This week, we’ve published an analysis of
welfare-to-work provision. This is historically an area where charities have
ended up as subcontractors to private providers. Many feel the sector gets
stiffed by this process.
Looking at the ages of those private providers, though, it seems the sector may have missed a trick somewhere along the way, because
most of these companies are younger than their charitable subcontractors.
Almost all were formed in the last 20 to 30 years, a period
during which many of the charities currently offering welfare-to-work services
have hardly changed at all.
How come charities haven’t achieved the scale that seems so
necessary, while these younger private businesses have become big beasts in the
welfare jungle? How has the sector been out-competed?
It isn’t on service. Charities are good at providing
welfare-to-work services, or they wouldn’t win all these subcontracts.
Nor are charities bad prime contractors. When the specialist
charity consortium 3SC was formed, it won substantial contracts under the
Future Jobs Fund, and immediately delivered on its goals better than just about
anybody. A similar consortium run by Social Enterprise London also had
considerable success.
I think, unfortunately, the flaw is in the charitable model.
Being a charity gives you a lot of advantages, but it makes you bad at getting
big.
Partly this is because charities don’t retain much cash for
growth, because they tend to spend it on needy people instead. A charity trying to grow will come under pressure from government, funders and its own
beneficiaries not to build up large reserves.
Of course many companies don’t get their growth capital from
operating profits, either, but from outside finance. However, the most frequent
way to do that is through equity – also not open to charities.
The charitable model also makes it hard to grow through
mergers and acquisitions. Most big companies are really aggregations of small
companies, brought together through the simple medium of hard cash. Charitable
mergers, their wheels not greased by the same lubricant of liquid wealth, take
longer and are less frequent than the corporate buyout.
The trouble is, you need scale to win prime contracts. And
charitable prime contractors are needed to get the best deal for charities,
which in turn means the best deal for beneficiaries. So it looks like the
sector will have to try to overcome the disadvantages of its legal model, and
build some seriously big charities.
There have recently been some concerted efforts to bring
this about.
One is the use of consortia and subsidiaries to deliver
contracts. A charitable special purpose vehicle, owned and financed by a number
of organisations, can attract enough income and have enough resources to
compete at scale.
The first attempt at a really large-scale project like this
is 3SC, the jobs consortium founded by the Social Investment Business. This has
met with mixed success, but certainly shown it can be done. Ian Charlesworth,
the man who created it, says he is well on his way to building as many as seven
more similar consortia.
The other factor required, for a sector which can’t attract
equity, is a new type of capital.
Here, too, there’s progress. The most talked-about example
is the social impact bond, which we hear about everywhere. It allows charities
getting paid by results to raise enough capital up front to provide services,
as well as transferring all the risk onto professional investors.
Let’s hope these solutions work, and that next time we see a
series of contracts as large as the Work Programme, the sector wins a fair few
more of them.