Value for money from social firms
This policy brief arises from the work carried out in the Social Economy theme of EQUAL, which involved over 400 projects across the majority of EU Member States. It addresses the issue: why support work integration social enterprises (WISEs), also known as ‘social firms’, as a way to create employment and tackle exclusion? It describes several efficient strategies for handling exclusion through WISEs, and discusses methods of assessing the costs and benefits of such an approach. The allied issue of how best to support work integration social enterprises is addressed in a companion brief, Handling Exclusion through Social Firms. The issue of training is addressed in a third policy brief, Management Skills for Social Enterprises .
This document has been prepared by experts and their opinions do not in any way engage the Commission.
Social firms - reaching the people other enterprises cannot reach
Social enterprises distinguish themselves by carrying out economic activity, but for social goals. This means that they compete in the market place and trade for profit, but they do not use this profit purely to reward financial investors. Instead, they use their trading surplus principally to further their social objectives. Social enterprises make up around 5% of the economic activity of Europe’s Member States. (In 2004, the Johns Hopkins Comparative Non-Profit Sector project, covering 36 countries worldwide but using a more restrictive definition including non-profit distribution, evaluated employment to be 4.4% of the workforce. )
Whilst they may have a number of social and environmental objectives, a significant sub-section are active in the inclusion of disadvantaged people through work, and these are known as “work integration social enterprises” or WISEs. They cater for a wide variety of disadvantaged groups, and while some act as temporary ‘springboards’ into permanent employment elsewhere, others themselves offer permanent sheltered jobs for more seriously excluded people. They mobilise several different streams of revenue for this purpose: along with the sale of goods and services, they might use public subsidies for integration, grants for other purposes and/or volunteer time.
The way social enterprises can simultaneously achieve multiple objectives with multiple types of resources, as much work within EQUAL has shown, allows them to produce outstanding results in many areas of employment and social inclusion. When serious attempts to evaluate the returns gained from investment in social enterprise, the results are often massively positive. However these benefits all too often go unmeasured and unrecognised.
Towards activity for all
In March 2007 the EU’s Spring Council stressed that Member States’ common social objectives should be better taken into account within the Lisbon strategy. Recalling the need to fight poverty and social exclusion, it called for more attention to be given to active inclusion.
This is a response to the growing realisation that the objective set by the Lisbon agenda – to raise the workforce participation rate to 70% of the population of working age, by 2010 – requires new ways to be found to bring those fractions of the population that have proved most difficult to activate into economically productive activity. This contributes to the simplified objectives set out in the mid-term review of the strategy in 2004, to create stronger, lasting growth and more and better jobs.
A second consideration is the need to preserve social cohesion and support for the EU among the population, in the light of stresses causes by increased flows of economic migrants since the extension of the EU in 2004 and by social unrest in peripheral housing estates, for instance in cities in France and Britain. Policy-makers across Europe are looking urgently for ways to solutions to these problems.
This gives a renewed importance to the call for an active labour market policy that will reduce exclusion, which forms part of the Lisbon strategy. This is expressed in the Integrated Guidelines for Growth and Jobs (2005-2008) , which state that: “Special attention should be paid to promoting the inclusion of disadvantaged people in the labour market, including through the expansion of social services and the social economy.” Integrated guideline no. 18 – “Ensure inclusive labour markets for job-seekers and disadvantaged people” – provides for “active and preventive labour market measures including … provision of social services necessary to support the labour market inclusion of disadvantaged people.”
European policy-makers increasingly recognsise the importance of assessing the social impact of policies. For instance the Commission, in justifying its flagship initiative against poverty, says:
- "Social Impact Assessment
- Better policy coordination means that the social impact of policy initiatives needs to be carefully assessed and that potentially adverse social consequences should be minimised through equity-orientated and poverty-focused measures. The European Commission has subjected all major initiatives and legislative proposals to a comprehensive impact assessment(IA), including the social dimension. The Commission will continue to refine and improve the quality of its impact assessment to ensure that attention is paid to the social dimension. It is important that other EU Institutions when modifying the Commission's proposals and the Member States at national level assess the social dimension of their own proposals."
- Source: The European Platform against Poverty and Social Exclusion: A European framework for social and territorial cohesion, COM(2010) 758 final of 16 Dec 10, page 12 
Experience from many EU countries shows that social enterprises are an efficient and cost-effective way of integrating disadvantaged groups into the workforce. There are a number of different approaches in different countries, and at the same time a process of mutual learning is under way.
Social enterprises integrate disadvantaged groups into the workforce in an efficient and cost-effective way
A thirty-fold return to society
The sheer cost-effectiveness of social firms in creating jobs for people especially far from the labour market is dramatically demonstrated by the social-economic reporting method developed in Sweden and piloted with some EQUAL projects under the guidance of the EQUAL National Thematic Network Social Entrepreneurship – a Way to the Labour Market. This shows truly remarkable results.(1)
The first two pilots involved two social co-operatives working as part of EQUAL projects with drug addicts during 2005 – Basta (2) near Stockholm and Vägen ut! (3) in Göteborg. Taking into account the various savings that society makes owing to their activity, the co-ops turn in an astonishing social profit of as much as €110,000 per employee per year – 50 times higher than their nominal business profit. This enormous difference results principally from the fact that social spending is traditionally not regarded as an investment. Yet in businesses, it is normal to turn in a loss in the first year, and then break even and move into profit. In order to reap a benefit, a little patience needs to be exercised. In the case of drugs rehabilitation through social co-operatives, this investment returns a profit after only a couple of months. However it is interesting to note that whereas the bulk of the expenditure is made at local level, the lion’s share of the savings goes to the national tier of government.
To calculate what the costs and benefits of a given set of interventions are, the method maps all the different actions that are taken in dealing with a drug addict. In the case of drug rehabilitation, this results in a map of no less than 130 factors, grouped into five main chains concerning income, treatment, crime, housing and children. The ‘crime’ chain is one of the most interesting, and it is remarkable for its extreme inefficiency. For example fences pay only a small proportion of the value of stolen goods, so if an addict needs to find 1,000 kronor for his fix he has to steal 4,000 kronor’s worth of goods. Taking property damage into account the cost rises to 16,000 kronor. Each factor is then costed – and the cost is colossal: each male heroin addict costs society €219,000 per year, while each male alcoholic costs €70,000. In effect each of Sweden’s 60,000 drug addicts ‘employs’ between two and three people.
Social co-operatives help addicts to stay away from drugs and crime, and thus generate sizeable savings, both for public services – particularly the judicial system – and for insurers – and there¬fore householders. Basta has been going for more than 10 years, and many of its members have stayed off drugs for five years or more. In their case, the return to society from Basta’s action rises to 3,150% – or a massive thirty-fold return.(4) The same holds true for other target groups: studies on the KOS and Briggen social co-operatives show that activating a person on long-term sickness benefit produces an annual saving of €37,000 for men and €26,000 for women, with the majority accruing to the län or county level.
Meanwhile in Finland, the Social Value Added Working Group of the EQUAL National Thematic Network for Social Entrepreneurship http://elware.fi/teematyo is developing the ‘SYTA method’ (SYTA-malli®) of assessing the economic and the content-related outcomes of a social enterprise’s activities. A tool has been produced, formatted as a spreadsheet application which is parameterised – in other words factors such as tax rates can easily be adapted to suit differing national contexts. Its economic side involves calculating the returns to the state, the municipality and the employees, then comparing these with what would otherwise have been the case. For example a study was made in 1998 of a social firm that employs 33 disabled people, and receives a subsidy of €297,000 a year. It already pays taxes in excess of this subsidy. However taking into account the savings in benefits it generates, its true social benefit is €140,000 per year.(5)
Thinking in terms of investment
Social return on investment (SROI) is a technique for capturing in a more holistic way the various types of impact that public programmes have. The short length of electoral mandate often makes it difficult for man¬agers of public programmes to think in terms of investment. But SROI does think in these terms. It allows values and benefits that are often overlooked to be brought within the financial calculus.
The process of calculating the social return on investment starts with carefully considering who the key stakeholders are and what the indi¬cators are of success. This process results in an ‘impact map’ which shows how its activity converts inputs such as funding into impacts of various types for various stakeholders. These impacts can then be monetised, and presented in the form of multi-year projections. From this one can use standard accounting tools to calculate a discounted cash flow, and the net present value (NPV) of the investment.(6)
During EQUAL, use of the technique has grown steadily. Three British regions as well as the Dutch EQUAL programme are using this tool, with the important effect of lengthening planning horizons.(7) Social Firms UK, which has carried out a number of SROI analyses on enterprises such as MillRace IT,(8) Pack-IT(9) and Six St Mary’s Place,(10) reports returns on investment of between twofold and eightfold – per year.(11) These come about because the fact that their beneficiaries are working rather than being inactive results in increased tax revenue as well as reduced public spending on social security benefits and healthcare.(12)
Another use of SROI in the UK has been by the Local Economic Growth Initiative (LEGI), a €450 million programme to benefit residents in deprived areas by stimulating enterprise. An 18-month research programme called Measuring What Matters finds that current approaches to measurement focus too much on outputs and processes, and on funded inputs as drivers of change. They lack benchmarks and misunderstand impacts, so they measure the wrong things. A more holistic approach might take into account other factors that impact on business, such as transport links, perceptions of the area, crime and changes in informal activity. The study of the €19m LEGI scheme in St Helens, Merseyside, shows a social return on investment of 11-fold in three years. The intervention was well targeted as the stakeholder group who gained most were the economically inactive, who garnered 44% of the benefits.(13)
EQUAL has also supported to use of the SROI method in Austria, where the Chance B Hausmeisters project was found to generate a public profit of nearly €200,000.(14)
Businesses can value all their impacts
Many variations on this theme are bubbling up across Europe as part of EQUAL’s work. Social auditing or social accounting is a technique that has been pioneered in the social economy but can be used by businesses of all types as well as the public sector.
Social accounting is a technique that has been widely used under EQUAL in the rural areas of northern Europe,(15) for instance in Scotland(16) and Finland.(17) It relies on identifying who the organisation’s key stakeholders are, and finding out from them whether they are obtaining the benefits they desire. It works by first defining what the principal groups of stakeholders in the organisation are, and what results they want to achieve. It then monitors the way the organisation performs, compares these achievements with those of other organisations, and publishes the results. The watchwords are that the process should be multi-stakeholder, comparable, regular, versatile, learning, auditable and transparent.
In France, the bilan sociétal is a set of 100 indicators (ranging up to 400) that show how an enterprise impacts on society.(18) In Italy, the bilancio sociale is a similar tool, which can be used to raise levels of transparency. For instance in the Agenzia di Cittadinanza project in Milan (IT-IT-S-LOM-039 ), the technique is used to take indirect benefits into account such as the added income generated by the provision of childcare that allows more parents to go out to work. From 2007 it becomes obligatory for all registered social enterprises (imprese sociali). (QUASAR (IT-IT-S-MDL-053) )
Such initiatives to become clearer about the costs and benefits of social enterprise – and inclusive enterprise in general – are multiplying rapidly around Europe. The New Economics Foundation, a think-tank based in London, has created the EQUAL-supported Proving & Improving toolkit(19) that social enterprises can use to design their own processes to measure, and improve, their quality and impact. It is web-based and summarises 22 different methods, including social accounting, LM3, EMAS, EFQM etc. A key component is the SROI primer, a web-based video introduction to the method . In Bristol, such a calculation is used as part of an EQUAL project to assess the benefits of transferring public assets such as land and property to social enterprises.(20) The European Social Return on Investment Network  has now been set up to spread this method.
One of the simple tools for enterprises reported in the NEF Toolkit is the British co-operative movement’s set of ten Key Social and Co-operative Performance Indicators, which measure for instance not only whether members receive a dividend on profits and whether they turn up at annual meetings, but how much carbon dioxide the business emits and whether it takes ethics into account in its purchasing.(21) Another online tool  has been published to calculate the local multiplier effect of spending and is in use by a score of local authorities in North-East England.
The capacity of social firms to create jobs and to integrate into the workforce many classes of excluded people, including the most severely excluded categories such as those suffering from mental illness, has been shown. So has the way their activity produces a chain of benefits across various policy areas, that can result in extraordinarily impressive savings in public expenditure. However the task of evaluating the multi-dimensional social and environmental benefits for the various groups of beneficiaries, and expressing them in monetary terms to inform resource allocation decisions, is far from easy.
Measuring social impacts is a useful tool both for enterprises and policy-makers. On the one hand it is a practice that enables businesses to define their goals and track their progress towards them, and on the other it enables policy-makers to assess whether programmes of action are actually achieving the desired results. As a result of EQUAL’s work, practitioners in several EU countries are now at the stage of putting figures to the value of various impacts of social enterprise, over and above financial costs and benefits.
Thus, public authorities should be paying much greater attention to the possible role of social firms, and to the techniques that make the full range of costs and benefits clear.
- If they wish to capture the full range of benefits, policy-makers should take an investment approach to social spending. They should consider the full range of costs and benefits, and over a longer-term perspective. They should also take into account who benefits from the savings generated – for instance the national rather than the local tier of government. They can then devise systems to channel public funding along the most effective path – ‘making the money follow the outputs’ in a more transparent way.
- Tools to do this that are already in use, such as social return on investment (SROI) and the ‘socio-economic reporting’ methodology used in Sweden, are producing some remarkable results. Based on the pioneering strategies developed in several Member States during EQUAL, Member States should develop wide-ranging integrated strategies to exploit the full potential of the social economy in job creation, inclusion and public service reform. Examples of some efficient support strategies are given in the companion policy brief Handling Exclusion through Social Firms.
- Encouragement should also be given to the exchange of experience on such initiatives at European level in the new ESF programming period. A start is already being made: as a follow-up to EQUAL’s work, the ESF Managing Authority of Flanders organised a seminar on the topic of ‘enhancing public procurement with social return’ in April 2008 - see Antwerp procurement seminar. ESF Managing Authorities could for instance support the creation of an exchange platform to pursue this work.
A number of case studies of the Social Return on Investment method can be found on the website of SROI-UK at http://www.sroi-uk.org/
'Measuring Social Value' by Geoff Mulgan (article in Stanford Social Innovation Review, summer 2010: http://socialinnovationeurope.eu/sites/default/files/sites/default/files/geoff%20mulgan%20stanford%202010.pdf
(1) Summary: From the Public Perspective. An introduction to Socioeconomic Reports, 16 pp Download: http://www.basta.se/_upload/filer/Introduction_socioeconomic_reports.pdf
Full report: From the Public Perspective. A summary of reports on Socioeconomic Reports for Vägen Ut! kooperativen and Basta Arbetskooperativ, 48 pp. Download: http://www.basta.se/_upload/filer/Summary_socioeconomic_report_Basta.pdf
– both by Ingvar Nilsson and Anders Wadeskog/SEEAB, NUTEK, Stockholm, 2006. http://www.seeab.se ‘SocioEkonomiskt Bokslut’, www.nutek.se
(4) For Basta, the calculation is as follows, making the conservative assumption that members stay at the co-op for an average of three years. The municipality pays out €31,500 per person but reaps average gains of €78,000, which gives them a 247% return on investment. Looked at from the point of view of society as a whole, the investment of €31,500 results in revenue of €595,000 – a return of no less than 1,890%. It should be noted that while the costs of rehabilitation fall largely on local government, the savings accrue mainly to central government: a stay at Basta breaks even for the municipality after 15 months, but for society as a whole after only 2 months.
(5) The calculation is as follows: of the 33 employees, 24 are paid a wage, 6 a combination of wage and pension, and 3 a wage plus a wage subsidy. It receives a subsidy of €297,000, but pays €391,000 in tax and national insurance, resulting in a net benefit to society of €95,000. However this apparent social benefit is increased once one also takes account of the costs that would have been incurred if the workplace had not existed. It is estimated that 20 of the employees would be on unemployment benefit, 4 working on the open market and 3 working but receiving a wage subsidy. This would result in public spending of €121,000, of which €75,600 would flow back to the state in taxes and social insurance, leaving a net cost of €45,400. Adding these two together, the social firm generates a social benefit of €140,000, equivalent to €4,300 per disabled employee per year.
(6) The credibility of the figure one arrives at will depend on whether you take into account factors such as attribution (was the result really due to your intervention and not another one?), dead¬weight (would it have happened anyway?), displacement or substitution (where a benefit is achieved, but results in a cost to someone else outside your project), the sensitivity of your assumptions, the discount ratio and the time horizon.
(7) See Social return on investment. A guide to SROI analysis, Peter Scholten, Jeremy Nicholls, Sara Olsen and Brett Galimidi, 132 pp, FM State of the Art, Netherlands, 2006, ISBN 978-9075-45828-2. http://www.fm-platform.nl
(8) MillRace IT employs people recovering from mental illness in the recycling of computers, and produces a return to society of €7.4 each year for every euro invested.
(9) Pack-IT, a distribution firm half of whose 16 employees have a learning disability, shows an SROI of 1.9:1. The benefits include reduced welfare spending and increased local purchasing.
(10) Six Mary’s Place guest house, a social firm in Edinburgh that employs people with mental health problems, shows average savings of €37,000 a year per head – a sixfold social return. The study was carried out as part of the EQUAL Social Economy Scotland project (UKgb-155) .
(11) See . SFUK took part in the Social Enterprise Partnership project (UKgb-59) <www.sepgb.co.uk> The studies are published as part of Measuring Real Value: a DIY guide to social return on investment, by Jeremy Nicholls, Susan Mackenzie and Alibeth Somers, NEF, London, 2007, ISBN 978-1-904882-22-0, free of charge, downloadable from http://www.neweconomics.org.uk
(12) According to the UK government: “Adults with mental health problems are one of the most excluded groups in society. Although many want to work, fewer than a quarter actually do. … Mental health problems are estimated to cost the country over £77 billion [€115 bn] a year through the costs of care, economic losses and premature death.” – Mental Health and Social Exclusion, Social Exclusion Unit, Office of the Deputy Prime Minister, June 2004.
(13) As reported at the EQUAL Policy Forum Putting the Heart into the Lisbon Process held in Hannover in June 2007. 
(14) Part of the Public Social Private Partnership project AT-3B-18/314). 
(15) This work was reported at the Everybody’s Business conference held in Örebro, Sweden, in November 2006. 
(16) For example the Social Economy Scotland project (UKgb-155) has produced the handbook Making the Case – Social Added Value Guide which outlines seven usable methods. 
(17) For example as part of the Response EQUAL project of the Finnish Red Cross (FI-73) .
(18) It is used for instance in work on rural employment development by MACIF in ‘Entreprendre ensemble dans l'économie sociale et lutte contre les discrimination’ (FR-2001-NAT-10565) and by FNCUMA (Fédération Nationale des Coopératives d'Utilisation de Matériel Agricole) in SOQLE (FR-2001-NAT-10727)
(20) C3 – A Credible, Competitive and Confident Social Economy (UKgb-147) 
(21) The 10 Key Social and Co-operative Performance Indicators (KSCPIs) are: 1: Member economic involvement / 2: Member democratic participation / 3: Participation of employees and members in training and education / 4: Staff injury and absentee rates / 5: Staff profile – gender and ethnicity / 6: Customer satisfaction / 7: Consideration of ethical issues in procurement and investment decisions / 8: Investment in community and co-operative initiatives / 9: Net carbon dioxide emissions arising from operations / 10: Proportion of waste recycled/reused. See the Co-operatives UK website at . The NEF Toolkit was developed as part of the Social Enterprise Partnership (UKgb-59) .