I’ve enjoyed attending a number of social enterprise events since the beginning of the year, including the CIC Association’s CIC Start 2010 and SEL’s Social Enterprise Question Time. It’s clearly a big year for social enterprise – with a new chief executive at the SEC and a growing political warmth towards social enterprise as a concept.

One thing that’s beginning to worry me, though, is the apparently growing focus on new financial instruments. It’s difficult to move in the social enterprise world without bumping to someone who’s got an exciting idea for a new bond or quasi-equity model that’s going to solve the problems of social enterprise finance. This is not a bad thing in itself. I’m supportive of these developments and either personally know and like, or know of and respect many of the people involved in developing them.

What I’m worried about is the prospect that people running average-sized social enterprises – the median annual turnover for UK social enterprises according to this is around £175,000 – are going to events and getting the idea that the key issue for their business is finding the right instrument to channel a big chunk of finance into their business.

‘Scaling up’ is (rightly) an issue for ‘the sector’ because ‘the sector’ wants to prove that social enterprises can be bigger business solving big parts of big social problems. But the vast majority of social enterprises  – like the vast majority of conventional small businesses  – either can’t or don’t want to become big businesses, they want (and need) to find a sustainable way of operating on a fairly smallscale while delivering significant social benefits.

One danger is that smaller social enterprises could be annoyed by ‘the sector’s’ focus on lauding and supporting those who want to scale up but a more worrying one is that they’ll think they need to join in the race to raise big finance despite its practical irrelevance to their aims.

The social enterprise world is unusual because it’s made up of a wide range of disparate organisations notionally group together based on perceived social mission rather than based on how big they are, what they do or who they do it for.

A social enterprise that wants to build and run a new clinic clearly needs a lot of cash to get started. And an organisation that delivers really good services to a particular group of people in one area and wants to do the same in five more area also needs some cash to take that step.

At the other end of the spectrum, a small social enterprise operating in the creative industries (of which there are lots) really, really, doesn’t need to spend ages trying to find the right investor to give them a £200,000 quasi-equity loan. They need to stop faffing around and start selling their services to someone.

The majority of the new financial packages currently being developed are primarily of use to social enterprises in specific sectors and/or at specific points in their development. And I’d estimate that 90% plus of currently trading social enterprises are never likely to be in position where these packages would be right for them, even if they could get hold of  them.

That’s not to say they’re not needed and they’re not valuable but it would be a shame if people in the early months and years of running a social enterprise were confused into thinking that finding an exciting specialised source of finance is a major priority for their business – when for most social entrepreneurs our most important aim should continue to be to work harder, get better at doing what we do and get more people to buy our goods and services.

“It will mean considering the viability of loans rather than grants in some instances, diversifying beyond sponsorship and grant-based giving, embracing social enterprise models that aren’t at the expense of artistic integrity.”

It being the change of mindset that – within an otherwise quite good blog post – The Guardian’s Lyn Gardner declares is needed to save British theatre. I imagine I’m not the only person working in the gloriously unpredictable mess that’s the UK third sector who can barely read the words ‘embracing social enterprise models’ without banging my head repeatedly against the desk before seeking a hiding place from the ever-encroaching cloud of darkness on the horizon.

Would these be the same social enterprise models that were going to stop charities needing grants? The ones that actually resulted in the formation of those social enterprises that are good fun for all concerned but actually need to be cross-subsidised with the charity’s income from grants and donations.

Or – if the theatres in question are organisations that run community activities and fund their ongoing existence through a mixture of grants for those activities, volunteer-staffed cafés, tickets sales and friends schemes – would they be the same social enterprise models that many small theatres already have in place but don’t currently refer to as social enterprise?

Some things which have interested me in the last week or so:

Rod Schwartz has continued the debate on social enterprise and trade unions. There’s an interesting comment from Liam Black at the bottom.

And the Glencraft factory in Aberdeen is being resurrected. At a cost in subsidies from the combined forces of the Scottish Government and Aberdeen Council of £680,000 or £13,333 per job. I’d be interested to hear what people involved with social firms think about that.

Then there’s the big decision that had so many social entrepreneurs biting their nails all through the Christmas holidays.

The workers at social enterprise transport company HCT are on strike. HCT’s CEO, Dai Powell, is unhappy. He says that “It is becoming abundantly clear that the trade union movement – and Unite in particular – have a real problem with social enterprise.”

Unite probably wouldn’t disagree with this assessment. In general most trade unions think, correctly, that one reason why politicians love social enterprise is that outsourcing public services to social enterprises can be a way for governments to axe the jobs and downgrade the pay and conditions of people providing public services while not taking the blame for doing so. It’s not worse than outsourcing to a profit-making private company but it’s not necessarily any better. Most social enterprise/ trade union relationship begin at this fairly unpromising starting point.

Powell believes that: “This language of adversarial labour relations is from a different era and a different business model. As a social enterprise, our business model is based on the needs of a broad range of stakeholders: our staff, but also our service users, our communities and our broader mission.”

Rightly or wrongly, the adversity clearly is taking place, and the accusation of outdated militancy isn’t especially modern itself.

More interesting, though, is the implication that social enterprise is a different business model. The are clearly philosophical difference between HCT and conventional for-profit transport providers but it isn’t obvious why that the fact that shareholders are not amongst the stakeholders of HCT in itself changes the relationship between company and its employees. Powell’s position seems to be that workers should alter their demands for wages and conditions in the interests of the community (as represented by HCT).

There may be instances – in all sectors of the economy – when it is a good idea for workers to moderate demands for a wider purpose. The danger of Powell’s apparent position is that he could be construed as suggesting that workers should moderate their demands just because their employer is a social enterprise. It’s not surprising that unions find that position unpalatable. It’s no more realistic than saying that workers should moderate their demands because their employer is the government (which, after all, is a much larger not for profit organisation run for the benefit of the community).

For all the pluck exhibited by: “Alternatively, by its abject failure to recognise that social enterprises are different in form, function and purpose to regular companies, the trade union movement will become the vanguard of capitalism in the public sector.” Powell fails to disguise the clear underlying message ‘boss tells workers not to strike’. Most trade unionists are used to bosses telling them not strike. For all its passion (and for all HCT’s undoubted good work) I doubt this article will change many minds within the trade union movement.

The overall position of hostility is a shame because there is scope for partnership between social enterprise and trade unions. In the coming years, there’s a fair chance that social enterprises and trade unions working together to deliver public services could be a much more positive alternative them some of the other options on offer. But there needs to be movement from both sides to make that happen. Social enterprise has to do more than just assert its goodness and expect unions to fall into line.

This post raises lots of interesting points. Liam Black’s point about Grameen’s success in a country where there is no effective state is well made but it doesn’t necessarily explain what social enterprises should do in a country such as the UK where – in a comparative sense – there is an effective state.

Black is right that social enterprises shouldn’t expect eternal grants and subsidies from the government just because they’re nice people trying to do good things but the relationships between government agencies and social enterprises are more complicated than that.

I reckon the fact that the UK government can comfortably provide the basics of existence for its citizens without necessarily needing the help of social enterprises is a good thing but it does mean that both the useful role of social enterprise and the relationship between social enterprise and the state is fundamentally different to the role of social enterprise in Bangladesh. Leaving us with the question of what that role and that relationship should be.

While I’ve got a good idea of the answers from the point of view of my own social enterprise, I think the general answer is currently unclear. In fact, it’s a political issue that’s likely to resonate beyond ‘the social enterprise movement’ in 2010.

I’m honoured that Nick Temple at SSE has put me at number 3 in his UK Top 10 Social Entrepreneurship blogs. Just below such esteemed commentators as Rob Greenland and Rod Schwartz.  Also pleased to get a mention in a post from Social Enterprise London CEO and fellow new bloggger, Allison Ogden-Newton. All quite exciting, really.

I’m going to one of the SSE’s taster sessions later this week as I’ve heard lots of good things about their courses and I’m aiming to apply next year.

Those with a keen interest in social enterprise in the UK will have been waiting in eager anticipation for the recent publication of the SEC’s State of Social Enterprise Survey 2009. It’s difficult to sum up a chunky piece of research in a short blog post and I’m not going to try but, over the next couple of weeks, I am going to pull out a few points of interest.

The first one relates directly to my own company’s experiences.

In ‘3.2 Are social enterprises profitable?’ the report tell us:

“Whilst the smallest social enterprises are the most likely to make a loss, the situation improves with turnover – except for organisations at £100,000 – £250,000. These organisations were almost twice as likely to report a loss as organisations that turnover between £50,000 and £100,000.

There are a number of hypotheses that can potentially explain this, from taking on debt finance to managing cash flow and becoming an employer. All of these present challenges to many businesses in the early stages of growth.

Further research could confirm whether there is a specific social enterprise related cause of this ‘speed-bump’ and could highlight a key area for intervention and support.”

As someone who runs an organisation in that turnover band, this doesn’t surprise me at all. This level of turnover is the point where many businesses find themselves moving from being ‘a few mates with some ideas’ to ‘a real business’.

The passive ‘find themselves moving’ is a deliberate choice of words. That’s often what happens. There’s a point where some people who are quite good at doing something suddenly get an opportunity to take it to the next level. The good thing about that next level is you’re (hopefully) doing something bigger and more socially useful, the challenging thing is that you’ve got lots of new bills to pay and people who depend on you to pay their wages.

The report is right to question the lack of support for businesses at this stage of development. There’s a phenomenal amount of support for people to start businesses but people who need professional support to work out the very basics of business – such as the need to provide goods or services that some people will pay for at a cost that enables you to survive and hopefully make a profit* – should generally be discouraged from starting businesses because they will just waste their own time and other people’s money. The problem is that it doesn’t suit anyone – government, the armies of generic business plan advisers and coaches, generic business plan participants – to admit this so the basic business planning circus is still in every town, every day.

But once you’ve dragged your business to a point where it’s turning over £100,000 a year or more, there’s quite a good chance that you’ve got at least a vague idea of how to do or sell something that some people want. The problem is that the leap into the £100,000 – £250,000 band is likely to involve taking one or several risks – including, as the report says, taking on debt or staff, or more likely debt & staff – and there’s a big question of how social enterprises can do that.

It’s a particular challenge for not-for-profit social enterprises because they can’t sell equity (not that this is necessarily easy or even possible for those who are allowed to do it constitutionally). If the risk involves developing a product or service that doesn’t aim to generate a large government/council/NHS service delivery contract if it succeeds, even specialist social enterprise lenders tend to be wary of stumping up the cash (and I don’t particularly blame them).

The question is whether social enterprises that might ultimately be able to operate deliver significant social social benefits at or beyond upper end of the £100,000 – £250,000 are currently losing out (or maybe not even trying to take the next step) because they’re unable to access the resources that would enable them to get there.

*Many good business people can’t do this immediately (or for several years) but they need to be clear that it’s the aim.

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

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

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

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

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

As a company tendering for a contract your questions are:

(a)   what are requirements of the contract?

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

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

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

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

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

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

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

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

“I would be delighted to extend an invitation to you to accompany me on a tour of London’s social enterprises, I run a network of 1800 of them. I spend my working life demonstrating to people the power and value in our wonderful movement and I would be delighted to do the same for you.”

So says Social Enterprise London (SEL) boss Alison Ogden-Newton at the end of a storming letter to National Association of Voluntary and Community Action (NAVCA) boss Kevin Curley, who has been posing a series of fairly narky question about social enterprise on Twitter.

Unfortunately, as MD of a SEL member organisation and general fan of their work, I don’t think Ogden-Newton has really won the exchange.

My main gripe is that she missed a clear opportunity to sign-off the letter by quoting Ralph McTell saying: “Let me take you by the hand and lead you through the streets of London, I’ll show something that will make you change your mind.”

But I also think that narkiness aside, Curley raises some important points that Ogden-Newton fails to rebuff or, at least, fails to rebuff effectively.

The least interesting question Curley raises is: “[I'm] wondering about social enterprise. Is it charity plus business for social benefit? Or a respectable veneer for profiteers?” Unless Curley’s spotted something I haven’t, there aren’t many social enterprises making big profits by misleading people. In fact, beyond the big boys in the co-operative and employee-owned sectors, there aren’t many social enterprises in the UK making profits at all.

The next question is a fair one: “Does calling your organisation a social enterprise give you a licence to do anything which makes money regardless of mission and values?” – but I haven’t got anything more say about beyond what I’ve already said at length in previous posts.

The tastier questions are Curley’s final two.  First, “Is political enthusiasm for social enterprise – all the parties love it – just an excuse to axe grants in the name of ‘sustainability’?”

The answer to this is definitely at least a partial “yes”.

Ogden-Newton’s response (quoted in full below) misses the most significant points raised by the question. She says: “To imply that politicians see social enterprise as a convenient vehicle to ‘axe grants’ is a misreading of the policies of all the main parties. Certainly in conversations I’ve had, ministers understand that in many cases social enterprises deliver outstanding value for money, but recognise their responsibility to support the ongoing development of the whole of the third sector through financial investment. Social enterprise is not the solution to everything. At SEL we are very clear that not all third sector organisations are suited to a social enterprise model; for much of the sector being a voluntary organisation which uses grants and fundraising to achieve its aims is preferable. But the social enterprise model enables an organisation to use a market driven, business led process to address its mission – it’s a process which is proven to promote innovation, entrepreneurialism and ultimately outstanding social outcomes.”

Obviously ‘we will axe grants and replace them with services funded through social enterprise’ is never going to be a manifesto for any political party. But all three major parties are very keen on the idea that, in situations where a community organisation’s ongoing activities are being funded by a grant, the council (or other agency) can withdraw some or all of the funding for that organisation and the difference will be made up through ‘social enterprise’.

The grant-cutting may be right in many cases (which should particular local groups get a chunk of cash from the council every year forever?) but, though SEL themselves are not prime culprits for this, plenty of politicians and social enterprise advocates both locally and nationally have spent the last five years or so encouraging well-meaning but not especially savvy people running community groups to believe that they can make up their lost grant money by getting their service users to run a café, provide gardening services or engage in some other theoretically commercial activity which – though often enjoyable – will generally cost most organisations more to carry out that they make from it. I’ve been at the conferences and the workshops. This one of the most prevalent policy messages being pumped out into the voluntary sector in recent years and Curley is right to challenge it.

Curley’s final and most crucial question is: “If social enterprise relies on state-funded contracts how on earth does this represent an example of third sector “sustainability”?”

In this case, Ogden-Newton’s answer (again printed in full) is illuminating but, once again, doesn’t actually deal with the most important element of Curley’s question. She says: “It is important to emphasise the distinction between grants and contracts. If an organisation from any sector delivers a public contract then it is providing a service. We do recognise that social enterprises can initially require grant funding in order to develop into sustainable businesses; after all, business development is a process, not an event. But at SEL we are very clear that in order to be recognised as a social enterprise, the organisation needs ultimately to be a business, earning revenue through trading in order to address our most pressing social and environmental challenges.

The social entrepreneurs I work with on a daily basis are some of the most brilliant, community spirited, determined individuals I have ever met. Of course, as with charities, public sector organisations and private companies, the model is open to abuse, but to suggest that at the heart of social enterprise is anything other than the desire to achieve lasting social change is a gross inaccuracy.”

But, in his question, Curley is rightly ignoring the technical labels and following the money. It is, of course, possible to trade with the state and still be a sustainable business with a broad range of income streams. Examples of this include companies flogging photocopiers, graphic design skills or team-building outings to government agencies (amongst a range of other customers) but at the other end of the spectrum you have organisations delivering uneconomic state-funded services – which would previously have been provided by the council or the NHS – to the public on the basis of a contract.

Whether or not their activities are described as ‘trading’ for tax purposes, it’s hard to see how those social enterprises that just provide an outsourced public service in a specific area – and would go bust if the council (or other agency) cut their biggest contract – are businesses in any meaningful sense. Either way, Curley’s point is that these kinds of organisations – that make up a worrying large chunk of the social enterprise sector – are not sustainable unless state funders choose to sustain them.

I don’t know if this is any less true of the organisations that Curley represents (who I imagine are more likely to be funded through grants than contracts) but whether or not it’s a pot kettle black situation that doesn’t make the question any less taxing for the social enterprise lobby. If social enterprise is really a way of doing things that is fundamentally more sustainable than other ways, how and why is it more sustainable? Unfortunately, this exchange reinforces the view that the specific case for the sustainability of social enterprise public service delivery is currently axiomatic to the social enterprise lobby – along with politicians for whom it’s expedient – and entirely inexplicable to anyone else.

Or maybe I’m missing something. Other thoughts much appreciated.

A few things have happened in the world of social enterprise since the last post. Edited highlights from closest to home are that my organisation has joined the Social Enterprise Coalition and, during September, I was up in Leeds for the day and got to meet up with Rob Greenland, who turns to not only to be an astute observer of social enterprise but also a lovely bloke.

More significantly in a wider sense, the Social Enterprise Coalition have appointed their new Chief Executive, the middle tier of the three-tier social enterprise trademark has been unceremoniously junked and there’s a continued gnashing of teeth at the idea that most people have no idea what social enterprise is.

Maybe I’m missing something but I’m not completely clear on the social (or, in fact, commercial) benefits that would be generated by a large percentage of the public having a conceptual understanding of the term ’social enterprise’. Most people I know do understand and (to a lesser or greater extent) aspire to the idea of doing work that has a wider social value than simply paying their bills at the end of the month.

Beyond that social enterprises (or clearly specified types of social enterprise like co-operatives) need to sell themselves on the merits of the goods and services they provide. For my organisation, being a social enterprise is an important part of our story as a company but the label ’social enterprise’ in itself doesn’t tell customers anything useful about our products. I see how with the Fairtrade mark or a Co-operative mark if the was one, the philosophy can part of the product. Social enterprise is too broad and too contested a term to be meaningful in that way.

That doesn’t mean I think that the social enterprise lobby is not needed but it does mean that I reckon it should – as the best bits of it already do – focus more on supporting a wide range of businesses and people to achieve positive social goals and focus less on the promotion of ’social enterprise’ as a quasi-political concept. In ten years time I’d like to see lots more businesses and other organisations getting socially useful stuff done. If that happens then I really couldn’t care less whether or not there’s a percentage increase in people who know what ’social enterprise’ means.