Inventory of Effective Practices in Financing and Resourcing of Voluntary Sector Organizations

Inventory of Effective Practices in Financing and Resourcing of Voluntary Sector Organizations in Canada

Article by Social Capital Partners

Contemporary Funding Strategies: Social Enterprise

Social Capital Partners was created to invest in and support revenue-generating social enterprises that employ at-risk populations outside the economic mainstream in Canada. The goal of these social enterprises will be to develop a national scope, exist without government funding, and create improved social outcomes and financial self-sufficiency for the populations they employ.

Our Observations of Strategic Challenges in the Funding Environment

The social enterprise model that we have chosen to employ is intended to create better than average social outcomes for certain groups of individuals and overcome some of the critical funding issues that many non-profits face. Our approach has evolved from over a year of research into the challenges faced by organizations in Canada and abroad.

It is important to note that our survey process was not fully systematic, but we did test our views against a broad cross-section of organizations. We had an opportunity to conduct extensive interviews with nonprofit professionals with experience, insight and commitment to their causes. This research yielded several observations about challenges in the funding environment in Canada.

There is plenty of talent and commitment in the Canadian nonprofit sector. We met great, capable, committed people everywhere who despite not having the same kinds of financial rewards as in the private sector persisted at their mission in the face of often very frustrating circumstances. The people and organizations were generally able to do a lot with a little.
Individuals in this sector are capable of doing a lot with a little because they have to. Virtually all the organizations we reviewed had relatively weak balance sheets and little in the way of rainy day reserves. They were in perpetual scramble mode just to make ends meet. Not an ideal environment for long range planning.
As a result of weak balance sheets a disproportionate amount of a charitable organization's time and energy is devoted to fundraising. The social mission has to frequently take a back seat. Even when they are successful at raising funds it doesn't necessarily make it much easier for them to accomplish their social mission for the following reasons:
There is little funding for organizational capacity - There seems to be reasonable levels of funding available for specific programs or services but there is little funding for the infrastructure that is required to carry out and integrate these programs. As a result, most operating charities have a myriad of separate programs funded by different donors all of which have to be tracked and accounted for separately with no means of integrating them in to a coherent strategy.
Further, there is little funding for long-term outcome measurements - Not one of the organizations we worked with could tell us very much about their users or target populations two years after their "graduation" from one of their programs. Once again no funders saw this as a useful application of their grants. This lack of knowledge about long term outcomes means that i) the charitable organizations really do not know if they are solving root cause issues or if the populations they serve slip back once the formal help is completed; and ii) there is no way to prove that they are more effective than other organizations attempting to address the same issue and therefore worthy of much more funding support. Ironically this lack of support for long term outcome measurement in effect ensures that funders cannot be as effective at their funding. It prevents the establishment of a link between performance and funding which means the good organizations don't necessarily get more funding and the poor ones don't necessarily get left behind. Instead success is measured only anecdotally and virtually all small and medium sized charities limp along.
Heavy dependency on government funding is also a problem - There is a disproportionate reliance on the government to be the principal funder of the social services sector. Government funding, however, is often short term (rarely more than a year at a time), and can be slowed by bureaucratic decision making processes. This isn't ideal for organizations trying to orient their operations to long-term goals.
The increased accountability required of the sector in the wake of the HRDC scandal has actually made things worse - The government (somewhat understandably given the nature of politics) wants to avoid any "risky" situations. Not only does that mean a preference for more conventional approaches rather than innovative "risky" ones but it is also insisting on much more accountability before it makes a grant. Unfortunately increased accountability often means more bureaucracy, requiring already strapped managers of charitable organizations to fill out mountains of paperwork. Accountability measures also tend to focus on counting the number of people "processed" rather than on determining whether the people "processed" have been meaningfully helped.
Beyond that, most financing in the sector comes through a "donor lens" - It is convenient to view government as the scapegoat. The truth is, most funding from other sources such as endowments and wealthy individuals tends to have the proverbial "strings attached," that are more about meeting donor wishes than end user needs. These don't always match.
As a consequence - the Canadian nonprofit sector has been forced to develop a core competency in tailoring programs to suit donor desires as opposed to focusing on unmet user needs. Frankly many charitable organizations have become better at meeting donor's needs than the needs of the populations they are trying to serve. They will willingly accept funds and tailor programs to donor's requirements even if they only loosely fit the organization's social mission. Sometimes it's the only way to make payroll.
These conditions create strategic bind that limits many organizations in the sector. The leaders of these organizations have a sense that they are running a series of loosely connected programs that aren't necessarily addressing the most critical needs of the users they want to serve but they are caught by all these systemic funding issues. They have never been in a position to say "no" to ill-considered funding and as a result they have effectively given away the keys to the car. One of the biggest challenges for the sector as a whole is how to get the keys back?

Our Approach to Addressing the Strategic Challenges

Our current assumption is that traditional models will not suffice in addressing systemic financing issues in the Canadian context. We hypothesize that if you could create viable businesses that balanced a financial bottom line while providing support systems and employment opportunities for a marginalized or at-risk population, the opportunity would exist for social organizations to maintain more control over their destiny while still achieving their social goals.

While we feel that many of our initial hypotheses have been validated, much more work is required to refine how to launch revenue generating social businesses and understand what challenges must be overcome in operating them successfully. That said, here is what we have learned so far:

Succeeding at revenue generating models is exceptionally hard. Even in the Roberts portfolio - a leader in this area - there haven't been many examples where achieving financial self-sufficiency and the social mission have occurred in tandem.
Chances for success are higher if the business and social mission are on equal footing. Making a business succeed and achieving a social outcome at the same time is a tough balancing act. The Roberts experience has been that if either the social or the business mission always takes precedence, then success isn't likely.
Chances of success are also higher if a businessperson with a good heart, as opposed to someone with a social services background, leads the organization. The organization needs someone who brings a "Rolodex of contacts" and experience at making money and operating businesses, not to mention an enlightened attitude to applying private sector realities to nonprofit opportunities.
The leader of a social enterprise requires a peer resource in charge of the social mission. It is tough enough to make business decisions - but who can handle the complexities and emotional turbulence involved in being the watchdog for the social mission? A division of labor and teamwork is required - a creative tension - between business and social aspects of the mission.
If a social enterprise is initiated within an established agency, it's critical to set it up with a separate governance and pay structure. Businesses typically operate on different dynamics than nonprofits. Mixing them is a recipe for failure, we found. An operational "firewall" is required to give the revenue generating enterprise every chance for succeeding on the unique terms of its mandate, which might be different than the organization spawning it.
High degree of burnout of social enterprise leaders - Getting revenue generating social enterprise off the ground requires that leaders undertake an immense amount of work to overcome significant challenges. A high level of burnout among the leaders of these organizations indicates how hard it is, even with the best of intentions, to make these enterprises succeed.
Many of the social enterprises in Canada are essentially "training labs" and not real businesses - Training labs serve a function but they only "simulate" the work experience, not provide the actual thing. As well, since government funding is often provided in correlation to the number of people an organization hires, sometimes there are more people on staff than needed, which can put unneeded stress on a business.
You can't be all things to all people. Too often, social enterprises get started without a clear idea of who can benefit from the undertaking. People employed in these social enterprises require enough adaptability to hold down a job. A revenue generating model can, in essence, only really help job-ready people. It's important to segment your users - clearly understand what you are doing and with whom. It will be difficult enough to succeed with job-ready people, never mind those with more serious adaptation issues.
The model doesn't replace the need for traditional agencies. Revenue generating social enterprises may not be able to solve the deepest, most intractable problems - it's not a solution for every situation and cannot replace the need for traditional agencies. People with significant mental illness, serious drug problems, or other issues that inhibit "job-readiness" are not ideal candidates for these organizations. This begs the question: how much can one achieve with a revenue generating model?

The Limitations to Our Approach

We do not think that Social Enterprise is a cure-all for the funding challenges in the non-profit sector.

We recognize that no matter how successful we are, our approach will never provide the answer to some of the most intractable social challenges faced by the disadvantaged populations we plan to serve. We focus on the "job ready" segment of these populations and therefore traditional social services agencies must still be in place to help those individuals with the significant barriers to overcome. We plan to partner with the best of these organizations to become an outlet for them as their clients become ready for the next step.

Despite these "limitations", we believe that creating social enterprises that aim for financial self-sufficiency as a core principle while achieving their social mission is vitally important to the nonprofit sector in Canada. Canada desperately needs more experimentation, creativity, and risk taking in this sector, and much less reliance on traditional funding.