Scott T. Helm
Interest in social enterprise has grown substantially since 2010, in the United States and around the world. Books on the topic are seemingly infinite in number, and their topics range from social enterprise and construction (such as Loosemore and Higgon, 2015) to social impact measurement (for example, Patton, 2003) to an exceptional range of “how-to” books (such as Social Enterprise Alliance, 2010). The attention to social enterprise has developed as part of the larger interest in the overall phenomenon of social entrepreneurship (for example, Nash, 2010) and reflects the interaction of several significant forces and challenges. Central is the impact of the growing competition for limited funding from both governmental and philanthropic sources, and, as Nash describes, the search for alternative sources of revenue has encouraged a growing number of nonprofits to “explore market-driven approaches and experiment with practices drawn from the business sector, including the launch of earned-revenue ventures, both mission-related social enterprises and unrelated businesses”(2010, p. 264). Similarly, Lester Salamon (2010, p. 91) has observed that one of the drivers of growth of the U.S. nonprofit sector has been “the vigor with which nonprofit America embraced the spirit and the techniques of the market.” He suggests that a clear indication of the success of this approach is the substantial rise in nonprofit income from fees and charges, which he characterizes as “indicative of the success with which nonprofit organizations succeeded in marketing their services to a clientele increasingly able to afford them” (Salamon, 2010). Social enterprise continues to grow in practice, even as its legitimacy is challenged by some, and it promises to play a significant role in the 21st Century nonprofit sector.*
Many nonprofits generate significant commercial revenues in the course of their everyday activities. Salamon reports “fees and charges accounted for nearly half (about 47 percent) of the growth in nonprofit revenue between 1977 and 1997—more than any other source.” McGeever and Pettijohn (2014) report that health care organizations and educational institutions, the two largest income-generating nonprofit classifications, comprise 30 percent of all public charities yet account for 70.5 percent of public charity revenue. They also report that more than 73 percent of all public charity revenue was generated from fees-for-service or government contracts.
A related trend among nonprofit organizations is the growth in unrelated business income. Unrelated business income refers to income generated from any nonprofit business activity that is outside the scope of the charitable purpose for which the organization received its tax-exempt status. Unrelated business income is reported separately and, because it is generated from activity outside the scope of the organization's tax-exempt mission, it is subject to income tax (and social enterprises that involve unrelated business fall in this category, too). According to the U.S. Internal Revenue Service (IRS), the number of nonprofits filing unrelated business income tax (UBIT) returns increased 59 percent between 1990 and 2011. Further, the amount of unrelated business income reported over the same period increased 187 percent (IRS, 2015). This growth is especially interesting in light of the fact that U.S. nonprofit law limits the amount of unrelated business income that a nonprofit may generate without jeopardizing its tax exempt status.
As the statistics illustrate, the lure of social enterprise can be very enticing to nonprofit leaders. In times of economic stress, such as that experienced by many parts of the nonprofit sector from 2008 until recently, the development of a social enterprise can appear to be a panacea. Especially to a financially desperate nonprofit leader, social enterprise may seem to be a sure-fire way to stabilize financials and maintain programming. Unfortunately, nonprofit leaders past and present can tell many tales of ill-conceived enterprises that exhausted already-limited funds. Foster and Bradach, for example, tell the story of a nonprofit organization that decided to make and sell salad dressing (2005). The intent was to develop revenues that could subsidize the nonprofit's mission-relevant operations. However, a failure to recognize or account for indirect costs and an inaccurate assessment of direct costs led the organization to severely underestimate total costs of salad dressing production. Using the inaccurate numbers, the organization set the price for the dressing with the expectation that each bottle of salad dressing would earn $0.35—a nice profit for the organization. In fact, their later assessment determined each bottle cost the organization approximately $86.50 to produce—a terrible and dramatic loss! Not every case of financial failure is this dramatic, yet such mistakes illustrate the need for nonprofits to fully understand the implications (financial and otherwise) of operating social enterprises. This is especially true when the social enterprise is expected to be a profit generator.
Horror stories notwithstanding, many nonprofits have generated significant benefits from their enterprise activities. Consider, for example, Support Kansas City, which is regionally recognized as a successful enterprising nonprofit organization. Originally fostered into existence by Bank of America, Support Kansas City provides back office solutions for small- to medium-sized nonprofits in the Greater Kansas City community. Recognizing that many nonprofit organizations with excellent client services lacked necessary capacity in accounting, Bank of America created this support organization to bolster area nonprofits by allowing them to focus on meeting mission. The design of the new organization would bring together financial management expertise akin to a for-profit accounting firm with a price structure that would be affordable for nonprofit organizations. Since their inception in 2001, Support Kansas City has added technology support, fundraising strategy support and strategic management support. In 2014, this suite of services generated almost 84 percent of all of the organization's revenue.
The purpose of this chapter is not to promote or discourage the use of social enterprise strategies but to provide nonprofit leaders with a broader understanding of the issues and opportunities associated with social enterprise and help them prepare to examine them. Rather than duplicate the content of the many existing “How-to” volumes on social enterprise, this chapter is designed to serve as an orientation to help nonprofit leaders make sense of key elements of the overwhelming volume of literature on the topic and understand key concepts that will be important to consider as they explore options for enterprise development. I encourage every nonprofit leader considering social enterprise options to discuss the relevant issues identified in this chapter with their board and executive colleagues and collaborators. This Handbook's Internet resource site includes a number of tools and resources that may be helpful to nonprofit leaders as they facilitate such conversations and weigh their options. Many of the important elements of the social enterprise development process fall under the bailiwick of other chapters in this Handbook, and it will be important to link the insights of this chapter with the discipline-specific methods and tools presented in the associated chapters (e.g., Chapter Nine for further information on the strategy and planning process, and Chapter Thirteen for specific information about market research and planning).
Social enterprises develop within the larger context of the nonprofit organization and even the nonprofit sector, and this context differs from region to region of the world. Therefore, I begin this chapter with a brief discussion of the cultural context of social enterprise. Culture shapes and influences the ways we perceive and understand the value of a strategy such as pursuit of social enterprise. Next, I address the questions: Who should launch a social enterprise? What are the implications of this choice? I describe knowledge acquisition and resources likely to be useful in the process of enterprise development. I then discuss who ventures into social enterprises, and the options that exist for engaging in a social enterprise. Finally, I discuss planning, the planning process, and the relationship between planning and social enterprise.
Analysis of social enterprise in 2016 is a global pursuit. The abundance of nonprofit (and more important for our discussion) social enterprise activity worldwide provides important insights into the role that culture and national context play in the creation of various forms of nonprofit enterprise. This is illustrated by the variation in the types of social enterprises described in the European literature versus those described in the American literature. There are several differences of interest and relevance and, taken together, they offer important insights into the reasons and ways that such enterprises develop and function.
Generally speaking, European scholarship describes social enterprise as it develops in the context of a strong welfare state. A 2014 study underwritten by the European Commission sought to provide the first continental mapping of social enterprises in twenty-nine countries (Wilkinson, Medhurst, Henry, Wihlborg, and Braithwaite, 2014). The study defined social enterprises by the following characteristics:
U.S. social enterprises, which develop in the context of capitalism, differ in some relatively significant ways. Typically, U.S. social enterprise exhibits the following characteristics:
This chapter focuses on U.S. social enterprises and, as such, the reader will note a strong emphasis on the purpose of commercial revenue generation. Equally important from this perspective is that social enterprises are often funded privately (that is, by foundations, individuals, nonprofit lenders, and banks). Both of these have important implications for how U.S. social enterprises are planned and implemented.
Unlike Hamlet's quandary “To be or not to be, that is the question,” the decision to establish a social enterprise venture is less existential and more pragmatic. As noted earlier, in many European countries social enterprise is a special class of organization designed to serve particular purposes; in the United States it is a strategy. Therefore, in the United States, the choice to operate a social enterprise (like any strategy choice) is available to any nonprofit organization regardless of its particular mission niche.
Social enterprise may be an option to any nonprofit, yet that does not mean every nonprofit should launch a commercial venture. Then how should a nonprofit begin to decide? The answer to this question requires significant deliberation, particularly regarding four core areas of deliberation:
Each of these four areas offers a different and complementary lens through which to examine your enterprise's possibilities.
At the core, it is essential to have clarity regarding who you are as an organization and how a potential enterprise strategy might relate to this. Typically, when asked to define their organization, nonprofit leaders will recite their mission. Mission is important, so this is an important starting point, but I would assert that mission only begins to describe the true nature of a nonprofit. Equally important is the unique value a nonprofit provides for the community. In what ways might a potential enterprise be relevant to mission? Will the potential enterprise boost value creation or might it interfere? What are the organization's core values or guiding principles and what guidance do they offer when it comes to exploring enterprise options? Will the development of an enterprise add value to the organization's core services or might it distract? It is essential that nonprofit leaders develop a shared sense of why they might explore an enterprise option, the results they seek, the risks they are willing to incur as a part of the process (and why they would be warranted), and whether an enterprise option will, in fact, offer appropriate benefits and results.
The second of the key areas of consideration and deliberation is that of operating environment. Later in this chapter, I discuss the implications for assessment of the operating environment as it relates to planning. At this early phase in exploring enterprise ideas, there are two basic areas to examine with regard to operating environment. First is the category of legal environment; the second is that of normative environment. When nonprofits take actions that conflict with either the legal or normative expectations of their environments, the ramifications can be grave—and both environments place constraints on the options that will be acceptable for nonprofit enterprise. In the United States, for example, legal environment parameters include constraints on
Normative elements are less formal and usually vary by the mission of the organization, the location of the organization, and the constituencies of the organization. Normative elements are primarily about expectations and the sense of what is and is not acceptable for a nonprofit to do, and it is essential that nonprofit leaders consider these dimensions at the very outset of their exploration of enterprise options. Even though a given enterprise option may be legal, it may be dangerously inconsistent with the expectations and values of an organization's key stakeholders. It may be inconsistent with (or even threaten) the overall culture of the nonprofit itself. For example, the decision of a volunteer center to charge people for their volunteer placement might conflict with the values of traditional volunteer center operations or the norms of the communities in which they operate. These are critical issues that have great potential to damage the legitimacy, credibility, and even sustainability of the nonprofit.
The third area of initial deliberation focuses on the business model or revenue model of the nonprofit and how it may change (or need to change) if an enterprise is developed. At core, the idea of the revenue model involves understanding the sources of revenue for the organization and why and how they provide financial resources. Nonprofits need to make explicit and informed choices about the potential of various types of revenue sources that might be available to finance their operations. This topic is fundamentally a marketing and economics discussion—beginning with an understanding of the demand for the nonprofit's services and the nonprofit's relationships with its current customers, and consideration of alternative ways that customers might be willing to engage in commercial exchanges with the organization. The topic of markets and market relationships is thoroughly examined in Chapter Eleven of this volume; the focus of this chapter is to underscore that these central choices must be examined again by a nonprofit considering the development of an enterprise.
Similarly, in Chapter Nineteen of this volume, Young and Soh discuss nonprofit finance and examine another facet of the revenue model—the critical relationship between source of revenue and beneficiary of the provision of services. Framing revenue generation in economic terms, Young's model connects commercial revenues with the value a client places on a service. The question is one of value and the overall value proposition: Do potential clients consider the value commensurate to the cost? This is central to any consideration of social enterprise. For example, an opera house may provide multiple programs to their community. The main line of business is the production of operas. Opera enthusiasts view purchasing a ticket to a show as a value transaction. The consumer receives a good (in this case the ticket to the opera) and is willing to pay a price commensurate to the value he or she places on an experience. In economic parlance, this is the essence of private good markets; social enterprises must operate successfully in private good markets.
More generally, nonprofits providing a good or service that directly benefits the client and only that client may be well-advised to examine that relationship as social enterprise. A few examples of this type of venture include:
Each of these types of services has individual clients (even though some may involve third parties, such as insurance companies) who pay for the value they receive for the respective service.
An emerging area of financial implications to consider involves the impact that commercial revenue may have on philanthropic donations. Smith, Cronley and Barr (2012) explored what happens with donation levels when an existing nonprofit launches a social enterprise. Their findings suggest donations decrease marginally when the social enterprise has good mission fit and more significantly when the donor does not perceive mission fit between the new enterprise and the mission. More studies will need to further our understanding of this relationship, but it is important to note that social enterprise may have a negative impact on donor behavior.
Finally, nonprofits exploring social enterprise will be well served by an analysis of organizational capacity and assets. Similar to environmental and revenue model issues, capacity issues are examined in great depth as part of the enterprise planning process, but they must be given initial general consideration at an early stage in any dialogue about the potential to develop an enterprise. In addition to financial capacity, the organization's leaders need to assess the organization's capacity with regard to the knowledge and competence required to move forward with enterprise development and the availability of other key resources needed to develop the enterprise—particularly human capital and assets.
Each of these “lenses” provides nonprofit leaders with a framework to help initiate an assessment of their organization and their enterprise options. Because social enterprise is a strategy that, at least in principle, can be employed by any type of nonprofit, the insights that you can gain from this examination will not necessarily encourage or discourage your decision to develop an enterprise. But it is important to understand these dimensions of your organization; having a better understanding of who you are as an organization will make it easier to recognize future obstacles and opportunities if you choose to develop an enterprise.
Google the phrase “social enterprise” and you will find there is no shortage of information on the topic. The sheer volume of social enterprise information may present a different problem for the busy nonprofit executive, since sifting through the many sources may seem an insurmountable task. However, nonprofit leaders beginning to explore social enterprise options may need to do so as an internally developed process. These “Do-It-Yourselfers” will probably seek resources for two types of information: the enterprise planning process and options for enterprise strategies. The vast range of literature derives from one of three general categories: social enterprise management books, information websites, and planning templates.
Management books on social enterprise target the nonprofit practitioner. As a whole, the genre introduces nonprofit leaders to key social enterprise concepts and provides instruction on how to use these concepts. Topics include market analysis, organization structure, and financial management. Some are organized as workbooks with exercises for the nonprofit to complete as they plan their enterprise (such as Barreiro and Stone, 2014); others are more conceptual and help nonprofit leaders frame their enterprise (for example, Lynch and Wall, 2009). In addition to these volumes, which take a holistic approach, practitioners can draw on the wisdom of books on specific functional areas of social enterprise management (technology, marketing, financial management).
Finally, a growing number of new books penned by successful veterans of social enterprise have begun to emerge (see a list compiled in 2013 by Stanford Social Innovations Review at http://ssir.org). Such books provide a director's eye view of social enterprise and can offer more intimate insights about the often-undulating path of new venture start-up. (When selecting specific books, remember that books of different nations are unlikely to work from a consistent definition of social enterprise. Therefore, select books that are relevant to the nation where you wish to develop the enterprise.)
New Internet sources also provide an abundance of information for the Do-It-Yourselfers. Using the Internet as a research medium has both positives and negatives, of course, but there is much that the careful user can glean. Among the promising are information websites with enterprise case studies (for example, Social Enterprise Alliance), reference materials on legal and managerial considerations (National Center for Nonprofit Enterprise and Social Enterprise Magazine-Online), and interactive venues such as chats and blogs (such as hosted by The Skoll Foundation). There is also a variety of planning tools and templates available on the Internet. Of course, Internet sources also have shortcomings. The most significant shortcoming is the reliability of some information sites. (References and links to useful Internet sites and resources are provided to readers via this Handbook's resource site.)
Nonprofit leaders considering the development of a social enterprise may debate whether to go it alone or work with a consultant. When making this decision, the questions and observations may help clarify the answer:
One of the first questions many nonprofit leaders consider when organizing a social enterprise is, How should I structure it? Structures need to be chosen based on the purpose and conditions under which the enterprise will operate, and the appropriate answer will be influenced by a number of factors:
Social enterprises typically take one of three general forms (Alter, 2009):
I describe each of these forms in the following sections (based on the typology of Alter, 2009). At the outset, it is important to note that no form is inherently superior to another and each form offers potential merits (and drawbacks). Further, no model is automatically consistent with an organization's external environment. Instead, these organizational forms should be evaluated as strategic options.
Nonprofit organizations that implement their sole or core “business” as a revenue-generating social enterprise are common throughout the sector. Hospitals, day care centers, and schools all charge fees-for-services and use these fees to finance the cost of providing their services. Operating in environments with norms (and laws) supportive of the generation of earned income, these organizations implement earned-income programs that are completely aligned with their charitable missions. Their enterprise programs are central to their organization's charitable purpose, so the organization does not need to be concerned with questions of mission relevance or the threat that the enterprise might lead to mission drift.
When a social enterprise constitutes the organization's primary business, it is most likely to be implemented as a new organization. (Existing nonprofit organizations that are not already social enterprises are unlikely to appear in this category since they obviously have revenue sources other than fees-for-service.) When an existing nonprofit chooses to shift its design to make a social enterprise its primary business, one of two scenarios is likely to have caused the change:
A second structural arrangement is the operation of a social enterprise as one part or unit of an organization. Unlike the first structural form, these social enterprises are considered related but not necessarily central to mission fulfillment. Depending on the relevance of the enterprise to the organization's mission, the earnings of this form of social enterprise may be subject to unrelated business income tax (UBIT). However, more often than not, a program's activities will be sufficiently related to mission to avoid this. For example, a typical program of a sheltered workshop includes work activities to be implemented by their developmentally disabled clients. The workshop then sells the products of their work to the public. For the sheltered workshop, the work opportunities for the developmentally disabled population are central to the mission. Therefore, the earnings of the work products are directly related to the mission and thus not subject to UBIT. We often see this second structural form in existing organizations. A nonprofit may realize there is a revenue generation opportunity, closely related to their mission, that they could implement. Consequently, they establish this mission-relevant program to generate additional revenues
Social enterprises structured as subsidiaries or affiliates of the nonprofit are a third structural option. The subsidiary structure allows a nonprofit to achieve legal separation between an enterprise and the parent organization. This may be useful or even essential as the nonprofit implements an enterprise that may not be feasible or appropriate to operate internally, usually for reasons of tax or other legal liability. The subsidiary organization may take either the nonprofit or for-profit form of organization. I discuss the implications of both next.
Social enterprise subsidiaries that take a nonprofit form often exist because an organization wants to pursue a charitable purpose without opening itself to UBIT or other legal liability (see Chapter Two of this volume for further discussion of legal and related risk management issues). For example, this option might be chosen because a nonprofit wishes to address a new need or opportunity that is tax-exempt and charitable but is not within the scope of its own tax exemption as granted by the IRS. Or it might be chosen to ensure a legal separation so that risks and liabilities associated with the new venture could not result in losses of the new venture being assessed against the parent organization (for example, a church that creates a low-income housing redevelopment agency and wants to keep its church assets separated from the riskier work of the redevelopment agency). The subsidiary is a separate nonprofit corporation with its own legal status. The subsidiary organization will have a separate governing board, but it will be under the control of the parent nonprofit (for example, the parent organization board would appoint or approve the membership of the subsidiary organization's board). Therefore, the board of the parent organization will be the primary governing body for the parent nonprofit and will either oversee or itself serve as the board of a subsidiary.
The for-profit subsidiary approach appears more often in the U.S. social enterprise literature. Prescribed as a revenue-generation model, the for-profit subsidiary is a taxable entity that can pursue financial opportunities outside of traditional charitable constraints. Since its earnings are taxable but it pays tax on them just as any other for-profit would do, it has no limits associated with tax-exempt status. Of course, the use of the for-profit subsidiary status can bring some of its own problems. Thus, prior to creating or spinning off a for-profit subsidiary, a nonprofit would be wise to consider the implications of the following potential issues:
The specific sector of incorporation is not an arbitrary decision. When weighing whether the subsidiary should be for-profit or nonprofit, management must consider the capital needs, the profit potential and the input markets of the subsidiary. Ventures with significant capital needs and profit potential tend to be suitable for for-profit forms. Ventures with low capital demands and inefficiencies in either customer or input markets often are better suited for nonprofit forms.
Nonprofit social enterprises are not confined to program activities. Many nonprofit social enterprises have successfully generated revenues from activities that are not directly involved with their programming. Three increasingly common enterprise opportunities of this type are
Each of these strategies involves the utilization of an organization's assets in a new way. CRM and licensing leverage a nonprofit's brand through relationships with for-profit organizations. Asset reappropriation involves the use of organizational assets for commercial revenue generation. Each of these is described below.
How many times have you visited a grocery store around Thanksgiving or another holiday and, at the checkout counter, the cashier asks if you would like to make a donation to the local food pantry? If you answered more than zero, then you have experienced a form of CRM. The question for a nonprofit leader is: When does CRM make sense?
Cause-related marketing is defined as, “a mutually beneficial collaboration between a corporation and a nonprofit in which their respective assets are combined to: create shareholder and social value, connect with a range of constituents,…and communicate the shared values of both organizations” (Foundation Center, 2010). Research on CRM has validated the potential value of a mutual-benefit relationship as described in the definition and, more specifically, research has found that CRM between organizations with similar purposes improves customer perceptions of the for-profit organization (Barone, Miyazaki, and Taylor, 2000; Pracejus & Olsen, 2004).
Cause-related marketing has become a big business in the United States. The IEG sponsorship report estimates corporate cause sponsorships will hit $1.92 Billion in 2015 (n.d.). There are a multitude of examples of CRM success. The initial example cited by the Foundation Center was between American Express and the Statue of Liberty. American Express launched a campaign in 1983 that donated to the restoration of the Statue of Liberty one cent for every purchase on one of their credit cards. As a result, usage increased 28 percent (Foundation Center, 2010). In a more recent CRM type of collaboration, telecommunications firm Sprint Nextel donated $2 to the Nature Conservatory for each Samsung reclaimed phone that was sold (http://causerelatedmarketing.blogspot.com/).
These examples demonstrate two critical points for nonprofits considering a CRM strategy. First, to attract for-profit partners, the nonprofit needs strong brand identity. A strong brand is critical so the for-profit's customers identify (and value) the nonprofit cause. Second, it is more useful for a nonprofit to seek for-profit partners whose businesses have some mission or service commonality. For example, the link between recycled telephones and an environmental organization offered such synergy for the Sprint-Nature Conservancy relationship. The key here is that not every for-profit will be a good CRM partner. A mutually beneficial relationship is contingent on some form of common purpose.
Let's go back to the grocery store setting we described in the CRM section. As you fill your cart with your favorite items you recognize that some of the items you have selected have the American Heart Association brand and logo. This is illustrative of another form of partnership, brand licensing. Under such relationships, nonprofits license the use of their brand in a business's marketing for a fee.
Similar to CRM, the success of brand licensing is contingent on a strong nonprofit brand and consistency between the nonprofit's mission and the for-profit product. This may appear to be a sure-fire social enterprise strategy, but it is important to remember that connecting your nonprofit brand and identity with a for-profit organization can open the door to problems. If the for-profit product performs poorly or the business misrepresents an aspect of a product that carries the nonprofit brand, the damage affects the nonprofit. Even in cases of no impropriety, failure of the nonprofit to conduct due diligence may lead to a partnership that conflicts with the core values of the nonprofit. In these cases, the nonprofit appears to “sell out” for money and the result can be loss of trust, credibility, or worse. Chapter Thirteen of this book offers a useful framework for examining the relative merit and value of various collaborative approaches.
Unlike CRM and brand licensing, which are enterprising strategies using a nonprofit's soft assets, asset reappropriation involves finding alternative uses for tangible assets. Too often, nonprofits look at their assets through overly narrow lenses: a building, for example, is only a place to implement core mission activities, or land is merely green space that adds to the aesthetic quality of the campus.
A strategic look at these same assets may uncover a possible revenue opportunity or stream not previously considered. For example, Drumm Farm is a Missouri nonprofit originally started as a boys' home in the early 1900s. As the founding family passed away and perceptions of the roles of boys' homes in society changed, Drumm experienced a significant decline in clients. What at one point was a robust campus with extensive acreage and buildings full to capacity began to wither away. Hampered with severely depreciating assets leading to ever-greater cash flow problems, the Drumm Farm executive director and board of directors revaluated their use and began to redeploy their property assets. Instead of leaving their buildings empty, they created a social service campus and rented the buildings to local nonprofits. Further, realizing their greatest asset was property, they developed a lease agreement with a local golf course management company. The management company converted a segment of the Drumm Farm land into a golf course, operates the new course, and pays the nonprofit an annual fee (lease). This venture has provided a significant source of new income that Drumm has been able to use to help fund its core mission operations.
Of course, not every nonprofit has an abundance of land and empty buildings. But almost all nonprofits do have some assets that may have potential as a source of additional revenue. It is important to ensure that redeployment of the assets should generate income that will exceed (by some significant margin) the expense involved in redeploying the asset. For example, if it takes $1,000 of time to negotiate the use of the asset, you should require the venture to generate profit exceeding that $1,000 by an appropriate margin. Further, you may not need to manage the use of the asset to generate revenues. In the Drumm Farm example, Drumm staff did not manage the golf course or the organizations in the buildings. Lease agreements included management responsibilities. This allowed Drumm Farm to earn revenues without incurring the expense of management or oversight.
Thus far, this chapter has discussed in relatively broad terms some of the options for social enterprise. Of course, to take these options and develop them into a useful social enterprise that benefits the nonprofit organization requires additional planning and development, and that is the focus of this section of the chapter. It is important to understand that effective enterprise planning and development flows from and builds on the broader organizational strategizing and planning processes explained by Brown in Chapter Eight and Bryson in Chapter Nine of this Handbook. In many cases, the development and implementation of a new enterprise would constitute a strategy in the context of a nonprofit's overall strategic plan. The planning and development process explained in this chapter will be most useful if it is implemented as an outgrowth of such a strategic plan.
Before elaborating on our discussion of planning, it is important to note an alternative approach to enterprise start-up has gained significant attention since 2010—the so-called “Lean Start-Up.” As Steve Blank explains in his Harvard Business Review article, a Lean Start-Up “favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional ‘big design up front’ development” (2013). Many nonprofits have picked up on this trend that preaches a less elaborate innovation path. However, it is important to recognize that lean start-up approaches apply only to process, not outcomes. As Peter Murray and Steve Ma point out in their 2015 article in Stanford Social Innovation Review, “No form of rapid experimentation, for instance, can test whether an intervention aimed at kids in preschool will affect high school graduation rates.”
Time and experimentation will help us assess the utility of lean models for nonprofit organization social enterprise. In some ways, the tenets of the lean approach are reminiscent of the work of Senge and other organization innovation theorists who have wrestled with the question of how to encourage organizational learning and innovation (Senge, Kleiner, Roberts, Ross, Roth, and Smith, 1999). More detailed resources on the practice of the lean start-up approach are available in the resource website for this Handbook.
The more traditional approach to enterprise planning demands that nonprofit leaders recognize the preconceptions and commitments associated with the process. A quick survey of any group of individuals who have participated in planning exercises in the past is likely to reveal that many have had less-than-positive experiences. Common among planning complaints are “It's a lot of talk with no action” and “There are more important things I could do with my time.” It is essential that the planning process be planned and organized well, and that it make effective use of participants' time and input. As discussed earlier in the chapter, the amount of time demanded of participants and (especially) executives will be influenced by the decision to use a consultant or process facilitator. However, even with external help, it is essential to recognize that a well-developed process will require that key participants devote an adequate amount of time to the process, time that will be in addition to their existing work responsibilities.
The enterprise planning process must begin with consideration of the current state of the organization. Organization leaders must have the answer to the question Where are we today? In an earlier section of this chapter, I outlined the key elements of this type of initial discussion—discussion about mission impact and relevance, characteristics of the nonprofit's operating environment, financial and revenue implications, and organizational capacity to implement the enterprise. The decision to proceed with enterprise planning assumes that those initial deliberations resulted in a conclusion that the context for enterprise development is positive and that a social enterprise strategy has potential for benefiting the nonprofit.
Overall, there are three levels of planning that are germane to the process of evaluating and planning a social enterprise: strategic planning, feasibility assessment, and business planning. A summary of the three levels is provided in Table 12.1. Each of these levels of planning has its own focus, and each adds its own unique value to the development of the enterprise.
Table 12.1 Linking Enterprise Process and Practice
Planning Type | Purpose | Role in Enterprise Development Process |
Strategic Planning | Disciplined effort to produce fundamental decisions and actions shaping the nature and direction of an organization's (or other entity's) activities within legal bounds (see Bryson, Chapter Nine of this volume). | An organization with no specific direction would begin with strategic planning. This comprehensive approach would identify multiple organizational strategies, including options for social enterprise. |
Feasibility Study | Assess the viability of an opportunity, and usually serves as a precursor to a business plan. | Explore an enterprise idea (usually from the strategic planning process) and assess how well it would fit and operate within the organization (or link to the organization, if developed as a subsidiary). The idea is formed and needs to be examined through a feasibility process. |
Business Planning | The final type of planning that leads to implementation, the business plan specifies in relatively great detail how the enterprise will be organized, managed, financed, staffed, and operated. It specifies goals and provides time-based projections of financial, market, and operational performance for the enterprise. | Assuming the feasibility study process suggests that the idea is viable and attractive, the nonprofit would develop a business plan for the enterprise. This will serve as a guiding document for the initial three to five years of operation. |
The remainder of this section of the chapter explains the sequence and key elements that comprise the seven stages of activity that will be important to a successful enterprise planning process. These seven stages or elements are
The beginning of the planning process starts with an organizing stage. Consistent with the recommendations Bryson presents in his Chapter Nine outline of the planning-to-plan process, critical questions to address during this stage include
The composition of the planning team is critical to the overall success of the process. The key is to bring to the table the people who have important knowledge to inform the planning of the potential enterprise. Inclusion of executive leadership plus a mix of board and staff is important because it combines the strategic leadership and perspective of the board and senior executive(s) with the operational and tactical organizational knowledge of staff. The exact mix will vary by organization and opportunity. Regardless, board members provide a valuable perspective and should be included in the planning process; often board members bring knowledge, skill sets, and experiences that staff do not possess. In addition to board and staff, some organizations also invite selected key stakeholders to participate on the planning team. These stakeholders may be previous board members, past clients, or close collaborators. It should be noted that involving individuals outside the organization may require additional norming processes to ensure the team comes together and is “pulling” in the same direction.
After the planning team is created, the plan-to-plan shifts focus to aligning the intentions of all the members. The first step in this process is developing a goal. The goal of the planning process will be defined by the purpose of the proposed social enterprise. For example, if the process is the result of a collaborator approaching your organization with a social enterprise idea, the planning process goal would be to assess the viability of the idea. Alternatively, if the process is the result of a strategic plan strategy that directs the organization to create a new earned-income enterprise, the planning process goal would be to develop enterprise options and then proceed to viability assessment. The key purpose of the goal definition is to provide a standard by which planning progress can be assessed and to help ensure all team members are working toward a common purpose.
Based on the planning goal, the planning team should establish milestones and time lines for the planning process. The planning process as a whole should have a finite end point. One pitfall many nonprofits encounter as they plan a social enterprise is perpetual planning. Seeking a level of certainty not feasible, some nonprofits continue to plan with no end date. Planning team fatigue eventually sets in and the process fizzles with no outcome. The long-term impact of these endless processes is evident when the organization begins to plan again. Team members and other stakeholders will be reticent to engage in a process they fear will have no end.
In order to avoid this trap, establish decision-making deadlines at the beginning. The deadlines should include the timing of a final decision on whether or not to pursue the enterprise, as well as intermediate deadlines for completion of stages such as the situational analysis. When considering time lines, it is important to achieve a balance between enough time to complete your work and time frames short enough to maintain planning momentum. No rule of thumb exists on how long an enterprise planning process should last. However, your plan will be built on certain assumptions and if your processes extend for too long those assumptions may change.
Finally, the plan to plan addresses the frequency of team meetings. The number of team meetings is not as important as how the meeting time is spent. Research should be conducted and summarized outside of meetings. This allows meeting time to focus on interpretation and analysis of the data. After broad enterprise strategies are developed, it may be useful to break the full team into a set of smaller sub-project work teams. These work teams (composed of fewer members) will investigate specific areas of a strategy and bring information back to the full planning team for further analysis and planning. The work team model may be useful for making effective use of specialized skill sets of individual planning team members.
The foundation of successful planning is research. Research enables nonprofit leaders to have a full understanding of the organization's capacities, effectiveness, and efficiencies. In an organizational context, research is often referred to as assessment. During a social enterprise planning process, assessment has dual foci: internal and external. Because the motivations for each are unique I will deal with them separately.
Internal assessment, sometimes taking the form of an organizational audit, is designed to identify organizational capacity and assets and identify organizational weaknesses. Operating a social enterprise requires specific capacities, capacities unique from traditional nonprofit activity. It is important that these capacity needs be clearly identified at the outset of this process. Then the organizational assessment should take care to assess whether the necessary organizational capacities and systems are in place to support the enterprise.
There are a multitude of assessment tools available to nonprofit organizations, and some will be more relevant or useful than others (for an overall discussion of various tools available for organization capacity assessment, see Bartczak, 2005). Assessment value needs to be judged on the basis of the information the organization needs to know in order to evaluate its capacity for the specific enterprise in question. Some types of enterprise call for very specific capacity, others do not. General assessments, such as the McKinsey Capacity Assessment (Bartczak, 2005), focus on an overall set of organizational capacity elements. The McKinsey assessment provides a vehicle for an organization's leaders to assess seven general categories:
Tailoring an assessment such as McKinsey to a social enterprise process often requires a nonprofit leader to add additional assessment areas. However, every process should provide a systematic basis by which to assess each of the following capacity elements:
These four capacity areas do not constitute an exhaustive list. Other areas of concern will relate to the focus of the proposed enterprise. For example, will the enterprise operate in an area governed by professional regulatory or licensure authorities (for example, admission to practice law or medicine)? It is essential to identify the additional areas of capacity that are likely to be relevant to your enterprise and implement relevant assessments in these areas.
An external organizational assessment for a social enterprise does not vary dramatically from external assessments any nonprofit would conduct, although a new enterprise idea may require a nonprofit to go back and redefine its relevant “external environment.” During an external assessment the planning team will collect data on competitors (often similar service providers), pricing models and practices, client characteristics, key stakeholder perspectives, and other factors (such as legislation) that are relevant to the venture. The goal of the external assessment is to identify and understand the implications of the opportunities and threats in the new enterprise environment. In order to develop a successful strategy, the planning team must be apprised of environmental influences that will support or mitigate performance of the new venture.
Following the completion of both assessments, the planning team will analyze the information by using practices similar to those Bryson discusses in Chapter Nine. Many nonprofits will use processes such as SWOT (strengths, weaknesses, opportunities, and threats) analyses for the analysis process. Such analyses provide the initial sense of the implications for enterprise viability or acceptability, and development of this information into strategic decisions is the essence of the next stage of the enterprise planning process. The most promising venture ideas will capitalize on synergies between existing organizational capacities and environmental opportunities. Of course, the real world rarely affords us such utopian scenarios. More likely, analysis will reveal a couple of options where some capacity exists and potential threats are minimized. The next stage of planning, strategy formulation, takes these ideas and develops plans to move forward.
Strategy formulation is the stage during which key strategic choices are made—choices about which options to pursue and how best to organize and pursue them. In the context of enterprise planning, this is the point in the process at which the nonprofit's decision makers weight the relative merits of the enterprise options and determine whether or how to proceed. In the previous stage the planning team identified a couple of possible broad directions or opportunities. During strategy formulation the planning team develops broad programmatic maps to guide the new enterprise.
Other chapters in this book explain in significant depth the key facets of strategy development, so little space will be allocated to those topics in this chapter. For example:
The next stage in the enterprise planning process involves aligning the financial dimensions of the enterprise with the strategic choices to be made. Far too many nonprofits adopt courses of action without ever making any systematic assessment of the financial implications of their choices—choices about where and how revenues are generated, and choices about where and how these resources are managed. The results of ignoring these financial aspects of our choices can range from underperformance on important mission-centric projects to an outright diversion of resources from mission to a relatively less-valued activity. This stage of the planning process calls for the nonprofit's leaders to examine and prepare to make decisions regarding three key areas:
The actual methods by which these assessments, plans, and decisions are made are explained in Part Four of this book. The essential point I wish to make in this chapter is that these all are important elements of the initial social enterprise planning process, and there are critical decisions to be made—decisions that can have lasting implications for both the social enterprise and the larger nonprofit organization that is the host or parent entity for the enterprise.
Financial discussions can be difficult for nonprofit leaders. Because mission is (and must be) the central focus for a nonprofit organization's executives, financial discussions often end up being of secondary concern (if they even receive that much consideration). However, when it comes to social enterprises, ignoring financial matters can have disastrous results. At worst, social enterprise financial problems can end up undermining all that the organization is doing to maximize mission accomplishment! I previously related the story of a nonprofit organization that decided to make salad dressing and the terrible costs the organization incurred because it failed to account for indirect costs and inaccurately understood its direct costs. Such mistakes underscore the need for nonprofits to ensure careful financial planning as they evaluate prospective social enterprises. This is especially true when the social enterprise is expected to be a profit generator.
A critical financial concern for a new social enterprise and its host organization is that of “capital structure.” A nonprofit's capital structure is the mix and distribution of an organization's assets, liabilities, and net assets (Miller, 2003); a nonprofit's capital structure can create significant problems with a nonprofit's ability to develop a viable social enterprise. Capital structure essentially defines the ability of a nonprofit to undertake new projects and absorb risks (both conventional projects and potential enterprises). Stated plainly, organizations with more liquidity have more flexible capital structures that are going to be more flexible in accommodating the financial dimensions of a new social enterprise. Analysis of capital structure helps the planning team appraise fixed assets available for the new enterprise (and if there is no one on the planning team with the ability to assess this aspect of the nonprofit's capacity, the organization should secure external talent to ensure that this can be done). Significant insights into this aspect of financial planning and management are also discussed by Bowman in Chapter Twenty-One of this Handbook.
In the enterprise planning process, it is essential to acknowledge that all new ventures require start-up capital. Social enterprise planning must plan for start-up funding, including attention to the amount needed to initiate the venture and to the debt service necessary to recover start-up costs. Flexible budgets (which map multiple scenarios) and break-even analysis can provide organization leaders with insights that inform necessary cash-reserve decisions. Armed with this information, the planning team can identify potential funders for their new enterprise. When it comes to nonprofit social enterprises, the most common start-up funders tend to be the nonprofit hosts themselves (using cash reserves), individual donors, and charitable foundations. On a less frequent basis, nonprofits may find start-up support from government grants or banks.
Moving from strategy development and financial implications to strategy implementation planning can be much more involved than many nonprofits expect. At this stage, the process moves from one of assessment to one of decision and—assuming that the decision to proceed is affirmative—to the creation of the actual operational or business plan that will take the information from the earlier stages of the planning and integrate it into an operational document. The process of evaluating the feasibility of an enterprise strategy and, ultimately, creating the implementation plan requires decisions on the key issues that have been examined throughout the process, including the following:
In order to develop the strategy implementation plan, the planning team may need to involve other key staff members (if they are not already on the planning team). Knowledgeable input from key staff is critical in this process.
The strategy implementation plan often is created in the form of a business plan for the new social enterprise. Business plans are documents that bring all of this information together and present it in a well-organized and complete manner—one single place that leaders and managers can use as the key reference point as they proceed with the implementation process. There are many formats for business plans, and the Internet resource site for this Handbook provides examples and a number of resources and links. A typical business plan will include the following specific information (drawn from Massarsky, 2005; the following list could serve as the table of contents for such a document):
A number of books and guides have been written specifically for nonprofit enterprises. These can be especially useful because they contain sections that are not typically found in traditional for-profit business plans, such as a description of the mission of the nonprofit, its purpose and goals for the social enterprise, and the operational, financial, and legal relationships between the nonprofit and the new enterprise (Massarsky, 2005).
Similar to any planning process, the enterprise planning process should include a process for evaluation and refinement of plans and operations. It is important to note that evaluation plans should be developed before the social enterprise planning process concludes. In addition to program metrics, metrics of enterprise financial performance also must be included (examples of financial metrics are profit and loss, marginal costs, and unit costs for both outputs and outcomes). Program evaluation is addressed in depth by John Clayton Thomas in Chapter Sixteen of this volume, with important guidance regarding processes that are appropriate to enterprise evaluation. The reader is encouraged to incorporate this information as they develop the evaluation part of the enterprise plan.
Social enterprise continues to be a source of both excitement and intimidation to nonprofit leaders as they explore the most useful ways to ensure that their organizations remain viable and responsive for years to come. Implemented effectively in appropriate contexts, social enterprise is another important strategy that the nonprofit sector has to use to address the needs of its clients and communities. Used less appropriately, social enterprise has the potential to derail an organization and undermine the trust it has earned. As discussed throughout this chapter, social enterprise simply is one unique strategic option among many strategic options.
Nonprofits should not begin their consideration of enterprise strategies with the assumption that they “ought to” create a social enterprise. Legitimate enterprise development requires thorough and thoughtful assessment and deliberation and due diligence by nonprofit governing boards and executives. The process begins with an accurate assessment of the organization's mission and critical issues, and a thorough understanding of markets, structure, and culture is imperative to the successful development of a viable social enterprise.
The content of this chapter serves two purposes. First, the framework of social enterprise is intended to be useful to academics and practitioners as they pursue their equal yet diverse interests. For both groups, the discussion of markets, structure, and strategy is intended to help organize the diverse aspects of social enterprise in a meaningful way that will enhance understanding. Second, the chapter is designed to serve as a reference tool to guide thinking as practitioners consider social enterprise options.
As we, academics and practitioners alike, continue to grow and develop with the sector, we have much to learn and share regarding social enterprise. Academics will continue to explore issues of structure, finance, markets, and culture through carefully constructed research. Practitioners will also conduct their own form of research and development as they explore enterprising new ways to fulfill their missions and sustain their organizations. Together we can add to the growing knowledge of the sector as we help ensure that nonprofits remain vital and viable as they provide the critical services their clients and communities need.