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While social enterprises have not been the unmitigated success story that their advocates would have us believe, they do have a role to play in public-service provision at a time when innovation is sorely needed

Only a couple of years ago, Jeremy Paxman snorted with derision when a Newsnight interviewee mentioned the possible role that social enterprise might play in public services. Surely the very idea of social enterprise was a ridiculous fantasy: how could something be social yet also an enterprise? His disbelief was disconcerting for the UK’s 70,000 or so social enterprises. But the cynics and sceptics have been largely silenced by a tide that has taken the overlapping concepts of social enterprise and social entrepreneurship into the mainstream of public life, more than anyone could have expected a couple of decades ago.

Some of the seeds of this shift were sown in the mid-1990s, when a cluster of new organisations, including the Community Action Network and the School for Social Entrepreneurs, sprang up to promote the idea of mixing business means and social ends. Little of what they proposed was entirely new. The tradition of socially focused business goes back at least to the 19th century; Britain has historically been rich in entrepreneurial charities, mutuals, cooperatives, industrial and provident organisations, and socially committed family firms. Robert Owen was one of many leading Victorian entrepreneurs who were convinced that enterprise could also have a social mission. The late Michael Young (a former RSA Fellow and recipient of the RSA’s Albert Medal in 1992) was dubbed by Daniel Bell “probably the world’s greatest entrepreneur of social enterprises” for his creation of dozens of new ventures in the 1950s.

But the climate of the 1990s was particularly propitious for social entrepreneurs. Parties of the left had lost their antipathy towards the language of enterprise, while those of the right were emerging from the extremes of Thatcherism and Reaganism. Anita Roddick had shown through the Body Shop that a mainstream business could have a social conscience and the Big Issue was a visible exemplar of social enterprise, with an ethos of self-reliance at its core.

Two decades on, the UK boasts a social enterprise sector worth more than £20bn a year, with strong and confident enterprises that range from Divine Chocolate and People Tree to Greenwich Leisure and HCT Group (formerly Hackney Community Transport). The NHS alone claims to commission more than 30,000 charities and social enterprises, and every minister (and prime minister) competes to show enthusiasm. Umbrella organisations are well funded, as have been public investment funds, and there is the prospect of a Big Society Bank that will use dormant bank accounts to provide a reliable flow of capital. New legal forms – notably the Community Interest Company, which allows social enterprises to issue shares – have been widely adopted and the social enterprise kitemark has been vigorously promoted.

Fuelling this enthusiasm is the push to open up public services, with legislation to encourage spin-offs and spin-outs, following a trail blazed by organisations such as Central Surrey Health. A YouGov poll conducted in April found that 43% of the public thought that “a community business that reinvests its profits to improve services” or a social enterprise would be best placed to run public services, compared with 36% favouring central and local government and just 4% favouring commercial firms.

For many in local and national government, social enterprise offers a way to break apart stagnant service models and put the pieces back together so that they deliver more bang for buck. Concepts such as the ‘social entrepreneur in residence’ are showing how the spirit of social entrepreneurship can be embedded in health organisations (as in Birmingham) or universities (as in Northampton). Nor is the UK alone: social entrepreneurship has become a global movement, from Brac in Bangladesh to the Barefoot College in India. Everywhere, business schools report that MBA students are keen to learn about social enterprise. Many European countries are developing policies to support the field, and a clutch of foundations, including Ashoka, the Skoll Foundation and the Omidyar Network in the US, exist to promote it.

Cause for celebration?

There is much to celebrate in this history of growing confidence and effectiveness. It has helped to make our economy more pluralistic and resilient, and our public services more creative. Having been part of many of these projects over the past two decades, I cannot help but welcome the ways in which good people and good projects have been given due recognition. So why not just celebrate?

One obvious reason is that social enterprises are taking a hit as public spending is slashed. Like the rest of the voluntary sector, they are first in line for cuts and, since they often provide cross-cutting services, they suffer when public commissioners retrench and prioritise their core statutory responsibilities. For all the rhetorical encouragement from government, the big contracts in public services – from criminal justice and welfare to health – are going to private firms, which then use social enterprises, if at all, as sub-contractors on meagre margins.

The bigger issue, however, is that some of the hopes of a decade or two ago have not been realised. Social entrepreneurs claimed to bring a new mindset to business, along with radically improved results. But analysts have struggled to tie down what this means and whether it is true. Do social enterprises and entrepreneurs have a special ability to access resources, such as volunteer labour or unused buildings, or to combine assets in more effective ways? Is their advantage essentially about commitment and the ability to lock in loyalty? The jury is out on all of these questions.

Another hope was that, by now, our societies would be celebrating a new kind of hero. In the 1990s, social entrepreneurship meant unique individuals – people such as Muhammad Yunus in Bangladesh, John Bird in Britain and Wendy Kopp in the US – succeeding against the odds in solving entrenched social problems. Michael Young set up the School for Social Entrepreneurs to discover and train just such exceptional individuals, hoping that they would bring a special chemistry to solving social problems. At the time, there was little support for such people, and the arrival of new funds such as UnLtd, which provides small grants to individuals wanting to create new social enterprises, has been a healthy corrective.

But the emphasis on individual heroes overshot and was, at times, almost comically oversold, particularly by certain American organisations, whose Oscar-style ceremonies and awards celebrated what some saw as a ‘club-class’ elite of social entrepreneurs, often with MBAs from western universities and privileged backgrounds. The language of magic and alchemy used to describe social entrepreneurs encouraged muddled thinking and action, obscuring the extent to which most successes depend on the chemistry of teams and places, not just individual brilliance. This is one reason why it has been harder than expected to replicate the serial entrepreneurs of business in the social world.

The uncomfortable truth is that, despite the hype, there has been no growth in the number of social entrepreneurs who are household names. The UK’s Jamie Oliver might be a partial exception, but he also proves the rule, since his primary identity remains that of a TV celebrity. An attractive story about how individuals could change the world has been tested and found to be, at best, only half true.

The third disappointment has been the lack of commercial investment. There were high hopes in the 1990s that big finance would become seriously interested in social enterprise. But the facts are sobering. A 2010 survey showed that commercial investment has been paltry. The biggest source of support has been public funds, such as the Futurebuilders fund or the Social Enterprise Investment Fund in Health. There are some significant commercial investment funds, notably Triodos and Bridges, a healthy Charity Bank and good examples of venture philanthropy and investment, including Venturesome and Impetus. Yet their scale of investment remains smaller than hoped.

Other parts of Europe have done better. A couple of years ago, Italy launched Banca Prossima, which is solely dedicated to social enterprise. In Spain, regional banks such as BBK in the Basque country routinely invest large sums in social ventures. The British banks, by contrast, talked a lot about social responsibility but made their bets on what turned out to be much riskier propositions. Many fear that the Big Society Bank could continue this disappointing story. The promise is that the new bank will capitalise the sector – funded by dormant bank accounts, not the public purse – but critics warn that the banks are providing funds on commercial terms. Given that social enterprises have little capacity to absorb commercial loans or equity, the fear is that much of the money will go unspent.

The fourth disappointment is the continuing absence of scale. Fifteen years ago, it was hoped that big social enterprise brands would emerge in fields such as food and transport, becoming in time as ubiquitous as Sainsbury’s or Vodafone. Today, while there are some visible brands with a social or mutual dimension, including John Lewis and the Co-operative Group, few social entrepreneurs have achieved the scale they hoped for. Most civic organisations find scale difficult and, although there are some very large NGOs, such as the Red Cross or Caritas in Germany, most are small. Some of this has to do with lack of capital or skills, but there is also a legitimate fear that greater scale can corrode values, commitment and intimacy. When organisations do grow large, they tend to maintain small units of activity, either with federal structures that link hundreds of local branches, as in the case of Age UK, or with cellular structures, as in the case of Alcoholics Anonymous.

There is another reason why social enterprises have struggled to grow. Often, the very individuals who are great at starting social organisations are ill suited to growing and consolidating them, and are uncomfortable with what growth requires: a shift from freewheeling and informal cultures to structure, bureaucracy and formal accountability to investors. Boards tend to dither over getting rid of charismatic founders or booting them upstairs into more honorary roles. Many small businesses refuse to grow because they would rather be small and free than big and dependent. Social entrepreneurs hoped that they could have their cake and eat it, but in the end they could not.

The other problem was that many business models could not be easily replicated. While some enterprises, including web-based organisations such as Kiva and Netmums, have thrived, others have struggled to grow. One of the UK’s largest social enterprises, the Wise Group in Glasgow, tried to expand to cities in England and quickly amassed unsustainable debts. The Big Issue stumbled in some countries where the model simply did not work, while South Korean online newspaper OhmyNews, one of the most exciting recent social enterprise models, has so far failed in its attempts to replicate its success elsewhere. Even the Grameen Bank model turned out not to work in India, where different models of microcredit have thrived, or in Europe, where the social conditions that helped microcredit succeed in the 19th century have largely disappeared. The lesson would seem to be that the conditions for success are often local and specific.

Ahead with caution

So what happens next? Social entrepreneurs’ natural optimism needs to be tempered by realism. In the short term, it is possible that the funds going into the field will fall. Social enterprises delivering public services may find themselves on the receiving end of public anger as services are cut. But in the longer term, the optimists are likely to be vindicated. Social enterprises are well placed in sectors that are likely to grow in the decades ahead, such as health, care and renewable energy. The opening up of public services should create more opportunities and, even if the hype around social investment is overblown, there will probably be a steady growth in the size and confidence of funds that support social ventures.

As is so often the case in social change, two steps forward are accompanied by one step back and we learn as much from the things that do not happen as from those that do. But I doubt that we will see many journalists in the future disputing the possibility that an enterprise could have a social mission.