Impact Measurement

The Challenges of Allocating Social Costs


When an entrepreneur starts up a small business on his or her own, it is fairly easy to identify the costs of doing so. With few exceptions, the business itself bears all costs of operations. However, it is somewhat different in the world of social enterprise. A parent nonprofit, other social service programs, other activities run by the parent nonprofit, donors or volunteers may all bear some portion of the costs to make the business successful. If the mission of a nonprofit-sponsored business is to train, employ, and serve at-risk youth, for example, is the cost of educational enrichment programs that encourage the attainment of a GED a social cost of the business or a program cost of the parent nonprofit organization? At some point those analyzing appropriate costs must draw a line between one organizational program and another.


The challenges

Our research has led us to one possible approach that may clarify these issues:

1. Clearly understand the mission of the social enterprise

First, an organization must clearly understand and state its mission relative to the social enterprises it operates. Is the mission to simply generate revenue for a parent nonprofit? Is it to employ a given population? Is it to both employ and train a given population? Or is it to employ, train and educate a given population?

2. Clarify the definition of success for its business

Second, having clarified its social mission, the organization must then clarify the definition of success for its business. It is our position that social enterprises operated by nonprofit organizations must first and foremost embrace the core mission of opera ting with no significant net loss to the business. Presently, many social enterprises operating in the United States operate at a loss—and that loss is often justified by management as “the cost of our social mission.” This approach makes it both impossible to manage the enterprise with any true sense of business discipline and prevents organizations from ever being able to truly value the social cost carried by their enterprise.

We are not saying all social enterprises must always operate on a breakeven or profitable basis. In fact, some of the stronger organizations we have seen over past years are those that generate significant revenue from their activities, but still operate at some level of subsidy in order to achieve their social mission. What we are saying is that if practitioners expect to contract with market-based customers and identify themselves as social entrepreneurs they must have the ability to track all costs and revenues accurately before adding in the social cost they carry by virtue of their social mission and community commitments. In a phrase, they must understand and be able to quantify their “true” costs and not simply bury those costs within the financial statements of the organization.

3. Address the business’s social purpose

Third, having clarified the core goal of the business, one may then address the business’s social purpose. Is the mission to successfully transition people off welfare, and provide them with opportunities for long term employment after they leave the social enterprise? Or is it to provide transitional employment for the period of time that they are employed by the enterprise? This brings us back to the social mission of the nonprofit parent organization: if the mission is clearly defined, it will be easier to identify when an enterprise has succeeded in fulfilling its part of that mission and what costs it incurs in doing so.

4. Agree upon the “true” costs to the business

Finally, the managers of both the parent and social enterprise must agree upon what will be considered the “true” costs to the business enterprise of fulfilling that social mission. These costs are not always easily found within the typical business financial statements or information systems, and, in fact, a second type of report may be needed to accurately describe the total social costs being carried by the business.

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