Is social enterprise being 'set up to fail'?

The recent budget directed resources to entrepreneurs through tax reliefs and tax breaks and, in an effort to help new firms grow, promised less red tape and improved access to high speed broadband. These benefits have undoubtedly been much welcomed by potential entrepreneurs thinking about setting up their own businesses and those already working in the private sector.

The unwritten assumption in these budget assumptions seems to be that the private sector should be rewarded for the risks associated with finding and exploiting viable markets in which to do business. I wonder if there are any unwritten assumptions concerning social enterprises? I suggest two. The first assumption is that, like alchemists, social enterprises can make markets viable where others have failed.

In the past decade we have seen great efforts to encourage social enterprises to seek out and exploit markets in which to do business. And many social enterprises have responded by adopting mixed income models that combine market-based activities and contracts to deliver public services.

Grants and donations still feature in the funding model of many social enterprises, but as we see the market competencies of social enterprises grow we should also expect to see reliance on non-trading income fall. However, if the market opportunities and public sector contracts are not viable then encouraging social enterprises to pursue these opportunities is setting them up to fail.

In the competitive arena of securing service delivery contracts, the costs of preparing and pitching for contracts is rarely included in the proposal.

Neil Stott, chief executive of Keystone Development Trust, when describing a recent contract to deliver services, found that the cost of preparing the work was going to be more than the value of the contract. He solved the problem by persuading the commissioning body to fund the service as a grant that gave the Trust greater flexibility in designing the service and lesser reporting requirements.

The second assumption is that, in line with the community-oriented values of social enterprises, the added value they deliver to society does not have to be paid for.

The current economic climate has put many, if not all, local authorities under pressure to cut expenditure. There simply is not enough money to maintain services at their current levels. The rhetoric of the big society has focussed attention on the increased role that social enterprises can play in delivering public services.

The advantages of social enterprise involvement in delivering public services is that their knowledge of, and experience of working with, local communities means that services can be more responsive to local needs. This is welcome news for social enterprises seeking to expand their portfolio of work. However, closeness to stakeholders is not cost free.

Social enterprises therefore need two important skills when formulating their strategies. First, they must be able to evaluate the market potential of business opportunities. Rigorous market assessment is fundamental to business planning in the private sector and equally important for social enterprises.

The outcome of this is that although it might be difficult, social enterprises should not enter into contracts that, at minimum, do not cover costs. Ideally contracts should also include a provision for surplus to either reinvest or further pursue the aims of the enterprise.

Let's start with covering costs first. Second, social enterprises must be able to calculate full economic, social and environmental costs and include these costs in their business plans. Again, this might be difficult as a consensus on which metrics to use has not yet been agreed upon.

However, until full costing is adopted, social enterprises are likely to find themselves delivering more than they are fully paid for. This might be good for the big society in the short term but ultimately fatal for social enterprises in the long run.

In these difficult times we should encourage social enterprise to be active partners in Start Up Britain [http://www.startupbritain.org/] and reward them for the full cost for the economic, social and environmental contribution they make to society.

Dr Helen Haugh is senior lecturer in community enterprise at the Cambridge Judge Business School, University of Cambridge

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