More NFPs Look to Social Enterprise Model

A report looking at the emergence of "social enterprises" in Australia has found a strong trend towards greater commercialisation among organisations that would traditionally have operated as Not for Profits.  

A study of applications to a Westpac Foundation grant program has found that 70 per cent of organisations reported having a three or five-year plan to become more commercial, in an effort to fill the funding gap between government and philanthropic support and cover the growing costs associated with increased demand for their services.

"Government funds and donations are limited. Capital needs to be mobilised from other sources to address the compelling social and environmental problems facing the world," UTS Business School researcher Dr Danielle Logue said.

"That means the Australian Not for Profit sector is in a state of transition."

New types of organisations and financial products were emerging, Dr Logue said.

“Impact investing, socially responsible investment and social enterprises are forming what has been dubbed the "social economy". Not for Profit structures now become one model within this broader ecology.

“The social enterprise is an alternative model to traditional Not for Profits and charities whose operation is reliant on external funding.

“It focuses on ways to generate revenue while the organisational mission remains focused on social benefit."

Dr Logue and her co-author Dr Gianni Zappala analysed data from applications for funding received by the Westpac Foundation's Catalyst Grant Program. The Catalyst Grant Program – introduced in 2011/12 – aimed to reward social enterprises that generated 20 per cent of revenue from trading activity.

In the sample of 132 grant applicants, nearly 60 per cent reported financial challenges, including the rising cost of operations. One in four organisations reported challenges related to decreased government funding and support; one in five also regarded staff retention and training as issues.

Dr Logue's study found a shift towards commercialisation in response to the strain on resources. "Not for Profits are looking at more effective and sustained methods of operation. With changes in government support and rising need, this change is necessary," she said.

But this change isn't necessarily easy. The report also uncovered challenges organisations face in integrating "customers" and "beneficiaries" into one business model. Social enterprises often work with people who don't have the financial means to pay, so the business model must differentiate between those clients and paying customers, with separate value propositions.

Dr Logue said business schools will have an important role in preparing graduates for roles in this "hybrid" environment of innovative financial strategies and new business thinking.

"CEOs of social enterprises need to be comfortable in this hybrid environment, and few candidates have this kind of experience," she said.

For the social economy to grow, more intermediaries – such as foundations or brokers – will be required to provide initial support and early-stage funding in this transition, Dr Logue said.

"The influence of these actors is critical to the growth of social enterprises and development of the social economy, especially in implementing new financial products such as Social Impact Bonds," she said.

The market for "impact" investing – where investors aim to blend commercial value and social impact – has reached $1 trillion in size globally, she said. In New South Wales, the first social impact bond has provided investors with a yield of 7.5 per cent.

"Australia needs to move away from the thinking that the social enterprise only includes the not-for-profit legal structure. Once this happens, more social enterprises will be discovered and, in turn, more will receive funding from intermediaries and investors."

Dr Logue also noted that the legal and taxation systems need to be able to accommodate organisations that have both financial and social goals. In Australia, the recently launched B Corporation structure provides the opportunity for organisations to be formally recognised for their socially driven work.

“The commercial and social sectors are converging and reconfiguring as the Not for Profit sector moves into the broader social economy,” Dr Logue said. "Modern business cannot afford to not think about sustainability and social responsibility. More than ever, the two are merging and shouldn't be discussed as separate concepts."