Putting Business Back Into Social Entrepeneurship. Part Two: Mission vs. Budget Driven Enterprise Decisions
The purpose of this series is to draw attention to and contrast the differences in social entrepreneurship as
it’s defined along a pathway of business and entrepreneurial activity, as opposed to the way many current practitioners
view the business model, as essentially any kind of social venture that benefits people in tangible ways regardless of
whether it is financially sustainable and profitable or not, and apart from it’s basic business culture. Much of what
passes for social entrepreneurship business is not business at all. It may be helpful and it may create social value,
but it bears minimal resemblance to true business.
The larger corporate world that exists outside this little enclave called social entrepreneurship is more and more being driven to conclusions about how business should operate based on factors not directly within their control, and these factors are inevitably leading corporations to think like social entrepreneurs, whether or not they recognize it. This impending sea change of global economics results from a much larger context of convergence and empowerment impacting business and how it’s done at its very core. Note the following observation from the Colorado strategic management firm KLM Inc. about how they view the changing US business model:
...today, under the influence of globalization, environmental crises, and widespread ethical breakdown there is pressure to identify and report new, non-traditional, and “non-financial” measures of performance to get at newly recognized dimensions of enterprise value, success, and significance. These new demands emerge from a belief that social, environmental, ethical, and geopolitical factors materially impact the ability of a company or enterprise to perform favorably. Much of what passes for social entrepreneurship now is not entrepreneurial in nature. In fact it can be argued that it’s really not business at all. Non profits fall into this category. NPO’s are wonderful organizations that do fantastic work around the world and impact society in dramatic ways. Without them governments across the globe would be waging an even more desperate battle against intractable social problems then they already are. But most NPO’s are neither entrepreneurial nor are they true businesses. My reasons for suggesting this have nothing to do with Mr. Sloan’s ideas however. I’m aware that I’m treading into some very controversial waters here. However, I believe this issue is one of the most important faced by the sector if SE is going to ever move with force into the mainstream of the US Economy and take the next step in terms of its impact and value creation.
KLM’s diverse client portfolio ranges from companies like technology giant Hewlett Packard to law firms, venture capitalists and energy companies, to the Shambhala Mountain Center, a non-profit that among other things, markets meditation training and personal development services.
Note the emphasis on social issues and things like globalization, environmental crisis and breakdowns in ethics given as reasons why US companies are moving their business models in the direction of fundamental change, towards quantifying value in more than strictly financial terms, but with “newly recognized dimensions of enterprise value”. These corporations are inherently becoming more like social venture enterprises and the reasons have a great deal to do with issues both social and financial, including things like competitive advantage, strategic planning and market dynamics…all things that should concern social venture entrepreneurs as well, even if they’re mission driven to a fault.
In addressing through this series the idea that social entrepreneurs need to become more business focused, I’ve made it a point to expound on the need for change in the fundamental model that has driven social benefit organizations for decades, that of financial dependence on partners that reside outside the organization and it’s mission. In doing so I’m urging that social mission executives begin to get on board with the changes in global commerce in order to survive. However there is another equally important concern, and one that goes to the heart of what constitutes entrepreneurship, which is critical to the point of this series. From a pure resource strategy standpoint, we can say that entrepreneurs differ from business managers because (among other things) they utilize their business vision to leverage resources outside their control as opposed to those they maintain in hand. Entrepreneurs, while obviously concerned about money, are not budget focused in the same sense that managers are. Entrepreneurs do not merely manage budgets to develop mission objectives; they use their mission objectives to create those budgets, which is a critical difference.
Entrepreneurs use managerial skills to motivate people rather than manipulate budgets
The migration from traditional non profit business models built on financial dependence to sustainability and independence has interesting implications for how we see the role of social mission executives. Differences and similarities exist within the same matrix here. To illustrate this, I suggest you think about the fact that NPO founders and executives also spend much of their time motivating people, just as their social enterprise brethren do, but for very different reasons. NPO management following the traditional funding models are responsible for creating the business infrastructure that targets donors as the company’s most important asset and motivates them to...well…donate. I doubt most people would seriously dispute this fact. Donors…be they corporate, government, philanthropic foundations or individuals…are the most important financial asset that NPO’s hold. Without them, the mission ceases to exist.
As we compare the fundamental role of NPO executives and that of social entrepreneurs, which is what we are doing when we weigh budget versus mission-driven operations that are creating social value, it becomes readily apparent that both groups have recognized the critical need for leveraging their primary asset into revenue, and both groups leverage relationships to obtain what they want. The most important difference is this; social entrepreneurs bent on financial sustainability and profitability must leverage their network of relationships to produce business in a competitive environment where market forces aren’t swayed by benevolence or sympathy to social mission. NPO managers leverage relationships as well, but the fundamental driving forces are not the same. NPO managers create donor relationships based on a variety of things other than competitive market dynamics or mutually shared business objectives, while social entrepreneurs depend for their very existence on the ability to manage those factors.
Budget driven decisions; how NPO boards translate social capital to financial capital
NPO’s maintain their mission directives in part through the use of influence created by their boards of directors. Members are frequently installed due to their ability to generate influence rather than provide assistance with their personal expertise. That influence is directed towards key decision makers within the outside circle of potential funding partners where it’s translated into grants, corporate sponsorship and other tangible benefit advantages. In other words, non-profits that utilize board influence to sustain themselves through these outside funding partnerships translate their social capital garnered through their board member’s influence into financial capital. This conversion process is a significant driver for the revenue engines of most large non profit organizations with the capability of attracting high profile individuals to their boards.
This strategy works well for large organizations that have the ability to attract high profile individuals with influence. It doesn’t benefit smaller operations where managers rely on constant adherence to budgets that are much more limited, almost completely dependent on their grants funding, and consequently have mission objectives that are defined and therefore limited exclusively by the available funds. Creating social value is thus ultimately a product of the grant seeking process. Management now becomes a process that’s more about complying with funding agencies requirements than it is translating social capital to financial capital or motivating and empowering people within the organization itself. Without the ability to generate significant social capital through board associations and convert it to financial capital, small NPO’s depend almost entirely on their limited grant seeking process to develop their budgets. This reality restricts small organizations to limiting their mission exclusively to a vision in line with resources held in hand as opposed to those they do not control. This is not the only restriction they function under, but it’s the important one for purposes of this discussion.
Social entrepreneurs utilize social capital networks as well, though like small non-profits, rarely do they have boards that are capable of extending their influence to generate financial capital by the force of their influence through social capital. Utilizing networks of influence in business, they turn their personal connections into resource networks, intellectual capital and strategic advantage to turn a profit. But these networks succeed only when they offer mutually beneficial and tangible business opportunities to their partners. Thus, social entrepreneurs must compete with other businesses on a business platform where they can offer benefit for benefit in lieu of the ability to generate raw financial power to achieve competitive advantage. They must be creative and innovative in the way they employ social capital through their networks, and they must find ways to leverage these relationships into financial impact that allows them to sustain social mission.
The weaknesses in board of director produced influence are two-fold; first, it degrades the ability of the board to offer specialized expertise and advice to executive management since these advantages are usually sacrificed on behalf of influence, and second, it offers nothing of value to smaller organizations. It’s a model that can only be used by operations of significant size and prestige. It is not a model that favors the proper utilization of board action, which is to make decisions at the oversight level that benefit the organization and its stakeholders, because it is not a business model for boards of directors involvement in oversight of daily operations.
Mission driven decisions; how social entrepreneurs share vision to create assets
We are talking about managerial practices in this discussion, and specifically the difference between managing budgets held in hand to satisfy mission objectives versus the idea that we can start with the vision first and leverage that as an intangible asset in determining mission objectives. In other words, we are working backwards through the process of funding the mission as compared to the traditional NPO model of utilizing social influence or grants funding to decide the level of our mission objectives based on available revenue. This brings us to an observation about social mission entrepreneurs that has significant interest to the larger corporate community because it reflects on global economic impact efforts to measure asset value for something that is intangible.
In developing this new entrepreneurial process, we are working with new economy theories on what constitutes value and specifically assets. Historically, assets have been viewed by banks, lenders, stock holders and venture partners as things that are physical in nature and have easily identifiable tangible financial value. Cash reserves, investment holdings, commercial infrastructure such as real property, buildings, vehicles, computers, furniture, etc…and these assets have been the accepted form of collateral in the financial community as long as free enterprise has existed as an economic system. Utilizing these assets to create working or expansion capital opportunities has followed a predictable and accepted course, being the basis for how lenders make decisions to fund an enterprise, along with some other less tangible, more esoterically considered factors like industry placement, business relationships and prior success, credit worthiness, etc…That basic assumption of how the business lending process is conducted is beginning to change and it has significant impact on how social entrepreneurs should think about value and asset creation. For the purposes of this discussion, when we talk about assets, and how they can be created through shared vision, we are talking about intangible assets such as intellectual capital rather than physical, tangible ones. Intangible assets, along with their creation and management, are the focus here.
Strategic management firms like KLM have begun to recognize this reality and have adjusted their approach to enterprise strategy accordingly. KLM is an example of a firm that recognizes a difference in the two classes of assets and the way that approach is changing to deal with mixed asset based companies, both in terms of the recognition that knowledge based intangible assets are a vital and recognized part of the company’s value, and especially in terms of how managerial competencies must change as well to reflect this reality as they note on their website:
Many managers and executives are well-versed, through years of practice, at working with tangible assets. They understand efficiency, cost-effectiveness, and operations. Most of the senior managers of today cut their teeth on the tangible asset base, and have developed great proficiency at trimming fractions of a cent off costs, increasing the quality and through-put of a manufacturing plant while also delivering reduced cost of goods, or deploying marketing vehicles for incremental gains against competition in market share. This is well and good, as these disciplines have built the modern industrial world and provided the ground of modern capitalism.
However, these very same managers are often less adept at managing ideas and focused innovation, strategizing and leveraging intellectual property, creating value, building brand equity, or building the reputation of an enterprise through human resource development and social responsibility initiatives
While organizations continue to optimize their tangible assets, they must also gain the ability to manage intangibles assets, or run the risk of greatly under-optimizing their combined asset base and thus too their corporate performance.
What are intangible or knowledge based assets? They are intellectual in nature rather than physical, and they include ideas, concepts, strategies, and proprietary information held by the individuals who make up a company, as well as networks of individuals contained within the social capital bank both inside and outside the organization that possess skill sets and abilities necessary to translate these ideas into innovation. They also includes the intellectual property like patents, trademarks and copyrights, brands, reputation, investment in social responsibility, personal character traits such as leadership and emotional intelligence residing within human resources and creative thinking processes that utilizes right-brain intelligence skills along with logic and analysis.
Syndicated columnist Jim Blasingame, a strategic consultant who hosts the world’s only daily talk show for small business people, and ranked by Forbes as one of the 30 most influential people in America representing small businesses, has summed up his views on intellectual capital and intangible assets like this:
Over the past twenty-five years, I have observed that the most valuable assets of an organization tend to be the knowledge, talent, experience, capabilities, and vision of the people within the organization. These, coupled with the value of their patents, customer bases, and good will, equal what is called their intellectual assets. When leaders understand how to formalize, capture, and leverage their intellectual capital to produce higher-valued assets, profits tend to soar.
Chris Bogan, President and CEO of Best Practices LLC, a North Carolina based research and consulting firm working to identify and utilize strategies in knowledge management and intellectual capital in post-merger integration environments, and a world leader in best practices benchmarking, says that companies don’t know how to handle this emerging class of assets to their benefit. Bogan noted that; “Most companies don’t know where to find their intellectual capital. In fact most
don’t even know where to start.”
Why do business strategists like Blasingame, Bogan and KLM share with SBIG an approach to identifying, developing and utilizing intangible, intellectual capital based assets? SBIG’s organizational structure is built on a hybrid business model that integrates both networking and business masterminding strategies and seeks to leverage these concepts within a framework of social entrepreneurship in the Dallas business community. By doing so, we have targeted what Blasingame, Bogan, KLM and others identify as a critical component for success in the new economy landscape, and merged it with a developing paradigm businesses are more interested in today than ever before.
Well publicized examples of graft and corruption in the non profit sector resulting in increased IRS regulatory control have also driven reform-minded foundations that now expect that every dollar they give is justified and proven to be effective not with Power Point presentations, but with testing and measurement tools that are unforgiving and unmoved by emotion.
Note the difference here in basic strategy, which represents a distinctive change from traditional NPO managerial competencies utilized by large organizations that leverage social capital based influence at the board level to achieve funding scales and small NPO strategies built on grants funding that manage budgets with resources held in hand to create social mission value. In our model, the strategy involves recognizing where intellectual assets are, recruiting them into our network, organizing those assets around project based environments that create social capital, and leveraging that capital to produce social and financial impact and vision. This vision then becomes the basis of our approach to quantifying the nature and scope of our assets. Instead of identifying infrastructure, real property, physical assets or portfolio holdings as our asset base, the purpose here is to move deliberately in the direction of removing tangible assets from consideration in our asset holdings rather than adding them.
Why should we wish to do so? The answer is simple. Intangible asset formulation serves to level the playing field for small organizations, offering the ability to create value apart from heavy financial investment in tangible resources. This kind of asset creation builds value in ways that do not depend on a company’s financial bottom line. Anyone can play this game with the right commitment to creating knowledge and mastering it’s deployment.
This approach obviously has repercussions in terms of how our stakeholders, clients and networking partners perceive us. As Bogan noted already, most companies do not yet understand these metrics, or how to work with them. This reality is certainly true in the finance industry as well, where 501(c) 3 organizational status is still the default marker of choice for many CRO’s (Community Resource Officers) who are used to traditional social mission strategies. These financial services professionals are overwhelmingly familiar with the corporate sponsorship model or the board of directors influence model for funding non-profit ventures, not risk capital and equity funding strategies for social mission organizations. The same is true of venture capitalists and other private sources of capital available to most for profit businesses. We are not merely talking about different ways of doing things here. We are talking about an entirely different kind of business; one that is only recently becoming known in the wider world of investors and philanthropic partners. Some refer to this business model as a hybrid, though I prefer to see it as an evolutionary outgrowth of two converging forms of commerce that must by necessity morph into something that meets the needs of both companies and customers on a more complete basis.
So in asking the question, “How do social entrepreneurs share vision to create resources?” we’re engaging the basic product of the global knowledge economy, which obviously…is knowledge itself. As noted, NPO executives utilize boards for their influence and grants to bring a budget to the table. That budgetary process obviously precedes the implementation of the social mission. In other words, NPO’s don’t generally plan to do anything they can’t budget for in advance because they can’t spend what they don’t have already or are sure they’ll receive. Remember the characteristics of an entrepreneur? Entrepreneurs do not just manage budgets to create value; they leverage value to create budgets. Entrepreneurs leverage resources they do not have, while managers do not. That is the essential difference in this equation. As we apply these concepts to social entrepreneurs, we are obviously working with a more complicated model since social entrepreneurs are working not with one bottom line objective in their business model (profit) but two (profitability and social value creation).
By now you should be recognizing a distinctive pattern here. As we examine mission versus budget driven enterprises within a social mission context, it should be obvious that what we are really talking about here is risk management and how it’s approached by both NPO’s and social entrepreneurs in different ways. Managing budgets with resources already held in hand is completely different than launching a venture where your operational capital is going to be the result of the founder or executive’s ability to install the vision across a network of other people, motivate those individuals to enthusiastically climb on board with their participation, and then boldly proclaim that their intangible intellectual assets should be viewed with as much legitimacy as tangible ones; things that banks and other lenders view as solid hedge points for their bets. As I noted in part one of this series, entrepreneurs are characterized by the willingness and ability to assume and manage risk to their advantage.
As we talk about words like “value” and “assets” here, keep in mind that the issue of quantifying these things is already a major part of the dilemma facing social entrepreneurs just as it’s of serious concern for knowledge economists. In fact this problem…measuring outputs that are not physical or financial…is at the very crux of one of the most difficult quandaries facing social entrepreneurs. How do you measure social value in financial terms? How do you quantify something that is so elusively defined? How do you analyze results when no standardized system of measurement exists? The same is true in characterizing assets as intangible and looking for the measuring stick that accurately portrays them.
Defining organizational assets in terms of intangibles like knowledge and social capital has only recently moved from the limited discussions taking place between business strategists and CEO’s looking for ways to activate hidden corporate resources, to systemic accounting solutions based on international standardization attempts in an effort to quantify intangible assets in the US and global economy. Estimates vary on the strength of these assets and opinions differ on how they should be measured. The International Intangible Management Standards Institute (IIMSI) places the value of intangibles at the 500 largest US companies at $7 trillion, or nearly 70% of total value, while other estimates place the figure at closer to $1 trillion, and one study suggests that 84% of the S & P 500 comes from intangible assets. Regardless of the numbers, the concepts are still unfamiliar and daunting to most companies, and not yet fully embedded in collective corporate practices on a wide enough scale for consensus figures on reliable data. Even achieving accepted measuring and accounting principles is an enormous hurdle, so obviously the reliability of data at this point is impossible to gage. The point is that CEO’s and senior managers are deeply concerned about this issue.
Questions about the impact of shifting views on asset management naturally generate debate over the role of the NPO executive and the social entrepreneur in terms of managerial competencies. Can this discussion go further though? Can intangible assets and their corresponding management strategies change decision making processes at the level where financial institutions invest or support an enterprise and are impacted positively towards organizations that utilize this model for valuing their business? Will banks and other financial institutions willingly adopt these ideas as legitimate for social entrepreneurs now that the larger business world is recognizing these new realities?
Trends in executive thinking and the metrics used to analyze and define the larger knowledge based economy suggest they already are. A joint research project by the $16 billion global management consulting firm Accenture, (they advise 87 of the Fortune Global 100), with the Economist Intelligence Unit revealed that 94% of senior corporate executives consider the comprehensive management of intangible assets important, and 50% consider it one of the top three management issues facing their company. Despite this, only 5% of surveyed executives believed their company had a solid system for measuring and tracking the performance of thee assets, while 60% said they apply only some measures and a third do not measure performance of intangible assets or intellectual capital at all. These numbers reveal a massive shortfall in the market for strategic consultation and enterprise development that social entrepreneurs have the opportunity to help provide if they can design and implement robust business models that demonstrate how these principles work in the real world.
Social entrepreneurs create knowledge networks of value to corporate decision makers
Because they leverage networks of intellectual capital to construct intangible assets and create social value within the same matrix, social entrepreneurs possess proprietary information that is of tremendous value to corporate decision makers. This kind of knowledge is difficult to develop, quantify, measure and manage, which means it is also difficult for companies to affordably obtain. And while it remains imperfectly organized and often resides tucked away in the right brain skill sets commonly associated with innovation, creativity, intuition and emotional intelligence, this problem does not diminish the fact that these “knowledge banks” exist, or that they are needed by and attractive to corporations that are beginning to understand that new paradigms for business now constitute the fabric of knowledge economics.
By filling the social value creation space where managerial competencies coexist with the power to drive asset creation through shared vision, social entrepreneurs are positioned to pioneer experiential business models with the potential to drive significant economic change in the knowledge economy. How well these entrepreneurs leverage these vital assets may ultimately determine whether social entrepreneurship successfully replaces the NPO business model, whether it is ultimately adopted by the larger community of socially responsible organizations, and whether it becomes a powerful driver of economic empowerment or merely a passing fad.
Mark R. Lewis is the CEO of the Strategic Business Intelligence Group, a Dallas-based business networking and masterminding organization of professionals, corporate and non profit executives, entrepreneurs, finance professionals, small business owners and public sector strategists and community builders. SBIG is building a strategic platform for social entrepreneurship in Texas and creating knowledge-based networks capable of leveraging intellectual capital and intangible asset creation. You can contact him at mark@strategicideas.org.