We’ve learned from experience that it’s really hard for our sort of social enterprises to break even from earned revenue alone. Probably the biggest reason for this is that margins in a typical labor-intensive small business are thin at best, and not sufficient to cover the social costs the businesses incur. (In Part 1 we looked at the top 6 social costs in this field.)
So where does this leave us? Were we wrong about the whole idea that social enterprises could use purchasing power of customers to help solve social problems? No, but we’ve learned that in most cases earned revenue alone won’t cover 100% of the costs entailed with helping someone reconnect to the workforce permanently. And we believe that’s okay, but it always has to be balanced with the results that the enterprise is achieving for its clients. And vice versa, if a social enterprise is breaking even off of earned revenue alone does that make it a “better” social enterprise? In order to answer that you must look at the results it has with the people it serves.
Here are two basic examples.
Take one enterprise that is breaking even and employing 100 people a year, but when you look closely at their social impact you see that people are dropping out of the transitional job for various negative reasons, like barriers were getting in their way to being able to work, or they were unhappy with their experience. And in the smaller number of instances where people left because they found another job, you see that those people quickly lost that job, and three months later were back where they started.
Another example is an enterprise that employs 40 people a year but can show that in most cases when someone leaves it’s for another job, and the majority of those people are still employed and stable a year later. On the other hand, they are losing money and have never had a year finishing in the black despite doing everything they could to increase prices, achieve economies of scale, and increase operational efficiencies. Which is the more successful social enterprise? At REDF we’ve evolved to look at success, in a measurable form (meaning short term) as clients successfully holding down a job(s) for at least a year, earning an increasing amount of revenue through wages, experiencing more stable housing, less substance abuse, and staying out of jail. And specifically, when it’s a social enterprise trying to achieve this outcome, success means that the business side of the double-bottom line is covering its costs with earned revenue and ultimately that the total enterprise is breaking even by covering the additional social costs either through the profit from the business or through a subsidy like contributed revenue.
While breaking even off earned revenue alone is ideal, it shouldn’t come at the expense of the social impact you are trying to achieve. Unless they can achieve the same goal through partnering with another organization who provides these services, I’d rather see the first enterprise increase the supports accessible to employees to help them succeed in the transitional job for a sufficient period. Even if this means they’ll need to fundraise for money on an ongoing basis, it’s a more successful enterprise because of the higher social impact, and as long as they can raise that subsidy in a reliable, recurring way, they are perfectly sustainable.
And in the second example, even though this enterprise’s model means they’ll never ever break even off of their earned revenue, they aren’t unsuccessful. They do have a sustainability problem, however, unless they can fundraise to cover the gap between earned revenue and total expenses (both business and social expenses). But assuming they know how much subsidy they need each year and are committed to raising it, they are a sustainable enterprise.
Anyone who runs a social enterprise whose mission is to employ people who face barriers to employment knows these things instinctually. The real challenge is with funder/investor perception and behavior. Too often, a funder may look at that second social enterprise and say, “But you’ll never outgrow the need to fundraise. You’re never going to be sustainable and thus this isn’t a smart investment for me.” We need to change the perception by funders that something is wrong with a social enterprise model that includes the need to fundraise for a portion of annual revenue.
Of course it doesn’t mean that every unprofitable social enterprise deserves donations to stay afloat; we must look at the social impact to understand whether the social return on the investment makes sense for the funder. This really underscores something else we all know: We have to get better at measuring results and showing success. If success equals self-sufficiency for people beyond a transitional job in a social enterprise, we need to fund the supports that set up a client for success beyond their transitional job experience. Thus, while there is a cost to the transitional job experience, the benefit pays dividends long beyond the transitional job time period if the client transitions successful to permanent self-sustaining employment. Viewed from that perspective, social enterprises become an extremely cost effective way of solving very expensive social problems. And if a small ongoing subsidy is still required, it’s money well spent.
In a few months REDF will release a first-of-its-kind social enterprise study, which helps to illuminate the benefit to society and taxpayers that is achieved through this type of social enterprise work. We’re excited to share the results because we believe it can really change the conversation about why funders and governments should look to social enterprises as a smart ongoing investment.