Bachelor Thesis Performance Measurement Systems for Social Enterprises July 8th, 2017 Emiel Gieles – ANR 500729 / S 1265836 Supervisor: Dr. J. S. Small Second Reader: Dr. M.A.H. Groen Word Count: 10,188 University College Tilburg - Liberal Arts and Sciences Major Business and Management Table of contents I. Chapter 1: Introduction 3 1. Problem Indication 3 2. Problem Statement 5 3. Research Questions 5 4. Relevance of Research 5 5. Research Design 6 II. Chapter 2: Defining Social Entrepreneurship 7 2.1 The starting point: Entrepreneurship 7 2.1.1 Historical Background 7 2.1.2 Contrasting Definitions & Core Characteristics 8 2.2 Social Entrepreneurship 10 2.2.1 Definitions and Key Characteristics 10 2.3 The Social Enterprise 13 2.3.1 Origin and EMES Definition of Social Enterprise 13 2.3.2 Social vs. Commercial Enterprises: Four Distinguishing Variables 15 2.3.3 Position of Social Enterprise in the Spectrum 17 III. Chapter 3: Performance Measurement Systems for Social Enterprises 21 3.1 Defining Performance Measurement 21 3.2 Issues in Measuring the Performance of Social Enterprises 22 3.3 Performance Measurement System for Social Enterprises 24 3.3.1 Social Return on Investment 24 3.3.2 Balanced Scorecard and adaptations 25 3.3.3 Multidimensional model by Bagnoli & Megali (2011) 28 3.3.4 The PMS Model by Arena, Azzone & Bengo (2015) 30 3.4 Comparing Social Enterprise Performance 34 IV. Chapter 4: Discussion and Conclusion 36 4.1 Key findings and Discussion 36 4.2 Contribution 38 4.3 Limitations 38 4.4 Recommendations for future research 39 V. References 40 VI. Appendices 44 2 Chapter 1: Introduction 1. Problem Indication In the traditional view of markets, a distinction between two types of organizations can be made: for-profit and not-for-profit. While the former type of organizations has a clear principle which states that the ultimate goal, according to classical theory, is to maximize its profits, the latter’s focus is on providing services and products without the need to make profit (Besley & Ghatak, 2016). However, in modern day markets, this division is rather simplified as it leaves out hybrid forms of these organizations. One of these types, a hybrid form that is tied to social entrepreneurship, is the social enterprise. The use of the term is gaining increased popularity, however, social entrepreneurship “as a focus of academic enquiry has a relatively brief history.” (Weerawardena & Mort, 2006). At the beginning of this century, Dees (2001) was one of the first to discuss the meaning of social entrepreneurship and identified five key characteristics. At this point in time, the term meant different things to different people. Since the late 1990s, social entrepreneurship has gained increased attention in not only the US and EU countries, but also in regions such as Eastern Asia and Latin America (Defourny & Nyssens, 2008). In line with the growing number of social enterprises, attention from academics in the field of social entrepreneurship has grown. Yet, there is still little consensus on what the key characteristics and boundaries of the term are. Definitions range from broad to narrow, as some opt for a more inclusive definition, while others argue in favor of a more rigorous definition because it would otherwise include too many activities that cannot be regarded as entrepreneurial. The current lack of a common definition is one of the factors that causes limitations, hinders research, and leaves room for discussion on which activities fall under the spectrum of social entrepreneurship (Martin & Osberg, 2007). 3 Another challenge that arises is the categorization of different organizational types of social enterprises. Social enterprises are not limited to merely the non-profit sector, but can also be active in the for-profit sector (Austin, Stevenson & Wei-Skillern, 2006). It is important to categorize different social enterprises taking into account the organizational structure in order to allow for comparisons between them. Besides the definitional and categorization challenges, the issue of performance measurement in social enterprises has become a topic of increasing interest for researchers. Since a social enterprise does not put profit maximization as the main goal, but rather aims at social impact, alternative models to measure their performance are needed. Even though there has been a rise in methodologies to measure social impact, a model that allows for systematic comparisons between different approaches, firms and sectors is lacking. Yet, the need to do so is increasingly gaining attention. According to Arena, Azzone and Bengo (2015), one important reason why social enterprises should start measuring their performances in a systemic way is to provide accountability towards stakeholders. According to Mair & Martí (2006), the issue in measuring social impact might not be the problem per se, but the quantification of the outcomes is what makes measuring social enterprise performance complicated. While traditional enterprises often rely on monetary values and financial indicators like profits to determine the company’s performance, social enterprises seem to lack a key quantitative factor that indicates their performance. This is also what causes the uncertainty in investment in social enterprises to be higher compared to traditional enterprises (Austin et al., 2006). A final challenge in establishing performance measurement system for social enterprises is the comparability between multiple performances in the social dimension. The comparison of social value creation as a consequence of different activity or interventions has been regarded as a great challenge by scholars (Austin et al., 2006; Mair & Martí, 2006; Zahra, Gedajlovic, Neubaum, & Shulman, 2009). This is due to the qualitative nature of social value and its quantification problem. 4 2. Problem Statement Based on the discussion above, the problem statement for this thesis has been defined as: How can a social enterprise’s performance be measured and how could it be compared with that of others? 3. Research Questions The following research questions have been identified in order to find an answer to the problem statement: 1. What are the key characteristics of entrepreneurship as defined in the literature? 2. What are the key characteristics of social entrepreneurship as defined in the literature? 3. What are the key characteristics of social enterprises and how can they be categorized? 4. How can performance by not-for-profit and for-profit social enterprises be measured and compared? 4. Relevance of Research By establishing a more clear definition, the consensus among researchers is likely to grow on what social entrepreneurship means, and future research might not be limited by a multi-interpretable nature of the term. Social entrepreneurship could gain more importance in the academic literature if there is a well-defined meaning that forms the basis for a framework on performance measurement. The main aim of this thesis is to provide insights into performance measures and how to make comparison in performances by social enterprises. This may lead to clearer rules and regulations. Another advantage could be that it would allow for less arbitrariness on whether a social enterprise underperforms in relation to its core values. 5 Such an analysis could lead to a model that systematically measures the performance of social enterprises which could be of relevance for government funding. The ability to measure social enterprise performance enables government funding to be performance dependent. Performance dependent funding could also function as an incentive for social entrepreneurs to improve and innovate. 5. Research Design The main approach of this thesis is a literature review. Sekaran and Bougie (2010) define a literature review as “a clear and logical presentation of the relevant research work done thus far in the area of investigation” (p. 67). They state that “its purpose is to identify and highlight the important variables, and to document significant findings from earlier research that will serve as the foundation on which the theoretical framework for the current investigation can be built and the hypotheses developed” (p. 67). Secondary sources are relied on in order to formulate answers to the posed research questions. The literature was gathered from academic journals such as the Entrepreneurship Theory and Practice journal (ET&P) by using search engines such as WorldCat, JSTOR and Google Scholar, where articles were identified in the field of social entrepreneurship and especially that of performance measurement have been investigated. Key terms: social entrepreneurship, social enterprise, social impact, social value, framework, performance measurement, measure, corporate social responsibility, CSR, SROI 6 Chapter 2: Defining Social Entrepreneurship 2.1 The starting point: Entrepreneurship 2.1.1 Historical Background The term social entrepreneurship consists of two elements. In order to obtain a complete and adequate understanding of the term, it is important to take entrepreneurship as the starting point, since the word ‘social’ simply connotes a specific form of entrepreneurship. The meaning of entrepreneurship was discussed by Dees (2001) when social entrepreneurship still had little recognition as an academic discipline. In pursuance of a definition that included key characteristics, he first returned to the origins of the word entrepreneur, and discusses previous ideas by Say, Schumpeter, Drucker and Stevenson. The