What Is The Difference Between An NGO and a Social Enterprise?
Category : Social Policy Advocacy
To many who are not direct actors or participants in the nonprofit space, this simple question may seem irrelevant, but for all else who build not-for-profit value chains to change social conditions, understanding this key distinction would inform decisions related to corporate governance, business model and having a sustainable source of funding.
Goals & Philosophy
Albeit there is no standard definition, consensus among practitioners has converged on defining social enterprise as a strategic view of business that achieves fair balance between environmental sustainability and measurable social outcomes, without necessarily compromising financial sustainability. In essence, a social enterprise is an organizational vehicle that achieves financial returns through market operations, at the same time meeting essential social (market) needs without destroying the environment.
Social enterprises are therefore, in essence, the basis of an emerging asset class called Impact Investing. Such investments may take the form of debts, equity, mezzanine facilities, project finance or even working capital support. Impact Investing has gained reputation as an asset class that balance social and environmental returns with financial viability of the enterprise. There is usually little controversy in terms of understanding the organizational types that could be classified as social enterprise. A social enterprise, unlike typical NGOs, could take the form of company limited by shares or by guarantee. NGOs on the other hand, almost invariably, are organized as companies limited by guarantee under Ghana’s company law, Act 179, 1961. In Ghana, the traditional organizational vehicle for pursuing social and environmental change is through NGOs that are registered as companies limited by guarantee. In terms of sector distribution, Poverty Reduction, Education and Health/Sanitation seem to top the list, arguably, in terms NGO presence across the ten regions of Ghana.
From the perspective of an untrained analyst, it may seem intuitive that a typical Non-governmental Organization (NGO), for instance, could be classified as a Social Enterprise. Nonetheless, it is erroneous to engage in such classification for the simple reason that, a typical NGO business model lack one key qualification; financial viability. The mere focus on social and/or environmental outcomes is insufficient to be categorized as a social enterprise. An organization must demonstrate commercial viability through market operations in order to qualify as a social enterprise. The key differentiator lie in the emphasis on financial sustainability and not sheer social and environmental outcomes.
Does It Even Matter?
The significance of drawing attention to organizational form, relates to the nature of action usually taken by social entrepreneurs to address market gaps, the reason for which they may qualify for impact investment. The implication for an organization’s business model in taking direct action to address a market gap spells the difference between commercial viability and financial/philanthropic dependence or between an NGO and a social venture. The entrepreneurial response to a market disequilibria and the potential impact created as a result is determined by the nature of action taken by such entrepreneur. An illustration should clear the fog. Let us suppose three scenarios:
- Suppose a market in a health sector has achieved equilibrium at a point where patients still feel short-changed due to poor care, unaccountable management systems and apathetic nursing.
- Suppose one entrepreneur designs a tech-driven solution that can demonstrate measureable reduction in consultation time, improve doctor accountability and provide feedback data on service quality at Out-Patient Departments. Let us suppose further that this entrepreneur is able to market and sell this solution to all the hospitals in Ghana. Clearly, the potential for changing the healthcare ecosystem and spawning new value chains is tremendous. And all this can be achieved with a significant financial return to sustain operation of this solution.
- Then, let us suppose that another private actor with good intentions and tons of empathy, decides to set up an NGO in order to train nurses on customer service or maybe advocate for a new law that would hold doctors accountable. Arguably this entrepreneur does not address the problem directly, but seeks to use indirect approach to solve the problem. Now the nature of action will no doubt influence the degree of change achieved, as in the case of the first social entrepreneur.
So essentially, the basis of classifying Civil Society Organisations into the social enterprise or NGO box must be done on the basis of three variables; nature of action, degree of change and balanced/sustainable business model.
Now You Know
For impact investors, using this approach to categorize the two organizational models in question helps to manage the risk of dissipating impact capital on organizations that are not achieving system-wide change or quantum growth with their well-intended but limited corporate actions. For such organizations, other funds are available from donor institutions that deal in grants.