Social enterprise and public procurement/Introduction

Introduction This chapter reports part of the activities undertaken during the Action 1 preparatory stage of an EQUAL funded Development Partnership 'BEST Procurement' operating in the East Midlands. The paper identifies the issues faced by social enterprises in their interaction with potential and actual public sector clients and records the considerations that formed the basis for the design of the resulting Action 2 social enterprise and procurement support programme. Background In the East Midlands region, as elsewhere in the UK, there is a strong driver to promote and develop social enterprise. Central government is promoting social enterprise through the Department of Trade and Industry and its support of the national Social Enterprise Coalition, a member organisation of social enterprises and social enterprise support agencies that promotes the interests of the sector at national level. Regional Development Agencies have been established to co-ordinate economic development activity in the regions and many RDAs, in particular East Midlands Development Agency (EMDA), recognise that social enterprises can help deliver on their targets for social inclusion. There are also agencies that have recognised the benefits of social enterprise in meeting sustainability targets for regenerating communities and involving local people in the improvement and delivery of local services. The East Midlands comprises of the counties of Lincolnshire, Derbyshire, Rutland, Nottinghamshire, Leicestershire and Northamptonshire. The East Midlands is the third largest region in England, with a population of just under 4.2 million, it has a distinctive 'polycentric' settlement structure based on the three major cities of Nottingham, Derby and Leicester. Approximately 40% of the population live in towns and villages of less than 10,000- making the East Midlands one of the more rural regions in England. The Indices of Deprivation 2004 ranks local authorities over a number of indicators of deprivation. Nottingham was described as a local authority that falls within England's 20 most deprived areas at 12th, with Leicester not far behind. Unemployment in the region remains lower than the national average and employment rates higher. As a result the East Midlands in general, scores quite well on a range of social indicators, yet masks a more complex picture of social conditions within it. In larger urban areas, Black and Minority Ethnic (BME) communities, in particular, suffer serious problems of social exclusion; whilst much of the region is relatively prosperous such areas contain deprivation not statistically reflected. Third sector organisations contracted to deliver public services can usually be described as social enterprises. The delivery of a public service means carrying out a defined service in return for payment - with the terms usually set out in a legally binding contract. In this case the third sector organisation can be said to be trading with the public body: undertaking specific activities in return for payment. In turn this makes the organisation a form of social enterprise. Small firms, voluntary and community organizations, social enterprises and ethnic minority businesses are recognised to be (potentially) innovative and add value. They play an important role in the local economy and contribute to social cohesion. They often have environmental goals. It is important that they have access to the local government marketplace, including as members of the supply chain for strategic partnerships. BEST Procurement The overall aim of the Development Partnership is to increase the conversion rate between public expenditure and social and environmental improvement within the East Midlands Region. This will be achieved by demonstrating improved value for public money, establishing social enterprises as key delivery agents for this goal. The BEST Procurement Development Partnership is focused on improving the prevailing conditions in the labour market in order to achieve long term structural change that increases equality in the labour market. Disadvantage in the labour market is created not only by the relative situation of the "disadvantaged" individuals but also by the value ascribed by the labour market to those individuals and their situation and willingness to include them. The DP intends to help social enterprises and voluntary and community sector organisations to access procurement opportunities made available by the public sector, to help the public sector purchase better labour market outcomes through its mainstream procurement practices and to help social enterprises to provide high quality employment opportunities for people from BME communities, women, people with disabilities and people aged over 50 year. The main partners are public sector bodies (local authorities and health sector bodies), charities and academic institutions working on issues of sustainable development, social enterprises and social enterprise support agencies and strategic regional and national agencies. The DP is focused on achieving a change in practice within the East Midlands Region that other parts of the country can learn from, that provides evidence of use to national policy makers and ultimately that informs European policy. The DP's aim is to increase the conversion rate between public expenditure and labour market equality within the East Midlands Region. To do this it is necessary to improve value for public money in targeted areas and establish the social economy, particularly social enterprises and voluntary and community sector organisations, as key players in achieving this goal. System design The emerging Action 2 project design was framed around a supply/demand model (in line with Figure 1 which is discussed in more detail below), with a marketplace connecting public authorities as the demand-side and social enterprises (SEs) as the supply side. The intent of the BEST Procurement Action 2 programme was to identify a mix of interventions within that marketplace to correct the distortions arising from lack of information or poor communication. The literature review revealed a relatively mature body of literature for each of the two aspects of the market - a significant amount of work has been done at the strategic level of the social enterprise sector (in academic as well as the grey literature), and on the nature and strategy of public authority procurement. Less well developed is the link between the two bodies of literature. There are a few, now well publicised, but rather aged, examples of SEs entering the public procurement market, in particular that of the construction sector. These examples mostly indicate difficulties with respect to the contracting side or the capability of the social enterprise or involve very large SEs supplying primarily outsourced public services such as homecare. On both sides of the market place, there are two aspects of the procurement process. On the side of the SE, there is the external aspect of the provision of products and services and the choices that SE makes about the capabilities it presents to the market. This includes the products and services already provided to the public sector in well known areas as direct outsourcing of public services such as home care or social service provision through social service provision such as recycling activities with the disabled or construction industry training for the intermediate labour market. The internal aspect is the 'fitness for' the market, ranging from the basic recognition of a need or desire to trade rather than exist on grants through to the financial and managerial capacity to trade effectively in the public procurement market. For the public authorities, the external aspect is the communications it provides to the market with respect to its procurement requirements including the nature and size of the procurement event. It is important to note that there are two distinct types of procurement within local authorities and the importance of each varies according to the extent of the central procurement function. The focus of much of the demand side procurement literature is on the major, planned, public tender processes such as those advertised through OJEU involving contract managers and central procurement officials. There is, however, a significant, but as yet within this study, unquantified procurement at a department or area office level that is more (although not entirely) ad hoc and usually involves limited action tenders (as opposed to whole UK or EU advertising) to a specific, small set of tenderers or are single action tenders on the basis of project extension or locally determined procurement factors. On the internal aspect of public authority procurement, there is the knowledge of the skills and capabilities that the SE sector could offer, over and above that already offered and the ability to 'bundle ' procurement requirements with social service outputs (often crossing departmental budget lines). A significant weakness in this area is the ability to effectively measure both procurement efficiency and social service outcome adequately in terms of each other. This leads to the scenario where, for example, community recycling initiatives 'cost' several times more per tonne of recyclate (the measure of efficiency used in contracts with the private sector, but with real but indeterminate social service outcomes. In such circumstances the 'cultural capital ' is not being realised or measured. This is often the case where intermediate labour groups are used as 'cheap labour' rather than trading on the specific skills or experiences within the marginalised group - such as disables groups providing Disability Discrimination Act compliance services. The public procurement literature suggests significant opportunities but, unless linked with specialist documents such as legal guides to procurement with social enterprises, the support is insufficiently specific to support any but the most determined and well prepared SE in the procurement process. In these circumstances, personal experience in the procurement on behalf of individuals in the SE, or direct support from the procuring authority, are the primary factors for success. There is, however, literature that analyses SME supply more generally which concludes that current trends (largely desirable) to larger contracts, aggregation of spend, and longer relationships with prime contractors and "partners" all make life more difficult for SMEs trying to sell into the sector. The outlook for SMEs (and in this context SEs) that do not offer any real differentiation (innovation, service, quality, specialist skills) compared to their larger competitors is not good. Figure 1 BEST Procurement Research Model The model above represents a systems diagram developed during the two day workshop between SEEM and SDRC and many subsequent meetings during 2004/05. On the left hand side of the model are the supply-side components, the profit distributing (non-SE, private sector) and the two main types of SE's - large multiservice organisations (usually up to 250 employees up to £250m turnover ) and the small, niche SEs that are fully constituted legal bodies. Such small SEs may grow to the large SE category through organic growth, merger or some form of consortium (either with each other or with 1st tier private sector contractors). At the large SE level, the main characteristic is long, large contracts, whereas the niche SE is most likely to capitalise on ad hoc sales or other opportunistic developments. The right hand side of the model is demand-side of the market. The model require development, but the types of contract let by the demand-side can also be split into large, tendered contracts, usually those above EU limits, and smaller contracts which are let through limited tender lists, adverts and networking. These are often procured by the technical department requiring the product or service, rather than a specialist procurement department. Increasingly, local authorities are being structured on an area basis and thus can procure identical products or services on a localised or area basis providing significant opportunities for small SEs. Two areas of significant risk for the supply- and demand-side can be identified. Risk, or the perception of risk, in these circumstances limits the adoption of new contract models. Interventions in the areas of risk, to reduce the perceived risk, through information, experience and capacity building, can free up the process to allow creatively structured technical and legal specification or free up an SE to develop new products or services that the demand-side requires. Suggestions for interventions in Action 2 of BEST Procurement to address the areas of risk for both demand- and supply-side included: Demand-side - Information brokerage- this has been suggested in a number of literature sources, but barely implemented specifically for SE's. The standard SME support services such as TED, OJEU etc are available, but SE's need to recognise that such procurement advertising routes can applied to them. Although national databases have not taken off as suggested, local and regional initiative would benefit SEs as well as the local private sector. - Catalyzer-similarly, there are a number of catalyzer initiatives that have been trialled in a number of areas, most notably the recent BizFizz from NEF. The approach for SEEM may be to replicate an existing model after due consideration of the strengths and weaknesses of each, but with a view to, regardless of which model, work as a partner with SEs to assist the development of their experience in tender processes. Supply-side - Fellowship - many SEs may identify either the need or the opportunity to expand from their existing structure towards greater trading, but there is a critical period between identifying the opportunity, or an entrepreneurial individual to take an initiative forward, and achieving that goal during which the SE is quite vulnerable. It is straying from its core-business into an unknown area with immeasurable payback and requires intensive support to overcome the initial hurdles of developing an idea into a defendable business plan or develop the systems required to be a credible public sector supplier. The concept would be to provide for a three month intensive fellowship for social entrepreneurs which provide them with business support from the private sector and time and income to allow the new business to be developed. - Management systems capacity development - a major aspect of being a credible public service supplier is having and maintaining robust management systems that cover all aspects of financial, health & safety, environmental and quality issues. As an SE develops towards being a public sector supplier, support s required in implementing such systems and developing a culture within the organisation that remains true to the core values of the staff but also allows it to trade in a new way. Consultation with potential beneficiaries of Action 2 also provided the following comments: - The Programme seeks to identify innovative ways in which public procurement can tackle labour market discrimination, by demonstrating ways in which social enterprises can achieve their aims through trading with the public sector - There is a £42bn market of public sector procurement in the UK - the challenge of the programme is to establish how to assist social enterprises in competing for that market - At a local authority, or even regional, level, the precise details of this spend are relatively unknown. Until recently, many local authorities did not have centralised reports of spending patterns and did not communicate those patterns to the supply market. - Local authority procurement is complex with thousands of suppliers and decentralised purchasing powers ensuring that 'contracting with the local authority' is more a case of contracting with individuals within the local authority. - Procurement processes are not primarily concerned with meeting social objectives but objectives such as Best Value have to be tempered with efficiency targets. - Local authorities are generally unenthusiastic about the outsourcing of social support services which means that enterprises that supply social services find the market very difficult. This programme is not primarily aimed at changing the service delivery options for the public sector but to capitalise on the existing procurement (or outsourcing) activities of the local authority- i.e. accessing the market rather than developing a new one (although this may be an effect of the Programme). - There is a cultural perception issue in that large parts of local authorities consider the social enterprise sector as voluntary or those activities that should be supplied by volunteers rather than being paid for at commercial rates. They are not seen as credible businesses that also contribute to social justice. - There is a need to find and exploit paths of least resistance - behaving like the private sector in order to secure contracts, communicating added value and retaining profits for investment in the social aspects of the organisation. - The private sector, through movements such as ethical businesses, corporate social responsibility and corporate governance concerns means that businesses are also reducing overall profitability to meet social or environmental concerns. - Resources are required to demonstrate why using social enterprises are better value than the wholly private sector. Work is being done on this in Scotland and SEs may benefit from being assisted to communicate their differentiation through tools such as Social Return on Investment. - SEs need assistance in marketing positioning, identifying unique selling points (USPs), niche identification, market intelligence, networking - all activities that are essential for a successful private sector entrepreneur - SE's can't raise share capital to fund opportunistic growth and are often understaffed, thus taking advantage of entrepreneurial opportunities requires an expansion of the staffing levels in the hope of success. This could be funded through CDFI or could consist of temporary teams given three or so months to take an idea through to business plan or successful contracting with the public sector - There are no recognised schemes for recognising the worth of social enterprises. Local authority staff are to pressed to undertake that research, so a Trade or Professional Association for SEs could demonstrate to procurement officials that an SE is a fit and competent supplier - Successful social entrepreneurs become 'precious' about their creations, whereas 'serial' entrepreneurs could work with SEs wishing to expand to help change, with a clear exit strategy. - Franchising of recognised SE initiatives adds authority to the new SE. - What is required is a lie network of intelligence and support to capitalise on opportunities, rather than toolkits and guides - meetings like First Friday, Meet the Buyers, excellence networks rather than books and pamphlets, advocates rather than advisors. The resulting Action 2 programme The considerations described above were then developed into a structured programme of support interventions to be delivered by a number of partners, not least the public sector, during Action 2, with a view to begin to correct the distortions arising from lack of information or poor communication. The resulting Action 2 design is summarised in Figure 3 Figure 3 BEST Procurement schematic The design of the programme was such that the starting capabilities in procurement issues of all beneficiaries entering the BEST Procurement Action 2 programme was captured, in order to measure the 'distance travelled' by the beneficiaries during Action 2 but also to assist in the selection of interventions that would be most beneficial to that beneficiary. Thus, the 'entry point' for BEST Procurement Action 2 was designed to be 'Enterprise Directions' Enterprise Directions The objective of the 'Enterprise Directions' work is to assist social enterprises operating in any field of potential relevance to public sector supply to understand whether and how they can improve their response to the public sector market. The Enterprise Directions Partner will assist social enterprises making contact with the programme, providing an initial one-to-one consultation at the clients premises or a nearby location. They will then signpost the enterprise to one or more packages of assistance under the Social Enterprise Development side of the programme where/as appropriate Enterprising ideas The objective of the 'Enterprising Ideas' work is to run a series of workshops which, incorporating market information provided, enable participants to develop new approaches to delivering added social value to delivery of goods and services to the public sector. The Enterprising Ideas Partner will convene a series of workshops to enable potential social enterprise suppliers and potential public sector purchasers to work together on new ideas that could eventually lead to contracts. Replication The objective of the 'Replication' work is to identify existing social enterprises that sell goods and/or services to the public sector in any part of the UK and Europe, and oversee a process of replication within the East Midlands for approximately 5 new social enterprises. It is anticipated that 2-3 of these will be established and start trading during the timeframe of the project. The replication intervention will be biased towards developing a response to general observations of the public sector market rather than specific contracts, however, where there is awareness of suitable contracts over a 2-3 year horizon there may be a case for working specifically towards them. Culture Change The objective of the 'Culture Change' work is to assist the staff and boards / committees / trustees of organisations to evaluate their 'fitness to trade' and undergo development activities to prepare their culture to support a move from grant based income. The Culture Change Partner will work with organisations (Voluntary and Community Sector organisations and social enterprises without significant trading experience) and assist social enterprises in understanding the nature of their operational culture and identify what changes they need to introduce to enable them to trade. The Partner will use a number of tools, from the private and public sector, on a one-to-one basis to assist social enterprises in developing a change management plan, should they decide to implement one, and coach them, over a period of a year, through that transformation process. Enterprising Management The objective of the 'Enterprising Management' work is to assist the staff and, to a more limited extent, the boards / committees / trustees of organisations to implement management systems necessary to support greater traded income. The Enterprising Management Partner will work with organisations (Voluntary and Community Sector organisations and social enterprises without significant trading experience). Initially the work will be done as a mixture of consultancy and workshop-style training according to client demand. The success of these delivery methods will then be compared to inform a decision about the forward strategy. Sales Broker The objective of the 'Sales Broker's' work is to achieve increased sales of goods and services from social enterprises to public sector purchasers. The sales broker will work on behalf a number of social enterprises, advising them on the way they promote themselves and making sales leads with public sector purchasers for up and coming contracts. The broker will set up selling clubs and networks as a route to collective promotion of social enterprise and the development of the enterprises' capacity to sell themselves. Contract Finder The objective of the 'Contract Finder's' work is raise awareness within social enterprises and the Voluntary and Community sector of contract opportunities as they arise. The contract finder will work on behalf of a number of social enterprises who subscribe to the service, sending details of relevant contracts and the sources of information. The contract finder may also work to promote the use of certain websites by public sector purchasers where this would assist in the on-going success of the venture. Contracting Know-How The objective of the 'Contracting Know-How' work is to develop and run a modular training programme that meets the development needs of social enterprises wishing to improve their response to contracting with the public sector. The Contracting Know-How Partner will be targeting established social enterprises and Voluntary and Community sector organisations who are already contracting, or are clear that it is appropriate for them to contract, with the public sector. Collaborative Frameworks The objective of the 'Collaborative Frameworks' work is to develop, test and evaluate appropriate ways of engaging groups of social enterprises in providing a successful collective response to parts of the public sector market. The Collaborative Frameworks intervention will be biased towards developing a response to targeted contracts that are coming up over the two years of the programme, however there may be limited scope for more speculative collaborative development where a market opportunity is identified. Advisory Partner The objective of the 'Advisory Partner's' work is to ensure that the Partners working within the Social Enterprise Development Working Group (supply side) of the BEST Procurement Development Partnership continue to do work of relevance to social enterprises' needs. The Advisory Partners will be expected to take, inform and advise the regular progress meetings with the Social Enterprise Development Working Group Equality of Employment The objective of the "E-Quality of Employment" work is to support social enterprises, expanding or becoming more financially secure as a result of improved contracting opportunities with the public sector, to develop their capacity as high quality employers providing Equal Opportunities in employment. The E-Quality of Employment Partner will work with signposted social enterprises to measure the changes in quality and equality of employment and to support social enterprises to maximise quality and equality in line with their social aims. Public sector action The less structured programme of demand-side interventions are based on the local authorities and primary health care trust partners developing more information with respect to their procurement practices, particularly considering influencable spend patterns and procurement processes, in order to facilitate better access of social enterprises to the market place and fairly distinguish the added (or blended) value that can be offered by the social economy. This aspect will be the subject of a subsequent paper. Innovation? EQUAL exists to encourage innovative solutions to employment and social problems which are difficult to solve. It provides support for applying new ideas to learning, sharing and international partnership. Evaluations of the ADAPT and EMPLOYMENT programmes offer the following definition. '...innovations are novel changes in a system, which are performed and achieved for the first time in its development. This first-time aspect of a novel change - the development aspect - is an important but insufficient criterion for innovations; a more important one is that the development should lead to something qualitatively new which increases the efficiency of a certain system. Innovations provide better solutions to problems from the previous state. The decisive determinant of the innovative content of the new solution is its relation to the old one. It is the relation to previous solutions and approaches that determines the degree of innovation of a novel change.' For the purposes of Equal, the following categories have been adopted. - Process-oriented innovations: these innovations relate to developing: - new or improved methods of doing things; - ways to use technology; and - labour-market initiatives. Examples of process-oriented innovations include new or improved approaches to delivering training and guidance and new ways of working with target groups. The final evaluation of ADAPT and EMPLOYMENT programmes found that the most common type of innovation was process related. - Goal-oriented innovations: these relate to developing new outcomes, outputs or 'products', with the needs of a specific target group in mind. In this way, it is about meeting a gap in the market. Examples include developing new qualifications and opening up new areas of employment for disadvantaged groups. - Context-oriented innovations: these relate to developing frameworks for interventions. Examples include: - developing local, regional and national networks; - developing new frameworks for, and approaches to, dissemination, information and awareness raising; and - steps to involve new partners and establish new working arrangements. Innovation is evident particularly in the co-ordinated response to developing a more equal market place and simultaneous supplier development of social enterprises. The connectivity between the social enterprise (supply-side) interventions and the public sector (demand-side) activities will serve to exchange theory, practice, experience and new solutions throughout the market-place. Mainstreaming activities are targeted at wider influence of use of public expenditure and increasing social enterprises' focus on understanding the market for what they want to do. Empowerment is addressed through appointing representatives to the steering committee from the outset and reviewing accountability of the partnership as the project progresses to target any gaps. Partnership principles include the way that programme is structured as a set of working groups focused on particular issues with representation on an overall steering committee enabling effective stakeholder participation. The partners are invited to submit their own work-plan against the set of intervention briefs (described above) and then the actual Action 2 activities were negotiated on the basis of the submissions of the potential partners. In this way, although the master plan was 'designed' the actual programme for delivery in Action 2 emerged out of the intentions of the master plan design and the submissions of the partners. The main activities to be undertaken in Action 2 are to understand and influence the demand for added value in public sector purchasing, to develop purchasing frameworks and specific contracts that deal with issues of sustainable development, to undertake supplier development of social enterprises and the VCS and to develop an evidence base that addresses key areas of policy. The outputs will be actual changes to contracting arrangements, toolkits, frameworks and local agreements, new businesses started, jobs created, improved employment conditions for existing jobs, analysis of social enterprises added value contribution and an increased capability within the social economy to address the public sector market. The goal of market-shaping to create growth potential for social enterprises will open up a new area of employment for disadvantaged groups by creating jobs within social enterprises and facilitating their entry into them. The programme will build new political alliances through undertaking joint work on a shared agenda with the Regional Assembly. The programme will also involve new working arrangements for the collaborative development of support programmes to social enterprise at sub-regional level and will bring new partners together, e.g. Local Authority Procurement Departments with Social Enterprise Support Agencies and the Voluntary Sector. Other programmes, on the other hand, concentrate on actions relating to one or other side of the marketplace, e.g. the Provide project focused on social enterprise support, NAPP focused on Local Authorities. The process of identifying the contract opportunities can be formulated as a public sector market analysis tool for social enterprise. This will ensure the maximum impact by only working where there is a possibility of success and was welcomed enthusiastically as a strong new approach by the public sector, social enterprises, support agencies and the voluntary sector who responded to our regional consultation. The programme will also use new combinations of existing approaches, by combining use of the various tools, guidance and methodologies currently available and drawing on others' experience to create a holistic approach. Tools and guidance can remain under-utilised by their target audience without effort being put in to increase their application. The programme aims improve an existing approach of seeking to create employment opportunities within social enterprises by linking this with the creation of targeted market opportunities in the public sector. Approaches to stimulating the public sector market for the benefit of social enterprise so far have been partial; based on information sharing and promotion, on toolkits or on guidance. This programme makes the link directly between the desired outcome (an equitable labour market), a major player in shaping the labour market (public sector contracting) the delivery vehicle (social enterprise and VCS), and the groups that suffer inequality. Conclusions The design of the BEST Procurement programme has been undertaken on a 'whole-market' approach. Internal programme design based on a systems approach with external consultation has resulted in a series of supply-side procurement support interventions being developed. These were taken forward by Social Enterprise East Midlands in its BEST Procurement Action 2 briefs for which social enterprise support agencies were free to bid. The final implementation of the design will be significantly altered from the original design on the basis of the capability and development interests of the development partners, adding to the innovation being deployed. This has been a process of emerging design, based on a broad ranging literature review and action oriented design workshops. The programme for SDRC in Action 2 is to measure the implementation of the programme by its partners, identifying where and why the programme departs from the design and establishing when and under what conditions, the market-place interventions work best to overcome labour market inequalities.