Times and Ideas of the Great Economic Thinkers, London: Penguin Books. James, E. (1998) Commercialism among nonprofits: Objectives, opportunities, and constraints, in To Profit or Not to Profit, Weisbrod, B. (ed.) Cambridge: Cambridge University Press. Kendall, J. (2003) The Voluntary Sector, London: Routledge. Kendall, J. and Almond, S. (1999) in Global Civil Society: Dimensions of the Nonprofit Sector, Salamon, L., Anheier, H., List, R., Toepler, S., Skolowski, S. and Associates, (eds) Baltimore: Johns Hopkins Centre for Civil Society Studies. Kendall, J. and Knapp, M. (1995) A loose and baggy monster: Boundaries, definitions and typologies in An Introduction to the Voluntary Sector, Davis Smith, J., Rochester, C. and Hedley, R. (eds) London: Routledge. Manzi, T. and Smith Bowers, B. (2004) So many managers, so little vision: Registered Social Landlords and consortium schemes in the UK European Journal of Housing Policy, Volume 4 (1), pp. 5775. McNiff, J. Lomax, P. and Whitehead, J. (1996) You and Your Action Research Project, London: Routledge. National Council of Voluntary Organisations. (2006) The UK Voluntary Sector Almanac 2006; The State of the Sector, London: NCVO. Nicholls, A. (2006) Playing the field: a new approach to the meaning of social entrepreneurship, Social Enterprise Journal, Vol. 2, Issue 1. Page, D. (1993) Building for Communities: A Study of New Housing Estates, York: Joseph Rowntree Foundation. Pearce, J. (2003) Social Enterprise in Anytown London: Calouste Gulbenkian Foundation. Rockart, J. (1979) Chief executives define their own data needs Harvard Business Review, Vol. 57 Issue 2, pp. 8193. Salamon, L. (2003) The Resilient Sector: The State of Nonprofit America, Washington DC: Brookings Institution Press.
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Social enterprise - a solution for the voluntary sector? Spear, R. (2001) United Kingdom: A wide range of social enterprises in The Emergence of Social Enterprise, Borzaga, C. and Defourny, J. (eds) London: Routledge. Tuckman, H. (1998) Competition, commercialisation, and the evolution of nonprofit organizational structures, in To Profit or Not to Profit, Weisbrod, B. (ed.) Cambridge: Cambridge University Press. Weisbrod, B. (1975) Toward a theory of the nonprofit sector, in Altruism, Morality and Economic Theory, Phelps, E. (ed.) New York: Russell Sage. Weisbrod, B. (1998) To Profit or Not to Profit, Cambridge: Cambridge University Press. *Contact details: Sinad McBrearty, Social Enterprise London, Third Floor, Downstream Building, 1 London Bridge, London SE1 9BG. Email: sinead@sel.org.uk Telephone: +44 (0)20 7022 1920.
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S E J
They have God on their side: The impact of public sector attitudes on the development of social enterprise
Tony Chapman* is Director of the Social Futures Institute, University of Teesside, Middlesbrough, UK. Dr. Chapman is currently developing a new research project on the relationship between organisational cultures in the third sector and levels of engagement with the delivery of public services. Deborah Forbes is a Lecturer in the School of Agriculture, Food and Rural Development, University of Newcastle, UK. She is currently researching employer supported volunteering in the northeast of England and is also engaged in the delivery of consultancy to third sector organisations on marketing. Judith Brown is Director of the Third Sector Development Unit, Social Futures Institute, University of Teesside, Middlesbrough, UK. She has over ten years experience working as a consultant, practitioner and researcher of the third sector. Judith is currently engaged in a new project on breaking down communication barriers between the public sector and third sector in Tees Valley.
INTRODUCTION Over the last few years, Britains Labour government has become increasingly committed to the development of the third sector in general and social enterprise in particular (Mulgan & Landry 1995; Leadbeater 1997; Dunn & Riley 2004; Morrin et al., 2004). A key attraction of supporting the sector, in government terms, arises from the assumption that social enterprises are often better placed to deliver services in some areas of activity than the private or public sectors. It is argued that social enterprises are well placed to help people in hard hit communities by providing services and jobs, as well as role models of successful community engagement (see Allan 2005; Office of the Third Sector 2006a, 2006b; HMTreasury/Cabinet Office 2006). In this sense, social enterprises have a central role to play in a number of government initiatives such as the National Strategy for Neighbourhood Renewal, Creating Sustainable Communities and the Local Enterprise Growth Initiative. Government also recognises that social enterprise may be an effective way of delivering health services. The Department of Health has now established its own Social Enterprise Unit to support organisations that wish to tender for such work (see Department of Health 2006). The research findings presented in this article support the view that social enterprises are value led and also market driven (Westall 2001). They also confirm the view that the potential of the sector to make a significant contribution is hampered to some extent by weaknesses in management and strategic planning (Paton 1992). Consequently, social enterprises cannot be expected to flourish without the support and trust of the public sector. We argue that lack of trust emanates from a deeply embedded discourse in the public sector, which is sympathetic to the social enterprise sectors willingness to affect change
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in communities facing multiple deprivation, but is yet mistrustful of the sectors ability to deliver services in a professional and businesslike way (Frumkin & Andre-Clarke 2000; Dart 2004a; Austin et al. 2006). We find that this mindset, which may be held by many public sector officers, especially at local authority level, puts barriers in the way of the successful development of the sector. RESEARCH CONTEXT AND METHODOLOGY This article reports on a study based in Tees Valley. Tees Valley is the southernmost subregion in northeast England. It is made up of five unitary authorities: Darlington, Hartlepool, Middlesbrough, Stockton-on-Tees, and Redcar and Cleveland. The sub-region has a population of 653,000, which represents about one quarter of the total population of the North East (TVJSU 2006). Like other areas in the North East, Tees Valley has suffered from a decline in its traditional industries over the last three decades. Statistics on economic and social well-being in Tees Valley demonstrate that this is one of the least prosperous subregions in the country: the area has 45 wards in the top ten per cent of wards nationally in the 2004 Index of Multiple Deprivation (TVJSU 2006, for a detailed account of Tees Valleys social and economic characteristics, see Chapman et al. 2006b). This article draws on previously unpublished data drawn from a research project that aimed, firstly, to assess the size, shape and scope of the social enterprise sector for Tees Valley Partnership (Chapman et al. 2004). The second element of the study involved in-depth qualitative interviews with 18 key stakeholders across Tees Valley and explored potential barriers to the development of the sector. Interviews were carried out with local authority economic regeneration officers and lead local strategic partnership managers across the five borough councils, together with key players at regional and sub-regional level with broad responsibilities for economic and social development. The initial purpose of this research was to inform the generation of a draft policy for social enterprise development in Tees Valley. In this article, we report in more depth on the findings from the qualitative research. Each two hour interview explored: (1) perceived differences in the culture of the social enterprise sector compared with private business and the public sector; (2) representation of the sector in key fora in the sub-region; (3) the potential for developing entrepreneurship and foresight in the sector; and (4) opinions on the level of support required for capacity building. Prior to the interview a copy of the interview schedule and key findings from the mapping exercise were sent to each interviewee to allow them to prepare for the interview and to collect any relevant information. Due to the political sensitivities surrounding the topic of discussion, it was decided that interviews should not be tape-recorded. Instead, handwritten notes were taken and respondents were reassured that all attributable interview material would be kept in confidence. The data were analysed using data reduction methods (Strauss 1987) to enable comparisons to be made, while preserving the uniqueness of the views and experiences of each participant. A cross-case analysis was also carried out (Miles & Huberman 1994). CHARACTERISTICS OF THE SOCIAL ENTERPRISE SECTOR IN TEES VALLEY According to the North East Social Enterprise Partnership (NESEP 2003), there is a long history of social enterprise activity in the North East. Our mapping exercise of Tees Valley (see Chapman et al. 2004) demonstrated that over 60 per cent of social enterprises had been in existence for more than five years, almost a half of which had been operating for more than 20 years. Social enterprises in the area varied in size. In employment terms, the number of staff ranged from only one person to more than 500, but the majority employed
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between 5-15 full and part-time staff. Most full-time posts were temporary due to the sectors heavy dependence on short-term funding. There is a heavy reliance on volunteers; indeed, one organisation had 800 volunteers, but the majority relied on a core group of supporters to help manage the day-to-day delivery of services. In Tees Valley, as elsewhere, social enterprises were typically established in response to discrete community needs and are driven primarily by social aims. More than half of the organisations had been established to meet needs that were not tackled by mainstream services or other parts of the third sector. Examples include: providing employment; palliative or respite care; training, skills and confidence building; localised accommodation needs; advocacy; and advice, information and guidance. Often, social enterprises dealt with a range of issues which were focused on the regeneration of the area within which they operated. In some cases this involved the provision of a focal point for community activity. Most social enterprises remained firmly committed to the activities which they had initially been established to provide. However, there was also evidence of diversification of activities, and in some cases the geographic spread of their operation had widened. Half of the social enterprises operated within the boundaries of a single local authority area (a third of these worked in a closely defined locality, such as a housing estate). Trading was the principal source of income for half of the social enterprises studied. The remainder were heavily reliant on grants to sustain core operations. Funding was accessed from many sources, including public monies from the Regional Development Agency, local authorities, European Social Fund (ESF), European Regional Development Fund (ERDF) and government funded agencies such as Primary Care Trusts (PCT) and Learning and Skills Councils (LSC). Many organisations were supported by public donations together with sponsorships from charities and businesses. Grants from charitable foundations (the Northern Rock Foundation, Millfield House, Esmee Fairbairn, amongst others) represented important sources of income. Fundraising and the management and monitoring of funds were key work activities within the social enterprises and were costly in terms of staff resources (for a more detailed account of patterns of third sector funding in the North East, see Chapman et al. 2006a). Funding was used to employ staff, purchase capital equipment and property and also to enable the development of new services. Levels of dependence on such funding varied across the sector with 17 per cent of social enterprises stating that such funds were essential for their survival. At the other end of the spectrum, many of the larger and longer established social enterprises (27 per cent of the sample) reported that the withdrawal of such sources of financial support would not have long-lasting impact on their activity. The majority of social enterprises were ill-prepared in terms of future planning. More than half of the organisations studied stated that a key objective was to ensure long-term sustainability and growth, yet 32 per cent of organisations reported that no formal strategic planning process was currently in place. Limited attention to strategic planning cannot, however, be explained wholly by the lack of business or management experience. Indeed, 78 per cent of social enterprises employed staff with senior managerial experience or experience of running a small business. Where support was sought for business planning, 35 per cent gained this from Business Link Tees Valley. However, for the most part, business support was gained informally through networking with similar organisations. This process was facilitated by events organised by umbrella organisations such as NESEP. Additionally, 73 per cent of organisations had informal relationships with other social enterprises in the immediate locality or with those offering similar services to their own. In many social enterprises, strategic planning was hampered by the existence of tension between management boards and operational managers (see also Abzug & Galaskiewicz
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2001; Brown & Iverson 2004). Almost 40 per cent of managers stated that they did not receive sufficient support from their board. Indeed, in many instances management committees and boards presented a barrier to planning, change and development, particularly where a more commercial approach was mooted by operational managers. This is because board members felt that such commercial activity detracted from the original aim of the organisation. As Foggin (2002) has shown, boards of Directors or management committees are often characterised by their well-meaning altruistic or ideological commitment to the social aims of the organisation, but often lack key skills, sustained time commitment and the business acumen to provide appropriate enterprise support. This problem may be endemic to the third sector where social values hold primacy over business values even if, paradoxically, business orientation is a key factor in achieving these social aims. As Moore (2000) has suggested, all organisations need strategies to remain purposeful and effective. They can also become more sustainable through the development of a competitive edge (see also, Porter 1996). It is not surprising, given the identified lack of governance and planning in social enterprises, that investment of time and resource in management training was limited and that the only area of regular support to managers was in fundraising (see also, Low 2006). Lack of investment in management training was compounded by high levels of turnover of key employees due to their relatively insecure employment status caused by short-term contracts. This research demonstrated that in spite of these problems, the sector was growing in Tees Valley, but the mapping exercise demonstrated that potential for further growth was constrained by lack of public sector support. PUBLIC SECTOR ENGAGEMENT WITH SOCIAL ENTERPRISE For some time now, central government departments have been developing strategies to increase the level of engagement between local authorities and the third sector (see: Office of the Third Sector 2006a, 2006b; HM Treasury/Cabinet Office 2006). At the time of this study, government policy was defined most clearly in the Treasurys Cross Cutting Review on the Voluntary Sector (2002) which addressed strategies to involve third sector organisations in the delivery of local services. Drawing upon the work of Billis and Harris (1996) the review argued that the voluntary sector might have inherent structural advantages over the public sector or private sector because they can respond more sensitively to states of disadvantage experienced by service users (see endnote 1). The Treasury concludes that voluntary and community organisations (VCOs) can deliver services better because of: 1. specialist knowledge, experience and/or skills (i.e. direct knowledge or experience of problems, i.e. drugs, caring, etc.); 2. particular ways of involving people in service delivery whether as users or self-help/ autonomous groups (i.e. working with friends and families as well as problematic individuals); 3. independence from existing and past structures/models of service (i.e. can be innovative, not bound by red tape); 4. access to the wider community without institutional baggage (i.e. not the council, etc.); 5. freedom and flexibility from institutional pressures (i.e. they are user centred not organisationally centred) (2002:1617). While the Treasury review pays only limited attention to social enterprise, the DTI, through the work of its Social Enterprise Unit (SEnU), has outlined specifically how government intends to achieve its aims by promoting a better understanding of social enterprises among local authorities and other parts of the public sector, so that they recognise the opportunities
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for delivering their objectives through social enterprises and open up opportunities for them (DTI 2003: 31, see also: DTI 2002, 2005). In parallel with these developments, The National Procurement Strategy for Local Government set out a three-year plan for 20042006 to increase the amount of work contracted out. Whilst this strategy does not focus solely on social enterprise, it highlights the needs of the sector. The question is how successful has central government been in transforming the way that local authority officers think about social enterprise? We asked public sector stakeholders to express opinions on the values, aspirations and organisational capabilities of social enterprises in Tees Valley. Most respondents found it difficult to muster a clear definition of the sector and were unaware of the strength and depth of sectoral activity in Tees Valley. It was also immediately apparent that attitudes were strongly affected by the respondents direct interaction with members of the social enterprise sector, rather than more measured evidence-based assessments of the sector as a whole. In Exhibit 1, we present two sets of answers from respondents on perceptions of the prevalent value systems in the sector and views on the business orientation of social enterprises. The first set suggests that public sector stakeholders have a broadly positive view on the value systems of social enterprises. It was widely recognised that social enterprises are driven by social values, that they aim to be inclusive by being closely involved in the communities within which they work, and that they want to make a positive difference to those communities. Supportive though these comments appear, some can be interpreted as barbed compliments. For example, when respondents commented that the leaders of social enterprises felt that they had God on their side or that they feel from the heart, a negative point was being made about their tendency to try to win arguments about gaining funding, representation on public bodies or other forms of support for their organisation on the grounds that they did good work. Many stakeholders expressed impatience with this tendency on the grounds that there was no real limit on the amount of good work which could be done; so many organisations attempted to make the same kinds of claims on public resources. Expressions of exasperation about such claims were not only with the leaders of social enterprises as such, so much as with leaders from other voluntary and community organisations in general.
The second column in Exhibit 1 lists a number of comments on the way in which the value systems of social enterprises are presumed to impact on their orientation to business practice. In broad terms, these data suggest that there is a common belief that social enterprises are not business oriented for three principal reasons: (1) that business activity is cushioned by public money; (2) that organisations are risk averse; and (3) that they are
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amateurish or playing at business. We will now deal with each of these assertions in turn. Key stakeholders generally assume that social enterprises cannot be fully businesslike because their activity is in some sense cushioned by the kind of funding arrangements they operate within. While it was recognised that short-term funding from grants or contracts could be disadvantageous in planning terms, the general feeling was that core funding support weakened entrepreneurial zeal. In making such claims, many respondents sought to make comparisons with small and medium-sized business enterprises (SMEs). SMEs, it was felt, had to operate in an open and competitive market where there was no real scope for the luxury of gaining public funding support. The presumed consequence of this was an increased incentive to plan for and to meet market needs head on in a professional and businesslike way. While we did not challenge respondents on this issue, it may be the case that such an interpretation of imbalanced financial support for business is mistaken especially in the Tees Valley sub-region where business benefits directly and indirectly from substantial government investment in economic regeneration. The perception of poor business planning, strategy and acumen in social enterprise is, of course, supported to some extent by the findings already presented in this article. However, the interviews suggested more than this: that social enterprises could not fully engage in businesslike behaviour because they were value oriented (see also, Dart 2004b). In other words, it was assumed that they had to be one or the other value led or market driven they could not be both. A second related assumption is that social enterprises are risk averse and lack a competitive edge. Respondents did recognise that leaders of such organisations were enterprising in the sense that they competed tenaciously for public funds and that they had highly developed political skills that enabled them to be innovative in meeting the objectives of a range of funding streams. In this sense a degree of professionalism was recognised; as one respondent observed, the sector is professional just in a different way. When discussing formal business contracts, by contrast, respondents marshalled examples to argue that the quality of tenders were generally poor compared with the private sector and many could recite examples of social enterprises which they felt had failed to deliver fully. The third direct and/or implicit criticism of social enterprise is that their leaders are, in some sense, hobbyists or amateurs. This view arises, we feel, from an assumption that social objectives are regarded as being of lesser value than economic objectives in any organisation which seeks to undertake activity on behalf of public sector organisations. It may be the case that public sector stakeholders arrive at such a position because their own organisations make a strong ownership claim over big picture social issues and doubt the legitimacy of other organisations making similar claims. The fact that many third sector organisations deal with discrete issues may reinforce such a view of amateurism or hobbyism. This is because their clearly focused work in particular areas of need may appear to limit their ability or willingness to take a broader view as required in the public sector. Public sector stakeholders were well aware of government pressure to engage more closely with the third sector in general and social enterprise in particular in the delivery of public services. The question we wished to raise with them was how they felt they could best address the presumed shortcomings of social enterprises in order to increase the volume of work they passed on to them? Public sector stakeholders strongly emphasised the importance of providing business support, through training, to encourage the development of a more businesslike orientation. They felt that particular attention should be applied to skills development for meeting contractual obligations, finance, legal issues, personnel and employment policy, business confidence building, risk taking and marketing. It is a moot point, of course, to ask whether the public sector was yet in a position (in both political
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and practical terms) to provide the kind of support the social enterprise sector required. We did not explore this directly in the present study. Evidence from a related study on skills development suggested that both private sector and third sector organisations were sceptical about the willingness and capacity of the public sector to provide support. That said, it was equally evident that private and third sector organisations often failed to fully invest time and resource in their own skill needs, particularly so at management level (Chapman et al. 2006b). The emphasis on training needs was underscored by a range of comments on the current situation in the sector. Stakeholders argued, for example, that leaders of social enterprises think they dont need it. In one case it was argued that they think its enough just to be passionate so they dont have to do training. In another it was claimed that management boards need training on taking risks in order to wean organisations from grant funding. Furthermore, stakeholders were sceptical of the ability of social enterprises to overcome barriers to training, as the following comments suggest: they dont know where to look for help: time, funding, culture, business planning, they dont think they need it, [it is because they have] a lack of capacity [and] a fear of accessing face-to-face support. Stakeholders recognised that social enterprises are financed from a variety of sources and were clearly aware that changes in government policy on procurement and projected reduction in European funding would have significant impacts on the sector (Community Foundation 2004). However, rather than focusing on how to encourage social enterprises to move from grant funding to contract funding, they tended to concentrate attention on what they perceived as the intractable problems caused by an endemic organisational bias against business practice. As one stakeholder argued, contracts are transparent with clear expectations; this is dangerous as the sector doesnt understand issues like evaluation and monitoring. They fail to plan or have exit strategies. Weakness in strategic planning was recognised by most respondents. Its prevalence was explained by one respondent stating that funding regimes restrict innovation and foresight whilst others pointed to a lack of understanding in relation to planning on behalf of the social enterprise. It has already been shown that most social enterprises do not approach conventional business support services for assistance but draw on other sources of support. Stakeholders were aware of this and attempted to explain the situation by emphasising differences in the value systems of social enterprises in contrast with SMEs. In one case, it was argued that social enterprises dont trust those support organisations, [they] feel Business Link advisors have a lack of knowledge of their sector. Another stated that staff and Boards can be resistant to people imparting their knowledge on them, [they] feel it is not relevant. Interestingly, many respondents recognised that such attitudes were justified to some extent, as one respondent stated, the advisors need to learn the language and ethics of social enterprises. Others stated that social enterprises were more likely to look to agencies that better understood their value systems. As one respondent commented, other organisations, such as the Council for Voluntary Services and the Rural Community Council are seen as [their] trainers, therefore its hard for people to go to Business Link. Its about who you know and informal networks. Public sector stakeholders were suspicious of the advantages created by increasing levels of representation of the social enterprise sector in, for example, Local Strategic Partnerships. This is ironic in the sense that on one hand, stakeholders wished social enterprises to distance themselves to some extent from the voluntary and community sector and to become more businesslike. Whilst on the other, they made a strong claim that their needs were already dealt with through a close association with the voluntary sector. About a half of respondents were sceptical of the need for further representation. Indeed one felt that the sector was already over-represented and asked the question: What is their claim? Why
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are they different and therefore why should they be treated and represented differently? The remainder argued that social enterprises did need an independent representative body because their operational orientation towards trading goods or services was different from other parts of the third sector. DISCUSSION AND CONCLUSIONS Our evidence suggests that key stakeholders in the public sector assume that there is a value continuum between the voluntary and community sector, through the social enterprise sector to the small and medium enterprise (SME) sector. This point is illustrated in Exhibit 2. In one direction (running towards the conventional business sector) it is assumed that the closer an organisation is to SMEs, the greater the likelihood that its driving force is the profit motive. Running in the opposite direction, the assumption is that the closer an organisation is to the voluntary and community sector, the more likely that it will be driven by its social values.
While we have shown that this continuum model is a commonly accepted way of thinking about the relationship between the sectors, it is largely unhelpful in understanding how the sectors actually interrelate. In particular, we argue that the emphasis on two separate sets of value systems (one profit driven, one socially driven) may distract attention from the similarities which exist across organisational types. For example, owners of SMEs may not be driven solely by the profit motive. Instead they may be driven by a number of alternative motivators, such as the creative process associated with the product or service they offer, the desire to control their own working environment, a strong impetus not to work for somebody else, and so on. At the other end of the spectrum, many voluntary sector organisations are characterised by their vigorous approach to enterprise. Their managers may not benefit personally in financial terms from such activity, but they are, nevertheless, extremely tenacious when pursuing market opportunities. In short, it is argued here that value systems are important but they impact in unpredictable ways and are not the only factors which affect the way that organisations work. Setting aside the value position of organisations for a moment, it must be stated that all successful organisations need to develop a set of skills and knowledge to be able to
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perform functions efficiently. This being the case, we favour the adoption of a concentric circle model (as shown in Exhibit 3) which demonstrates that at the core of VCOs, social enterprises and SMEs there exists a set of key skills and support needs which facilitate the successful and sustainable running of their organisations. That said, it is also recognised that the value position of the leaders of social enterprises may lead them to look in different directions to gain the support they need to develop these skills. Some of this support may be gained from voluntary sector providers whilst other support may come from the conventional business support sector. Once this is achieved, then the sector will be in a position to realise fully its potential.
As shown in Exhibit 4, while the value systems of organisational leaders in the voluntary and community sector, social enterprise sector and SME sectors may differ markedly in certain respects, it is clear that all organisations need to manage people, finance, marketing and operations successfully if they are to be sustainable. A potential problem for the social enterprise sector is that the perceptions of key stakeholders in the public sector (who may fund training, support or procurement opportunities) may lead them to direct social enterprises away from some forms of support which would suit them best. However, this assertion requires further research. Our research on the social enterprise sector in Tees Valley clearly shows that there is potential for further growth. As such it offers many opportunities for the stimulation and development of a diverse and dynamic economy, especially in deprived areas which are currently static, moribund or in decline. There is much evidence to show that locally based social enterprises are close to the customer, responsive to changing needs and astute at identifying gaps in the market. However, providing assistance for the development of social enterprises will continue to be a challenge for support organisations as long as public sector stakeholders fail fully to understand the sectors needs and thereby reproduce a lack of trust in its capabilities. Any proposed interventions which threaten the underlying values of the organisations will be unlikely to succeed. Thus, providers who enter the sector to broker the changes will need to demonstrate empathy with its diverse value systems. We conclude that it is possible for social enterprises to achieve a balance between being market led and value driven. However, this is contingent upon the establishment of robust
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internal organisational structures and processes and recognition from external support organisations that despite some similarities with other third sector organisations and SMEs, social enterprises also have distinctive features and diverse objectives and therefore require different types of support. ENDNOTES (1) By states of disadvantage Billis and Harris (1996) recognise that people are affected by many different factors that disadvantage them including financial (no market power), personal (less well equipped to articulate preferences), societal (stigma) and community (breakdown of civil structures).
REFERENCES
Abzug, R. and Galaskiewicz, J. (2001) Non-profit boards: crucibles of expertise or symbols of local identities?, Nonprofit and Voluntary Sector Quarterly, 30 (1), pp. 5173. Allan, B. (2005) Social enterprise: through the eyes of the consumer, Social Enterprise Journal, 1: 1, pp. 112. Austin, J., Stevenson, H. and Wei-Skillem, J. (2006) Social and commercial entrepreneurship: same, different or both?, Entrepreneurship Theory and Practice, 30:1, pp.122. Billis, D. and Harris, M. (1996) Voluntary Agencies: Challenges of Organisation and Management,
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They have God on their side London: Macmillan. Brown, W.A. and Iverson, J.O. (2004) Exploring strategy and board structure in non-profit organisations, Nonprofit and Voluntary Sector Quarterly, 33:3, pp.377400. Chapman, T., Crow, R., Brown, J. and Ward, J. (2006a) Facing the future: voluntary and community sector responses to the changing funding environment, Middlesbrough: Social Futures Institute. Chapman, T., Brown, J., Crow, R. and Heggie, J. (2006b) Major skills issue in Tees Valley, 2005 2025, Middlesbrough: Social Futures Institute. Chapman, T., Fuller, T., Forbes, D. and Dodd, M. (2004) Towards a strategy for the social economy in Tees Valley, Middlesbrough: Social Futures Institute. Community Foundation. (2004) VCS Funding Post 2006, Newcastle: Community Foundation. Creating Sustainable Communities, see: http://www.communities.gov.uk Dart, R. (2004a) The legitimacy of social enterprise, Non-Profit Management and Leadership, 14: 4, pp. 41124. Dart, R. (2004b) Being businesslike in a non-profit organisation: A grounded and Inductive typology, Non profit and Voluntary Sector Quarterly, 33:2, pp. 290310. Department of Health. (2006) Our Health, Our Care, Our Say: a new direction for community services, London: HMSO. Department of Trade and Industry. (2002) Social Enterprise: A Strategy for Success, London: HMSO. Department of Trade and Industry. (2003) Public Procurement: A Toolkit for Social Enterprises, London, HMSO. Department of Trade and Industry. (2005) A Survey of Social Enterprises Across the UK, London: HMSO. Dunn, A. and Riley, C.A. (2004) Supporting the not-for-profit sector: the governments review of charitable and social enterprise, The Modern Law Review, 67:4, pp. 632657. Foggin Brown, J. (2002) Third Sector Care: Case Studies of the Organisation of Care Provision Through Co-operatives, Unpublished MPhil thesis, Northumbria University. Frumkin, P. and Andre-Clarke, A. (2000) When missions, markets, and politics collide: values and strategy in the nonprofit human services, Nonprofit and Voluntary Sector Quarterly, 29:1, pp.141163. HM Treasury. (2002) A Cross Cutting Review of the Role of the Voluntary and Community Sector in Service Delivery, London: HM Treasury. HM Treasury/Cabinet Office. (2006) The Future Role of the Third Sector in Social and Economic Regeneration: interim report, London: HMSO. Leadbeater, C. (1997) The Rise of the Social Entrepreneur, London: Demos. Local Enterprise Growth Initiative, see http://www.neighbourhood.gov.uk/publications
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They have God on their side Low, C. (2006) A framework for the governance of social enterprise, International Journal of Social Economics, 33:56, pp. 376385. Miles, M.M. and Hubermann, A.M. (1994) Qualitative Data Analysis: An Expanded Sourcebook, Newbury Park, California: Sage Publications. Moore, M.H. (2000) Managing for value: organizational strategy in for-profit, nonprofit, and governmental organisations, Nonprofit and Voluntary Sector Quarterly, 29, pp.183208. Morrin, M., Simmonds, D. and Somerville, W. (2004) Social enterprise: mainstreamed from the margins?, Local Economy, 19:1, pp. 6984. Mulgan, G. and Landry, L. (1995) The Other Invisible Hand: Remaking Charity for the 21st Century, London: Demos/Comedia. National Strategy for Neighbourhood Renewal, see: http://www.neighbourhood.gov.uk North East Social Enterprise Partnership. (2003) Building a Vibrant Social Enterprise Sector: the North East Social Enterprise Regional Action Plan, Morpeth: NESEP. Office of the Third Sector. (2006a) Partnership in Public Services: an action plan for third sector involvement, London: Cabinet Office. Office of the Third Sector. (2006b) Social Enterprise Action Plan: scaling new heights, London: Cabinet Office. Paton, R. and Cornforth, C. (1992) Whats different about managing in voluntary and non-profit organisations? in J. Batsleer, C. Cornforth and R. Paton (eds) Issues in Voluntary and Non-Profit Management, Wokingham: Addison-Wesley. Porter, M. (1996) What is a strategy? Harvard Business Review, November/ December. Strauss, A. (1987) Qualitative Analysis for Social Scientists, Cambridge: Cambridge University Press. Tees Valley Joint Strategy Unit (TVJSU). (2006) Economic Profile for Districts in the Tees Valley, Middlesbrough: TVJSU. Westall, P. (2001) Value Led, Market Driven, London: IPPR. *Contact details: Tony Chapman, is Director of the Social Futures Institute, University of Teesside, Middlesbrough, UK, email: t.chapman@tees.ac.uk, +44 (0)1642 342301.
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S E J
Making sense of social enterprise

Pam Seanor* has 20 years experience of working in co-operatives, developing community projects in local development trusts and regeneration projects and has also worked with a variety of community groups across Kirklees. This paper has been researched as part of her PhD on social enterprise networks, which is supported by the Huddersfield University School of Business. Julia Meaton is Head of the Centre for Enterprise, Ethics and the Environment research unit and Senior Lecturer at the Huddersfield University School of Business where she teaches social entrepreneurship.
INTRODUCTION This is a critical time for community organisations. Third sector groups with experience of delivering services within their communities are expected to change the ways in which they secure funding. For example, many third sector organisations have been caught as key funding streams (e.g. European Regional Development Fund and Single Regeneration Budget) come to an end and there is more competition for charitable grants. In this time of change, many academics working on social enterprise, practitioners and the government are advocating social enterprise as the way forward. Much of the social enterprise literature (e.g. Leadbeater 1997; Dees et al. 2001; Bornstein 2004) builds on the foundation that a social entrepreneur works differently from those in the third sector and uses a business acumen model to achieve social change. The tacit value of the individual entrepreneur, as with Dees (2001) forceful engine, is underscored as key to shaping and driving the sector. The allegory of the lone social entrepreneur appears to be the only image on offer for social enterprises to follow. Successful social enterprises are assumed to be heroic, innovative and risk taking. Dart (2005:1) highlights that where the concept of social enterprise focuses broadly on improved organisational processes and design for achieving pro-social goals little research has examined the effects of social entrepreneurial changes. This study seeks to uncover and understand how people are making sense of the effects of these changes in those organisations. Social enterprises cannot drive social change alone. They are dependent on government policies and practices and their development is also influenced by support agencies. This paper questions whether the social entrepreneurial model is the most appropriate one for all groups. The assumption that it is has implications for the development of these organisations as well as the potential of the social enterprise sector as a whole.
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This paper starts with the issues and concerns of participants in a social enterprise network in Bradford, West Yorkshire. This network includes those organisations identified as social enterprises as well as agencies offering them support. It takes an overview of organisational changes, looking beyond the individual social entrepreneurs and engaging each actor in the network to reflect upon the processes they have undergone in making sense of their decisionmaking and actions. The paper asks the following interrelated research questions: 1. What are the shared meanings and sense of shared identity that actors use to make sense of social enterprise? 2. How are these related to actions and projects within the social enterprise sector? 3. In responding and adapting to changes, is there network integrity? If so, is this creating a foundation for sustainable and flexible social enterprise development? APPROACHES AND MODELS FOR SOCIAL ENTERPRISE DEVELOPMENT Opposing views and approaches are presented under the one banner of social enterprise. One of those views suggests that social enterprise offers a radically different model for society (Pearce 2003; Drayton 2005). Those holding this view see social enterprise as a social movement. This process is linked to those in other social movements and is understood as being more than collective action, one which involves adopting a specific language and a common identity (Massarsky 2006). Borzaga and Solari find that from a social movement, social enterprises have grown into (even in the opinion of most policymakers) a socio-economic reality (2001: 340). Others view the sector as delivering social projects through traditional, market mechanisms (Michael 2006). These perspectives influence the goals that social enterprises pursue as well as the ways in which intermediary agencies frame help and support for the sector. Social enterprise is included in the governments agenda for change. Much of the literature advocates using a business approach for organisations that are part of the social economy and delivering services to their communities. Exhibit 1 (see overleaf) depicts a DTI view of social enterprises in the UK (DTI 2005). Organisations in the overlapping areas of the model indicate those that are identified as social enterprises within co-operatives, charities and voluntary community organisations (VCOs). According to the Governments Annual Small Business Survey 2005, there are at least 55,000 social enterprises in the UK (SBS 2005). However, this data provides only a partial view of the development of social enterprise and could indicate either a dynamic, growing sector or simply a confusing picture, which is reflected in debates within the literature on the confused identity of social enterprise (Borzaga & Solari 2001; Defourny 2001). Social enterprise is not a distinct sector and it is informative to examine the ways in which it is being perceived and mapped, especially where lines and boundaries are being drawn. This study explores the ways that existing organisations, especially from the voluntary community sector, are grappling with the concept of social enterprise. Government has long acknowledged that the voluntary community sector plays a vital role and brings added value to the services they deliver to disadvantaged communities (e.g. Deakin Commission Report 1996; Home Office 1998). Pearce (2003) identifies different levels of a social economy system, which radiate outward from community to social enterprises in relation to voluntary organisations. In the UK, community group and social enterprise ethos is rooted in their social capital and local-level involvement (Spear 2001). Though some are concerned that this strategic and rational emphasis upon a business-like approach and financial management may lead to social mission drift (Anheier 2000; Evers
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2001; Foster & Bradach 2005). Dart (2005:412) suggests that social enterprise is likely to continue its evolution away from forms that focus on broad frame-braking and innovation to an operational definition more narrowly focused on market-based solution and businesslike models because of the broader validity of promarket ideological notions in the wider social environment. This focus upon the commercialisation end of Dees et al. (2001) spectrum of social enterprise may have implications for the development of the sector if innovation and finding new ways of delivering services are lost from sight. Defourny (2001:2) describes the transformation of organisations into social enterprises as a process, a new [social] enterprise spirit which takes up and refashions older experiences. Voluntary groups may be transforming their organisations and adopting social enterprise models. However, to date, they have a way of doing business that has been working. They may be changing specific practices rather than embracing the whole concept of social enterprise in order to make serious organisational changes. In other words, they may not be innovative but may instead be copying good practice that has been seen to work elsewhere. They may also be averse to being held solely responsible for risks being proposed. Therefore, one question that arises is just how do organisations and intermediate support agencies make sense of these changes?
SENSE MAKING Without doubt heroic social entrepreneurs lead to inspirational changes. Support for these individuals in organisations may well be fitted to the existing model. However, it may not be a single person, one social entrepreneur solely controlling the direction in which the organisation is going. As others comment, negotiating deals between the social entrepreneur and various resource providers that create alignment between goals and incentives is
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considerably more complex and challenging in social than in commercial entrepreneurship (Austin et al. 2006:15). While not attempting to review the definition of social enterprise in this paper, it is noted that the terms social enterprise and social entrepreneur are often used interchangeably. A social enterprise is a group of people with varying aims. Dym and Hutson (2005) emphasise the need to move away from the individual leader model to one in which more diverse goals and aims are aligned through leadership within non-profit organisations. This paper considers that interaction within and between the social enterprises and the network of agencies offering support. Sense making begins in attempts to find clarity out of uncertainty and problems. It also begins with reflection and reconstruction of actions and events. The approach is constructionist in that it examines how actors make sense of social enterprise development. A first step in making sense of how people adapt to change is to ask them how they identify themselves and give meaning to what they are doing. This also uncovers what cues they chose not to act upon. The focus is on identity, reflection, and taking actions from cues in organisations (Weick 1979, 1995). The approach does not concentrate on any one individuals characteristics or motivations but rather the leadership qualities of networking, negotiation and enabling (Hosking & Morley 1991). Sense making has a great deal to offer to the exploration and understanding of how groups and support agencies are coming to terms with social enterprise at this crucial time in its development. It would also help to identify the next steps in their development. The next section outlines the background of participants interviewed from a Bradford social enterprise network. BACKGROUND TO THE CASE STUDY Exploratory semi-structured interviews were conducted between November 2005 and February 2006 with 11 key actors involved in social enterprise networks in Bradford, England. All are involved in either delivering services to the community or are from agencies tasked with supporting these groups. Each attends a network meeting and is in contact with a support agency. However, it should be noted that at the time the research took place, no single, coherent social enterprise network exists in Bradford. The community organisation interviews were part of a larger feasibility study looking at successes and barriers to social enterprise in the area. Anonymity was promised to everyone participating in the case study. Hence, no actor or organisation will be identified in this paper. In addition to carrying out interviews, data was also collected from follow-up conversations, documents and social enterprise events. Eight of the interviewees work in community organisations. Most are small neighbourhoodbased organisations offering services to disadvantaged communities. Areas of work include childcare, social care and re-engaging disaffected youth through training and community arts. All are companies limited by guarantee and a few are registered charities with trading arms. Some have been delivering services for over 20 years. All of the groups surveyed have benefited from either Neighbourhood Renewal, Single Regeneration Budget or European Regional Development Fund programmes. With these funding streams coming to an end, it is anticipated that these groups will consider selling their services to customers such as Bradford local authority. That is in addition to a successful Local Enterprise Growth Initiative (LEGI) bid and potential income from contracts with National Health Service (NHS) Primary Care Trusts. As part of their strategy to support social enterprise, Government mainstreamed infrastructure support comes in two different streams: the Changeup and Changemakers
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programmes which develop capacity within the voluntary community sector and are led by Voluntary Action Networks. At the time of writing, under the Regional Development Agencies, Business Link is the lead body responsible for business advice for social enterprise development. This stream supports social enterprise job creation and the success of individual organisations. Three support agencies working to help social enterprises were interviewed. The support that they offer includes strategic planning for the sector, business planning for groups, access to grants and advice on procurement. This work is couched within regional strategy documents such as the Regional Investment Plans for Social Enterprise Development in Yorkshire and the Humber and the Regional Economic Strategy. Yorkshire Forward, the Regional Development Agency for Yorkshire and the Humber, has recently awarded a further 5.7 million to support this work until the end of 2009. It is anticipated that activity and investment in the sector will potentially transform it for the next decade (from 2004-2014). SENSE MAKING IN A SOCIAL ENTERPRISE NETWORK Five key themes emerged from the interviews with social enterprise actors. The patterns described are constructed with attention to how the actors reflect upon and make sense of the problems they are experiencing in their organisations. Similar to the mapping of social enterprise outlined in the literature, an attempt is made to create a conceptual map of the local network, to draw upon differences in that network and identify any patterns within it. Theme 1: Identifying as a social entrepreneur The heroic leader was missing from all eight interviews with community organisations. There was no mention of a manager, local advisor, consultant or board member who stood out from the rest. Similar to Laws (2004) use of allegory in working with community service delivery organisations, there were no tales of the leader who like a superhero flew in and put the organisation back on the rails to run smoothly. It would be nave to suggest that organisations do not have key individuals with skills and networks which provide that organisation with access to information and resources. However, when asked if they would consider acting as a social entrepreneur, seven of the eight replied no. There may be many factors underlying their rejection of this identity. For example all participants referred to the problematic nature of going it alone. Unlike most of the existing literature, which makes little distinction between the social entrepreneur and the social enterprise, the responses from the community actors place more importance upon the differentiation between these two terms. The actors did not equate the quality of service offered to their users and the commitment to their organisations with being a social entrepreneur. The social entrepreneurial identity they saw as being a lone actor and not part of the team. Comments included that it would be too stressful to go it alone and that there was a minefield of issues to consider (insurance, training, employment rights). Several commented on the need to keep committed staff within the organisation, as they had experienced people leaving to set up as social entrepreneurs and felt that the organisation had suffered as well as the quality of services that those individuals were able to offer by going it alone. Theme 2: Organisational identity All of the community organisations studied were identified as social enterprises by support agencies. However, the organisations themselves do not necessarily self-identify as a social enterprise. One organisation said that support advisors describing their organisation as such reflects an important pattern, namely that government and social enterprise academics as
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well as practitioners may be defining the sector, but how do the groups identify themselves and give meaning to their actions? These groups were familiar with the label of social enterprise, yet nearly all continued to describe themselves as belonging to the voluntary community sector. They described the strength of their organisations as being transparent and genuine, designed to fit the needs of the neighbourhood, caring for the human aspect of the work they do and creating invincibility, being recognised as being needed to make a project work. The problem highlighted by Borzaga and Solari, namely that it is harder to bring [social enterprise] into focus because of the hybrid and poorly defined nature of the social enterprise form (2001: 333), may account for these organisations not having a shared social enterprise identity. All of the groups have business plans, possibly hastened by funding criteria, which do not appear as the dog-eared tools Dees (2001) anticipated but instead sit untouched on shelves and in cabinets. The community groups in the network described their struggle to secure grant funding and identified the need to move towards contracting with statutory service providers. However, they saw it as more important to their success to continue looking for grant funding and spending time looking for ongoing revenue funding and filling in applications. One support actor reflected: I think people understand social enterprise and dont need a promotional phase. Theyre just torn between being used to grants that are no longer there and realising that they may need to look at charging or contracting to pay for services they deliver. A greater tension than that created by gearing up to change income streams may be underlying those organisations not choosing to embrace social enterprise. Several saw social enterprise as no more than a fashionable move driven by government. These groups have experienced several government policies and programmes. One commented that the management committee and workers were against moving towards social enterprise as they were in it for the long haul and did not want to become outcome focussed. They were concerned that social enterprise would compromise the quality of the work they deliver. There is an interesting paradox here. Somehow the strengths and qualities of these organisations and the social capital recognised as the strength of the sector as a whole were seen as something that would be compromised if they became social enterprises. Theme 3: Common language This pattern explores the use of a common language to frame how people discuss and give meaning to issues. Social enterprise may be the lifeline of economic sustainability being thrown to organisations. Social enterprises are generally considered risk averse due to their management and governance arrangements (WYSEL 2005). This may well be a factor. Yet, groups may not want to risk jumping too soon. They may not be contract ready without appropriate systems in place, as some support workers suggested. The community organisation actors all spoke of survival, identifying this as their main concern. One person described themselves and their colleagues as working together for the past twenty years, in different partnerships with the board and manager; we have overseen change from an organisation working like a voluntary organisation with grants to the current state of grants and service level agreements. Risk aversion has been an accusation levelled at these groups. However, many described how they just need to hold on by the skin of their teeth while new programmes and potential contracts come into effect. One commented for organisations like ourselves, working with disadvantaged youth, the NSF money will come to an end a year before Childrens Fund money becomes available.
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This gap, identified by many, also supports their hesitancy to take contract work, and helps explain why they continue seeking grants and working as they have done. A support actor commented that at the moment, the move from local authority grants to contracts is all smoke and mirrors. They [the local authority] are saying you now have a contract, go away and deliver what youve always done. Motion or movement analogies were commonly used by support actors. They spoke of their work as keeping social enterprises going and moving them on. One saw herself as the person with the oil-cantrying to make it run better. I hope people see Ive got the oil-can and am hoping to go around making it easier for them. The kinetic metaphors (Morgan 1986) highlight the support agencies attempts at encouraging the social enterprises to go somewhere. Weick (1979:51) speaks of the use of metaphor inventing richer ways to understand and conduct business but warns of the overuse of a metaphor in an organisation as it may lead to overlooking new opportunities and novel solutions to problems. For example, the metaphor described above seems mechanical, rather than organic, and that could reflect the way in which support workers believe themselves to be part of a mechanistic production line in which they fulfil output requirements and change and mould voluntary organisations into the shape they feel best resembles social enterprise. Theme 4: Growth Austin et al. (2006) points to organisations either choosing or being pushed into growth. All but one in the case study was reducing in size or had chosen not to grow beyond their communities. One commented that they were not intending to grow and designed their services to fit the needs of their neighbourhood. These organisations may better reflect Pearces (2003) notion of community enterprise. Only one commented that it had grown more quickly than projected. They were taking on new staff, moving offices as well as in need of managing organisational changes such as policies and human resource management. They were quickly trying to play catch up at the same time as delivering a quality service. One support actor commented their intent to shift their clients to those groups who are selfidentifying leaders and to focus upon larger organisations already showing capacity and desire for growth. If others were to adopt this stance, support for the smaller, community-based social enterprises may be cut off. Market forces could begin to drive social enterprise development with the larger and more able to contract monopolising the sector. There may be a warning here; the social theory literature indicates that more does not necessarily mean better. One actor noted that they had run a very successful neighbourhood after-school care scheme until Sure Start began to offer the same provision. The actor commented that this could have been avoided if there had been better planning and surveying of what was already available in the area so as not to set up in competition. Some of the SRB (ed: Single Regeneration Budget) money started up new projects that were in competition rather than complementing services provided. Minkoff (2001) has found that those taking an evolutionary organisational development approach in social movement studies found optimal numbers were counter intuitive to population studies. Higher numbers led to higher competition and were not necessarily conducive to a unified social movement. Understanding the effects of competition and co-operation may lie at the heart of how the sector develops. That includes questioning whether the traditional business model that is often advocated for social enterprises to
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compete in the market fits with those organisations looking to promote a social movement with complementary services. There appears little on the ground to support smaller groups to co-operate and work together and tender for larger contracts. Theme 5: Networking Despite the fact that all the actors are based in the Bradford area, there appeared to be little communication between the social enterprises. Borrowing ideas from the social movement literature enables exploration of processes and patterns of interaction in the Bradford study: the sense of identity within the movement as well as its unity or fragmentation (Massarsky 2006; Snow & Trom 2001). One participant commented that an assumption was made that everyone in the voluntary community sector knows one another, when in fact they may not. Only three of the community organisations mentioned other community organisations as regular contacts. Most work in isolation and only a couple are working together on a common goal. All of the community groups are in contact with at least one support agency. However, none were in contact with the Changeup or Changemakers programmes. All list the support agencies as key in their networks rather than delivery partnerships. The overall pattern is that of receiving fragmented support from different agencies, even within the local authority where links with different service departments that offer a different quality of support. Two of the eight groups have had specialist support from West Yorkshire Social Enterprise Link (WYSElink), the specialist arm of Business Link offering tailored social enterprise support. A pattern emerged of community actors that were sceptical of the advice promoting the social enterprise model as reflected by one stating, we want to do things in the right way but in the past we have been let down or received lots of conflicting advice from support agencies. Rather than accessing this free advice and support, four of the organisations chose to pay for independent specialist consultants. The fragmented pattern found in community organisations also exists between support agencies. All cited their key contacts as local authority colleagues, Business Link or Yorkshire Forward. They also discussed divisions and a lack of communication between support agencies. It was acknowledged the social enterprise support agencies did not wish to duplicate those services offered by Voluntary Action networks. One support agency identified that the support infrastructure needs to respond to clients needs. Support needs to be linked to, but different from, voluntary support bodies and be clearly focussed on business development (SESC 2004: 41). However, not all of the actors were in frequent contact with these networks. Advisors chose who they work with to get things done, and as one stated, There are too many support advisors just doing a job, maybe 10% believes in what they are doing. For most interviewees, their work is more than just a job. They all identified with being part of a social enterprise network. However, those that believed they were part of a social movement said that they did not use that term in describing their work to others. One person pointed out that they thought that would scare off the people you need like Yorkshire Forward and Government Office. That type of fragmentation has the potential to adversely affect the development of social enterprise. IMPLICATIONS AND CONCLUSIONS Having won a successful LEGI bid and as a centre for specialist social enterprise support agencies, Bradford is experiencing social enterprise activity and growth. This paper has
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given one perspective on how organisations make sense and respond to these changes. Using the perspectives of community organisations as well as intermediary support agencies, it examined the relationship between the development of social enterprise and organisational identity, processes and problems. Interviews with actors involved in social enterprise networks in Bradford uncovered five themes and patterns underlying this growth and activity. It is a crucial time to uncover how actors make sense of social enterprise. This paper has been one starting point from which to explore the problems faced by social enterprise organisations, which range from changes in funding to the construction of shared meanings and identities. Identity Two crucial points of view were uncovered in relation to identity. First, the majority of those leading organisations did not identify a heroic leader nor would they choose to become social entrepreneurs. They saw social entrepreneurs as those who go it alone rather than being committed team members in their organisation. Second, the majority of these groups do not consider themselves as social enterprises. Many were extremely sceptical of the social enterprise model, especially as they reflected that previous advice and support received had been inappropriate for their projects. Most continued to consider themselves members of the voluntary community sector. However, they acknowledged the need to adopt some social enterprise practices. The wealth of definitions for social enterprise may offer these groups the flexibility to adopt practices that best fit their organisations and communities. In contrast the support agencies did identify these groups as social enterprises and focused on providing a business model that they felt delivers appropriate support tailored to fit social enterprise development. Some of the support actors are beginning to target organisations with a self-identified, social entrepreneurial leader. One definition seems not to fit all social enterprises, and the imagery of the heroic leader appears at odds with the views of many community actors. An alternative is needed. Lack of a common metaphor Returning to the motion metaphor used by support actors and the intention of moving groups towards social enterprise and business efficiency, one question that arises is Do voluntary community groups have any intention of going there? This is not to suggest that language and metaphors alone are important. There is much more to life and work than metaphor; actions show what is happening. Groups have a choice and are taking action. They describe surviving as the most important objective. Social enterprise is not necessarily a force with enough momentum to sweep them up. The question raised here is Would richer metaphors offer richer ways for people to work together? Staying small Support actors are seeking to target larger organisations which are more able to make an impact, but many groups are not aiming for exponential growth and are instead focusing on staying small in order to deliver services that meet local needs. By considering growth differently and looking outside the boundaries of one organisation, the impact of numerous smaller organisations would amount to large scale, sweeping change. If this pattern of development is what is wanted, new models need to be created and brokerage agents put in place to support these networks. Fragmentation In responding and adapting to changes, there appears to be little network unity and integrity. Groups are in contact with different support agencies and few are working together to achieve a common aim. There appears to be no coherent approach. Community organisations, as well as support agencies, are still fragmented. In this respect, social enterprise processes are not reflecting social movement processes.
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In conclusion, one respondent claimed that their participation in the research had been useful as no one else in the network is asking these questions and I would love to know what the others are saying. This relates to our final research question of whether a local network creates a foundation for sustainable and flexible social enterprise development. We found that this has yet to be debated on the ground. Until that happens, it is hard for organisations to make sense of what is happening either internally or within their social enterprise networks. REFERENCES
Anheier, H. (2000) Managing non-profit organisations: Towards a new approach, Civil Society Working Paper 1 available at www.lse.ac.uk. Austin, J., Stevenson, H. and Wei-Skillern, J. (2006) Social and Commercial Entrepreneurship: same, different or both?, Entrepreneurship Theory and Practice, 30 (1): pp.122. Bornstein, D. (2004) How to Change the World: Social Entrepreneurs and the Power of New Ideas, Oxford, Oxford University Press. Borzaga, C. and Solari, L. (2001) Management challenges for social enterprises in Borzaga, C. and Defourny, J. (eds) The Emergence of Social Enterprise, London, Routledge. Boschee, J. (2002) Entrepreneurial strategic planning and the organized abandonment process, available at www.socialent.org/resources. Dart, R. (2005) Unintended consequences of social entrepreneurship: the complex structure and effects of radical service delivery in a Canadian human services organization. Paper presented at International Social Entrepreneurship Research Conference, IESE, Barcelona. Dees, J., Emerson, J. and Economy, P. (2001) Enterprising Nonprofits: A Toolkit for Social Entrepreneurs, New York, John Wiley and Sons Inc. Defourny, J. (2001) Introduction: from third sector to social enterprise in Borzaga, C. and Defourny, J. (eds) The Emergence of Social Enterprise, London, Routledge. Drayton, B. (2005) Where the real power lies, Alliance 10 (1): pp. 2930. Department of Trade and Industry (DTI). (2005) www.dti.gov.uk (September). Dym, B. and Hutson, H. (2005) Leadership in Nonprofit Organizations, London, Sage. Evers, A. (2001) The significance of social capital in multiple goal and resource structure of social enterprises in Borzaga, C. and Defourny, J. (eds) The Emergence of Social Enterprise, London, Routledge. Foster, W. and Bradach, J. (2005) Should Nonprofits Seek Profits, Harvard Business Review, 83 (2): pp. 2100. Home Office. (1998) Compact Relations between Government and the Voluntary and Community Sector in England, London. Hosking, D.M. and Morley, I.E. (1991) Social Psychology of Organizing: people, processes and contexts, London, Harvester Wheatsheaf.
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Making sense of social enterprise Law, J. (2004) After Method: Mess in Social Science Research, London, Routledge. Leadbeater, C. (1997) The rise of the social entrepreneur, London, Demos. Massarsky, C. (2006) Coming of Age: Social Enterprise Reaches Its Tipping point in MosherWilliams, R .(ed), Research on Social Entrepreneurship: understanding and contributing to an emerging field, 6787, 1 (3) Indianapolis, ARNOVA. Michael, A. (2006) Securing social enterprises place in the economy, presentation given at VOICE 06 Conference for Social Enterprise. Minkoff, D. (2001) Macro-Organizational Analysis in Klandermans, B. and Staggenborg, S. (eds) Methods of Social Movement Research, Minneapolis, University of Minnesota Press. Morgan, G. (1986) Images of Organisation, London, Sage. Pearce, J. (2003) Social Enterprise in Anytown, London, Calouste Gulbenkian Foundation. Small Business Service (SBS). (2005) Annual Small Business Survey 2005. www.sbs.gov.uk SESC. (2004) Onwards and outwards; Investment plan for social enterprise in Yorkshire and the Humber, Social Enterprise Support Centre West Yorkshire, available at www.pennine.org.uk. Snow, D. and Trom, D. (2001) The Case Study and the Study of Social Movements in Klandermans, B. and Staggenborg, S. (eds), Methods of Social Movement Research, Minneapolis, University of Minnesota Press. Spear, R. (2001) United Kingdom: A wide range of social enterprises in Borzaga, C. and Defourny, J. (eds), The Emergence of Social Enterprise, London, Routledge. Weick, K.E. (1979) Social Psychology of Organizing, Reading, Massachusetts, Addison-Wesley Publishing Company. Weick, K. E. (1995) Sensemaking in Organizations, London, Sage. WYSEL. (2005) Winning new business for social enterprise. Paper presented at Bradford Talking Social Enterprise Conference. *Contact details: Pam Seanor, Centre for Enterprise Ethics and the Environment, Huddersfield University Business School, United Kingdom. Email: p.seanor@hud.ac.uk
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So you like to play guitar? Music-based social enterprise as a response to economic inactivity
Molly Scott Cato* is a Senior Lecturer in Social Economy at the Cardiff School of Management and has worked at the Welsh Institute for Research into Cooperatives (WIRC) since 2002; she is course director of the MBA in Social Entrepreneurship. Her PhD thesis was published as The Pit and the Pendulum: A Cooperative Future for Work in the Welsh Valleys by the University of Wales Press in 2004. Len Arthur is a Senior Lecturer at the Cardiff School of Management and Director of the Welsh Institute for Research into Cooperatives. He has studied Tower Colliery workers cooperative as an example of critical management in practice. Currently his research interest is the extent to which the social economy can be seen as a social movement. Russell Smith is a Senior Lecturer in Economics at the Cardiff School of Management. His specific research interests include the social economy and economic regeneration, capital anchoring and the relevance and applicability of a human firm framework for evaluating co-operative enterprises. Tom Keenoy is a professor at the Management Centre at the University of Leicester. His primary involvement in WIRC is through the ongoing research project on the worker-owned co-operative, Tower Colliery. He is particularly interested in the historical emergence of Tower and in how management is accomplished in the cooperative context.
INTRODUCTION Increasing political interest in social enterprise has highlighted its role in the inclusion of marginalised workers, especially the young, into the labour-market. The authors were interested in exploring the evidence base for this policy interest, and whether the nature of the governance and management structure of social enterprises influences their social and economic impacts. The paper reports the preliminary stages of the research project in which the authors explore the relationship between organisation structure and socio-economic impact in the Welsh music industry. The authors are conducting case-study research at three sites, and present here the rationale for the research project and preliminary findings. The paper opens with a discussion of the enhanced political role social enterprise has come to play and presents a critical analysis of its potential to achieve social and economic regeneration. This leads on to a presentation of the authors own conception of mutual economic activity, associative entrepreneurship. The authors feel the need for this concept because the existing definition of social enterprise has become too wide to have analytical value, and because the emphasis of the authors own research is on the importance of ownership and control. The paper then presents a short literature review introducing the music industry. The issues that it discusses include the continuing importance of the locality and the tension between
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creativity and financial return. The authors then reach their central research questions, asking whether the music industry needs a specific form of management, what form this might be, and how this may influence socio-economic outcomes. The paper concludes that there are indications that the particularly loose nature of the music industry, a result of its essentially creative nature, seems to flourish best within a matching loose governance structure, of which the co-operative is the primary example. THE ECONOMIC VALUE OF SOCIAL ENTERPRISE Recent political attention directed towards the social economy has focused on its role in addressing problems of social exclusion and labour-market inactivity. Social exclusion has been defined by the governments Social Economy Unit as a shorthand label for what can happen when individuals or areas suffer from a combination of linked problems such as unemployment, poor skills, low incomes, poor housing, high crime environments, bad health and family breakdown (Belfiore 2006). Without necessarily subscribing to the view that work is the only route to inclusion within society, it is possible to identify a nexus of issues that lead to a significant proportion of society facing an intractable and interactive set of problems: lack of work, loss of identity, low incomes, and the inability to interact as an equal with other members of society. It has become accepted that the social economy may offer an alternative route to mainstream employment that can start to untangle this nexus of disadvantage: Social enterprises take many forms, yet each one exemplifies values that are important to us. They contribute to tackling social exclusion and to bringing the economically inactive back into the world of work. They provide a real alternative for those not attracted to the profit-making sector they have a vital part to play in putting the citizen centre stage (WAG 2005, Ministerial Foreword). Defining the social economy is a complex business, and beyond the scope of this present paper, but for the purposes of their research the authors draw attention to two aspects, namely the gap-filling role and the importance of relations of reciprocity. To explore the gap-filling theory of the social economy the authors draw on Nyssens (1997) and her characterisation of the three poles of the economy: the public, characterised by institutional relations dominated by the state; the private, where competitive relationships are the norm and the focus is on capital accumulation and profit; and the community, where relationships are based on reciprocity and individual needs are the dominant motivator. Westlund extends the consideration of reciprocity, which he considers, can be described in terms of give-and-take in a relationship between actors who, to a certain extent are equals. Mutuality is often used as a synonym for reciprocity. Reciprocity of social relations creates mutuality of economic relations, but mutuality in economic transactions is no guarantee of reciprocity in social relations (Westlund 2003:1196-7). For many who are excluded from the conventional labour-market, part of the reason for their exclusion relates to the clash they experience with the type of relationships that characterise the labour market, namely those of competition and individuality. The authors have made this argument in the context of areas with a strong radical tradition such as the South Wales Valleys (Cato 2004), but it is also true of particular sub-cultures, especially in areas of lasting economic depression. The discovery of social enterprise, where responsibility and benefits are more widely shared and relationships are based on mutual impulses, can offer such people who feel alienated from the mainstream economy the chance to contribute economically and socially in a way in which they feel comfortable (Pearce 2003; Gordon 2004; Hirst & Bader 2001).
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The authors have labelled this sort of entrepreneurial activity that focuses on community rather than individual gain and which is carried out in supportive groups as associative entrepreneurship. Associative entrepreneurship channels energy in the economic sphere towards shared social and economic goals. Thus the objectives of a regeneration strategy can be much broader and more socially determined than the creation of elite profit-making entrepreneurs, growing their individual businesses and indirectly creating jobs for others. Money invested in regeneration can, in addition to conventional economic development objectives, also have the objective of community advancement, and those objectives would be set in collaboration or partnership with the community. The key to this process lies in ensuring that regeneration is not viewed simply as an exclusively economic process. This means that any regeneration initiative must formally incorporate a mix of social, economic and environmental objectives and must involve a measure of local accountability to the community. This would be a genuine commitment to the community empowerment to which many regeneration programmes pay lip service. The purpose of this research project is to apply these theoretical ideas about the role of the social economy in regeneration to one particular economic sector, the music industry, and in one specific economy, that of Wales. Redhead (1992) and Corrigan (1995) explore the role of popular music as a creative industry with the potential to develop local social economies. In the case of the Welsh creative industries there appears to be a policy gap between the commercial creative businesses who compete globally and are the focus of economic development support from the Welsh Assembly (WAG 2004), and the community arts projects such as those that formed the basis of a study on the regeneration potential of the arts funded by the Joseph Rowntree Foundation (Dwelly 2001). The social enterprise sector may hold the key to uniting these two by creating innovation and a sought-after product but sharing the proceeds within a community and thus achieving social and economic regeneration. THE ROLE OF THE CREATIVE INDUSTRIES IN URBAN REGENERATION With the publication of reports like Culture at the Heart of Regeneration (DCMS 2004), central government in the UK has clearly indicated its belief in the power of the creative industries (see endnote 1) to affect the urban renaissance. The apparent turn in Glasgows fortunes following its designation as European Capital of Culture in 1990 (Miles 2005) has strengthened the role of creative industries in strategies to deal with urban problems. The same rhetoric has been adopted by Welsh policy-makers: It is a fundamental underlying proposition of this strategy that culture can be a springboard to a more prosperous society (WAG 2004, Culture as a Springboard, Priority Action Plan 6: Culture and the Economy). In spite of the failure of Cardiffs bid to become the UKs capital of culture for 2008, the conviction remains that culture, in broadly defined terms, can act as a basis for lasting and broad-based urban regeneration, the idea that culture can be employed as a driver for urban economic growth has become part of the new orthodoxy by which cities seek to enhance their competitive position (Miles & Paddison 2005:833). However, the same commentators who identify this orthodoxy are sceptical of the outcomes of policies to achieve genuine economic benefits in the long run (Miles & Paddison 2005; Miles 2005; G. Evans 2005). Others consider the expectation that culture will solve social problems to be nothing more than a form of political displacement activity (Sellwood 2006:44), or that Local authorities have turned to cultural regeneration as a phoney substitute for real economic revival (Heartfield 2006:80). In addition to the direct economic contribution of the creative industries, such activity has also been directly linked to enriching and stabilising disadvantaged areas. Beneficial
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outcomes from an enhanced cultural sector include personal growth, social cohesion, environmental renewal, and health promotion (Smith 2000). Based on an analysis of peripheral economies in the East of England, Li, Gleave and Mitra (2006) found that a specialised creative industry base can increase an areas attractiveness to highly educated people who can then stimulate business creation in that area and ultimately raise wage levels. This is a more positive and successful strategy than focusing regeneration around what they term bland measure of infrastructure improvement centred round consumption, such as the development of retail parks. Recent theoretical work (M. Evans 2005) has suggested that it is useful to think in terms of a community economy that has within it a tension between the mainstream economy and the shadow economy. The latter can be said to include social enterprises. This work suggests that the nature of social interaction within the shadow economy may lend itself to a mutual or cooperative structure. One of the objectives of the research the authors are outlining here is to start an evaluation of the dynamics of this relationship and its potential impact on economic inactivity. Similarly the importance of social capital and social entrepreneurial networks in developing and sustaining activities both within and across sectors has also been proposed (McCall & Livesey 2005; Murdock 2005). In this respect, there is a direct link between local development agencies in the creative industries and local socio-economic regeneration. WHAT IS DIFFERENT ABOUT THE CREATIVE INDUSTRIES? Consideration of the production, management and consumption of leisure activities as an economic sector labelled cultural industries is a relatively recent phenomenon. The sector itself is difficult to define, Garnham (1987) making a bold attempt in describing them as social practices whose primary concern is to transmit meaning. In this way the industry of buying and selling culture is perhaps the archetypal industry of the post-modern economy. Cultural products are products that are consumed in an act of interpretation rather than being used in some practical way to solve some practical problem (Lawrence & Phillips 2002:431). In other words, the value of the product is its meaning, so that the cultural industries are creating and maintaining an organisation that can produce and sell meaning (Lawrence & Phillips 2002:431). What makes creative production distinct from a broader definition of cultural activity is the following: creative production that begins with people - not businesses per se (Gibson 2003:203). The corollary is that, unusually for capitalist production, the producer seeks out capital (say, a performer seeking a record company), rather than the capitalist seeking a labour force. The decision to engage in production is not primarily motivated by the desire for material return, so that the distinction between work and non-work is blurred. For most people becoming a musician, writer, artist or film-maker begins as a response to being an avid consumer of cultural products; ones emotive response to certain acts of consumption leads to the desire to engage directly in creative production (Gibson 2003: 203). This unique feature can be seen as both an opportunity and a threat. It can provide a route to encourage disaffected and economically inactive young people into the mainstream of society, and possibly into the economy too. However, it can also lead to clashes between the artistic motivation and the desire to use this as a means of generating financial benefit, as discussed in a later section. Rather more pragmatically, and with a distinctly economic focus, the Department of Culture, Media and Sport defines the creative industries as those industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property (DCMS
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2001) (see endnote 2). The DCMS sees this as a significant economic contributor to the UK economy, estimating revenues for 1997/8 at 4.6bn, 3.3bn from domestic sales, and estimating employment in the UK at 122,000 (DCMS 2001). Pratt (1997) pointed out that the UK creative industries sector employs some 4.5% of all employees in Britain which is equivalent to the workforce in the construction industry. Yet he, along with other researchers (Hirsh 2000; Kretschmer et al. 1999; Raffo et al. 2000), also note that little attention has been paid to the various ways in which the production of culture is organised and the variety of mechanisms which stimulate cultural enterprise. This is perhaps unsurprising as Lawrence and Phillips (2002:430) observe that the unique dynamics of cultural production remain largely uninvestigated. THE IMPORTANCE OF LOCAL PRODUCTION In an era in which much academic focus is on the end of geography (see e.g. Graham 1998; Williams 2001), the music industry continues to be an arena where the sense of place is of key importance: The impact of culture-led regeneration is clearly closely tied up to a localised sense of place (Miles & Paddison 2005:836). Examples such as the Creative Industries Quarter in Sheffield or Manchesters music scene in the 1980s highlight the way in which a particular sound or style of music is associated with a time and a space, leading to the discussion of the music industry under the rubric of creative clusters (www.creative clusters.com). Working with this understanding, the DTI clusters group has conceded that creative clusters are not the same as other clusters, and common strategies will not work. Economic policy-makers have identified the importance of creative clusters in Wales and have acknowledged the importance of co-operation rather than competition in supporting their development, for example in the case of the proposed cultural quarters of Cardiff and Newport (WAG 2004). It is argued that the music industry benefits from close personal relationships and networks that are locally embedded in place: The music industry is, most often, a highly localised cultural-product industry that draws on local creative milieux and cultural forms and has a tendency to agglomerate in urban areas (Power & Hallencreutz 2002:1833). It is an industry in which spatial structure appears to have a direct bearing and constitutive role in processes of creativity and innovation as well as the resulting value chain (Power & Hallencreutz 2002:1836). This locally dynamic creativity rarely translates into profit or even into widespread cultural influence. Whereas for the stimulation of most productive sectors one would be seeking financial capital and human capital in the traditional economic sense of high levels of educational qualification, when it comes to the cultural industries, subtler requirements become essential. Two of the less tangible forms of capital identified by Bourdieu social capital and symbolic capital (see endnote 3) are essential prerequisites of a flourishing cultural industry. The authors have already introduced the concept of associative entrepreneurship to mean a form of economic activity whose benefits are widely shared and which is based on a network of reciprocal relationships. One of the central research questions is whether such a structure has particular relevance in the case of the music industry because of the importance of clustering and close personal relationships to its success. Wittel (2001) has identified the existence of what he terms network sociality in which social relations are of key importance but are ephemeral and intense rather than extended and communitarian. He identifies a move from narrational to informational relationships. Power and Hallencreutz (2002) make a similar argument about the importance of dense networks in their study of the success of the music industry in Stockholm.
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FOR LOVE OR MONEY OR BOTH? For many theorists of, and more importantly, practitioners in the creative industries, there may be a clash between their art and their livelihood, since there is an in-built resistance to selling what is a personal and creative outpouring rather than a material product. Adorno stated the extreme form of this view in his comment that The entire practice of the culture industry transfers the profit motive naked onto cultural forms (1991:86). Negus (1992) describes this as a conflict between commerce and creativity or art and capitalism. In the Welsh context, Cultural Enterprise (2001) has identified that practitioners are often driven more by a passion for the product than for profit and growth, resulting in a skewed approach to business. These issues typify a central problem with deriving economic value from cultural products, namely that the originators of those products may value esteem and recognition more than financial rewards. It may also be necessary for those supporting creative artists to be careful in their use of terminology, since research has shown that they prefer to think of themselves as self-employed artists rather than entrepreneurs (Ringwald et al. 2006). It may be that the relationship between culture and creativity is one of the mutual values valuing culture for its intrinsic enrichment rather than commodification or commercial investment (Ringwald et al. 2006; see also Vaughan Jones 2001). In this case conventional business support might have a negative impact, while more mutual models of economic activity might be more successful in supporting the sector. Negus (2002) argues that the cultural industries more broadly defined (i.e. including such activities as advertising and marketing) are precisely placed in the space between production and consumption and play the role of extending that distance. It is the exploitation and maintenance of this space between production and consumption that allows the extraction of profit by those involved in distribution and the deprivation of the full value of their work to those who produce. One of the key advantages of a cooperative model of organisation in the creative industries or others is that they shrink this space, thus allowing producers to gain the full value of their product. This is important to the creative industries, as their products are based on the perception of their value which is created by means of signs (Lash & Urry 1994, see endnote 4), and which changes rapidly due to fashions and trends (Leadbetter 1994). A CREATIVE MANAGEMENT RESPONSE TO A CREATIVE SECTOR Commentators who have studied the cultural industries agree that they have a unique structure which requires a unique management response. What Bourdieu called the field of cultural production is hypothesised to rely more heavily on networks and relationships of trust than most other economic sectors. A crucial difference between cultural and other products is that cultural products have a purely symbolic value (Bourdieu 1984). As such, it is hard for producers, distributors and consumers to assess the worth of any given product. There is no independent or objective standard by which to measure the products. This makes assignment of the rewards from the sale of products problematic. In fact, to some extent the value of any given product may be as much the result of the work of cultural intermediaries in creating an interest for it amongst consumers as it is in the quality of the product itself (Negus 1992). Lawrence and Phillips (2002:431) argue for developing a theory of management that is sensitive to the dynamics of cultural production and the unique nature of cultural products and industries. Raffo et al. (2000:356) conclude that entrepreneurs in this sector learn best by being able to experiment with ideas, by doing and networking with others and by working with more experienced mentors in their sector. Other case-study research has shown that the nature of the organisation of creative industries is the key to maximizing their
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economic potential for local economic regeneration (Power & Hallencreutz 2002). In the context of Wales it has been found that traditional business support providers may not be equipped to meet the needs of SMEs in the creative industries (Ringwald et al. 2006). The key role of management in the creative industries is to operate as a filter between the huge quantity of output and the small amount that can be consumed in the market, albeit by a large number of consumers. This is illustrated in Exhibit 1 and was first developed as the filter-flow model by Hirsch (1972). It is described as follows on the Creative Clusters website: The creative industry ecology is one of whales and plankton: a handful of high-profile global players, stars and multinational companies, dependent upon vast shoals of project-based micro-enterprises. From the surface, only the bigger players are visible, but these big fish are wholly dependent on the small fry further along the supply chain.
The creative industries are quite different from other productive sectors in this respect. Producers often produce for their own satisfaction, and much of the output is both of dubious worth (when such taste distinctions can be made at all), or has unknown and indefinable market appeal. The role of the gatekeepers is thus crucial, and their power is that of market maker as well as judge and arbiter of taste. For many talented but inexperienced musicians, the gatekeeper is the controller of images and technology: the work of music cannot be divorced from the social networks of people who make and promote it (Gibson 2003:205). Exhibit 1 is, of course, only indicative in terms of the number of market players, except for the fact that at the stage of distribution, there are in fact only four global distribution companies in the music industry (see endnote 5). The concept of gatekeeper requires some exploration, particularly as it is relevant to the organisational structure of the firm producing and distributing musical outputs, which is the research focus. Negus (1992:45) suggests that while useful for comparing the work of personnel in different media environments, the concept of the gatekeeper is limited because it implies that cultural items merely arrive at a gate where they are either admitted or excluded. In fact the process is far more complex than this, and based on an extended network structure with interactions in many different directions between network members. However, the fact that expertise and knowledge is being individualised and personalised has important implications for the nature of organisation of the industry.
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The internet has challenged this rigid structure of production and distribution by enabling bands themselves to advertise their songs online and sell them direct from websites. The Arctic Monkeys has been the most successful band to exploit this method of distribution, although the energy they generated via their active website was eventually turned into record sales by a label which then gained much of the profit (the indie label Domino). The record labels are responding to this challenge to their power by using it to their advantage. New bands cannot hope to have their demo taken seriously unless they have their own website with a significant fan base. Since they are likely to still sign with a major label if given the opportunity, the distributors are reducing their risk and involvement but are likely to continue receiving the majority of the economic value. It was precisely a concern with this sort of loss of value that inspired the commercial decision by Cardiff-based development agency Promo, one of the enterprises the authors will be studying during the next phase of this research, to devote itself to the production and promotion of music by artists themselves. CONCLUSION: SOCIAL ENTERPRISE AND THE MUSIC INDUSTRY The question lying behind the research project reported here is whether there is something particular about the music industry which would make social enterprise its ideal form of economic organisation. Negus (1992) identifies a bantering male camaraderie as the key style of working in the music industry. He also suggested that collaboration and cooperation are central features of the organisation of the industry: The work of recording industry personnel has often been characterised as a collaborative or collective activity coordinated according to various conventions, shared goals, consensual values or commercial formulas. Aitchison and Evans (2003:137-8) draw attention to the importance of a community of an established social and artistic base to support the further development of a cultural sector, as lone flagship projects can only sink without trace. There are also specific aspects of the music industry itself that ally themselves naturally with mutual activity, expressed in the economic sphere as associative enterprise: The music business, or rather the actors appear to have a high capacity for self-organisation; that is, to create mechanism for the coordination and promotion of joint interests, to exchange information and to take collective action (Power & Hallencreutz 2002:1842). Earlier the authors introduced their concept of associative entrepreneurship, which is the term they use for a specific form of social enterprise that has ownership and control by the community locked in, generally through use of the co-operative form. Their initial conclusion from a consideration of the literature relating to the music industry is that it is ideally suited to social enterprise, and for the value of its creative talent to achieve its maximum in terms of socio-economic development that enterprise needs to be shared amongst those who generate it and within the wider community. The authors would suggest that a form of economic activity based in shared enterprise and sharing profits may have more resonance in marginal local economies and amongst the economically inactive than standard entrepreneurship models. A paper comparing the outcomes of music industry activity in Stockholm, Sweden and Kingston, Jamaica suggested a similar cultural block to success in Rastafarian anti-property attitudes which run counter to the idea of an intellectual property regime (Power & Hallencreutz 2002). In either case the answer might be a more creative approach to intellectual property, such as Lawrence Lessigs Creative Commons licence (see www.creativecommons.org.uk) and a more communitarian approach to the creation and distribution of the fruits of creative activity. This paper has presented the authors preliminary attempts at applying their knowledge on the social economy to the music industry literature. It is the first stage of a research project which has been funded by the Welsh Assembly. The authors are in the process of conducting case studies of three music businesses based in South Wales: one is a
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development agency based in co-operative principles, one is a loosely organised collective of practitioners and trainers and the third is a limited liability company. All three began by focusing on hip-hop music but have developed in different directions. They also have distinct forms of governance, which enable the authors to pursue their research interest concerning the relationship between governance, the music industry, and socio-economic outcomes. The authors hope to present these research findings to a conference of creative industries academics in the coming year. ACKNOWLEDGEMENTS This article was produced in connection with a research project funded under the New Ideas Fund of the Welsh Assembly Government Social Justice and Regeneration Unit. We are grateful to the WAG and especially to Helen Bushell for continuing support. Thanks also to Gareth Roberts of Creative Clusters for his insightful explanations of the music industry and to Marco Gil Cervantes of Promo-Cymru for his support and explanations - and the title! ENDNOTES (1) The authors are favouring the phrase creative industries (as defined thus by DCMS (2001): those industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property) over that of cultural industries which includes industries specifically dedicated to creating ephemeral value in products rather than the products themselves, the paradigmatic example being the advertising industry. (2) For the purposes of this research the authors are focusing on a sub-sector of the more broadly defined creative industries, namely music and the performing arts. Space limitations prevent giving further details here but a fuller version of this paper is available from the authors on request. (3) Both these terms derive originally from Bourdieu and have been widely theorised, generating mutually exclusive understandings. For the purposes of theorists of social enterprise, social capital can be understood as a basic trust within a community or society that facilitates other types of relationship, particularly economic relationships; symbolic capital is a type of cultural capital that derives from the value of distinction achieved through superior knowledge about a field of productive activity, for example a deep knowledge of the cutting-edge trends in hip-hop music. (4) As per Lash and Urry 1994, whose work derives from semiotic understandings of the sign as an indicator of meaning within a specific group. (5) Given the pace of mergers in the music industry it is hard to name these precisely, however a BBC news article from July 2004 gives the following percentages of market share: Universal, 25.9%; Sony-BMG, 25.2%; independents, 25%; EMI, 12%, Warner, 11.9%, leaving 75% of sales in the hands of four companies (http: //news.bbc.co.uk/1/hi/business/3908405.stm : downloaded 15 December 2006). REFERENCES
Adorno, T. W. (1991) The Culture Industry: Selected Essays on Mass Culture, ed. J. M. Bernstein, London, Routledge.
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So you like to play guitar? Music-based social enterprise as a response to economic inactivity Aitchison, C. and Evans, T. (2003) The cultural industries and a model of sustainable cultural regeneration: manufacturing pop in the Rhondda Valleys of South Wales, Managing Leisure, 8, pp.13344. Belfiore, E. (2006) The social impacts of the arts myth or reality? In Mirza, M. (ed.) Culture Vultures: Is UK Arts Policy Damaging the Arts? London, Policy Exchange, pp. 2037. Bourdieu, P. (1984) Distinction: A Social Critique of the Judgment of Taste, London, Routledge & Kegan Paul. Cato, M. S. (2004) The Pit and the Pendulum: A Cooperative Future for Work in the Welsh Valleys, Cardiff, University of Wales Press. Corrigan, P. (1995) What do kids get out of pop music and football? In Bramham, P. C., Critcher, C., and Tomlinson, A. (eds) Sociology of Leisure, London, E&FN Spon. Cultural Enterprise. (2001) The Cultural Industries in Wales: Setting the Economic Development Agenda, Cardiff, Cultural Enterprise. Department of Culture, Media and Sport (DCMS). (2001) Creative Industries Mapping Document, London, DCMS. Department of Culture, Media and Sport (DCMS). (2004) Culture at the Heart of Regeneration, London, DCMS. Dwelly, T. (2001) Creative Regeneration: Lessons from Ten Community Arts Projects, York, Joseph Rowntree Foundation. Evans, G. (2005) Measure for Measure: Evaluating the Evidence of Cultures Contribution to Regeneration, Urban Studies, 42, 5/6, pp. 95983. Evans, M. (2005) Mutualising Cash in Hand? Social Enterprise. Informal Economic Activity and Deprived Neighbourhoods. Working paper delivered at the Social Enterprise Research Conference, Co-operatives Research Unit, Open University. Garnham, N. (1987) Concepts of culture: public policy in the cultural industries, Cultural Studies, 1, pp. 16. Gibson, C. (2003) Cultures at work: why culture matters in research on the cultural industries, Social and Cultural Geography, 4/2, pp.201-15. Gordon, M. (2004) The potential role of social enterprise in addressing the problems of peripheral areas. Paper given at the Open University Social Enterprise Conference, July. Graham, S. (1998) The end of geography or the explosion of place? Conceptualizing space, place and information technology, Progress in Human Geography, 22/2, pp. 16585. Heartfield, J. (2006) A business solution for creativity, not a creativity solution for business. In Mirza, M. (ed.) Culture Vultures: Is UK Arts Policy Damaging the Arts? London, Policy Exchange, pp. 7192. Hirsch, P. M. (1972) Processing fads and fashions: An organization-set analysis of cultural industry systems, American Journal of Sociology, 77/4, pp. 639659.
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So you like to play guitar? Music-based social enterprise as a response to economic inactivity Hirsch, P. M. (2000) Cultural Industries Revisited, Organization Science, 11, 3, pp. 356-61. Hirst, P. and Bader, V. (2001) Associative Democracy: The Real Third Way, London, Frank Cass. Kretschmer, M., Klimis, G. M. and Choi, C. J. (1999) Increasing Returns and Social Contagion in Cultural Industries, British Journal of Management, 10/1, pp. 6182. Lash, S. and Urry, J. (1994) Economies of Signs and Space, London, Sage. Lawrence, T. B. and Phillips, N. (2002) Understanding Cultural Industries, Journal of Management Inquiry, 11, 4, pp. 43041. Leadbetter, C. (1994) Living on Thin Air: The New Economy, Harmondsworth, Penguin. Li, J., Gleave, W. and Mitra, J. (2006) Creative Industries, The Creative Economy and Entrepreneurship in the Periphery, paper presented to the 29th Annual ISBE Conference, Cardiff, 31 Oct. 2 Nov. McCall, B. and Livesey, R. (2005) Networking notworking? Dialogue on the praxis of developing social enterprise networks. Working paper delivered at the Social Enterprise Research Conference, Co-operatives Research Unit, Open University. Miles, M. (2005) Interruptions: Testing the Rhetoric of Culturally Led Urban Development, Urban Studies, 42, 5/6, pp. 88991. Miles, S. and Paddison, R. (2005) The Rise and Rise of Culture-Led Urban Regeneration, Urban Studies, 42, 5/6, pp. 83340. Murdock, A. (2005) Social Entrepreneurial Ventures and the Value of Social Networks. Working paper delivered at the Social Enterprise Research Conference, Co-operatives Research Unit, Open University. Negus, K. (1992) Producing Pop: Culture and Conflict in the Popular Music Industry, London, Edward Arnold. Negus, K. (2002) The work of cultural intermediaries and the enduring distance between production and consumption, Cultural Studies, 16/4, pp. 50115. Nyssens, M. (1997) Popular economy in the South, third sector in the North: Are they signs of a germinating economy of solidarity? Annals of Public and Cooperative Economics, 68/2, pp.171200. Pearce, J. (2003) Social Enterprise in Anytown, London, Calouste Gulbenkian Foundation. Power, D. and Hallencreutz, D. (2002) Profiting from creativity? The music industry in Stockholm, Sweden and Kingston, Jamaica, Environment and Planning A, 38/10, pp.183354. Pratt, A.C. (1997) The cultural industries production system: a case study of employment change in Britain, 1984-91, Environment and Planning Vol A: 29, 11, pp.1953-74. Raffo, C., OConnor, J., Lovatt, A. and Banks, M. (2000) Attitudes to Formal Business Training and Learning amongst entrepreneurs in the cultural industries: situated business learning through doing with others, British Journal of Education and Work, 13/2, pp. 21530.
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So you like to play guitar? Music-based social enterprise as a response to economic inactivity Redhead, S. (1992) The popular music industry. In Wynne, D. (ed.), The Culture Industry, Aldershot, Avebury. Ringwald, K., Harris, J. and Luo, L. (2006) The Doctor Who effect: the emergence of a creative industries cluster in South East Wales, paper presented to the 29th Annual ISBE Conference, Cardiff, 31 Oct. 2 Nov. Sellwood, S. (2006) Unreliable evidence. In Mirza, M. (ed.), Culture Vultures: Is UK Arts Policy Damaging the Arts? London, Policy Exchange, pp. 3852. Smith, C. (2000) Creative Britain, London, Faber. Vaughan Jones, Y. (2001) Creative Regions: A Positive Culture. The Welsh Economic Review, January. Welsh Assembly Government (WAG). (2004) Creative Success: A Strategy for the Creative Industries in Wales, Cardiff, WAG. Welsh Assembly Government (WAG). (2005) Social Enterprise Strategy for Wales, Cardiff, WAG. Westlund, H. (2003) Form or contents? On the concept of social economy, International Journal of Social Economics, 30/11, pp.1192206. Wikstrom, P. (2005) The energy of music: modelling the behaviour of a cultural industry in crisis, International Journal on Media Management, 7/12, pp. 6574. Williams, C. C. (2001) An evaluation of financial globalization under fund-manager capitalism: the case of the UK unit trust industry, 33/4, pp. 3607. Wittel, A. (2001) Towards a network sociality, Theory, Culture and Society, 18/6, pp. 5176. *Contact details: Molly Scott Cato, Wales Institute for Research into Co-operatives, Cardiff School of Management, UWIC, Colchester Avenue, Cardiff, CF23 9XR, Tel. +44 (0)1453 882662; email: mscott-cato@uwic.ac.uk
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S E J
Understanding social enterprise: A case study of the childcare sector in Scotland

Paul Hare* is Professor of Economics at Heriot-Watt University, Edinburgh. He mostly researches the transition economies of Eastern Europe. Paul has long experience of advising governments and international organisations on private sector business development. Declan Jones is Director of the Social Enterprise Institute at Heriot-Watt University, Edinburgh. The SEI provides research, consultancy, training, evaluation and policy services to social enterprise organisations, funders, government agencies and other stakeholders. Declan is a committed social entrepreneur, having established or helped to develop over 35 social enterprises and voluntary bodies. Gemma Blackledge is an Economics PhD student at Heriot-Watt University, with an MA in Development Economics from Sussex University. In 2005/6, Gemma worked as a researcher on the project reported in this paper.
INTRODUCTION The DTI defines a social enterprise as a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. (DTI 2002: 13). Such businesses, it argues, contribute to the economy and society by: raising productivity and competitiveness; creating socially inclusive wealth; enabling individuals and communities to foster local regeneration; demonstrating new ways to deliver public services; and fostering an inclusive society with an active citizenship.
Voluntary sector organisations are set up as charities and are principally funded through membership fees, donations, grants (both general and project-related) and occasional bequests. By contrast, social enterprises operate as businesses that sell a product; their net revenues provide the financial means to enable social objectives to be pursued. In many cases, a social enterprise might simply be the trading arm of an established charity, such as the organisations that sell products through catalogues and are linked to larger charities such as Oxfam. Social enterprises come in many shapes and sizes, just like more conventional, profitmotivated businesses. Also like the latter, they enter and leave the (social) market. Of those that survive, many reach a certain size and then cease to grow any further, while a few continue to grow and develop. However, we appear to lack detailed statistics on such birth
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Understanding social enterprise
and death rates for firms in the social enterprise sector. Improved statistics on the social enterprise sector would be very valuable both from the standpoint of supporting sectorrelated policies more effectively and from the more intellectual standpoint of understanding its function and behaviour better than we do currently. The study began with clarification and development of some of the ideas on social enterprise found in both the official and academic literature. We then carried out a study of social enterprise in the childcare sector in Scotland as a case study to help elucidate our thinking on social enterprise and to develop a practical model for analysing such firms. This analysis could be helpful for banks and other financial institutions that might be in a position to offer credit. Social enterprises are frequently disadvantaged when they seek credit, because banks do not understand the nature of the beast or regard them as inherently high risk. Either way, such organisations find it hard to secure enough funding on good terms. Therefore, one of the more practical aims of this study was to assist banks wishing to fund investments in the social enterprise sector. The rest of the paper is structured as follows: the next section reviews the concept of social enterprise. This is followed by a review of features of the childcare sector both generally and specifically in Scotland where our survey was carried out. The importance of the sector has been acknowledged in several recent official reports, most notably in a National Audit Office publication (see NAO 2004). The survey and major findings section reports on our own survey of childcare businesses and summarises our principal findings. The final section outlines conclusions and lessons of more interest and applicability to the childcare sub-sector itself and for social enterprise as a whole. THE CONCEPT OF SOCIAL ENTERPRISE The notion of the social economy is the latest in a long line of attempts to develop a universal term that describes socio-economic organisations and activities that exist in that sphere of human organisation and interaction between the purpose, norms, values, mission(s), rights, responsibilities and actions of the public and private sectors (Spear 2001) (parts of this section draw heavily on Jones & Keogh 2006). Previously proposed terms sought to differentiate these organisations and their activities from private and public ones. The diversity of social economy organisations is difficult to encapsulate in a single phrase. For some practitioners there is little merit in attempting to write an accurate definition. Academic investigation and rigour are seen as being largely irrelevant to the task of doing good work. The view often expressed by many social economy practitioners is that Trying to define a social enterprise can be like trying to define an elephant very difficult and not much point, because you know one when you see one (Social Enterprise London website, 2002, cited by Cabinet Office 2002b: 2; see also Cabinet Office 2002a). Exhibit 1 illustrates the complexity and diversity of organisations involved in the social economy. Social enterprise The problems of ambiguity and imprecision are similar in considering the term social enterprise. For many people, the organisational terms: social enterprise, community enterprise, social firm, ethical enterprise, and non-profit enterprise are readily interchangeable. Despite this, different definitions and interpretations continue to be developed and used. Pearce defines social enterprises as those which are: not-for-profit organisations;
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seek to meet social aims by engaging in economic and trading activities; have legal structures, which ensure that all assets and accumulated wealth are not in the ownership of individuals but are held in trust and for the benefit of those persons and/or the areas that are the intended beneficiaries of the enterprises social aims; have organisational structures in which full participation of members is encouraged on a co-operative basis with equal rights accorded to all members (Pearce 2003:32).
While the Birmingham Social Economy Consortium (2001:3) believes that: social enterprises try to make a profit, but they operate on a not-for-personal-profit basis, applying any surplus they create to furthering their social objectives. They put people first and, through their economic activities, seek to deliver employment opportunities and other social, environmental, or community benefit. Definitions appear to differ regarding the nature of the intent to make, maximise and distribute profit and the extent to which organisations are committed to active participatory forms of corporate governance. The next question then is, how does a social enterprise grow? Much of the academic literature on firm growth is devoted to a variety of so called stage models, usually identifying three to five stages and occasionally as many as ten. The best known of these models is probably that of Churchill and Lewis (1983). They distinguish five stages: (i) existence; (ii) survival; (iii) success (with sub-stages (a) success-disengagement, and (b) successgrowth); (iv) take-off; and (v) resource-maturity. This is not the place for an extensive review of such models, except to note that they commonly suffer from a lack of empirical testing and can also appear rather mechanistic. However, the model provides a useful starting point. For a social enterprise, the growth process is likely to be more complex, and quite possibly more difficult than it is for a conventional, profit-oriented firm, whatever particular model of the latter one might adopt. It will often be the case that in a given line of business a social
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enterprise will be operating in competition with conventional firms seeking to make money for owners rather than for the pursuit of social objectives. To succeed, therefore, not only in the basic sense of surviving but in the more important sense of being able to attract funding for investment and expansion, a social enterprise has to offer society (or the market, if we take a narrower viewpoint) something different or special. For a social enterprise, the growth process will naturally include all the elements that are important for a conventional profit-seeking firm. However, the success and hence growth of a social enterprise will also depend on how effectively it is able to capitalise upon three factors, namely volunteer labour and the self-exploiting workforce, a network of funders and a captive market. These features make a social enterprise different from a standard commercial entity. Even in a framework in which social and environmental dimensions of a business are to be examined, businesses must be financially viable to survive. The financial performance indicators of such businesses are a core concern of this study, both for understanding the dynamics of the social enterprise sector and for enabling us to provide well formulated guidance to banks on how to assess and support firms in the sector. THE CHILDCARE SECTOR IN SCOTLAND As part of the National Childcare Strategy launched in 1998, the government committed itself to improving the access and affordability of childcare services. The government has invested around 14 billion in the sector since 1998, with 3.6 billion (see endnote 1) invested during 200203. Despite the considerable amount of funding available, it is reported that there is only one registered childcare place for every seven children under eight in England (Wilkinson 2001: 10). In addition, NAO (2004) highlights that high staff turnover and finding suitable premises are major threats to the sustainability of childcare provision. A lack of demand is a particular problem faced by playgroups and childminders. It may seem odd that there appears to be both a lack of supply and not enough demand at one and the same time. However, it makes sense since the supply (e.g. a particular childcare establishment) always has a specific location, and many parents especially those less well off are unwilling or unable to travel far to deliver their children. It is perfectly possible for parents to report an insufficient supply of services while spaces might be available at a facility only half a mile or a mile away. The future of childcare If employment targets in Scotland are to be met and there is such a high proportion of lone parents accessible and affordable childcare must be made more widely available. Mothers are increasingly returning to the labour market, with the proportion of women with children under five years old engaging in paid work rising from 28% in 1980 to 58% in 2001 (SEL 2002: 23). Traditional working hours are also less common now as more and more firms seek to employ labour outside the standard hours of Monday to Friday, nine to five. This creates a demand for more flexible childcare provision both in terms of opening hours and the facilities/services provided (SEL 2002: 23). The childcare market in Scotland The Scottish Executive (2005) estimates that there are 263,000 children in Scotland aged 04 years old. This number is expected to decline modestly to 248,000 by 2010. Recent statistics published by the Executive report that there were 4,717 childcare and pre-school education centres in January 2005, employing 11,905 full-time staff and 16,208 part-time
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staff. The number of childminders working in Scotland has fallen slightly and only 25% of these have any formal childcare qualifications. Day care of children is defined as those services which care for children outside the home for more than 2 hours per day for at least 6 days a year; many groups that operate within this definition are not required to be registered and are not subject to the Care Commission regulations and inspections. Nurseries, crches, after school clubs (also known as out of school clubs) and playgroups are included in the childcare sector and may operate on a private, public or voluntary sector basis. Sports clubs and uniformed activities such as scouts/brownies are not included. Across all types of childcare provision, there were 2,517 establishments providing nursery services, 1,079 offering out of school club services, 368 breakfast clubs and 62 offering Gaelic provision. The majority of the service providers offer multiple services and operate for varying periods during a typical day, depending on the service being offered. Local authorities run 1,984 childcare and pre-school education centres, while the private sector operate 1,037, and 1,345 are run by the voluntary sector. Just over half of all nurseries in Scotland are managed by the local authority and approximately 50% operate within school premises. Breakfast clubs and out of school clubs also tend to operate in school premises. It was estimated that there were 861 playgroups operating in 2005, with 596 of these being run by voluntary committees and over a third run in church or village halls. SURVEY AND MAJOR FINDINGS The survey In late 2005 and early 2006, we carried out a postal survey of 300 childcare organisations selected from a list of registered organisations in Scotland provided by the Care Commission. Within that list of 4,414 organisations, we selected those classified (see endnote 2) as voluntary (the other categories being private, local authority, other). That gave us an initial dataset of 1,502 organisations from which a random sample of 300 was selected. Our research could not therefore include the possibly large number of unregistered organisations operating in the childcare sector (and that is why the numbers in this paragraph differ from those reported in the previous section). The survey questionnaire was formulated following extensive discussions with stakeholders in the childcare sector. It was piloted on 10 childcare groups who either offered to assist our research, or who were suggested to us by other contacts. A total of 81 organisations have been included in our analysis. An additional 9 questionnaires were returned but were not included in our statistical analysis as too many sections were incomplete. There were also some incomplete questionnaires that were included in the analysis because it was felt that they provided enough useful data to justify their inclusion. Survey results Number of sites and closures: Approximately two-thirds of the organisations surveyed operated at just one site, as one would expect given the large number of playgroups that responded. Playgroups tend to be local groups operating in relatively small geographical areas, although there may be many within large towns and cities. Just fifteen organisations operated at more than one site and two-thirds of these multi-site organisations had between two and five sites in total. Only 3 organisations indicated that they had more than 10 sites. Our results show that very few organisations (less than 5%)
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have experienced any site closures within the past year, although lack of finance is cited as the key reason for site closure when it does occur. Most organisations liase with their local Childcare Partnership (see endnote 3), with 68% of all organisations that responded to the question stating that they belong to their local organisation. Almost 70% of the organisations were not managed by the same people who set them up originally. Considering that the mean lifetime of an organisation in this survey was 18 years 5 months, that was not too surprising. Several organisations had existed since the late 1970s or early 1980s. Enterprise ethos: When asked whether childcare should be free, responses were fairly evenly distributed from strong agreement to strong disagreement. Of the organisations that gave a positive response to this question, 44% suggested that they were responding to the lack of provision by the local authority, 36% were neutral and 21% disagreed. The view that the local authority should fund childcare was supported by 68% of the organisations that answered the question, with 45% strongly agreeing with this statement. Funding: On external sources of funding and the problems related to these, the majority of respondents agreed that childcare services are unsustainable without external funding. In this context, sustainability is not, of course, the same as self-sufficiency. The former term means that an organisation is able to keep going, but this may be with the help of various grants (including direct local authority funding), and sub-commercial contracts often with local authorities or Childcare Partnerships known as Service Level Agreements (SLAs). The latter term, self-sufficiency, would imply that an organisation had the financial means to keep going without such external supports. In practice, many social economy stakeholders use language ambiguously, and would often use the term self sufficiency to mean sustainability. Grants/funding/investment, etc., from the state (in whatever guise) are treated as gifts or discretionary finance rather than a purchase of services. Furthermore, short-term funding was not judged by most respondents to be conducive to sustainability. Interviews and informal discussions with organisations had raised this issue on numerous occasions. Short-term funding does not give organisations the opportunity to plan for the future, as their survival is reliant on a succession of successful grant applications which require a great deal of time and effort. This imposes a vast administrative burden on what are mostly quite small organisations and which enjoy, in many cases, very modest managerial capacity. Changing the structure of grants mostly only offered for one to two years at a time will not happen overnight. Alternative means are needed for groups to access long-term finance. One of the areas in which the financial institutions could perhaps assist is through loan finance. However, the survey responses suggest that this is not widely regarded as a good way forward. Nearly a third of those who responded to the question disagreed with the statement that long- term loan finance would improve sustainability and only a quarter of respondents agreed with it. There is a high degree of aversion to loan finance on the part of many organisations operating in the childcare sector. At the same time, even if they desired it, many childcare businesses in the social economy are not investment ready. They would be unable to service a loan offered on normal commercial terms. In a recent study of the social economy, McGregor et al. (2003:12) found that almost three quarters of the smallest organisations are not prepared to consider a loan and very few small organisations indicated that they would seek to obtain loan finance. Looking beyond the traditional financial institutions, a significant proportion of respondents agreed that a mixed economy of customers is conducive to sustainability. One manager of a local childcare organisation said that you need to encourage families from the more affluent
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areas as they tend to be the families that will pay on time and you dont need to spend time chasing for payment. These prompt payers therefore offset some of the cash-flow difficulties that can arise when organisations have a large number of families who require prompting for payment. These social economy childcare organisations have a very different culture to private sector organisations. As they operate in small geographical areas, an individual case of nonpayment can quickly lead to widespread non-payment, with the attitude among parents being why should I pay, if such and such doesnt have to? Therefore, organisations that aim to have a mixed economy of customers must equally protect the prompt and reliable payers as these are the pool of customers who effectively compensate for late payments. If that pool was significantly reduced then it could lead to financial instability. Interestingly, though, only 40% of respondents clearly agreed with the view that childcare services should be paid for by the customer at the point of delivery. Thus many of the businesses we surveyed were far from having a well-developed commercial outlook. Childcare services provided: As demonstrated in Exhibit 2, just over half (52%) of the organisations surveyed indicated that they were playgroups and out of school clubs (OSC). Breakfast and holiday clubs are often an extension of out of school clubs, in fact 89% of OSCs also provided a holiday club and 36% provided a breakfast club. Less than 10% of the organisations surveyed were day nurseries and 15% stated that they provided another form of childcare which had not been listed; these are most commonly crches and mobile crches. (Note: Percentages sum to more than 100 because some organisations belong to more than one category.) Enterprise type: Almost a third (32%) of organisations that responded to this question stated that they were a parent co-operative, followed by partnership (27%) and then community business (18%). Of the organisations that answered the question on incorporation, 31% indicated that they had some form of incorporation, with 80% of incorporated organisations being companies limited by guarantee (CLG). Many of the surveyed organisations did not answer the structured questions on organisation type and form of incorporation but did describe themselves in their own words. Sixty per cent of organisations then identified themselves as something other than the terms we had provided, most of these claiming to be voluntary, non-profit or not-for-profit organisations. Of those that answered the question on charitable status, 85% had charitable status and only two were affiliated to larger organisations. Starting up: Securing initial finance was the most common problem, with just over a quarter of respondents stating that that this had been very difficult for them. Nearly half suggested that it created more than average difficulties. The next most common problem encountered was finding suitable premises: 15% stated that this had been difficult. Grants were the most common sources of start-up finance with both capital and revenue grants used in nearly a third of all cases. The use of personal funds or those of family/friends
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was rare. Organisations suggested that grants and loans were the most useful form of start-up finance. Organisations that had previously received a capital grant indicated that the most common sources were their local authority and the Lottery. A few organisations had secured grant funding from the EU or the Scottish Executive. Fourteen organisations had received funds from other sources, including charities such as Children in Need and the Scottish Pre-School Play Association. Revenue grants had a similar distribution. Staff: Only a few organisations had qualified childcare staff working for them on a voluntary basis. The majority of voluntary staff were unqualified. The majority of the organisations surveyed were relatively small, and most reported having between one and three paid members of qualified staff. A smaller proportion had between four and six members of qualified paid staff. Only the very largest organisations had a qualified workforce of more than six people. The results for unqualified staff showed similar patterns, one or two members of unqualified staff being most usual. Working part time rather than full time is common. That was expected given the large proportion of playgroups within our sample, since these tend to operate for only a few hours in the morning. Sixteen percent of organisations did not employ any part-time childcare workers, while 64% did not employ full-time staff. The emphasis on part-time volunteering within these organisations is strong, with 38% having at least one part-time voluntary member of staff. Almost a quarter of organisations (23%) used volunteers for non-childcare activities such as bookkeeping and other administrative roles, although 32% employed parttime staff to carry out such activities. Management and Board: In just under three-quarters of the organisations surveyed, the manager had a background in childcare, and 30% had a professional background. Managerial tenure ranged from newly appointed managers who had been in place for less than six months, to a few whose managers had been there for more than 15 years, even 20 years in one case. The most common length of service for a manager was between 3 to 5 years. Most organisations claimed to have a management team (i.e. more than a single manager). However, this question might have been misinterpreted by some organisations as the responses were similar to those about board members. For the majority of the organisations, the Board was made up of the manager together with a mix of local parents and business professionals. Pricing, expenditure and income of the enterprise: Nearly all the organisations set their own pricing and offered a mixture of set weekly and session-based charges on a roughly equal basis. Three-quarters of the organisations responding to this question also applied a charge when a child missed a session. Less than half of the organisations offered special discounted rates for families with more than one child using a service. Most charged at a single rate, unrelated to the age of the child and 60% did not charge separately for nappies, outings or snacks. However, price and cost data were extremely limited in our survey. Most respondents did not answer questions on these areas. The same was true about responses on their annual expenditure budgets. Information on sources of financial support for families was also incomplete. Almost half (48%) of the organisations did not indicate how many places were funded through the Working Families Tax Credit. Furthermore, 64% of those that did respond to the question said that they had no funded places. The uptake of childcare vouchers was also low, with only 24% of organisations that recognised the scheme accepting the vouchers.
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Capacity: The number of places that organisations offered varied a great deal from as few as 10 up to 440 places in a multiple-site case; the most common size of organisation is around 24 places. The number of places taken up in the previous week also varied a great deal. One organisation had no places taken up in the week prior to them completing the survey (we assume that the organisation may have been closed). By contrast, 203 places had been filled in the very largest organisation. Sixty-one per cent of organisations said that they had a waiting list, although 44% did not achieve full occupancy, which they felt created stability/sustainability problems for their organisation. The most common reason stated for operating below full capacity was lack of demand, followed by competition from other providers. The vast majority of organisations operated for 5 days per week and tend to run alongside school term times. There was, however, a great deal of variation in the number of hours that organisations operated. Credit policy and action: Only a quarter of the organisations surveyed stated that they had a written down credit policy and almost 9% were unaware whether they had a policy. Of those with a credit policy, only half enforced the policy all the time. The majority of organisations appeared to operate credit control on an ad hoc basis and most had not designated a specific member of staff to manage credit control. Issues of non-payment were most commonly dealt with via individual negotiation, emphasising the lack of any standardised credit policy. Cash was the most common form of payment (94%), but a small number of organisations had standing order facilities set up and a significant number of organisations had contract agreements as partner-providers (22%). Investment: Personal sources of finance or those of family and friends (includes fundraising) were rarely used for investment purposes. Nearly all organisations drew their investment funds from fee income and grants and almost a third also used their reserves for investment purposes (for a more general discussion of financing social economy organisations, see Bank of England 2003). Evidence from FutureBuilders Scotland shows that some childcare organisations have already benefited from investment programmes that aim to develop social economy organisations by helping them move away from grant funding and onto earning income. FutureBuilders have tended to provide funding for the larger childcare organisations. This suggests that scale may be an important factor for investors. FutureBuilders are clear in their mission statement that they aim to make one-off investments in organisations to enable them to both expand future service delivery and improve their financial sustainability. Opportunities and threats: Nearly three-quarters of the organisations surveyed did not plan to expand the number of places currently available or increase the range of services available. Very few organisations wished to undertake any changes to their organisation over the next 12 months, with only four indicating an intention to pursue other business opportunities in the year ahead (of which three had finance for their new activities confirmed at the time of the survey). They planned to open training centres, pursue private contracts similar to the services provided by mobile crches and would pursue other activities not related to childcare. The greatest threat to sustainability over the next 12 months was possible reductions in grant funding, followed by changes in legislation such as the minimum qualification
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requirements and to some extent the recommendations of the Care Commission. Competition from other providers was also noted as an area for concern by half the surveyed providers, a point further supported by the 57% expressing concerns about reductions in their occupancy rates. Three-quarters of the organisations responding on special funding were aware of grant funding to meet the needs of children requiring additional support; 23 organisations had previously applied for such funding and all but two had been successful. It is unclear whether new legislation such as the Disability Discrimination Act was considered to create opportunities or further threats for social economy organisations, since over 40% of the respondents indicated that they did not yet know how they would be affected. Relationship with banks: To function at all, all the businesses we surveyed needed a bank account. However, most used a very limited range of banking services. Just over two-thirds of the organisations used a deposit account, almost a quarter had direct debit facilities and just over a quarter used standing orders. Other banking services such as overdraft facilities were only used by two organisations, and only one organisation indicated that it had benefited from a bank loan. Moreover, only 12 organisations had used the business advice services provided by their bank. Profit: Three-quarters of the organisations that responded to the question on profit were comfortable with the concept of making profit to ensure their sustainability. Organisations were then asked to indicate whether they found it acceptable to make profits from childcare, with 59% indicating that they did not find it acceptable. However, when asked whether they were comfortable with making enough profit to fulfil their needs, 88% indicated that they agreed with this sentiment. It appears that social economy organisations such as those in the childcare business are well aware that they need to cover their costs, but are frequently quite uncomfortable with such market-economy terms as profits when this is linked to their specific business activity. It is widely considered that childcare and profits do not belong together. CONCLUSIONS AND LESSONS Our survey of the Scottish childcare sector presented a fairly comprehensive picture of provision by social economy businesses, though as noted earlier we left out of consideration those providers run by local authorities and those describing themselves as wholly private providers. The conclusion briefly places our study in the wider context of the childcare sector and the social economy sector as a whole. Childcare sector issues The most significant issue is in the area of childcare regulation in which a number of recent and ongoing developments pose a serious challenge to the sector. Existing regulation on health and safety standards (including fire regulations applied to premises) and criminal records checks for all staff working with children (through Disclosure Scotland) are sufficiently onerous. Plans to require childcare staff to possess certain qualifications will significantly add to the sectors difficulties, partly because some good staff might not be willing to undertake the needed training. The new requirements might also make recruitment more difficult. Further, once staff are better qualified, it is certain that they will expect better wages, and in our view this expectation has not been taken on board in the sectors financial planning. The 2005 Disability Discrimination Act (DDA) will have further consequences for the sector, some undoubtedly unintended. For example, premises used to deliver childcare services
March 2007
will have to comply with DDA requirements. That is likely to require provision for wheelchair access even when the organisation concerned does not currently have a child on the books needing this. Moreover, in the course of our research we encountered instances of childcare businesses located on school premises, where the DDA was expected to entail very substantial spending by a childcare business to meet the new rules in a situation where neither the school nor the relevant local authority were willing to contribute anything at all. In these circumstances, it is almost inevitable that some childcare businesses will be compelled to close, since the smaller ones, in particular, would be unable to meet the additional costs of compliance with the DDA. Social economy issues Our final topic concerns the funding of social economy businesses, and the possible role of commercial banks in that. While all social economy enterprises have a bank account to handle their routine, day-to-day cash inflows and outflows, few are in a position to seek loans (whether on commercial or preferential terms) to support their development and expansion. Surprisingly few even have a regular overdraft facility in place. Very few social economy enterprises are therefore regarded as properly bankable. However, while our own survey confirmed that such businesses are mostly non-bankable, there are a few that are large enough and sufficiently commercially minded to be clearly bankable, some of which already have experience of receiving and servicing loans as part of their business. In-between these extremes lies a grey area of what we term the near bankable firms. Here, the interesting question is what features of social economy businesses influence their position along this spectrum? Drawing on the data from our interviews and meetings with people working in the sector and from our own wider conceptualisation of social economy issues, we consider three features, namely size, ethos, and goals. The first of these, size, is clearly relevant. Many social economy organisations are small, offering services in a limited area to a modest client base. To be large enough to be bankable, such a business would need to offer multiple services, possibly in different locations. This suggests there is some critical mass, some lower size limit, below which an organisation is highly unlikely to be bankable in our sense. The ethos of such an organisation is also important, since it matters whether it thinks of itself as a social service provider (often with the background idea that, really, it is doing something that the state would ideally be doing), or a commercial business (with the background idea that profits are acceptable, private-sector provision is fine), or a mix of these. Last, it matters whether the organisation has a goal such as getting single parents back to work and off benefits, or something more commercial such as covering all its costs or even making profits through business growth and diversification. Life in the social economy is not straightforward, perched uneasily between the state and the private sector, and often competing with both. It is therefore not that surprising that business identities often appear unclear or that there is such widespread ambivalence about commercial norms. The result, we suspect, is that only quite a small segment of the social economy sector will prove of significant interest to commercial banks. ACKNOWLEDGEMENT The research reported in this paper has been supported financially by Lloyds-TSB Scotland, for which the researchers are most grateful. None of the views and findings expressed by the authors in this paper should be regarded as official bank policy, or even as necessarily enjoying the endorsement of the bank.
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ENDNOTES (1) National Audit Office (2004) (2) The organisations listed on the Care Commission database were not classified by the Care Commission itself; rather, organisations chose for themselves which category was suitable for them, so we expect that there is some degree of misclassification. (3) Childcare Partnerships were set up in every one of the 32 local authority areas in Scotland. Their initial tasks were to carry out an audit of childcare supply and demand in their area and based on this, to draw up plans for expansion, integrated with plans for the expansion of early education. REFERENCES
Bank of England. (2003) The Financing of Social Enterprises: A Special Report by the Bank of England, Domestic Finance Division, London, Bank of England. Birmingham Social Economy Consortium. (2001) Opening the Gateway to Birminghams Social Economy, cited in Pearce, J. (2003), Social Enterprise in Anytown, Calouste Gulbenkian Foundation, London. Cabinet Office. (2002a) Private Action, Public Benefit: Organisational Forms for Social Enterprise, background paper produced for the Strategy Unit, London, Cabinet Office. Cabinet Office. (2002b) Private Action, Public Benefit: A Review of Charities and the Wider Not-forProfit Sector, Strategy Unit Report, London, Cabinet Office. Care Commission. (2005) National Care Standards: Early Education and Childcare up to the Age of 16, Care Commission, Edinburgh, Scottish Executive. Churchill, N.C. and Lewis, V.L. (1983) The Five Stages of Small Business Growth, Harvard Business Review, vol. 61 (3), pp.3050. DTI. (2002) Social Enterprise: A Strategy for Success, London, Department of Trade and Industry. Jones, D and W. (2006) Social Enterprise: A Case of Terminological Ambiguity and Complexity, Social Enterprise Institute, Heriot-Watt University, mimeo. McGregor, A., Glass, A. and Clark, S. (2003) ReValuing the Social Economy, Training and Employment Research Unit, University of Glasgow. NAO. (2004) Early Years: Progress in Developing High Quality Childcare and Early Education Accessible to All, HC268, London, National Audit Office. NCH. (2004) Facts and Figures about Scotlands children, NCH Factfile 2004. Pearce J. (2003) Social Enterprise in Anytown, Calouste Gulbenkian Foundation, London. Scottish Executive. (2004) FutureBuilders Scotland: Investing in the Social Economy, Edinburgh, Scottish Executive, August.
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Scottish Executive. (2005) Pre-school and Childcare statistics 2005. A Scottish Executive National Statistics Publication, Edinburgh, Scottish Executive. Social Enterprise London. (2002) Social enterprise guide to childcare, London, SEL. Spear, R. (2001) United Kingdom: A wide range of social enterprises, in Borzaga, C. and Defourny, J. (eds) (2001), The Emergence of Social Enterprise, London, Routledge. Note: This paper was presented at the 3rd Annual UK Social Enterprise Research Conference, London South Bank University, London, June 22-23, 2006. *Contact details: Paul Hare, Professor of Economics, School of Management and Languages, Heriot-Watt University, Edinburgh EH14 4AS, Tel: +44 (0)131-451 3483/3497; E-mail: p.g.hare@hw.ac.uk
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Notes
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All rights reserved. No part of this book may be reproduced in any form or by any means without permission in writing from the publisher, except by a reviewer who may quote passages and reproduce images for the purpose of review.
All photographs included in the front and back covers were taken by Rob Farrar.
Copyright 2007 Social Enterprise London Published by Social Enterprise London March 2007
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Social Enterprise Journal

VOLUME NUMBER 3, ISSUE 1 MARCH 2007

2007 Report to readers

Foreword by the Minister of the Third Sector

Making sense of social enterprise PAM SEANOR AND JULIA MEATON

S OCIAL E NTERPRISE L ONDON S TAFF R EVIEWERS

Social Enterprise Journal Volume 3, Issue 1 2007 Social Enterprise London

A new model for supporting social enterprise through sustainable investment

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A new model for supporting social enterprise through sustainable investment

Social Enterprise Journal

A new model for supporting social enterprise through sustainable investment

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A new model for supporting social enterprise through sustainable investment

Social Enterprise Journal

A new model for supporting social enterprise through sustainable investment

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A new model for supporting social enterprise through sustainable investment

Social Enterprise Journal

A new model for supporting social enterprise through sustainable investment

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Social Enterprise Journal Volume 3, Issue 1 2007 Social Enterprise London

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Using human resource management tools to support social enterprise

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Social Enterprise Journal Volume 3, Issue 1 2007 Social Enterprise London

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Recent reforms to corporate legal structures for social enterprise in the UK

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Recent reforms to corporate legal structures for social enterprise in the UK

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Recent reforms to corporate legal structures for social enterprise in the UK

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Recent reforms to corporate legal structures for social enterprise in the UK

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