7 top challenges facing social enterprises

  • Austerity, increasing competition for public sector work and continued political uncertainty is changing the environment for social enterprises
  • CEOs are responding to these issues by diversifying, collaborating and competing more fiercely for work
  • We pick out the seven main challenges facing social enterprise CEOs, from our Striking the Right Balance white paper

Austerity, political uncertainty and steep competition for public sector work is rapidly changing the environment for social enterprises – forcing many to adopt an increasingly commercial mindset.

Interviews with charity and social organisation chief executives for our Striking the Right Balance whitepaper reveals that this adjustment hasn’t been plain sailing for all.

Here, we explore seven top challenges facing charities and social enterprises as they adjust to the environment they now find themselves in.

1. The impact of austerity

Despite two-thirds of charities seeing increasing demand for their services, between 2008 and 2014, small and medium-sized charities saw a fall in their income by around 17%.

The CEOs we spoke to explained that with many social enterprises depending on public sector business, local authority cost cutting is causing real concern.

One CEO explained: “Decisions are hugely based on price – sometimes it’s as much as 80% price and 20% quality.” It was felt by some that with so much focus on cost, “cut-to-the-bone pricing must be a risk to residents.”

2. Managing diversification

The challenge posed by austerity has led many social enterprise CEOs to explore new business models and diversification.

One CEO remarked that their organisation is considering a “Robin Hood model”, whereby income generated from commercial activities is used to provide subsidised services for the most disadvantaged.

While diversification can bring commercial benefits to an organisation, there are risk considerations. For example, social enterprises looking to offer services such as employment training or financial advice will find themselves open to potential negligence claims.

3. Increasing competition

With an intense focus on price at local authority level, social enterprises are in a more competitive environment than ever before. Many are finding themselves in competition with local councils, which are frequently undercutting prices, and larger providers with greater resources.

This challenge should not be underestimated. One leader of a health and social care enterprise recounted losing a major local authority contract it had held for several years, and which accounted for more than half of its business.

This new reality for social organisations makes it increasingly important to avoid overreliance on one revenue stream.

4. Accessing finance

The number of social organisations seeking finance for working capital has risen from 28% in 2011 to 43% in 2015, according to Social Enterprise UK.

One CEO admitted to feeling nervous about taking out a £12m bank loan to ease cash flow, but is far from the only social enterprise leader to consider going down this path.

For local authorities to meet the challenges posed by austerity, increasing competition and diversification, decisions will need to be made on how to finance the transition to a more commercial business model.

5. Collaboration

In this rapidly changing environment, there is also a growing desire for collaboration. The harsh climate social enterprises are working in is forcing many to partner with other organisations, even those whose values may not necessarily align with those of the social enterprise.

This collaborative mindset will often require a cultural shift. One CEO commented: “Collaboration is key, but it’s a struggle. Small charities are suspicious of larger charities wanting to take over.”

For collaboration to be successful, the charity CEOs felt there was a need to communicate more effectively than is currently the case, and better understand and appreciate what others can contribute.

6. Retaining social purpose

With diversification, collaboration and increasing competition comes the potential for distraction. Many organisations will encounter difficulties in striking the right balance between diversifying into new revenue streams and maintaining a core ethos.

One CEO warned that in the current climate, there is always a danger that organisations can lose sight of their social purpose as they “follow the money”.

Retaining a strong sense of social purpose requires a clear understanding of how far an organisation can diversify and the pros and cons of doing so. One interviewee recounted a 2014 decision to target 30% of its business in non-local authority leisure.

7. Brexit

Social enterprises are not immune to reverberations following the result of the EU referendum. While around three quarters of social enterprise leaders wanted to remain in the EU prior to the vote, the majority were confident that Brexit would not put their business at risk.

Nearly a year on, the main feeling among social organisations CEOs we spoke to is uncertainty. One CEO commented: “We were totally caught out by the result of the EU referendum. I don’t think anyone really expected that to happen.”

One particular challenge has been staffing. Many CEOs are already reporting difficulties in attracting and retaining staff, which are likely to intensify if EU workers leave the country.