Evaluating Social Enterprise

The social enterprise concept is an excellent one, bringing forprofit principles into the nonprofit world, and when handled correctly, benefits both.

Many New York social enterprise efforts have recently been evaluated, as reported by the Wall Street Journal.

An excerpt.

“Hundreds of New York's social-service organizations are short-changing the people they are supposed to serve by focusing on money-making schemes, according to a report released Wednesday by Pace University.

“By pursuing income-related activities such as selling donors' contact information to third-party marketers and running online shops, nonprofits have diverted income away from service activities, says Rebecca Tekula, the report's author.

"Organizations that spend money and divert resources to other activities do so at the detriment of the homeless, domestic violence victims and people who need these services," says Ms. Tekula, executive director at the Wilson Center for Social Entrepreneurship at Pace University. "Social enterprise may be an innovation," she says, but it is one that can tempt nonprofits into a substantial "mission distraction."

“Researchers analyzed the tax forms of 700 social-service organizations across New York County between 2000 and 2005. The organizations in the sample raised an average of $1 million in so-called unrelated business income, putting the money toward average expense budgets of $19 million.

“The report found that organizations that engage in unrelated business activities, often called social enterprise programs, are more likely to run less efficient shops than their peers. As income from peripheral businesses went up, the share of a contributed dollar that went to actual services went down, according to the report.

“While Ms. Tekula says the report does not prove causality, she maintains that the high correlation between poorly performing nonprofits and those that pursue income-generating projects is cause for concern.

"Organizations with unrelated businesses were not investing profits in their mission-related services," Ms. Tekula says. "Instead, profits were reinvested in the business, and losses were subsidized with funds that might have gone to clients."

“For instance, she points to God's Love We Deliver, an organization that prepares meals for people with serious illnesses, which in 2006 lost about $100,000 on merchandise it sells via holiday catalogs. Since then, it has made between $36,000 and $55,000 a year through online sales, according to tax forms.

“God's Love maintains that the real loss was closer to $7,000 and that the larger number reflects an Internal Revenue Service accounting rule that requires charities to record donated goods as expenses, even if the charity did not pay for them.

“The sales ventures "either break even or have a positive bottom line every year," says Karen Pearl, the group's president and CEO. "Our catalog and gifts are a teensy part of our $9 million budget but it helps keep God's Love in the forefront of peoples minds, hearts and ultimately in their giving."

“Covenant House, a $37.6 million New York-based nonprofit that provides food, shelter and crisis care to homeless youth, has earned between $500,000 and $700,000 a year by renting out its list of donor contact information to third-party marketers. Meanwhile, only half of the nonprofit's revenue went to run its programs, with the other half going toward administrative and fund-raising expenses, according to Ms. Tekula's analysis.

"List rentals aren't an ideal way to earn money but it translates into a source of income that can help hundreds of kids," says Tom Manning, a spokesman for Covenant House.

“Because Covenant House is an umbrella organization with 18 affiliates, its administrative expenses appear higher when looked at alone, Mr. Manning says. Including the affiliates, which run the bulk of the organization's programs, he says the amount spent on programs rises to more than 71% of its expenditures.”