Article by Simon Lee, Associate at Hempsons, the SEYH Legal Partner
With apologies to Led Zeppelin here but, fundamentally, is everything now set for social enterprises to grow and take centre stage and, mixing up my music metaphors to draw on S Club 7, to reach for the stars?
A Weighty Task
We live in challenging times: the economy (so we hear) is improving with more people in employment, but those improvements are not seen by all. The significant rise in demand at food banks, for instance, shows that under the surface remains great need.
We have already lived through a number of years of ‘austerity’ and the expectation is that we will have to live through at least a further four years or so: the current budget deficit – the difference between what Government gets in and is spending - sits at around £60bn, whilst the national debt (what we owe in total) is around the £1.36 trillion mark. However, even if public sector savings return us to budget surplus from budget deficit, it seems unlikely that we will return to a wealth of grant-funding options for third sector organisations. In such circumstances there are, I think, four possible responses (beyond getting on the phone to Bill Gates to see if he’s got a few quid he could send us):
- Getting overwhelmed by the enormity of it all and doing nothing;
- Ignoring the issues and financial realities of this situation and doing nothing;
- Seeking to deal with the situation with an economic head dominating; or
- Seeking to deal with the situation in some way taking account of the human picture.
And this last one is where social enterprises come in. Perhaps I’m idealistic here but in times of doom and gloom and misery, the social entrepreneurs are the ones saying “Yes, but what if we could just do this or that – that would at least start to help.” “What if we could do some social good whilst all still getting paid at the end of the day?” Of course, this is not to say that only social entrepreneurs are able to make a contribution in this way but simply that they are obvious candidates for doing so.
Some of this is borne out by the growth of social enterprises despite the economic ‘downturn’. The last published RBS SE 100 (the 2014 edition) also included a useful 5 year overview of the picture since 2009. This showed that “over the past five years the social enterprises on the RBS SE100 Index have achieved phenomenal growth.” Backing this up further, a recent Pioneer’s Post article quoted initial data from the SEUK ‘State of Social Enterprise 2015’ report as showing that (in the last year) 52% of UK social enterprises have increased their turnover, 39% have expanded geographically, and 59% have developed new products and services. All of this tells us where we have been and where we are, but what about what’s coming up in the years ahead? Everyone knows that past behaviour is no guarantee of future performance and only a fool would try to predict the future, but here goes anyway…
Public Service Transformation
It is almost certain that the future holds further cuts to and changes in what are currently seen as public services. It seems unlikely that Government will be willing to pump billions of extra pounds into public services, at least for those outside the NHS.
It follows from this that the policy of creating new social enterprises from those currently working in the public sector will continue to be a serious option to consider for challenged public sector services. This is not least the case because we know that both past Labour and Conservative-led governments have actively supported the idea. Of course, simply turning something in to a ‘mutual’ is no more a guarantee of a successful organisation than choosing to paint the walls a different colour but there is increasing evidence available – both academic and anecdotal - that this kind of model can bring genuine benefits to both staff and beneficiaries alike.
We know that many social enterprises rely to at least some extent on public service contracts and it follows that these particular services may have their funding reduced or even be cut all together. If councils are forced to scale back on non-statutory services, and those services are the bread and butter of social enterprises, then there is a clear challenge there: those social enterprises will need to find other buyers of their services or adapt to deliver new services instead.
The Challenge to Scale Up
Where there have been public sector opportunities to bid for in recent years, often it has been necessary for organisations to group together and submit some form of collaborative bid. It is difficult to see this trend changing (not least because a smaller, lot-based, approach places a greater burden on the public body managing the contract) and so it will continue to be important for organisations to understand the different models of collaboration and their relative merits.
The Public Services (Social Value) Act has had a slow but steady start with a number of local authorities choosing to go further than the legal minimum thresholds because they see the advantages of doing so. The recent review of the Act called for a greater push in other areas of public services, such as the NHS, but this is really a slow burn change based, for the time being at least, on anecdotal evidence of others’ success stories.
The reporting and demonstration of the added, social, value beyond the core requirements of the contract will continue to be important and, whilst social enterprises should score well here, the challenge is still there for social enterprises to show their distinctiveness in some way. Some fear, though, that private-sector business might simply learn to report better on their own social value and so nullify the potential advantages of social enterprises in procurement processes which take that in to account. The truth is, I think, that private sector businesses may well do this and so social enterprises need to be aware of this and react accordingly.
Whilst, in some ways, it would be great if social enterprises could have ‘carve outs’ where certain work is guaranteed to come to the sector, this is perhaps a sign that the market needs to mature further. Surely, an indication that the social enterprise sector has truly ‘made it’ is where there is no fear of competing on an equal basis with the private sector because the offer is both confident and assured.
You might be thinking that this is all very well, but we all know that there are relatively few social enterprises operating at significant scale (the RBS SE 100 2014 index noted that only 14% have turnovers greater than £5m). How can the sector possibly compete with the ‘big boys’? The challenge is for the sector itself to scale up.
There has been talk for years of various models of ‘social franchising’ but relatively little talk of ‘mergers and acquisitions’ in the social enterprise world (charities do engage in this to a certain extent). I appreciate that this language commonly lives at the heart of the private sector but the concept is nevertheless one that needs to be considered and learning adopted from both the private sector and from charities. As with other aspects of the world of social enterprise there is nothing wrong in taking a concept from the private sector and turning it in to something slightly different (and more positive) in the social sector. Mergers and acquisitions in the social enterprise world needn’t have the connotations of profit over person (Kraft taking over Cadbury’s, for instance) and could instead be a genuine nurturing relationship, where skills and abilities available in one part of the business complement existing ones, extend the offering, and help both to grow.
Mergers and Acquisitions in the Social Enterprise World
There are already examples of charities and social enterprises creating group structures in this kind of way: Stoke’s PM Training (part of the Aspire housing association group) and Stockport-based Pure Innovations are just two. This kind of approach has a number of potential advantages – a stronger group balance sheet, the potential to draw on skills across the group to aid greater diversification, and a sharing of back-office functions. For younger organisations or start-ups, there can be the comfort of access to experience of those who have simply been around for longer.
This links too to access social finance – the message from social funders is not that there is no money to invest but rather that there is still a shortage of what they see as investable propositions. Adding the financial weight and experience of others helps to reduce the risk and so make an initial investment that bit easier to achieve. An organisation which is an investable proposition would, of course, not be limited to accessing only social finance: more traditional bank loans and investment could be on the table too.
Another potential advantage of this model of scaling up is succession – many social enterprises, and particularly those who have come out of the public sector, are relatively young organisations and have the same (or very similar) core leadership team that they have always had. But what happens when the chief executive retires, is ill, or just would like a new challenge elsewhere?
These moments of transition are potentially momentous in the life of an organisation and so need to be carefully planned and managed wherever possible – having the wider comfort and ‘safety net’ of a wider group structure could be a crucial factor in continued success.
The recent changes to procurement law also mean that it is generally harder to be able to justify a direct award of contract without some form of procurement exercise. A nascent start-up organisation would certainly stand a better chance of success in such competitions if backed in some way by social enterprises already carrying ‘real world’ experience and a balance sheet to go with it.
Over the next few years many social enterprises will need to continue to adapt to survive in what will almost certainly be a world of continued austerity and increased cuts to public sector budgets. Growth by seeking out ‘mergers’ with existing third sector players, and so moving beyond simple joint working or collaboration, will certainly be a challenge.
It is, though, a challenge well worth taking.
Simon Lee is an associate at Hempsons. He is a solicitor specialising in support to social enterprises and charities and has over 10 years’ experience of working with the sector.
Tel. 0207 484 7629