Are you contract ready?
Around 80% of social ventures earn income from delivering contracts, says the NCVO. Before you join the crowd, make sure you can trade, deliver and prove your impact, advises Paul Henry of Inspire2Enterprise.
Paul Henry works in the Enterprise and Partnership Development team for Inspire2Enterprise. Describing himself as "the gateway into the service" essentially his role is to spread the word about the services that Inspire2Enterprise can offer. He’ll often find himself speaking at events and have people approach him to see how Inspire2Enterprise can help with a certain aspect of their business. One of the more common requests is around contracting.
As with any business, social ventures depend on income; be that revenue from the products and services they sell, income from grants and donations or a mix of both. According to the National Council for Voluntary Organisations (NCVO), 80% of social ventures now earn income from delivering contracts. However, before your organisation considers tendering for contracts, how do you ensure that you’re ready to take on that business?
Can you trade?
Firstly, delivering a contract is regarded as trading. It is important to check what kind of trading your organisation is permitted to undertake. If you’re a charitable organisation then restrictions are imposed on the nature and level of trading activity you can carry out. Secondly, are you incorporated? There is a possibility you may be held personally liable if there is not a structure which offers limited liability. You may be an unincorporated organisation, and in the event of something going wrong in the delivery of the contract, then your personal assets may be at stake.
Incorporation, in its various forms, offers the directors (or trustees) a degree of protection that they can pursue the trading activity secure in the knowledge it is the organisation that will be pursued if things go wrong – it will not be the personal responsibility of the directors, unless there has been fraudulent or wrongful trading. It is the organisation that is taken to task, not the individual. For example, if the contract is being delivered by a Community Interest Company (CIC) limited by guarantee, then the limit of liability of the directors is the amount they promised to pay in the event of an insolvent winding up. If the CIC is limited by shares, then the limit of liability is to the extent there may be unpaid shares.
Whilst the duties of trustees are similar to directors, if they can establish they did all that they could have reasonably been expected to do, then they won’t be held personally liable. A Community Benefit Society will also offer limited liability for its members, set out in their rules. These organisations are governed by the Financial Conduct Authority. A relatively recent addition is the Charitable Incorporated Organisation, which offers limited liability to its trustees, and whilst it uses ‘incorporated’ in its title, it is not in fact regulated by the Companies Act. It answers to the Charity Commission alone.
Also remember not all ‘new’ money is the right money. Chasing the money can lead to ‘mission drift’. Ensuring you have an up-to-date business plan complete with clear mission statements will help keep you on the right road.
“Your mission statement should say everything about your social venture; it’s the kind of DNA that should run through the organisation,” explains Henry. “If there’s a division between what you’re doing and what your mission statement says, then that’s when problems can start. That’s not to say that organisations shouldn’t ever diversify but it needs to be a planned and considered decision taking into account your business plan and mission statement.”
Prove you can do it
Next up: how can you prove the effectiveness of your organisation? Evidence, by way of experience, competence and track record, together with the confidence to deliver are critically important to those purchasing services. The purchaser will want to be confident that you have the skills, expertise and resource capacity to deliver what they want. Take time to understand what they want to purchase. Bear in mind also that delivering a contract in the social sector will mean that you have two customers: it’s not just about meeting the needs of the person who’s paying for your service, it’s about delivering the needs to the beneficiaries too.
Delivery capacity is often an issue for organisations looking to bid for contracts. It may be that your organisation can deliver some elements of the contract but not all of them. In this instance, the importance of partnership working is highlighted. Collaboration ensures you have the capacity and expertise to deliver the whole contract. Commissioners are increasingly favouring partnerships or consortia bids as it spreads the contract risk too – they aren’t relying on just one organisation to do everything. It is also beneficial to small or newly formed organisations which may not yet have the required track record to win a bid on their own. By being a delivery partner, organisations can establish a track record with the security of knowing that they aren’t working on their own.
Do the maths
Henry also emphasises that the financial side of tendering for business should be watertight. "One of the common mistakes I see is organisations not taking the time to sit down and actually work out in finite detail what it’s actually going to cost to deliver that service," he says. "Generating additional profit by way of contracts will mean you can continue to trade and achieve your impact. However, if you cut residual profit to the bone in order to be competitive or you underestimate the cost of resources (be they internal or external) then you’ve only got to get your budgeting slightly wrong and all of sudden you’re losing money.”
Proving the finances of your organisation will also be necessary if, say, a commissioner is the procurer and is conducting due diligence on your organisation and your ability to deliver a service. Audited accounts may help you win the contract. “It is not unusual for a procurer to ask for three years of accounts. Not all organisations will have these but they need to demonstrate some level of management accounting structure; having a responsible person in the organisation who’s the point of contact for aspects relating to finance will also help.”
Increasingly organisations are also being asked to demonstrate their social value. Grant funders, commissioners, investors and donors want to know what social impact your organisation will create if they give you their contract or money. Being able to measure and demonstrate your organisation’s social impact is essential. Whether you do this yourself, bring in an impact measurement specialist or buy a tool to measure your current impact, being able to estimate what additional impact will be created due to a new contract or funding is extremely important. Most social ventures realise that they should be measuring their social impact, but a key issue for many is having the resource to do this. There is no easy answer to this but social impact measurement is not going away so organisations need to think carefully about how they can start measuring the social value they deliver if they’re not doing so already.
New ventures can be nervous about the cost of their services but Henry advises not to confuse value with price – if you can prove your value in terms of your social impact, you can be confident. Henry believes legislation like the Social Value Act is helping to ensure that procurement teams will begin to look beyond the bottom line. “There’s a direction of travel towards being able to demonstrate social value. This should play to the strengths of social ventures, but only if they can demonstrate the social value they deliver.”
Find more help at Inspire2Enterprise
Inspire2Enterprise provides a unique, free-to-access social enterprise support, information and advice service – from start-up through to initial growth and beyond. Call them on 0844 9800 760 or click here to find out more.