Introduction
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. 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 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 REDF has 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.
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. 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.
How do we assess financial performance?
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.
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.
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.
Conclusion
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.
