A new framework for analysing social enterprises

Tuesday, 20 May 2008

I have been looking at various frameworks for categorising social enterprises and have noticed that a lot of them distinguish between grant and contract income. I think there are flaws with models which only look at whether funding is trading or grants in terms of public sector commissioners. Many of these commissioners (whether they are Primary Care Trusts, Strategic Health Authorities or Local Authorities) often use terms like contracts and grants interchangeably in terms of the third sector and often for varying political motivations. For example, a Local Authority may specify some outputs for a piece of funding and regard this is a contract. Even though the funding rarely covers the full cost of those outcomes and so is not really a true contract but a grant towards running costs, many social enterprises describe this as contract-funding to differentiate themselves from more charity-like third sector organisations which are dependent on grants and fundraising.

I have developed a different framework (called Funding Base Analaysis) which doesn’t differentiate between grants and contracts but the source of that funding. This is particularly useful in looking at social enterprises which work in areas such as health, social care, transport, regeneration and other areas with a high public sector presence. The model looks at the percentage of turnover that an organisation receives from public sector commissioners compared with organisations and individuals who are not public sector commissioners. This is plotted on the horizontal axis and is then compared with the percentage of profit of turnover on the vertical axis. In this way, organisations are allocated to one of size quadrants as in the following diagram.

Using this framework, the characteristics of the 6 quadrants are as follows:
A – this tends to be where the commissioner-funded third sector organisations operate. They receive most of their funding from public sector commissioners but generate little or no surpluses or profits.
B – is similar to A but generating reasonable profits.
C – is similar to A but generating high profits.
D – this tends to be where the publically funded charities and voluntary sector organisations operate and social enterprises that trade directly with the public and/or other enterprises (social and private). They receive little or no funding from public sector commissioners but generate little or no surpluses or profits.
E – is similar to D but generating reasonable profits.
F – is similar to D but generating high profits.

D, E and F have tended to be the areas where Fair Trade organisations have tended to operate historically whereas the majority of social enterprises appear to be in the A, B and C quadrants. One of the interesting aspects of this framework is that where organisations are has nothing to do with aspiration or perception but simply financial variables which can be externally monitored and verified (the profit:turnover ration and the percentage of turnover from the public sector).

The usefulness of this framework is that it predicts organisational behaviour, success factors and sources of competition. A, B and C organisations depend for their success on the patronage of public sector commissioners who are rarely recipients of the service. Their focus tends to be on delivering outcomes that commissioners want and measuring performance indicators that are important to commissioners and if there is a conflict between what the recipients of the service want and the commissioners, the commissioners will tend to win. D, E and F organisations on the other hand depend for their success on the satisfaction of the customers who receive their services or products. Their focus tends to be on making the customer happy and they measure performance indicators that are important to the customer as well as to internal benchmarks. A and D organisations operate in a relatively uncompetitive market as there is little to attract an outside organisation into this market. C and F organisations operate in a highly competitive market as outside organisations (particularly private sector ones) see these areas as high profit opportunities.


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