I spoke to a group of assistant commissioners and deputy assistant commissioners in the Australian Tax Office yesterday on issues that might affect their future workforce strategy.

One of the issues I raised was the rise of social enterprise. I define this model as an organisation that has both a profit driven business model and a social mission.

In my work and interactions with the not for profit sector I am seeing a number of factors that are coming together to fuel what I see as the inexorable rise of the social enterprise model.

The first of these is that not for profit organisations are coming under increasing financial pressure as the global financial crisis grinds on. These pressures are coming from a number of directions:

• Corporate sponsorship is under increasing pressure as companies look to cut costs.
• Corporate volunteer programs are under pressure as employees are more concerned about keeping their jobs than contributing to the corporate social responsibility programs of their company.
• Philanthropic organisations are seeing their capital bases eroded at the same time as an increase in funding applications.
• Governments are seeking to reduce expenditures in all sorts of areas, either as austerity measures or for political messaging purposes.

As a result that has been a surge of interest from not for profit organisations looking for opportunities in social enterprise as a way to create a more stable funding base.

It is my very strong view that a well run social enterprise model has a competitive advantage over a commercial business operating in the same space. As a customer I will spend money at a social enterprise business over a commercial business but only if their product or service is equal or better to that of the commercial business. Sadly many of the social enterprises around the place (with some notable exceptions) are relying too much on people spending money with them because they are doing good things rather than being the best business in the sector or space.

Those that can match a great profit driven business model with a social mission can create a competitive advantage that is almost unassailable. This is because they have an advantage with both customers and their staff. If two products or services are of a similar quality and I can support my community by spending my money at the social enterprise that supplies them rather than a commercial business why wouldn’t I do that? If I want to live my life with purpose and making a contribution to my community and can be paid the same amount of money at a commercial business or social enterprise business which am I going to choose?

Which brings me to the bloodbath part of this story.

There are two parts to the bloodbath, one that is is chaotically destructive and the other one that will continue to underpin the rise. One is short term and painful and the other is permanent and constructive.

The chaotic part is that in my view a lot of not for profit organisations that are poorly equipped to enter the social enterprise are doing so because they are being driven by a financial crisis imperative rather than a strategic one. Running an excellent business model in a social enterprise or a commercial enterprise is hard and requires different skills than a not for profit organisation. This means there will be lots of serious failure in the space over the next five years. That will be difficult but what emerges will be stronger.

I believe I saw a component of the permanent and constructive model this week when I attended an evening of the LV Foundation as part of my involvement in Leadership Victoria. The Foundation hosted a presentation by Lance Fors the Chairman of Social Venture Partners International which is a group looking to support not for profit organisations and social enterprise by taking some of the lessons learnt in the start-up and venture capital world. They are doing so by providing grants, by providing loans, and by investing in social enterprises. On top of that they are also providing their expertise.

The part of Lance’s presentation that struck me as most important was his view about risk and that the sector was not taking enough risks and therefore not being innovative enough and that SVPI was looking to change that. His view was that if the sector was not failing enough then they were not pushing the boundaries of what could be achieved.

The “creative destruction” that occurs in the venture capital and start-up ecosystems is what has underpinned the amazing flowering of innovation we have seen in the technology sector in the last decade. The sort of model that SVPI uses and promotes has the potential to do the same in the social enterprise sector. I for one think that is fantastic and I have put my name down to be part of the group looking to be part of the model here in Melbourne.

If anyone else is interested then just tweet me : @futuristpaul and I will put you in touch with the organisers.

The social enterprise space is certainly one we will observing closely for signs of innovation and change.

Paul Higgins