Without Profit Is Social Enterprise a Success? – Nicole Simoneaux

Part 1

We need a new definition of sustainability in the world of social enterprise focused on employment for people facing barriers to work. Those of us working in the field shouldn’t perpetuate the belief that social enterprise businesses need to be profitable from earned revenue alone in order to be considered sustainable. Our social enterprises are successful based on the success of the people they serve, and that sometimes means incurring higher costs because the social mission costs can’t always be covered solely by business revenues.  Many of our social enterprises have a revenue model that relies in part on ongoing fundraising and this doesn’t necessarily make them unsuccessful or unsustainable.

Profitability is hard enough to maintain in the for-profit world. Just ask anyone who has ever run a small business. According to The Small Business Administration about half of all small businesses fail within their first five years.

In the world of social enterprise where companies must generate revenue— often while operating with far greater costs than a typical business—profitability is even harder to achieve.

Over the past two decades we’ve learned that the ‘social’ costs of these social enterprises can be significant, and the reality of these expense dynamics is that in many cases it’s impossible to break even off of the business revenue alone.

Understanding the true cost of running a social enterprise

Typically in a small business, profits accumulate, or they are paid out to owners. In social enterprises that exist to hire people who face barriers to work, profit margins are used to support workers with needs over and above a typical for-profit employee. In Part I of this blog, let’s look at the top 6 costs typically faced by a social enterprise that puts people before profits:

1. Social enterprises, by their very nature hire less skilled workers.

There’s more to hiring workers who need a second chance than simply making a job available. The workers hired are less skilled than in a typical business. And that’s the whole point of social enterprises that provide transitional jobs. Social enterprises hire less skilled workers to give them the skills they need to go off and get a real, lasting, permanent job. A typical businessperson would normally hire the workers with the most skills. Choosing those with the least skills, in order to deliver on the promise of skill building, is inherently costly, and can mean reduced productivity.

2. Skill building is expensive.

Workers need to learn additional things to raise their level of employability beyond the social enterprise transitional job. Those skills can be soft skills such as anger management classes, how to deal with coworker conflict, showing up on time, and aligning their motivation with the needs of the business. Then there are job-finding classes such as how to put together a resume, a cover letter, and handle questions about your past in a job interview. Finally there are the on-the-job hard skills that must be taught in order for the employee to do the transitional job correctly.

3. Supervisor ratios are higher in social enterprise settings.

Where a typical car wash for example might have one supervisor for 16 workers, the ratio found in a comparable social enterprise might be one supervisor for every eight employees. That kind of overhead becomes expensive quickly. Businesses need more eyes to observe, maintain levels of quality, and perform correction and provide advice in real time.

4. Turnover rates are higher. And that’s the point.

Turnover rates vary widely between typical businesses and social enterprises. The hallmark of a successful business is employees who stay on the job a long time, which results in a reliable workforce that doesn’t require constant supervision. In social enterprise, just the opposite is true. Social enterprises are designed to experience high turnover. For us, success is defined when people leave. That means they are now trained, and can move on to permanent jobs. Instead of reliable workforce, a social enterprise may be bringing on 15 new workers every month. That’s a phenomenal success. But it has its costs. There are recruiting costs, onboarding costs, training costs, and of course, productivity takes a hit as new workers without skills arrive

5. It’s expensive to remove roadblocks to employment.

Social enterprises often help employees remove the barriers standing in the way of permanent employment. What’s preventing our workers from finding long-time employment? It could be a criminal record that must be expunged. It could be access to stable housing. Or $1200 in traffic fines that have to be paid before a driver’s license can be reinstated. If $1200 is all that’s standing in the way of putting someone to work, that’s an inexpensive investment for society to make in order to reap long-term rewards.

6. Workers in social enterprises need support to manage mental health and addiction issues.

Social enterprises go out of their way to hire workers most difficult to employ, including those with mental health and past substance abuse issues. Are employees able to get reliable case management and mental health services? Are they able to attend classes that help them stay clean and sober or will they slide back into addiction and self-destructive behavior once they enter the pressure of a real job? These are issues not faced by typical businesses, and expenses that don’t impact their bottom line.

In Part 2, we’ll look at the revenue side of these social enterprises’ business models and explore how we assess financial performance, if it’s not as simple as the ability to cover expenses with business revenue.

–Nicole Simoneaux is REDF’s Director of Investments & Advisory Services