Unsustainable and Un-scalable: Why Some Social Enterprises are Unlikely to Meaningfully Change Lives
In 2006, I worked with a Malawaian microfinance institution (MFI). The MFI had trouble encouraging employee attendance and performance. “Armed” with 8-months in business school (!), I provided what I felt was a simple solution: provide incentives. Incentives mean harder working employees with better attendance. Of course, the incentives failed. Sometimes, people did not come to work because family members were sick with AIDS. Sometimes, people just didn’t care.
The MFI (and me) is an example of ways in which people seek to leverage business approaches as part of a broader enterprise in solving social challenges. These efforts have morphed into various forms, one being social enterprises – businesses that prioritize social impact, while seeking financial sustainability.
However, two challenges prevent social enterprises as independently sustainable tools for having a wide-reaching, deep-seated effect on poverty alleviation: they lack scale and most are independently unsustainable.
One of the most prevalent metrics used to evaluate the success of social enterprises is scale. Yet, outside of rare exceptions like BRAC – an organization that provides millions of people with micro-credit, health and educational opportunities – very few social enterprises have truly reached many people, across many geographies.
On the other hand, for-profit businesses have reached significant scale in a variety of economies. While this success is not unmarred, the ability of for-profit firms to sustainably achieve scale is indicative of the model’s potential to affect a broader swathe of society versus social enterprises.
A pithy rebuttal may argue that the social impact of for-profit enterprises is, to say the least, questionable. How can the work of an organization that provides low-income individuals with the capital needed to start businesses, be compared to a business that sells shampoo?
To that end, my position is that job creation from for-profit enterprises is a wide-reaching weapon in the fight against poverty. With increased incomes, households are in a better position to access better healthcare, better education, and better access to clean water. In short, increased incomes mean better lives.
To be fair, there may well be an argument for experimenting with different models to deliver social impact. Yet, it is questionable if the lion share of resources should go to social enterprises, when so much has already been (painfully!) learned about for-profit businesses.
With a better understanding of how to create shared value for businesses and societies – does it not make more sense to figure out how to leverage for-profit businesses to help the poor, versus disseminating millions of dollars on “experiments?”
Underscoring this argument are results from the petri dish experiments on social enterprises. Namely, social enterprises are seemingly bedeviled by many of the problems of its ‘antiquated’ ancestors, like AID or NGOs: corrupt finances, ineffective systems, and exaggerated stories on impact coupled with questionable data.
Why spend significant and scarce resources supporting organizations that have yet to – on a broad scale – deliver on the promised step change over charities, NGOs, for-profit enterprises, or aid?
Social entrepreneurship’s disciples argue that this model is appealing due to an ability to be financially sustainable, while also achieving a social impact.
Yet, while little data exists, it is becoming increasingly evident that a significant amount of social enterprises are dependent on grants in order to achieve financial sustainability. In other words, the profit of more than a few social enterprises does not come from enterprise’s core function, but from the grants received from donors.
If a significant amount of social enterprises are depending on charity to be financially “sustainable,” then are these really ‘enterprises’? Probably not.
Any organization dependent on external funding for sustainability is not a social enterprise – it is an NGO.
To be fair, space for social enterprises in the broader field of international development does exist, and rightly so. Some social enterprises may achieve financial sustainability, while delivering a meaningful social impact.
Yet, increasingly evident – and possibly, prevalent – problems among social enterprises cautions a belief in (messianic) interpretations of these models consistently having a substantive, sustainable and scalable impact on poverty alleviation across a broad variety of economies, markets and geographies.