Are private sector supply chains the answer to scaling social enterprises?

Reaching scale is one the most important challenges facing the social enterprise movement today. Beyond the Big Issue most people cannot name a national social enterprise in the UK (and a lot of people still look blank when confronted with the term social enterprise in the first place). The magnitude of this challenge is thrown into relief when you compare the median turnover of the RBS Social Enterprise 100 index – £445k – to the median turnover of the FTSE100 – £8.8b (and that’s excluding any social enterprises in the SE100 with fewer than 3 years’ accounts).

At On Purpose we are helping to tackle this issue through helping high-calibre talent access jobs in social enterprise at an early point in their career. We believe these kinds of people are needed to help build and run social enterprises. In addition to this debate, the so-called finance gap is also much discussed: small amounts of funding are relatively easy to come by; similarly amounts over £250k (on more commercial terms) are accessible, but in between many social enterprises run into the funding doldrums.

Recently, there has been quite a bit of interest in whether social enterprises should target large private sector supply chains to help scale quickly and sail through these funding doldrums (see for example here); just few contracts could, after all, create a lot of revenue. Elvis & Kresse are a great example of success in this area: their life-style accessories, re-engineered from seemingly useless waste materials, are sold through Sainsbury’s, Apple and Brompton bikes, to name just a few.

As a relatively young social enterprise itself, On Purpose has supplied services to 12 organisations ranging from charities to businesses and start-ups to multi-nationals such as O2 and Interface.

With some corporates social enterprises are knocking on open doors: O2 and Wates, for example, have committed publicly to working with social enterprises.

And yet finding and making such supplier relationships work is still often not easy:

The relative lack of scale of most social enterprises (coupled to low levels of available growth and working capital) means that many contracts are simply too large to compete for. Ironically, to get scale you need scale, or at least a very convincing plan for how you can supply scale quickly.

You also need the right networks and language. Few captains of industry are familiar or even aware of social enterprise and their purchasing departments are even less so. Once you do find the right person you need to talk to them in their language; many people in the social enterprise world flip seamlessly between charity and business jargon. This bi-lingual world is, however, still small and in mainstream business terms like ‘social impact’, ‘beneficiary’ and ‘theory of change’ may at best be met with curiosity, at worst with distrust.

Even once you have managed to form your first large supplier relationship, you’ve strained your resources to triple your annual output and you’ve managed to obtain a commercial loan to buy the raw materials you need, the race isn’t won. Building your organisation on just one large customer is a risky business – even if that one customer is the government as many charities and social enterprises are currently finding out; just when you are straining to keep up with the orders, delivering after-sales service and the contracted-for flexibility of your first contract, you need to be out there securing your pipeline with new deals. This often requires significant organisational change and often a new skill set that is less entrepreneurial and more managerial.

Of course, these issues are no different from any commercial SME trying to supply to a larger corporate and many SMEs manage to win dozens of contracts and scale successfully. Where then lies the difference? Although this sounds perverse, I believe that the perceived advantage many social enterprises have over their commercial competitors can often sow the seed of their ultimate struggle to scale.

Most social enterprises try to capitalise on a market failure: the waste of perfectly usable fire-hose or coffee sacks in the case of Elvis & Kresse or the impossibility of a getting a job if you are homeless in the case of the Big Issue. The best business models manage to turn this into a real competitive advantage that makes them cheaper, higher quality, more accessible, better distributed, better serviced or a host of other things; Elvis & Kresse is able to source much of their raw material at low cost and what magazine has the distribution network that the Big Issue calls upon?

Where social enterprises have created a business model that can deliver this advantage at scale, they stand a good chance of succeeding. If, however, this advantage is not clearly articulated and worked through the business, things often go wrong. One common misconception is that “being good”, “being ethical” or “donating to a cause” is a sufficient reason for why people should do business with you.

In fact it may, in the long run turn out to be a disadvantage. Whilst it may buy you some business, the one-sided charity implicit in such a deal (more CSR than social enterprise) is not only fickle but also discourage innovation and improvement. It may only last until the next head of purchasing turns out to have less personal interest in your particular cause than his or her predecessor. In this sense, what I call “pity-based contracting” has some parallels with small scale grant funding. It helps a lot of social enterprises get off the floor, but it doesn’t prime social enterprises for scale.

I don’t suggest that social enterprises should not capitalise on the social impact they generate, but in terms of hard-nosed purchasing decisions, it should always be an added bonus, not the deal-clincher. The warmth and fuzziness of contracting with a social enterprise should be the icing; it won’t make the cake rise.

***

Tom Rippin is the CEO and Founder of On Purpose the leadership programme that kick-starts social enterprise careers for professionals at an early point in their career. You can keep up with On Purpose at: onpurposeuk.blogspot.com | twitter.com/onpurposeuk | www.facebook.com/onpurposeuk | www.linkedin.com/company/on-purpose

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Tags: #Top Stories, #featent, chains, contracting, contracts, enterprise, private, scale, sector, social, More…supply

Comment by Nadia Millington on March 5, 2012 at 1:24

Really enjoyed your post. It made me wonder if scaling via private sector supply chains as a first option is becoming a source of distraction for some social enterprises.  Maybe instead the question should be how can social enterprises develop innovative distribution options or utilise ancient methodologies in a new way.  At the Base of the Pyramid we see Uni Lever using Shakti women (distributed micro supplier network), and beginning to achieve scale; we also see micro work picking up some steam and we can easily envision it achieving scale using a franchising model. The thing is, at the BOP they have no choice but to think outside the box as there are no private sector supply chains that could be easily leveraged.  In the UK however, the seduction of the private supply chains maybe somewhat of a hindrance. Of course for some social enterprises private supply chains are absolutely necessary, for others they provide complimentary services but for the rest there is much hope due to technology advances and corporate experiments being run elsewhere to explore alternative options to scale.  

Comment by Nadia Millington on March 5, 2012 at 1:26

Really enjoyed your post. It made me wonder if scaling via private sector supply chains as a first option is becoming a source of distraction for some social enterprises.  Maybe instead the question should be how can social enterprises develop innovative distribution options or utilise ancient methodologies in a new way.  At the Base of the Pyramid we see Uni Lever using Shakti women (distributed micro supplier network), and beginning to achieve scale; we also see micro work picking up some steam and we can easily envision it achieving scale using a franchising model. The thing is, at the BOP they have no choice but to think outside the box as there are no private sector supply chains that could be easily leveraged.  In the UK the  seduction of the private supply chains maybe somewhat of a hindrance. Of course for some social enterprises private supply chains are absolutely necessary, for others they provide complimentary services but for the rest there is much hope due to technology advances and corporate experiments being run elsewhere to explore alternative options to scale.  

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