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Dey / Photo made in India

Balancing social and entrepreneurial values

NGOs embracing social entrepreneurship

Sothy Khieng, Evert-jan Quak | October 24, 2013

In their search to become more financially self-reliant development NGOs are experimenting with social entrepreneurship. Many are doing this to strengthen their financial situation, but social entrepreneurship can do much more and opens up new ways to help poor communities. However, NGOs embracing social entrepreneurship face risks of being diverted from their missions and excluding intended beneficiaries.

Non-governmental development organizations are searching for new models to enable them to fulfil their missions. The common goals they strive towards, like eradicating poverty, inequality, insecurity and injustice, remain relevant. It is the way NGOs are organized and financed that is changing rapidly. A new business or funding model is required because reliance on tax-based funding is being openly criticised while it has become more accepted to generate social and economic change by embracing entrepreneurial values. 1

Looking for self-reliance and independency

Many development organizations are turning to social entrepreneurship as a way to become more financially self-reliant with the promise of financial sustainability. 2 Self-funding is the new mantra, helped by a pro-business Zeitgeist that has made for-profit initiatives more acceptable. As a result, sources of funding available to non-profit organizations are shifting in favour of approaches that are more commercially oriented. Furthermore there is an increasing belief, rightly or wrongly, that institutional charity and social movements like development NGOs, do not only do good, and that there is a danger that they undermine beneficiaries’ self-esteem and create a sense of helplessness and dependence. 3

In developed countries like the United Kingdom, the Netherlands and Sweden, donors are now being more selective and careful in providing funding to the enormous number of NGOs competing for less funding. Seemingly unending financial support is no longer acceptable. 4 At the same time, most donors expect a culture of improved efficiency and self-reliance among NGOs. In response, NGOs are experimenting with new forms of partnerships, moving away from long-term financial commitments with partner organizations towards project-like support that includes an exit strategy and cooperation with local entrepreneurs, investors and businesses (see box 1 about the Dutch development sector). This is happening in both the developing and the developed world, where international NGOs and their local partners are facing the same difficulties of dependency among beneficiaries and the limited support and goodwill of donors.

Social entrepreneurship may be the solution NGOs are looking for. The social entrepreneurial model promotes independence and self-reliance, allowing NGOs to generate their own income while the overall social mission of reducing poverty and fighting injustice and inequality remains the same. It is all about recognizing business opportunities that can, at the same time, solve social and civic problems. This does bring the danger, however, that solving only local problems is not enough to accomplish the social mission of NGOs and social movements, and that a simplified ‘one size fits all’ scenario is created, resulting in many small-scale projects that are not interrelated and are difficult to scale up. 5 This is something that the development sector is all too familiar with.

The changing landscape of Dutch development NGOs

Many Dutch development NGOs are redefining their position and role and are experimenting with adopting more entrepreneurial values within their organization. Social entrepreneurship has become a buzz word in the sector. Although various NGOs are integrating some aspects of social entrepreneurship into their organization, they still cannot be seen as full social enterprises, as they still depend on grants and subsidies to finance their programmes. Most NGOs, including ICCO, Cordaid, Oxfam Novib and Woord en Daad, are creating separate ventures which are for-profit and act as impact investment funds for small social enterprises in developing countries. These ventures are separate from the NGO itself but cooperate with entrepreneurial programmes within the organization and a small part of the profits from these ventures may go to the parent NGO. Furthermore most Dutch development NGOs are starting to work on a project-like basis and with separate, self-funded units. Most units will act more as NGOs, especially in the field of human security and relief work, but without long-term financial obligations to partner organizations and with exit strategies. ICCO, for example, is in the process of developing a model in which their regional offices have to attract more programme funding themselves in the near future, including covering their operational costs. Cordaid is establishing business units within its organization. NGOs can ask fees for advisory work. Or when cooperatives in which NGOs have invested are ready to be financed by investment funds, the NGOs are now thinking about ways to retrieve some of the costs from the investment fund. This does not turn them into social enterprises themselves, but they are facilitating and financing social entrepreneurship in developing countries and promoting an enabling environment in which they can flourish. Because NGOs are working with new business models they also are engaging more and more in projects in cooperation with other organizations or businesses that have the potential to become self-reliant social enterprises. Examples are Hivos cooperating with the Triodos Bank, ICCO with their FairClimateFund and more recently Action Aid Netherlands with FairPhone.

The paradox of NGOs relying on market principles

Overemphasizing or glamourizing social entrepreneurship as the only solution for NGOs is therefore too one-sided. 6 It is more important to address the question how social entrepreneurship can help NGOs, not only by making them self-reliant and more independent of donors, but also by increasing their social impact on such a scale that it has the potential to change the power relations that currently obstruct development. However, there is a paradox in expecting NGOs that adopt social entrepreneurship and rely on the very market principles that are a cause of the problems their missions call them to deal with.

Development NGOs are not alone in facing this problem. Over the past two decades, starting mainly in Anglo-Saxon countries, non-profit organizations have been facing rising costs, increasing competition for donations and grants and growing rivalry from for-profit companies entering the social sector. Universities, hospitals, art-houses and many other foundations have turned to the market to leverage or complement their traditional sources of funding, with a variety of outcomes that have turned out negatively for some and positively for others. 7 This is now being promoted in more and more countries where new social value low-profit legal forms have been legislated for, taking the United States (L3Cs) and the United Kingdom (CIOs) as examples. 8

Many studies have shown the difficulties, as well as the opportunities, non-profit organizations face when they turn to business. 9 The need to seize market opportunities may draw NGOs incrementally and unintentionally into new arenas far from their original focus. At worst, commercial operations can undercut an organization’s social mission. For many people – and especially those who work in the development sector – it is inappropriate to see the poor and vulnerable as customers, but implementing entrepreneurial values requires a shift in mindset from seeing poor and marginalized communities as victims or aid needy to seeing them as people who can generate market opportunities.

To become social entrepreneurs NGOs must earn money in the market. They are therefore searching for business models that can help them obtain self-generated income through the market without compromising their general social mission.

Photo by Jared Zimmerman (taken in India)
Evert-jan Quak

Photo by Jared Zimmerman (taken in India)

The right business model

The first option is to sell services and products directly to clients to help them solve some of the problems they face. Development NGOs in particular face the difficulty that the beneficiaries of the products or services they wish to sell on the market are mostly the poor and vulnerable at the Base of the Pyramid. 10 The question then is whether these people are able and willing to pay for a product or service. Moreover, how should prices be set for beneficiaries with different paying capacity?

Relying on the poor as customers has genuine limitations. If development agencies did adopt this model, they would only be able to operate in relatively wealthy communities in developing countries and not focus on the poorest and most vulnerable. 11 It is for the NGOs to decide if they are willing to reduce the scope of their missions in this way.

This is the challenge for NGOs wishing to become social enterprises. Imagine Amnesty International charging a fee to political prisoners released as a result of its activities, or the Red Cross charging disaster victims for relief services. 12 Furthermore, it is not always clear who the intended beneficiaries are. A project to save the tropical forest for example benefits a lot people, not only the indigenous people who live there but also the general public and future generations by protecting biodiversity and mitigating climate change.

However, social entrepreneurship is not a formula that NGOs should dismiss. Asking for at least some payment can give beneficiaries a sense of responsibility and enhance their commitment to the further development of a service or product. If the intended beneficiaries vary in their ability to pay, the NGO should examine the feasibility and desirability of cross-subsidization and discounted fees. They can use sliding fee scales or special discounts for people of lesser means. This formula is widely used by not-for-profit insurance, mobile phone services, products like glasses, or education services for the poor. 13

Where there are difficulties with charging the beneficiaries themselves, NGOs can earn income by getting third parties, like government agencies and corporations, that have a vested interest in an intended beneficiary group to pay for services or products for them. Governments can do this for collective goods and in the welfare of the poor, while corporations can pay for services that benefit their employees. Most beneficiaries share some of the costs through co-payments and deductibles. However, the costs of negotiating contracts and managing the ongoing relationship with a third-party payer can be considerable. Particularly in the case of government contracting, bureaucracy is a real problem and administrative costs can be huge. NGOs will also face the dilemma that their advocacy for social and economic change might be overshadowed by short-term solutions and may even be diminished because their clients are also actors that they may be campaigning against.

Integrating business values in the organization

In recent years a new earning model has emerged in which a third party pays, but has no vested interest. With these ‘buy one, give one’ initiatives, a consumer buys a product and someone less fortunate receives the same product for free. 14  However, this model, based on the charitable act of donating a product, serves as little more than a short-term fix in a system in need of long-term, multi-faceted economic development, health, sanitation, and education solutions. Supporting projects that go further than giving, like One Water or Wakawaka (see in this dossier article 'Doing social business right'), may solve this problem.

Most social entrepreneurs will seek to generate some profit to improve their operation and scale up their activities. Commercial programmes, however, do not need to be profitable to be worthwhile. They can improve the efficiency and effectiveness of the organization, can enhance the quality of programmes by instilling market discipline, and can better respond to the real needs of and be more accountable to the communities they serve.

NGOs can integrate a commercialized formula into their organizations in different ways. Most NGOs experiment with partial self-sufficiency, wanting commercial revenues but not market-based costs. They use earned income to cover out-of-pocket operating expenses and pay wages, but depend on their access to philanthropic investment capital, volunteers and donations to lower their overall costs. Based on the level of integration of earned money, four broad models can be distinguished for NGOs wising to become social enterprises: 15 embedded, integrated, external and complex. 16 (See box for a number of cases.)

In the embedded social enterprise model, an NGO’s business and social programmes are the same. In other words, its business activities are embedded in its operational and social programme and it achieves its social mission through a business approach. The close relationship and embeddedness of its social and business activities enables the NGO to achieve both its social and economic missions at the same time. Because of their strong focus on their mission, many social enterprises in this category are structured and registered as non-profits. Organizations that form a cooperative, focus on employment provision, or introduce fees for services usually fall into this embedded social enterprise model.

For-profit subsidiaries do not turn NGOs into social enterprises

The second model involves integrating business activities into an NGO’s social programme. The NGO uses the business activities, which are often related to its mission, to generate income to subsidize its operations or fund and extend its social programme. Structurally, the business and social sections of the organization may share costs, an office and operational staff. One way that an NGO can earn income is by selling goods (e.g. food or books) or services (e.g. mobile phone services) on the external market. However, simply selling product or service on the market does not make an NGO an integrated social enterprise, even if it uses the profit to pursue its social mission. Whether it is a social enterprise or not will depend on the business model it uses (see in this dossier article 'Doing social business right').

The same can be said for the third option, in which NGOs construct a separate legal entity, such as a for-profit subsidiary. This may have financial implications, such as having to pay a tax on profits that they would not have to pay if they remained registered as a non-profit organization. In this model, the NGO’s business activities are different from their social activities. When the organization or part of it is a separate legal entity, it is fully commercialized, and its revenues must cover all its costs at market rates. Most NGOs will have problems with this, as they may create revenue with business activities to pay their operational costs, but this does not mean they can pay all their costs, for example repaying start-up capital, at market rates. The purpose of the business is fundamentally to support the parent NGO financially. With this model, too, whether the NGO can be called a social enterprise will depend on the business model used.

The fourth option, the complex or mixed model, entails combining the models described above (embedded, integrated, or external) to best achieve the NGO’s double bottom-line of providing a variety of goods and services and pursuing multiple social goals. This mixed operation may occur at the level of the parent NGO or of the social enterprise. For instance, while some programmes or operations may be turned into for-profit ventures, others remain non-profit but cover their operational costs with money earned from the market. Other divisions of the NGO may continue to be financed from philanthropic sources. This means that the NGO’s whole organizational structure increasingly becomes a ‘non-profit-for-profit hybrid’. 17

Cases of social entrepreneurial models for NGOs

1. Embedded model

Digital Divide Data (DDD) was founded in Cambodia but now operates in several countries. It is an international social enterprise whose main mission is to provide employment, ICT skills, educational scholarship and other social support to young people from disadvantaged backgrounds (such as those with a disability). DDD provides Impact Sourcing Service with a specialization in digitization and data and e-book conversion services to clients across the world. 18

2. Integrated model

SEAMETREY is an integrated social enterprise whose mission is to provide quality education for underprivileged children and bridge the rich-poor gap through social and cultural integration. SEAMETREY funds its nursery and primary schools with income from its multiple social businesses, including a guesthouse, a restaurant and mini-bar, and by the production of jam. In addition to income for SEAMETREY, these businesses also provide employment and income to community members. 19

3. External model

The Global Child (TGC) operates two external social enterprises, the Joe to Go Restaurant and the Beau Fou Boutique. The restaurant and shop are registered as for-profit businesses, with staff and business managers, separate from TGC. The profit generated is used to fund a social and educational programme for orphaned street children through a small school and a safe house. 20

4. Mixed model

Mekong Plus (MKP) is an example of the mixed model. Its mission is to support disadvantaged and impoverished women and their communities in rural villages of Cambodia and Vietnam by promoting employment, income generation and education. The women make handicraft products, including quilts and furniture from local bamboo. Using funds from successful income generation projects, MKP established Mekong Quilts in 2001 and Mekong Creations in 2010 as limited companies. Mekong Quilts employs community producers to make and sell design quilts while Mekong Creations works with women to produce innovative and handicraft products from silks, bamboo and water hyacinth. These items are sold to local markets and foreign tourists in the two countries. Both companies share the common goal of generating sustainable employment for women and generating profits to fund the parent NGO. MKP also have teams in Belgium and France to raise funds to provide additional support to their community development programmes, which also include a microcredit programme for villagers and small family enterprises as well as a savings-credit group. 21

Photo by Dey (taken in India)
Evert-jan Quak

Photo by Jennik Okodesu (taken in Cambodia)

Challenges and risks and how to manage them

To set up or integrate social entrepreneurship within an existing organization is a bumpy road for most NGOs. As mentioned above, if the connection between the social enterprise and the NGO’s core work is weak or non-existent, there is a risk that it will do more harm than good by diverting resources or causing confusion amongst partners over the NGO’s priorities. 22

In a large-scale study in Cambodia, NGO leaders and social entrepreneurs shared some lessons learnt to address these challenges and minimize associated risks. First, NGOs should avoid simply replicating a successful business idea from another organization with no regard for the NGO’s area of expertise. Social entrepreneurship may not be appropriate for or applicable to NGOs of all types and to all sectors. NGOs should take account of factors such as the background and skills of their managers and staff, and their other resources, in deciding whether engaging in a business is appropriate for them. A number of successful social entrepreneurial NGO managers caution against using NGO staff who lack business skills and a business mindset in a new social enterprise venture and advise recruiting key business staff, whenever possible, from outside to manage and operate the enterprise. However, there is a downside to this, because it can create a cultural split in the organization, while having only people from the business sector might result in the NGO adopting entrepreneurial values without a social impact.

The second issue relates to governance and transparency within an NGO. This is a particularly important factor for countries (e.g. emerging economies) where corruption and misappropriation of NGO income is more prevalent. A strong board director and transparency are also important in a decision-making process where all stakeholders, especially staff and beneficiaries, are engaged and their opinions are valued. A democratic governance mechanism in social entrepreneurship means that NGOs can be held more accountable to their constituencies and beneficiaries, promoting a bottom-up or grassroots approach to development.  

It is also important to strike a balance between the economic and social objectives of entrepreneurial NGOs. 23 For example, how to pursue the social objective of generating jobs and income for deprived and disabled villagers while ensuring that the quality of the handicraft products they make are up to the market standard. Safeguard their mission through strong governance and a robust financial system while laying a strong emphasis on social impacts assessment is therefore critical.

A new concept or only a new financial structure

Every NGO will take its own decisions regarding social entrepreneurship depending on the local circumstances. However, they should invest in a strategy for how to improve their social impact and measure success across multiple criteria and how to be transparent about their operations and social impact. Measuring the social impact of a venture is difficult and should be done with a well prepared set of criteria and measurement mechanisms that should be developed before the social enterprise starts operating. Although NGOs are well practiced in showing the outcome of their activities to donors, they lag behind in measuring real social impact. In The Broker’s small survey of 38 social entrepreneurs, half of the respondents said they are not yet ready to measure social impact. This was confirmed in interviews with several NGOs in the Netherlands and in South-East Asia. For a social enterprise, however, this is the core of its success and they should invest in mechanisms to show progress and stagnation in social impact. Doing so will strengthen them and will help them to build networks or alliances with other actors to improve and make social impact sustainable (see more in this dossier article 'Social enterprises: catalysts of economic transition?')

Social return on investment

One method of assessing impact is the Social Return on Investment (SROI), which is a measuring and accounting framework for a set of values: economic, social and environmental changes. 24 It prescribes different steps, ranging from defining the objective and scope, identifying and engaging key stakeholders, identifying intended changes, calculating the SROI ratio, verification and narrating the context. An assessment can be made after a programme has been completed, based on actual outcomes, or can be conducted prior to starting a programme and be used to forecast values that will be achieved (see more on social impact measurement in article 'What we measure affects what we do'). However, SROI seems to be more suitable for stakeholder dialogue-based investment decision-making than for tracking performance. SROI must be repeated if it is to capture unanticipated second and third order socioeconomic effects, while other methods may be better at doing this (see 'Measuring and managing societal impact' for an overview of different social impact measurement methods).

What then has social entrepreneurship to offer for NGOs? It certainly has many potential benefits that are worth consideration by NGO managers and administrators who are seeking more financial stability, independence and sustainability. However, social entrepreneurship should be more for NGOs than just a way to diversify funding sources. If well implemented it not only enhances an NGO’s independence and self-sufficiency, but can also improve the quality of programmes, because entrepreneurial values can open up new grassroots-driven initiatives and local partnerships that respond to real needs of communities they serve. With good social impact measurement and strong alliances and networks around it, there is potential for an organization to increase its local impact or even deliver economic and social change.

However, social entrepreneurship also has a number of side effects, including the potential risks of NGOs being diverted from their missions, of the exclusion of intended beneficiaries who cannot pay, and exploitation by the top management of NGOs. It is as critically important for NGOs to be aware of and to address these risks and challenges as it is for them to consider an appropriate model for social entrepreneurial engagement. Social entrepreneurship is not a panacea for all social problems. Some development and social service NGOs may find it easier to adopt a social entrepreneurial approach while those with a political and advocacy agenda may find it difficult to reconcile social entrepreneurship with their work. Others will see themselves more as facilitators and advisors, supporting social enterprises locally rather than changing completely into a social enterprise themselves.

Nevertheless, now large international NGOs like Oxfam, Save the Children, Care International and the Dutch and Asian NGOs mentioned above are experimenting with the concept of social entrepreneurship by integrating it into some of their programmes or by setting up separate social ventures, other NGOs may consider how they can contribute to this shifting development paradigm.

Co-readers

Alan Fowler, Independent development adviser and analyst related to international development, governance and civil society. And Emeritus Professor, Institute of Social Studies, Erasmus University, The Hague.

Gerd Junne, Chairman of the board of The Network University (TNU).

Andre Vording, Policy Advisor and Expert Fair Economic Development at the Dutch development organization ICCO

Photo credit main picture: Dey / Photo made in India

Footnotes