 Identifying
the Cost of Doing Good
By
Esther Kim
Portfolio
Manager, REDF
Take a peek
into the minds of social enterprise managers, and you’ll often find a
tug-of-war: How do I balance financial goals with a social mission?
Whether it’s for labor, materials, marketing, or management, all
businesses incur costs, and one way to improve profitability is to
reduce those costs. But delivering social impact also requires money,
and cutting the wrong costs may compromise the mission. What’s a manager
to do?
One way to handle this tug of war is to identify which costs are related
to delivering an enterprise’s social mission—in other words, its
“social costs.” Identifying social costs, like identifying other types
of expenses, gives managers a clearer picture of an enterprise’s true
performance (both financial and social) to make the right decisions and
achieve both goals. For over 10 years, REDF has helped social enterprise
managers identify and manage social costs, so we offer some tips from
our experience to help you get started.
What are social costs?
In the Spring 2005 issue of the REDF newsletter, Cynthia Gair offered
some guidelines to help identify social costs in a social enterprise in
her article “Social Costs: What Are They and Why Do We Care?.”
-
It’s a
social cost if it’s incurred to accomplish a social mission;
-
It’s a
business cost if it’s incurred by a similar for-profit business in
the same industry;
-
If all
social costs are taken out, the remaining cost structure should be
comparable to a for-profit business in the same industry.
Imagine a list
of costs for a janitorial business employing formerly homeless
individuals. This list may include wages, cleaning supplies,
supervisors, vehicle usage, and marketing—all typical for any
janitorial business. However, supervisors here may spend 20 percent more
hands-on coaching time than at a for-profit, or the business may provide
30 percent more health benefits to help the employees rebuild their
lives. The extra time and benefits could be considered social costs,
since they are taken on to further social goals. In addition, 100
percent of expenses for case workers, employment counselors, or
fundraising would be social costs.
Key questions to help identify social costs
The following questions will help you zoom in on the main social costs
in your enterprise. When considering these questions, take into
consideration in-house knowledge and industry expertise, and remember
that these are meant to be estimates only.
-
What type
of business are you running? Or, what are the main drivers of cost
in your business? Service businesses have high labor costs, so
worker efficiency is key. Manufacturing, on the other hand, is
driven by process efficiency and cost of raw materials.
-
What is
the social mission of your business? Employing at-risk youths has an
entirely different set of social costs than selling clean drinking
water devices to rural villages in India. Social costs for the first
business may include employment counselors and job coaches, while
the latter may include higher-than-average marketing costs to
educate rural villagers on the benefits of clean water.
-
What is
the relationship of your business to the rest of your organization?
Social costs can hide in unlikely places. For instance, a social
enterprise owned by a nonprofit may be disproportionately using
development staff time for fundraising to cover the enterprise’s
startup costs. This social cost might show up only on agency-level
financial reports.
-
What does
a comparable for-profit look like? How fast does a typical
for-profit janitorial employee clean a 5,000-square-foot area? What
is the typical fulfillment time for a national mail-order catalog?
And how much longer does it take a nonprofit to do the same work?
Comparing against relevant industry benchmarks is a key part of
estimating social costs.
Why bother?
Managing your financial bottom line is a very different activity from
managing your social one. For instance, if your financial bottom line
(without social costs) is negative, you may consider increasing prices,
changing suppliers, better managing inventory, or improving the layout
of your operations. On the other hand, if your social bottom line is
negative, you may consider increasing your fundraising efforts or look
at alternative ways to make the same social impact.
Either way, social costs are a powerful tool to manage the social
enterprise tug-of-war.
 REDF is a
San Francisco-based nonprofit that invests in and supports a portfolio
of job-creating social enterprises. Esther Kim, REDF’s portfolio
manager, has experience in both nonprofit and business management
practices. Contact Esther at ekim@redf.org, or visit
www.redf.org for more information.
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