The journey starts with planning. How to establish a Social Enterprise in terms of filing forms and complying with regulation is the easy part. More than 50% of Social Enterprises fail in the first twelve months, and this rises to greater than 80% by years 3 and 4. But why is this failure rate so high?
First, risk is simply part and parcel of the nature of starting any enterprise, social or not. The rules of survival which apply to business apply to Social Enterprise and there are no exemptions. This leads to one of the first myths of social enterprise, which is that it will solve all problems or provide better security, in the face of current spending reform in the public sector. Our experience in The Community Gateway CIC is that our perceived security is improved as compared to our previous employment within Central and Local Government because we are in more control. We outline a 5-step methodology which we believe mitigates the failure risk:
1. Go in eyes wide open
Ensure that the team leading the process are all fully conversant in the principles not only of establishing social enterprise, but also in starting up a business. This is a great opportunity to provide people, including staff, managers and service users some support through space and time to become more acquainted with social enterprises in the social care sector. It is a good time to also ensure that everyone is cognisant of the risks as well as the benefits and opportunities. Senior Executives, whilst it may not be required from the beginning, should be ready to accept some risk and liability with regard to Directors Loans or Security. The Local Authority, NHS or Central Government funding is not going to be there in the future for bail-outs.
2. Have an idea and service model to back it up
There are a number of Social Enterprises within social and health care now, many in particular providing Community Equipment services or domiciliary care. When considering the scale, Social Enterprises do not have to be huge. In fact the majority of social enterprises have a mean average annual turnover of £2.1 million and median of £175,000, and a smaller proportion where turnover is greater than £100,000. The key here from a commissioning perspective and those wishing to establish social enterprise is that there is much less risk in several smaller well-defined and scoped social enterprises than in one large social enterprise. It will also lead to greater flexibility and agility, and much less risk if one enterprise folds or no longer provides good value. It allows smalls parts of the ‘system’ to fail.
Larger consultancies we find may advise against this and steer towards larger social enterprises but there may be a profit motive as to why they might advise in this way. For example, it is easier to then transition and sell more services to either the commissioning or newly established provider organisation. Then bearing in mind Commissioning is as much about market shaping also. So you do not have to adopt one business model and legal form but consider a portfolio of enterprise to spread risk, with a varied range of discrete but related enterprises with appropriative models and legal forms, with potentially some shared services, e.g. effectively the finance or ICT could be externalised in to a discrete social enterprise and provide support back to the other enterprises.
3. Have a Business Plan
Firstly your plan will become a self-fulfilling prophecy. Putting ideas on paper and working through how it will be achieved will make it much more real. It will also detail how positive cash flow will be achieved. There is no large government department or NHS as a backstop where payroll is run alphabetically and cannot run beyond ‘M’. The human resource is the most important organisational asset to the new social enterprise, so it is important as well as staff being paid, that they are properly recruited, developed and retained. Remember that with smaller Social Enterprises, such as Social Work Practises (similar to GP Practises), with 10 or less employees the legal process is simplified, where TUPE doesn’t apply, but through CIC or CIO status, pensions can be protected – providing the best of both worlds.
4. Setting up and Start up Readiness
This is your opportunity to independently ‘stress test’ not only the Business Plan but also the assumptions of the underlying business model and the understanding of the team involved. If not at the previous stage, it is certainly likely at this stage that some external support is required, if nothing else but to consider financial risks and considerations as well as legal issues around staffing, treatment of assets and legality of ‘sweet heart’ contracts, to get the social enterprise on its feet.
A successful social enterprise will have a service model which is universal, i.e. not dependent on public sector funding alone, or at all if possible. The launch is an important event to demonstrate readiness and it is advisable that it is done in two phases, a soft launch for more immediate and internal stakeholders, and then after a run in period, to robustly bed in processes, a hard launch to broader stakeholders.
This article was written by Richard Haynes, founding director of The Community Gateway CIC. You can follow Richard or The Community Gateway CIC on twitter at @richardchaynes and@tcg_cic or visit their website at http://thecommunitygateway.co.uk