Scaling up from bunnies to bananas

Having spent a year or so at Forth Sector I have come to two conclusions: social enterprises don’t really exist and our social firms have no future. At this point I should go home, but you deserve an explanation.

Why do I think social enterprises don’t exist? A social enterprise has no legal status. You can’t register one. There are no Companies House, Inland Revenue or OSCR rules governing one. Notwithstanding CICs and other structures, most so-called social enterprises are in fact charities, some for legitimate reasons and others as a financial or political expedient, like social housing or independent schools.

Social enterprise commentators like to include these because they make the sector seem huge, £27bn a year was one figure I saw quoted; yeah right! The truth is without these big players the sector is an economic minnow.

As Dorothy, in the Wizard of Oz steps on to the Yellow Brick Road she says to her dog: ‘Toto, something tells me we are not in Kansas anymore.’ The cosy world that third sector organisations have inhabited for the last twenty years is shattering. Grant funding will be cut drastically as local authorities abandon discretionary funding and embrace competitive tendering. And still many organisations think the warning bell sounding is the dinner gong calling second helpings.

Those who wake up and smell the coffee will realise that if they want to survive, they will have to trade. Will this make them social enterprises? Or will some arbitrary measure of trading vs grant be used to determine their membership of the exclusive social enterprise club?

For these reasons I believe social enterprise does not exist as an entity, but as an activity. Don’t get me wrong, the activity that is social enterprise needs to be commercial, competitive and hard-nosed. Social enterprise should never be the descriptor of charities ‘doing a bit of trading’. They should be unequivocally businesses, standing or falling by their ability to compete in real markets without subsidy.

Why do I think our social firms have no future in their current form? The simple answer is over-dependency on grants. Twenty years ago Edinburgh Council were prepared to fund trading losses to keep people with mental health problems off the street. Twenty years later they aren’t.

Forth Sector’s social firms have always had a gap between trading and grants, but in recent years with grants remaining static or declining, the gap has grown. Like Boxer in Animal Farm, our response to the problem was to work harder – in our case finding pockets of funding to prop up an unsustainable business model. This worked while public funds were plentiful.

In the name of ‘scaling up’ we opened more businesses, usually because we could get start up grants, only to find that when the grants ran out the businesses weren’t viable. The math is simple, open more grant-dependant businesses without securing additional grants and you are guaranteed to make ongoing losses. Grant-funding is the Glenn Close of enterprise, she seduces but if you fall for her, she will end up boiling your bunny!

The social firms model that served Forth Sector for twenty years is no longer viable. We have responded assertively. Last year we closed two loss-making businesses and we cut overhead significantly, without reducing the number of service users we support. In a year we have moved from a loss to a projected surplus. The performance of the remaining social firms has been very good, despite the economic downturn, and we have doubled income from our consultancy business. We are leaner, meaner and fitter but we know that even these actions still don’t address the fundamental problem and that is an unsustainable social firms model.

We took a completely fresh look at what we were trying to do and how we do it. In the first instance, we needed to understand that Forth Sector is first and foremost a charity, which exists to support people with mental health problems; we forget this at our peril. We happen to use social enterprise or more specifically, social firms as the means by which we pursue our charitable aims. Social firms are an expedient not a purpose; a means not an end. If something which better meets our needs comes along we would go with it. Social firms are a tool not a cause.

Secondly, we needed to tackle the core problem head-on, which was the model. This led us to a very simple conclusion, our businesses a) must provide an environment where people with mental health problems can flourish, and b) they must be sustainable. The type of business is irrelevant. We don’t care if we sell bananas as long as they meet these tests!

We have four social firms. They are good businesses run by dedicated people and they are a great environment for our service users but they do not provide nearly enough placement opportunities or range of experience. They are difficult and expensive to manage and they are not sustainable in their current form. However, we believe that with substantial investment they can grow and meet the test. We are developing a new model, one which is not grant-dependant and one which can be sustained.

Twenty years ago Forth Sector pioneered a new way of achieving a social aim. We are once again at the forefront of pioneering a new approach, one which recognises the new paradigm we find ourselves in and one which we believe will serve us for the next twenty years. 

The need for what we do is growing by the day and without rapid expansion we cannot hope to meet demand. We have to think and act on a very, very different scale and lose the crutch of grant funding, which will always hold us back. For Forth Sector, scaling up is not an option, it’s an imperative.