opportunities for social entrepreneurship

CHAPTER7

OPPORTUNITIES FOR SOCIAL ENTREPRENEURSHIP

LEARNING OBJECTIVES

After reading this chapter, you will be able to:

1. Explain how social entrepreneurship is both similar to and different from traditional

for-profi t entrepreneurship.

2. Offer a defi nition of social entrepreneurship that encompasses social ventures and

enterprising nonprofi ts.

3. Apply the Timmons Model of the Entrepreneurial Process to the social entrepreneurship

context.

4. Discuss how the concept of adding value relates to socially focused organisations.

5. Evaluate and discuss the MS Australia and the formation of Multiple Sclerosis Limited case

studies.

E D I T E D B Y L M U R R AY G I L L I N

★

Social entrepreneurs are not content just to give a fi sh, or teach how to fi sh. They will not rest until they have revolutionized the fi shing industry.

BILL DRAYTON CEO AND FOUNDER OF ASHOKA

HTTP://ASHOKA.ORG

WHAT IS SOCIAL ENTREPRENEURSHIP? Social entrepreneurship has become a global movement—a movement with a goal to effect positive social change. On the surface we know social entrepreneurship is a good thing, but on further study it becomes quite apparent that social entrepreneurship is a complicated phenomenon and diffi cult to defi ne. This leads to a perception of nebulous boundaries. Such ill-defi ned boundaries have led some to argue that all entrepreneurship is social, or any differences between social and the more traditional commercial entrepreneurship are neither well articulated nor understood. Some view social entrepreneurship purely as a form of entrepreneurship in

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This material is distributed for marketing purposese only. No authorised printing of duplication is permitted. (c) McGraw-Hill Australia.

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nonprofi t sectors. For example, a pundit in a large foundation questioned whether social entrepreneurs can even become economic entrepreneurs. 1 Such either/or thinking creates false boundaries and a perception that entrepreneurs have to choose between social and economic impact. As you will see from examples in this chapter, the reality is that social entrepreneurs can do both. Social entrepreneurship encompasses for-profi t and not-for-profi t ventures.

As with any emerging area of intellectual and practical signifi cance, it is important to have a guiding defi nition for the purpose of shared understanding and discussion. A guiding defi nition does not, however, imply a unifying defi nition. Social entrepreneurship, in theory and in practice, does not have a unifying, agreed-upon defi nition. Exhibit 7.1 offers a few of its most popular defi nitions. These defi nitions share a common theme: Their method and execution are entrepreneurial in thinking and action, while their mission and purpose are driven by social need and benefi t.

Recently I was speaking to an audience of approximately 50 academics, consultants and PhD students, all interested in social entrepreneurship education. I asked each participant to write his or her defi nition of social entrepreneurship on an index card. Naturally I received 50 unique defi nitions, but there were identifi able patterns

EXHIBIT 7.1 P O P U L A R D E F I N I T I O N S O F S O C I A L E N T R E P R E N E U R S H I P ( O R S O C I A L E N T R E P R E N E U R )

Defi nition Author

Social entrepreneurs play the role of change agents in the social sector by (1) adopting a mission to create and sustain social value (not just private value); (2) recognising and relentlessly pursuing new opportunities to serve that mission; (3) engaging in a process of continuous innovation, adaptation, and learning; (4) acting boldly without being limited by resources currently in hand; and (5) exhibiting heightened accountability to the constituencies served and for the outcomes created.

Greg Dees, 1998a

[Social entrepreneurship is] a process involving the innovative use and combination of resources to pursue opportunities to catalyse social change and/or address social needs.

Johanna Mair and Ignasi Marti, 2006b

Innovative, social value-creating activity that can occur within or across the nonprofi t, business or government sectors.

James Austin, Howard Stevenson, and Jane Wei-Skillern, 2006c

A process that includes the identifi cation of a specifi c social problem and a specifi c solution (or set of solutions) to address it; the evaluation of the social impact, the business model, and the sustainability of the venture; and the creation of a social mission-oriented for-profi t or a business-oriented nonprofi t entity that pursues the double (or triple) bottom line.

Jeffrey Robinson, 2006d

Social entrepreneurship is (1) about applying practical, innovative, and sustainable approaches to benefi t society in general, with an emphasis on those who are marginalised and poor; (2) a term that captures a unique approach to economic and social problems—an approach that cuts across sectors and disciplines; (3) grounded in certain value and processes that are common to each social entrepreneur.

The Schwab Foundation for Social Entrepreneurshipe

Social entrepreneurship arises from an unconscious spirit of generosity within various people who produce a facility to envision, resource and enable activity which otherwise exists as unmet need. Need is lessened by a social entrepreneur who posseses unique qualities to match the need.

Loris Gillinf

a ‘The Meaning of Social Entrepreneurship,’ p. 4; http://www.caseatduke.org/documents/dees_SE.pdf. b ‘Social Entrepreneurship Research: A Source of Explanation, Prediction, and Delight,’ Journal of World Business 41, p. 37. c ‘Social and Commercial Entrepreneurship: Same, Different, Both?’ Entrepreneurship Theory and Practice , January 2006, p. 2. d ‘Navigating Social and Institutional Barriers to Market: How Social Entrepreneurs Identify and Evaluate Opportunities,’ in J Mair,

J Robinson and K Hockerts (eds), Social Entrepreneurship, p. 95. e http://www.schwabfound.org/whatis.htm. f L Gillin, ‘Social Value Creation: Core Determinant from the Impact of Social Entrepreneurship’ , PhD Thesis, Swinburne University of Technology, 2005.



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or commonalities across all the submitted defi nitions. Participants wrote about identifying opportunities, creating systemic social change, developing sustainable solutions to social problems, and generating economic and social returns. A personal favourite referred to social entrepreneurship as using principles of entrepreneurship to create economically sustainable social value. Jeff Stamp, an assistant professor at the University of North Dakota, offered a thought-provoking perspective: ‘All ventures require investment; all ventures require return. The social question is who pays and what is the return horizon. The decision is a social value decision.’ This question of value for what purpose and to whom resonates in this chapter—and indeed throughout this book.

The entrepreneurial process (Chapter 3) talks about entrepreneurship resulting in the ‘creation, enhancement, realisation and renewal of value’. The result of social entrepreneurship is no different, but it helps clarify the concept of value. Specifi cally, social value is derived from entrepreneurial activities that seek to address problems related to people and problems related to the planet—regardless of profi t orientation. In other words, social entrepreneurship seeks creative and valuable solutions to such issues as education, poverty, health care, global warming, global water shortages and energy.

A single, defi nitive view of social entrepreneurship is not necessarily important. What is most important is understanding the key differentiating factors between social entrepreneurship and traditional entrepreneurship while also realising that there is not just one type of social entrepreneurship.

TYPES OF SOCIAL ENTREPRENEURSHIP The shaded area of Exhibit 7.2 depicts the territory of social entrepreneurship. The primary difference between traditional entrepreneurship and social entrepreneurship is the intended mission. Social entrepreneurs develop ventures with a mission to solve a pressing social problem. Social problems are most typically associated with such sectors as health care, education, poverty, environment, waste, water and energy. We will address these opportunity sectors shortly. First let’s look at the language, territory and defi nitions of social entrepreneurship.

SOCIAL PURPOSE VENTURES Social purpose ventures (Exhibit 7.2, quadrant 1) are founded on the premise that a social problem will be solved, yet the venture is for profi t and the impact on the market is typically seen as economic. Remember Denis Hanley’s innovative backwash hollow fi bre-based membrane separation technology from Chapter 4. Hanley is a great example of a social entrepreneur starting a such a social venture. Hanley co-founded Memtec Ltd with the aim of building an enterprise that would help the environment and at the same time drive sales and the growth of his company. According to Hanley:

Memtec’s products were directed mainly towards the billion dollar global waste and potable water treatment markets. A Memtec system was the perfect solution for fi ltering the drinking water of a large municipal water authority. The vision was ambitious. Memtec products had the potential to completely transform the world’s water and waste water treatment systems. A transition to sewage treatment at small regional centres with the effl uent returned to the local catchment area, there would be no need for huge investments in sewage mains capacity. Ocean discharge could be virtually eliminated, and there would be reduced need to divert water away from the natural water catchment and fl ow system. Water pollution would be reduced and cost savings would be signifi cant.

EXHIBIT 7.2 T Y P O L O G Y O F V E N T U R E S

Economic Social

Economic

Social

Venture mission

Primarymarketimpact

Traditional(2)

Social Purpose(1)

SocialConsequence

(3)

Enterprisingnonprofits

(4)

� Hybrids exist

Source: H Neck, C Brush and E Allen, ‘Exploring Social Entrepreneurship Activity in the United States: For-Profi t Ventures Generating Social and Economic Value’, Working Paper, Babson College.



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ENTERPRISING NONPROFITS Exacerbating the confusion about social entrepreneurship is a preconceived notion that all entrepreneurship taking place in social sectors is reserved for nonprofi t organisations. As we know from the Hanley story, not all social entrepreneurs start nonprofi ts. Furthermore, not all nonprofi ts are entrepreneurial. This is why the term ‘enterprising nonprofi ts’ is used in quadrant 4 in Exhibit 7.2.

We might argue that any nonprofi t startup is entrepreneurial. However, consistent with the focus of this book and research in entrepreneurship, the scaling and sustainability of new ventures are incredibly important to the economy (as with for-profi t ventures) and to systemic change (as with nonprofi t organisations). It is not enough, from both an economic and social perspective, to simply start a venture; it must be scalable and sustainable. With longevity, innovation and an eye toward growth, signifi cant impact can be made.

There are two types of enterprising nonprofi ts. The fi rst type utilises earned income activities, a form of venturing, to generate all or a portion of total revenue. In many ways enterprising nonprofi ts apply the principles of entrepreneurship to generate revenue to sustain their mission-driven organisations. The second type has a focus on growth and economic sustainability. Such an enterprising nonprofi t may incorporate outside investment, in the form of venture philanthropy, to signifi cantly scale the organisation for better impact toward systemic social change. Just as a social venture may receive value-added venture capital or angel investment, an enterprising nonprofi t may receive venture philanthropy funding, which is different from grant funding or donations. Venture philanthropy is a blend of fi nancial assistance with a high level of professional engagement by the funder. This funding concept will be addressed later in this chapter.

Regardless of type, enterprising nonprofi ts represent a form of social entrepreneurship. In addition to their social mission, their impact on the market is social because the profi t motive exists only to channel operating funds to the organisation. Whereas social ventures may distribute profi t to owners, enterprising nonprofi ts by law may not.

KickStart International is an example of an enterprising nonprofi t using earned-income activities and venture philanthropy. Martin Fisher and Nick Moon founded KickStart in 1991 with a mission to end poverty in sub-Saharan Africa. They started in Kenya and today have offi ces in Tanzania and Mali. Though Fisher and Moon have introduced many technologies related to irrigation, oil processing and building, their greatest success to date is with their micro-irrigation pump known as the MoneyMaker. This low cost irrigation system has helped rural farmers in Kenya increase their crop production by a factor of 10, allowing the farmers to produce crops not only for family survival but for profi table return. Their metrics supporting success are inspiring. By early 2008 KickStart featured the following statistics on its website: 2

■ 45 000 pumps are in use by poor farmers. ■ 29 000 new jobs have been created. ■ The pumps generate $37 million per year in new profi ts and wages. ■ More than 50 per cent of the pumps are managed by women entrepreneurs. ■ Four manufacturers produce the pumps. ■ Over 400 retailers are selling the pumps throughout Kenya, Tanzania and Mali.

Winner of the Fast Company social capitalist awards for 2007 and 2008, KickStart and its enterprising ways is making great strides in its mission of fi ghting poverty.

A study was conducted by the Yale School of Management and the Goldman Sachs Foundation Partnership on Nonprofi t Ventures to better understand how and why enterprising nonprofi ts pursue earned-income activities. 3 Of the 519 nonprofi t organisations participating in the study, 42 per cent were operating earned income ventures, 5 per cent had tried but with little success, and 53 per cent had never tried to pursue any type of revenue-generating activity beyond fundraising, grant writing and other activities. Some of the study’s key fi ndings were interesting. Nonprofi ts pursuing earned income activities: 4



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■ Have more employees. Fifty-fi ve per cent of the enterprising nonprofi ts had 1001 employees compared to 36 per cent that had never participated in any type of venturing activity.

■ Believe they are more entrepreneurial. Seventy-seven per cent of the enterprising nonprofi ts characterised themselves as entrepreneurs compared to 46 per cent that had never participated in any type of venturing activity.

■ Typically do not wait for complete fi nancing before starting a business. ■ Have budgets of $5 million to $25 million. This is an important fi gure because the majority of nonprofi ts in the

United States and Australia never exceed a budget of $1 million. ■ Do so to fund other programs (66 per cent), become self-sustaining (52 per cent), or diversify revenue streams

(51 per cent). Other reasons include job creation and building community. ■ Have a strong desire to see their ventures grow and replicate—but only 55 per cent had actually written a

business plan. However, 56 per cent said they would fi nd help writing a business plan valuable.

HYBRID MODELS OF SOCIAL ENTREPRENEURSHIP Many types of ventures within the domain of social entrepreneurship do not fi t nicely into quadrants 1 or 4 in Exhibit 7.2. In fact there are probably more hybrid arrangements than social ventures and enterprising nonprofi ts combined. In a recent survey 2000 entrepreneurs were asked about the primary goals of their business. 5 Entrepreneurs chose one from the following four options:

■ For profi t—primarily achieving economic goals. ■ For profi t—primarily achieving social goals. ■ For profi t—equally emphasising social and economic goals. ■ Not for profi t, serving a social mission.

How do you think 2000 random entrepreneurs in the United States, not necessarily classifi ed as social entrepreneurs, responded to this question?

As you might expect, the majority of the entrepreneurs (49 per cent) were traditional enterprisers (quadrant 1). They identifi ed themselves as having a for-profi t venture with purely economic goals. Another 9 per cent classifi ed their ventures as for profi t with a pure social purpose—similar to Hanley and his Memtec fi lter. Only 8 per cent of the surveyed entrepreneurs identifi ed themselves as not-for-profi t. Most interesting were the 31 per cent of entrepreneurs that claimed to be for-profi t with social and economic goals. These fi ndings show that new ways of organising are emerging: dual-purpose organisations with missions that equally emphasise economic and social goals.

Established during the Great Depression, the Brotherhood of St Laurence was the vision and creation of

Fr Gerard Tucker, a man who combined his Christian faith with a fi erce determination to end social injustice.

The Brotherhood has developed into an independent organisation with strong Anglican and community links. Their

vision is: An Australia free of poverty . The Brotherhood delivers services, develops policy and supports social change to

help achieve our vision by: 6

■ empowering themselves and the people they work for

■ developing and building community capacity, as part of the community

■ creating and developing enterprise projects and ventures as catalysts for individual and community

transformation.

A social enterprise is a business. But the BSL is a business with a difference. All profi ts made by the social enterprise

are reinvested back into the community to develop much needed services and resources. Each social enterprise is run

in a socially responsible and entrepreneurial manner and the business itself often provides an unmet service to the

community, e.g. Modstyle—an importer and wholesaler of optical frames, BSL community stores—selling recycled

clothing and homewares, Hunter Gatherer stores—selling hand picked retro clothing, a No SweatShop accredited

fashion label, and accessories and homewares sourced from young independent designers.



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Recently a new classifi cation of organisation has emerged called ‘for benefi t’. A growing army of volunteers and interested social entrepreneurs are participating in a community called the Fourth Sector Project. 7 The fourth sector emerges from a rather unchanged historical classifi cation of businesses that have served either the private or public sector but not both. There are for-profi t entities, nonprofi t (nongovernmental) social organisations, and government. The Fourth Sector Project seeks to recognise a new model, the for-benefi t model, as sectors begin to blur.

Hybrid models are not examples of corporate social responsibility—a term that is growing in popularity both in theory and in practice. Corporate social responsibility (CSR) emphasises doing good and serving communities while still making a profi t. You may be saying, ‘Well, this certainly sounds like a hybrid model of social entrepreneurship!’ Revisit Exhibit 7.2 and recall that the primary difference between social entrepreneurship and the more traditional, commercial views of entrepreneurship is the intended mission. The primary mission of both social ventures and enterprising nonprofi ts is social regardless of market impact. The hybrid model equally emphasises social and economic goals.

Corporations with CSR practices impact communities in which they operate and other stakeholders in many ways, but CSR is not the core component of their business models. For example, Dow Chemical donates Styrofoam to Habitat for Humanity for new home insulation. Starbucks builds relationships with local farmers, pays fair market prices, and extends credit so local farmers can grow their coffee bean businesses. Anheuser-Busch commercials encourage consumers to drink responsibly to prevent alcohol abuse and drunk driving. In 2005 Wal-Mart announced lofty long-term goals to show support for the environment. These goals stated that Wal-Mart would work to be supplied by 100 per cent renewable energy, create zero waste and sell environmentally friendly products.

Such CSR examples are numerous and growing, and many large corporations are making a positive impact on the world. Some companies have created CSR job functions. For example, Australia Post has a corporate responsibility department led by a senior manager of corporate responsibility. Similar positions can be found at other companies such as The Gap and American Express. But CSR is a support function. These companies were not founded on missions to solve the world’s most pressing social problems. CSR activities benefi t many but are not considered part of the domain of social entrepreneurship. CSR activities align best with Social Consequence ventures as seen in quadrant three of Exhibit 7.2.

THE TIMMONS MODEL INTERPRETED FOR SOCIAL ENTREPRENEURSHIP Chapter 3 introduced the Timmons Model of the Entrepreneurial Process. The three major components of the Timmons Model—opportunity, resources and team—certainly apply to social entrepreneurship; but the model requires a few contextual changes. Social opportunities, for example, are driven not only by markets but also by mission and social need. The brains trust aspect of the team—the external stakeholders—are especially important here because collaboration across boundaries is paramount in social entrepreneurship. Similar to traditional startups, the art of bootstrapping is a necessary method of resource acquisition. Yet capital markets exist for social entrepreneurs, and available funds are increasing in both the for-profi t and not-for-profi t sectors. The concepts of fi t and balance remain because sustainability and growth are the essence of any entrepreneurial endeavour. Without longevity and value creation, impact is limited. This is particularly relevant to mission-driven social entrepreneurs. A recently adapted ‘health audit’ has been applied to social enterprises to both assess and measure the entrepreneurial climate and intensity in mission-driven social enterprises.

WICKED PROBLEMS AND OPPORTUNITY SPACES Opportunities in social sectors, including environmental issues, are driven by large, complex problems. Perhaps we can be so bold as to call social problems ‘wicked problems’. In the early 1970s the notion of wicked problems emerged out of the complexity of resolving issues related to urban and governmental planning; wicked problems were contrasted with tame problems. 8 In other words, the linear and traditional approaches to solving tame



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problems were being used on social issues with little success. Further observation indicated that the problems were ill-defi ned; so the perception of the actual problem was the symptom of another problem. As such, wicked problems became characterised as malign, viscious, tricky and aggressive. 9 An examination of the characteristics of a wicked problem (Exhibit 7.3) reveals the considerable challenges facing social entrepreneurs.

Ageing of the population and care of the elderly is an excellent example of a wicked problem: this has become a topic for sustained discussion as all societies consider ways to cope with worldwide, rapidly increasing interest in socioeconomic demography. This is particularly so for the dramatically changing aged structure of both Western and Eastern/Asian cultures. Individuals as they age have always been concerned about the ‘who, what, where, why and how’ of their future. Families and signifi cant others have become increasingly concerned with the quality of aged care services at all levels—decision making, access to quality services and bedside care are three such areas of concern. Elderly care is a major industry that consists of many components to make a functioning whole. There are close to 2 million Australians over the age of 70 and the number is set to double in the next 20 years. 10

Given advances in health care, specifi cally disease control, humans are living longer. In 1903 in the United States, for example, 15 per cent of white females lived to the age of approximately 80; but today close to 70 per cent of white females live to be 80 years old. 11

This ageing population creates signifi cant challenges for society. Pensions and retirement incomes will need to last longer. Health care costs are likely to increase. The service economy will capture an increasing percentage of GDP as the elderly require more help from services as opposed to products. Also consider that the workforce pays for many social benefi ts of the elderly. As the population ages, there are fewer taxpayers supporting the growing number of nonworking retirees. But in addition to these tangible issues are the intangibles such as the emotional and physical sides of ageing. The ageing of the population creates challenges socially and economically, yet there are also issues related to human rights:

Young people burn countertops with hot pans, forget appointments, and write overdrafts on their checking accounts. But when the old do these same things, they experience double jeopardy. Their mistakes are viewed not as accidents but rather as loss of functioning. Such mistakes have implications for their freedom. 12

As with many such issues, this massive societal challenge represents a growing opportunity space for alert social entrepreneurs. Let us consider one aspect of this issue using the characteristics of wicked problems as the backdrop. Most elderly people want to maintain their independence as long as possible, so for many moving to an assisted living facility or nursing home is the last and least desired option. Furthermore, as the population ages and baby boomers enter their declining years, the availability of such assisted living facilities will decrease. A solution may be to create the next generation of smart homes that allow the elderly to stay in their own homes yet reap the

EXHIBIT 7.3 W I C K E D V E R S U S TA M E P R O B L E M S

Characteristics of Wicked Problems Characteristics of Tame Problems

1. You do not understand the problem until you have developed a solution.

Have well-defi ned and stable problem statements.

2. Wicked problems have no stopping rule. Have defi nite stopping points—when a solution is reached.

3. Solutions to wicked problems are not right or wrong. Have solutions that can be objectively evaluated as right or wrong.

4. Every wicked problem is unique and novel. Belong to a class of similar problems that are all solved in a similar way.

5. Every solution to a wicked problem is a ‘one-shot operation’.

Have solutions that can be easily tried and abandoned.

6. Wicked problems have no given alternative solutions—infi nite set.

Come with a limited set of alternative solutions.

Source: J Conklin, Dialogue Mapping: Building Shared Understanding of Wicked Problems , Chapter 1.



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benefi ts and security of assisted living. Let us assume the technology is in place and retrofi tting existing homes is possible. Is this a good solution? On the surface yes, but consider other challenges:

■ The elderly are not universally comfortable with technology. ■ Older people may not earn money to pay for the smart features. ■ Elderly people staying in their own homes may require assistance to reach hospitals in cases of emergency; so

more elderly at home may stretch emergency response systems. ■ Cities and towns may be expected to create services for a larger elderly population, and these services may be

funded by additional property taxes.

The list could go on, but the point is that sometimes we do not understand a whole problem until a solution is developed (No. 1). But let us continue with the idea of smart homes for the elderly. How much independence should be built into the homes? What are the trade-offs of being able to use both fl oors of a two-storey home versus just the bottom fl oor? Does the entire home need to be smart? Wicked problems do not have a predetermined stopping rule (No. 2), so the social entrepreneur is forced to make rational choices based on a rigorous evaluation of trade-offs. The social entrepreneur must accept that a wicked problem is never fully solved and the solution is not likely to meet all expectations; this is also known as satisfi cing behaviour. As characteristic No. 3 states, there are no right or wrong solutions. If smart homes are built, there will be criticism of the choices made or not made.

Independent living for the elderly is a unique social problem (No. 4), and interpretation of the dilemma is in the eye of the beholder. The problem in this example affects not only older people but also many other stakeholders. Potential solutions to wicked problems are known to have consequences over an extended period. A smart home may be a good idea for an old person wanting to maintain her independence, but consider the amount of work involved in retrofi tting a home. What systems need to be installed? What changes to the home structure are anticipated? Finally how diffi cult will it be to sell an ‘elder smart’ home on the market, and would it be easy or desirable to take the ‘smartness’ out of the home after the death of the independent elder? Perhaps there are many other consequences of making a home smart in this context, but for a wicked problem only time will tell. Elderly independence is just one aspect of the social problem we will encounter as the population ages. There are innumerable possibilities, and wicked problem theory tells us that there is not a fi nite solution set (No. 6). Perhaps some see this as a limitation; but social entrepreneurs see an ocean of possibilities and opportunities.

An example of creating sustainable innovation is provided by Bruce McKenzie, CEO of Goodwin Aged Care Services. Goodwin’s strategic vision was to embark on a fi ve-year plan to double in size and continue to provide resident valued living. Such ambitious growth has an impact on all functions associated with providing basic maintenance of services, achieving compliance with accreditation standards and seeking to increase effi ciencies. In particular Goodwin saw an opportunity for radical innovation in meeting their staffi ng requirements, a ‘wicked problem’ in elder care facilities. McKenzie 13 states: ‘We have an ageing workforce, with the average staff member working 42 hours per fortnight and with a culture in which elder care work is not the highest priority.’

Such a scenario is also part of Canberra’s low unemployment rate of 2.4 per cent (national average 4.4 per cent), high salaries offered by the public service, and other elder care providers being established with a demand for skilled elder care workers. Within this turbulent environment McKenzie asked: ‘Where is the staff for Goodwin going to come from?’ ‘With an ageing workforce we need to attract younger staff into the industry.’

The management group identifi ed the entrepreneurial opportunity as a challenge to recruit highly trained, competent staff, who know what they are doing, who are reliable and who come to work effectively.

In contrast to the past, McKenzie articulated the new philosophy: ‘Invest in a permanent workforce in whom there are no casual staff or agency supply staff.’

Research by McKenzie into employee motivators versus what employers think motivates staff (Exhibit 7.4) provides the framework for an innovative recruitment process offering a total package which addresses the employee motivations of the generation Y population who are less than 27 years of age. They have very different



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values to the existing Baby Boomers and have lots of work options from which to choose. Analysis of Exhibit 7.4 resulted in developing an innovative approach to staffi ng in elder care. ‘To attract good quality staff and retain our existing quality staff we should embark on an employee of choice of strategy.’

The resulting certifi ed staffi ng agreement included a number of innovations to deliver: ‘Better pay conditions; leave benefi ts; personal benefi ts; educational benefi ts; extra mural benefi ts; and changed management attitudes that support staff development and team work.’

Outcomes, based on the 2007 and 2008 staff satisfaction surveys, show that of the 18 satisfaction measures tested in 2007, 17 were signifi cantly improved in 2008. Between May 2007 and September 2008, the average age of staff in the four facilities of Goodwin fell from 44 to 42 with increased skill levels and a reduction in turnover rates. Such a transition, based on innovative management practices will ensure that Goodwin will survive and grow in the competitive environment.

The ageing of the population (nationally and internationally) is just one of many wicked problems that are being addressed by social entrepreneurs. To get a better understanding of the social challenges facing the planet, the United Nations’ Millennium Development Goals are a good starting point. The goals were developed in 2000 in a historically signifi cant event when world leaders came together to address the world’s most pressing social issues. The collaboration resulted in the inspiring United Nations Millennium Declaration. According to then Secretary-General Kofi Annan, the eight goals (Exhibit 7.5) with a target achievement date of 2015:

form a blueprint agreed by all the world’s countries and all the world’s leading development institutions—a set of simple but powerful objectives that every man and woman in the street, from New York to Nairobi to New Delhi, can easily support and understand. Since their adoption, the Goals have galvanized unprecedented efforts to meet the needs of the world’s poorest. 14

Goodwin Aged Care Services, 2008 Source: B McKenzie, ‘A Generational Shift—Becoming an Employee of Choice’, Aged Care Association 27th Annual Congress, Hobart, 17 November 2008.

Employee Motivators v What Employers Think Motivates Staff

What Employees Want What Supervisors Thought

• Interesting work • Good wages

• Full appreciation of work done • Job security

• Feeling of being ‘in’ on things • Promotion and growth

• Job security • Good working conditions

• Good wages • Interesting work

• Promotion and growth • Personal loyalty to employees

• Good working conditions • Tactful disciplining

• Personal loyalty to employees • Full appreciation of work done

• Tactful disciplining • Help with personal problems

• Help with personal problems • Feeling of being ‘in’ on things

EXHIBIT 7.4 M O T I VAT O R S O F S TA F F S A T I S F A C T I O N

EXHIBIT 7.5 U N I T E D N AT I O N S M I L L E N N I U M D E V E L O P M E N T G O A L S

1. Eradicate extreme poverty and hunger.

2. Achieve universal primary education.

3. Promote gender equality and empower women.

4. Reduce child mortality.

5. Improve maternal health.

6. Combat HIV/AIDS, malaria and other diseases.

7. Ensure environmental sustainability.

8. Develop a global partnership for development.

Source: The Millennium Development Goals Report 2005, http://www.un.org/millenniumgoals/background.html.



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Though these goals represent the UN’s view of our most pressing social problems, the opportunity spaces for social entrepreneurs (in for-profi t and nonprofi t areas) are vast and promising. The simplicity of entrepreneurship applied to wicked problems creates a powerful force for humankind. An opportunity is merely the positive view of a problem or challenge. We know from previous chapters that entrepreneurs think differently and identify opportunities that others cannot see. What opportunities can you identify in these spaces?

RESOURCES Not unlike the traditional entrepreneurial ventures discussed throughout this text, resource acquisition is critical to the success of social ventures, enterprising nonprofi ts, and even hybrid forms. Most social entrepreneurs will admit that access to capital is a burgeoning challenge as more and more social ventures emerge, especially with high growth aspirations and visions of international scalability. Bootstrapping is prevalent among passionate social entrepreneurs, who are often quiet in their approach as they struggle to build sustainable business models. Two sources of capital have emerged for social entrepreneurs.

Social venture capital (SVC) is a subset of the traditional venture capital market. SVCs seek to invest in for-profi t ventures not only for fi nancial return but also for social and environmental return; this is also known as the double bottom line or triple bottom line . Research at Columbia University estimated that $2.6 billion is under management in the double bottom line private equity market. 15

Within the social venture capital territory are three types of funds. First there is the ‘focused’ fund. For example, Expansion Capital Partners with offi ces in San Francisco and New York invests solely in expansion-stage clean technology businesses related to energy, water, transportation and manufacturing. Similarly, Commons Capital, operating outside Boston, invests in early-stage companies operating in one of four areas of social concern: education, health care, energy and the environment. Both companies explicitly promote the environmental and social focus of their funds. The second type of fund is the ‘community’ fund; its purpose is typically economic development and job creation in impoverished areas. CEI Ventures, headquartered in Portland, Maine, invests in businesses operating in underserved markets. Each company in the CEI portfolio is required to hire employees with low-income backgrounds from the community in which the business is operating. The case at the end of the chapter is an example of this type of SVC. The third type of fund is what has been referred to as ‘VC with a conscience’. 16 This fund stipulates that a certain percentage will be invested in socially responsible businesses related to their target investment areas. For example, Solstice Capital operates offi ces in Boston, Massachusetts and Tucson, Arizona. It invests 50 per cent of its fund in information technology and the remaining 50 per cent in socially responsible companies. According to its website: ‘Socially responsive investments can generate superior venture capital returns and make a positive contribution to the natural and social environments.’ 17

Venture philanthropy provides value-added funding for nonprofi t organisations to increase their potential for social impact. Though the origin of venture philanthropy has been attributed to John D Rockefeller III in 1969 as he spoke before Congress in support of tax reform, the modern version looks more like venture capital but with a social return on investment. 18 There are various defi nitions of venture philanthropy, and the European Venture Philanthropy Association (EVPA) has adopted several tenets of venture philanthropy that are similar across all defi nitions of venture philanthropy—in both Europe and the United States, where the venture philanthropy concept is gaining unprecedented popularity (Exhibit 7.6).

New Profi t Inc., based in Cambridge, Massachusetts, exemplifi es venture philanthropy using venture capital methodology. With 25 full-time employees, New Profi t has a venture fund that as of 2007 had invested in 20 nonprofi t organisations, with plans to grow its total portfolio to 50 organisations by 2012. The average investment in each organisation has been $1 million over a four-year period. However, New Profi t tends to stay with organisations longer than four years to achieve sustainability and desired scale. In addition to providing growth capital fi nancing, portfolio organisations receive strategic support from a New Profi t portfolio manager and New Profi t’s signature partner, Monitor Group—a global advisory and fi nancial services fi rm. Monitor Group, through a collaborative



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and unprecedented partnership, provides New Profi t portfolio organisations with pro bono consulting as well as giving New Profi t additional operating resources. It is estimated that since 1999 Monitor Group has provided New Profi t and its portfolio organisations more than $30 million in pro bono services. Given the value-added investment capability of New Profi t, this venture philanthropy organisation is able to double the impact of each investment dollar from donors as illustrated in Exhibit 7.7.

Thus donors (or investors) of New Profi t know that for every $1 they invest, the nonprofi t portfolio organisation actually receives $1.98 due to services, support and intellectual capital delivered by the New Profi t team in conjunction with Monitor Group.

New Profi t has signifi cantly increased the social impact of many nonprofi t organisations across various sectors, including education, workforce development and health care. To date (1997–2007) the New Profi t portfolio as a whole boasts an impressive 44 per cent compound annual growth rate for revenue and a 49 per cent compound annual growth

Source: R John, ‘Venture Philanthropy: The Evaluation Of High-Engagement Philanthropy In Europe’, Working Paper, Oxford Said Business School, Skoll Center For Entrepreneurship, 2006.

EXHIBIT 7.6 A C C E P T E D P R I N C I P L E S O F V E N T U R E P H I L A N T H R O P Y F R O M T H E E U R O P E A N V E N T U R E P H I L A N T H R O P Y A S S O C I A T I O N

Characteristic Description

High engagement Venture philanthropists have a close, hands-on relationship with the social entrepreneurs and ventures they support, driving innovative and scalable models of social change. Some may take board places in these organisations, and all are far more intimately involved at strategic and operational levels than are traditional nonprofi t funders.

Multiyear support Venture philanthropists provide substantial and sustained fi nancial support to a limited number of organisations. Support typically lasts at least three to fi ve years, with an objective of helping the organisation to become fi nancially self-sustaining by the end of the funding period.

Tailored fi nancing As in venture capital, venture philanthropists take an investment approach to determine the most appropriate fi nancing for each organisation. Depending on their own missions and the ventures they choose to support, venture philanthropists can operate across the spectrum of investment returns.

Organisational capacity building Venture philanthropists focus on building the operational capacity and long-term viability of the organisations in their portfolios, rather than funding individual projects or programs. They recognise the importance of funding core operating costs to help these organisations achieve greater social impact and operational effi ciency.

Nonfi nancial support In addition to fi nancial support, venture philanthropists provide value-added services such as strategic planning, marketing and communications, executive coaching, human resource advice and access to other networks and potential funders.

Performance measurement Venture philanthropy investment is performance-based, placing emphasis on good business planning, measurable outcomes, achievement of milestones, and high levels of fi nancial accountability and management competence.

EXHIBIT 7.7 N E W P R O F I T D O U B L E S A $ 1 I N V E S T M E N T

$1.00 Financial capital donated to New Profi t portfolio organisation.

–0.00 New Profi t expense or management fee (overhead and operating costs are covered by New Profi t’s board of directors).

+0.48 Value of New Profi t portfolio manager.

+0.50 Value of Monitor Group services donated.

$1.98 Total investment to New Profi t portfolio organisation.

Source: New Profi t collateral materials, 2008.



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in lives touched. In 1999 New Profi t portfolio organisations touched approximately 3000 lives; by 2007 this number jumped to more than 700 000. 19 The innovative approach of venture philanthropists such as New Profi t illustrates the power of entrepreneurial principles to scale nonprofi t organisations to achieve unparalleled social reach.

The social entrepreneurship sector in Britain sits between government, banks and venture capitalists on the one hand, and charity or welfare and venture philanthropy on the other. Representative bodies in the sector such as Charity Bank, Charity Evaluation Services, Community Development Finance Association, Development Trusts Association, National Council for Voluntary Organisations, Social Enterprise Coalition and Social Enterprise London, service all kinds of resource needs. This support infrastructure enhances the functioning and long term sustainability of social ventures in the fi eld. 20

S o c i a l E n t r e p r e n e u r W i n s N o b e l P e a c e P r i z e i n 2 0 0 6 ★

This is not charity. This is business: business with a social objective, which is to help people get out of poverty. Muhammad Yunus

Muhammad Yunus is the banker to the poor. He revolutionised the banking industry in the late 1970s when he

started offering microloans with no collateral to the poorest of the poor in Bangladesh. Over 25 years later he and

his Grameen Bank were introduced to the mainstream as recipients of the Nobel Peace Prize for their contributions

to social and economic development by breaking the cycle of poverty through microcredit.

The idea is simple yet powerful. Borrowers are organised into groups of fi ve, but not all members can borrow at once.

Two borrowers may receive a microloan at one time; but not until these two borrowers begin to pay back the principal

plus interest can the other members become eligible for their own loans. The average interest rate is 16 per cent,

and the repayment rate is an unprecedented 98 per cent, which is attributed to group pressure, empowerment and

motivation. The loans are tiny—typically enough to buy a goat, tools or a small piece of machinery that can be used

to produce new sources of income.

The Grameen Bank was founded by Yunus with the following objectives:

■ Extend banking facilities to poor men and women.

■ Eliminate the exploitation of the poor by money lenders.

■ Create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh.

■ Bring the disadvantaged, mostly women from the poorest households, within the fold of an organisational format

they can understand and manage by themselves.

■ Change the age-old vicious circle of low income, low savings and low investment into the virtuous circle of low

income, injection of credit, investment, more income, more savings, more investment, and more income.

As of October 2007 the Grameen Bank had served 7.34 million borrowers, of whom 97 per cent were women. The bank

operates 2468 branches and employs 24 703 people. Since 1983 the Grameen Bank has disbursed $6.55 billion to the

poor and has been profi table every year except 1983, 1991 and 1992.

THE IMPORTANCE OF THE BRAINS TRUST IN SOCIAL ENTREPRENEURSHIP The third component of the Timmons Model of the Entrepreneurial Process is the team. As we have discussed, social entrepreneurship seeks to solve wicked problems, and such problems cannot be solved alone or even with a small startup team. The environment to solve social problems requires a spirit of collaboration; and therefore in the social entrepreneurship context the brains trust is particularly important.

The brains trust in social entrepreneurship can include the community, investors, the government, customers, suppliers, manufacturers, or in the case of the Grameen Bank, villagers. The list is endless in many respects and



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IPdepends on the venture. The current momentum around social entrepreneurship is exciting, but the sustainability

of doing good can be achieved only if it delivers some type of value for those most involved. In other words, social ventures must deliver value for key stakeholders. What the value is and to whom will vary, but it is important that the social entrepreneur understand the interactions among brains trust stakeholders as well as the potential value derived from being associated with the venture.

Enablement for Social Ventures has been ignored in previous community work. The vital means to serve the ends of an organisation are very often in the hands of larger, more professional, better resourced (with equipment) and able to pay-their-way bodies. The Enablement Effectiveness Model, Exhibit 7.8, offers a pathway to transformation and sustainability whenever such collective expertise can be donated for ‘other order’ outcomes. 21

Any vision to alleviate need or to service need is founded on two axes—‘Responsiveness to need’ and ‘Resourcing Need’. The other parameter ‘Risk’ can be managed—against the odds. In the Enablement Effectiveness Model, responsiveness to need is a function of the social entrepreneur and the support team for social venture enablement. Being opportunity mission conscious the social entrepreneur inspires and the team gives support.

In respect of resourcing the need the entity is enabled through association with clusters of empowering organisations acting with strategic intent and higher up in the resource chain. These organisations invest not only with capital but with skills, specialisations and services to address best practice. To be successful the enterprise requires a purpose-driven board that leads to professional style governance that can work cooperatively and yet be a sounding board to the social entrepreneur.

Think back to the Denis Hanley example at the beginning of the chapter. Hanley must understand the value proposition for each stakeholder. In a municipality, for example, the company responsible for water treatment management needs to see money saved by reducing the frequency of pollution. Hanley must show, for example

EXHIBIT 7.8 E N A B L E M E N T E F F E C T I V E N E S S M O D E L

Loris O Gillin © 2005

Social Entrepreneurship Orientation

‘E’Indicator

Means: Intention, Persistence, Risk

Manager, Alert to Opportunities

Ends: Resource acquisition, enable

Social Venture Enablement

‘G’Indicator

Means: Team compatibility amongst

support & volunteer staff

Ends: Serving to meet need

Focus of People in Venture Cluster

‘Process’

Means: Good attitude toward each other,

Information Management,

Communication

Ends: Effective Enablement

Social Venture Cluster

‘EN’ Indicator

Means: Agreed-on Policy,

Agreed-to Goals which are met,

Effective Outcomes.

Ends: Investment and Best Practice

(Objectives set & action taken)

Stakeholders

Means: Board

Ends: Sustainable Enterprise

MANAGE NEED/RISK

ENABLEMENT EFFECTIVENESS MODEL

Social Entrepreneurship

RESPONSIVENESS TO NEED

RESOURCING NEED

RISKRISK



the mayor of the city, that the fi ltering system supports green initiatives. For city planners, Hanley can address improved water availability. But what about labour unions? What if reducing the number of large sewerage plants cuts the number of operators and maintenance workers needed? Every social innovation likely has a downside; the social entrepreneur needs to consider not only the value added but also the value loss to various stakeholder groups and assess consequences. A primary question underlying stakeholder theory is what is at stake and for whom. This is an important point. Even social entrepreneurs must assess the risk inherent in their new ventures.

The social entrepreneur can build his or her brains trust further by recognising and participating in the powerful networks surrounding social entrepreneurship activities. There is something unique about like-minded entrepreneurs and investors coming together to address world problems and understanding that their solutions, or a lack thereof, will change the world forever. But communities are emerging everywhere to share best practices, learn, create and collaborate to build and grow ventures for a better world. Social Venture Network, Investors Circle, Echoing Green, Ashoka, Net Impact, Social Enterprise Alliance, and University Network are just a few places to start building and participating in social entrepreneurship networks. Bill Drayton, founder of Ashoka, believes: ‘The inertia of our experience pulls us into conventional directions. We must engage in group entrepreneurship to collaborate and become far more than the sum of the parts.’

CONCLUDING THOUGHTS: CHANGE AGENT NOW OR LATER? Bank of America recently commissioned a report on philanthropy that found that entrepreneurs, on average, give 25 per cent more to charitable causes than do other types of wealthy donors. 22 Of course this spirit of giving among entrepreneurs should be recognised and applauded; but is such giving suffi cient? The story of a successful entrepreneur building a company, creating personal wealth, and then making signifi cant charitable contributions is common. Social entrepreneurs, however, do not wait to give. Social entrepreneurs build businesses where economic value and societal contribution are two sides of the same coin. They identify opportunities to solve problems related to education, health care, poverty, energy, water and the environment—to name a few. They are cause fi ghters and change agents using the fundamental principles of entrepreneurship to promote positive change and permanent impact. Social entrepreneurs are creating the future.

CHAPTER SUMMARY

• The primary difference between traditional entrepreneurship and social entrepreneurship is the intended mission.

• There are two types of enterprising nonprofi ts. The fi rst type utilises earned-income activities, while the second has a focus on growth and economic sustainability.

• The primary mission of both social ventures and enterprising nonprofi ts is social regardless of market impact. The hybrid model equally emphasises social and economic goals.

• Social opportunities are driven not only by markets but also by mission and social need.

• With social entrepreneurship, the team in the Timmons Model is expanded to include stakeholders external to the venture.

• As more social ventures emerge, access to capital becomes a greater challenge.

• Social venture capitalists seek to invest in for-profi t ventures for fi nancial return as well as for social and environmental return.

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Study Questions 1. What are the differences among socially responsible ventures, social ventures and enterprising nonprofi ts?

2. Why are corporate social responsibility (CSR) activities not considered to be part of the domain of social entrepreneurship?

3. What are three characteristics of wicked problems?

4. What is meant by the concept of double bottom line with regard to socially focused investing?

5. What is an example of a wicked problem facing humanity, and what types of opportunities might arise for social entrepreneurs in that space?

Further Information http://www.netimpact.org Net Impact is a global network of leaders who are changing the world through business.

http://www.echoinggreen.org Since 1987, Echoing Green has provided seed funding and support to nearly 450 social entrepreneurs with bold ideas for social change in order to launch groundbreaking organisations around the world.

http://www.se-alliance.org An increasing number of organisations are working toward sustainable social innovation by applying the power of market-based strategies to advance social change. The Social Enterprise Alliance serves as a single point of reference and support and a source of education and networking lenders, investors, grant makers, consultants, researchers, and educators who recognise the increasing impact of social enterprise.

http://www.svn.org Founded in 1987 by Josh Mailman and Wayne Silby, Social Venture Network (SVN) is a nonprofi t network committed to building a just and sustainable world through business.

http://www.skollfoundation.org The Skoll Foundation’s mission is to advance systemic change to benefi t communities around the world by investing in, connecting, and celebrating social entrepreneurs. Social entrepreneurs are proven leaders whose approaches and solutions to social problems are helping to better the lives and circumstances of countless underserved or disadvantaged individuals.

Have You Considered? Identify three social ventures in your community, defi ne the stakeholders, and ask them how they receive 1. value from their social venture.

For the same three social ventures, defi ne the nature of risk. 2.

What do you think your generation’s most wicked problem will be? 3.

Have You Considered?

MIND STRETCHERS

References 1. http://www.philanthropy.com/free/update/2007/04/2007042301.htm. 2. http://www.kickstart.org/tech/technologies/micro-irrigation.html. 3. C W Massarsky and S L Beinhecker, ‘Enterprising Nonprofi ts: Revenue Generation in the Nonprofi t Sector’, 2002. 4. Ibid., pp. 5–12.



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5. Questions related to social entrepreneurship were included in the Global Entrepreneurship Monitor survey for the United States sponsored by Babson College. Social entrepreneurship results are included in H Neck, C Brush and E Allen, ‘Exploring Social Entrepreneurship Activity in the United States: For-Profi t Ventures Generating Social and Economic Value’, Working Paper, Babson College.

6. http://www.bsl.org.au/main.asp?PageId=5&iMainMenuPageId=5 7. See http://www.fourthsector.net/ for more information. 8. H Rittel and M Webber, ‘Dilemmas in a General Theory of Planning’, Policy Sciences, 1973, 4, pp. 155–69. 9. Ibid., p. 160. 10. Cam Ansell, Grant Thornton Aged Care Survey Report, Grant Thornton Australia, 14 October 2008; L Hazelton and

M Gillin, ‘Corporate Social Entrepreneurship in the Aged Care Industry’, 5th AGSE Entrepreneurship Research Conference, Melbourne, 2008.

11. Ibid. 12. Ibid. 13. B McKenzie, ‘A Generational Shift—Becoming an Employee of Choice’, Aged Care Association 27th Annual Congress,

Hobart, 17 November 2008. 14. The Millennium Development Goals Report 2005, p. 3, http://www.un.org/millenniumgoals/background.html. 15. C Clark, ‘RISE Capital Market Report: The Double Bottom Line Private Equity Landscape in 2002–2003’, Columbia

Business School, 2003. 16. Ibid. 17. http://www.solcap.com/objective.html. 18. R John, ‘Venture Philanthropy: The Evolution of High-Engagement Philanthropy in Europe’, Working Paper, Oxford Said

Business School, Skoll Center for Entrepreneurship, 2006. 19. http://www.newprofi t.com/impact_results.asp. 20. L Gillin, ‘Evaluating the Availability of British Social “Venture” Capital on the impact of Social Entrepreneurship’,

International Journal of Entrepreneurship and Small Business, 2006, 3, pp 123–36. 21. L Gillin and S Long, ‘A Model for Social Value Creation within Social Entrepreneurship Ventures’, Babson Kauffman

Entrepreneurship Research Conference, Babson, Mas., 2005, p. 448. 22. C Preston, ‘Entrepreneurs Are among Most Generous Wealthy, Report Finds’, Chronicle of Philanthropy, 13 December

2007, 20 (5).

CASE

M S AU S T R A L I A A N D T H E F O R M AT I O N O F M U LT I P L E S C L E R O S I S L I M I T E D Adjunct Professor Hugh Morrow with assistance of Carl Hedberg. © Copyright Macquarie University, NSW, http://www.mii.mq.edu.au. All rights reserved.

PREPARATION QUESTIONS

1. What are the tensions in a not-for-profi t compared with a for-profi t organisation?

2. In what way could the merger proposals be considered entrepreneurial?

3. How effective were the two chairmen in leading their respective organisations into one? Identify the important entrepreneurial contributions.

4. Discuss Paul’s question: ‘What could we have been done better and how might our experience serve as a model for other organisations’?

Background

In the spring of 2003, Terry Winters, Chairman of the Victorian Multiple Sclerosis Society, called Paul Murnane, the Chairman of MS New South Wales. Terry informed Paul that he did not think that the Victorian MS Society could survive as a needs-based organisation without scaling back services. Paul smiled into his mobile phone:

That’s curious; we just had our own strategy offsite, and came to the same conclusion!



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It was a real meeting of the minds. Terry went on to explain that his board felt that as the two largest (and geographically adjacent) societies, they had to work much more closely together in order to achieve some scale economies—and better meet the needs of their members. Paul summarised the challenge:

Depending on which State they live in, the number of Australians being diagnosed with MS and approaching the MS societies for assistance is increasing at nearly 10 per cent per year—that is around seven times the rate of growth of the general Australian population. This increasing prevalence of the disease is partly due to better tools for earlier diagnosis, as well as the actual disease prevalence possibly increasing. The point is, the pool of clients is growing. Our private funding base is increasing at just 3 to 5 per cent a year, and government funding, which accounts for between 40 and 50 per cent of the total in New South Wales and Victoria, is declining in real terms at an annual rate of about 1 per cent. We could see we were headed for trouble. Put simply, we needed to fi nd better ways to improve services for the growing numbers of people with MS. If we do not fi nd a better and more effi cient way of doing things, both MS societies face the very real possibility of having to reduce the level of services currently provided to people with MS. This is not an option we want to contemplate.

While the directors knew they had the option of pursuing additional government support to close the funding gap, they worried about becoming too dependent on a funding source that might begin to have undue infl uence over the internal decision-making process at the organisation. The directors were in agreement; the best solution would have to come from inside the Society.

Multiple Sclerosis

Multiple Sclerosis (MS) is a chronic, relatively common and incurable disease that randomly attacks the central nervous system (brain and spinal cord). The term ‘multiple sclerosis’ means, literally, many scars. Symptoms of MS are unpredictable and vary greatly from person to person and from time to time in the same person. They may include: extreme tiredness (fatigue), tingling, numbness, impaired vision, loss of balance and muscle coordination, slurred speech, tremors, stiffness, bladder and bowel problems, diffi culty walking, problems with memory and concentration, mood swings and, in severe cases, partial or complete paralysis.

Approximately 70 per cent of cases begin between the ages of 20 and 40, with the average age being 30. Peak incidence occurs in the mid 20s, and although rare, individuals as young as two and as old as 75 have developed it. MS, which is the most common degenerative neurological disease affecting young Australians, annually costs Australia over $2 billion in direct and disease-related outlays.

The disease is marked by a notable latitudinal gradient of prevalence (see Exhibit 1); the further away from

the equator, the greater the incidence of the disease (in both the northern and southern hemispheres). The incidence in Hobart is approximately double that in Sydney and seven times that in Townsville. MS is also three

times as common in women compared with men. Paul noted some of the challenges for MS healthcare providers:

As the course and progression of MS is very unpredictable and variable, people with MS require access to timely and appropriate services and supports at every stage from diagnosis to end of life. In the diagnostic phase there is a high need for information, appropriate support and assistance for understanding and learning how to live with MS. Specialist information resources, education programs, counselling and the development of self-management plans are required for facilitating healthy adjustment and management of this disease. The need for timely information and appropriate support remains a common theme for people with MS throughout their life. As the disease progresses and disability increases and becomes more complex, there is a need for more comprehensive and coordinated services. We recognised that across the disease spectrum, there were gaps in the supports and services that we were able to provide to people with MS and their families, particularly those living in rural areas. There are over 16 000 people in Australia with MS, and if you multiply that by three or four to include family members and active friends, that gives you a sizable pool of individuals who are directly affected by the disease. Australian medical students receive little instruction about the disease and since it is not that widespread relative to the general population, a typical doctor may see very few people with MS over years of practice. MS is not front-of-mind for most GPs, and the initial symptoms of MS can often be hard to distinguish from other medical conditions. This may lead to delays in referral to consultant neurologists for investigation and diagnosis.



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There are also neurological and psychological aspects of the disease that are challenging. Many symptoms are not necessarily visible and yet can be disruptive and diffi cult to manage, such as fatigue, sensory and visual changes, pain and cognitive changes. Clinical depression is more frequent in MS than in the general population and suicide rates are also higher. We know that heat can cause a temporary worsening of symptoms such as when the weather is very hot or humid or they run a fever, sunbathe, get overheated from exercise, or take a very hot shower. For example, some people may notice that their vision becomes blurred when they get overheated. We have developed specialist knowledge and strategies to complement medical treatments, to help people with MS manage their symptoms and maximise their wellbeing and quality of life. It is important that this knowledge is shared with health service providers so that they in turn can provide quality care for people with MS. A set of national standards of care and a certifi cation system for health practitioners in key disciplines all over Australia could be achieved by State societies beginning to work more closely together.

Since 1956, MS societies had been providing treatment, accommodation, support services and counsel to Australians with MS and their families (see Exhibit 2). The MS societies’ services had evolved naturally in and around major population centres, but by the early 2000s, it had become evident that the outlying (and underserved) MS population was growing as a percent of the whole. In New South Wales and Victoria, for example, nearly 40 per cent of people with MS now lived outside the metro areas, and in Australia, ‘outside’ could mean many hours from specialist MS physicians or treatment facilities. 1 While the leadership at MS Australia understood that delivering services equally well to all MS patients throughout Australia was virtually impossible, they did feel there was room for considerable improvement.

EXHIBIT 1 G E O G R A P H I C A L P R E VA L E N C E

AUSTRALIAN MULTIPLE SCLEROSIS LATITUDE PREVALENCE GRADIENT

• Bold numbers are MS Prevalence/100 000LEGEND

• Figures in () are MS numbers by State• Figures in () are latitude of capital cities

AustraliaDarwin

NORTHERN TERRITORY

(42.5°S)

18.8

WESTERN AUSTRALIA

Perth

SOUTH AUSTRALIA

NSW/ACT

VICTORIA

******

******

******

TASMANIA

Melbourne

Adelaide1 dot = 1000 persons

QUEENSLAND

Sydney

[5055]

(122°5)

(31°5S)(33.5°)

(27.3°S)

(35.2°)

(17.5°S)

(34.6°S)

[38]

[1645]

[1228]

[2321]

[5087]

[658]

82.1

83.0

71.3

99.7

135.7

58.8

79.3

1 Due to greater population and the increased prevalence due to latitude, New South Wales and Victoria have signifi cantly more people with MS than the other States (31 and 33 per cent, respectively), or a total of approximately 10 000 people. Queensland had 14 per cent, Western Australia had 10 per cent, with the other areas making up the balance.



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EXHIBIT 2 M S A U S T R A L I A — S N A P S H O T

MS Australia and its member societies are the only Australian support organisations for people with MS. MS Australia’s affi liate, MS Research Australia, is the largest single non-government contributor to research into the disease.

Formation History

1956 MS Society of NSW. Originally titled the Australian MS Society changed to MS Society of NSW in 1972.

1957 MS Society of Victoria. This organisation subsequently merged into the Victorian Society for Crippled Children and Adults. In 1966 the organisation that was to become today’s MS Society of Victoria was formed.

1958 MS Society of Queensland

1958 MS Society of Tasmania

1964 MS Society of SA/NT

1967 MS Society of NZ

1972 MS Society of WA

1972 National MS Society of Australia. Changed to MS Australia in 1999.

1978 MS Society of ACT. Originally the MS Association of the ACT, titled MS Society of the ACT in 1983 and incorporated in 1984.

1986 People with MS (PwMS) formed

Organisational Structure The National MS Society of Australia was formed as a federation of State MS societies in 1972. In 1999, the name was simplifi ed to Multiple Sclerosis Australia. The State societies were Members of MSA and owned it (each State had one vote at general meetings). In 2006 there were 14 directors on the board, and at least one director had to be on each of the State boards as a link between MSA and the States. One of the directors was from PwMS or MS Advisory Committee, and a minimum of two directors must have MS. Currently all State Presidents are MSA directors and all other directors are also members of State Boards.

Activities of MS Australia Strategy Forum: For the States to collaborate on MS National strategic direction.

Activities undertaken by MSA where population with MS benefi ts from a national approach. Adds value by doing activities which States individually fi nd diffi cult to achieve, through scale advantages and through consistency and elimination of duplication.

Revenue programs:

• MS readathon

• Direct mail marketing

• Corporate sponsorship.

Branding (values, image and promotion).

Advocacy at federal government level and support of State level advocacy.

National policy development.

Research under the MSRA umbrella.

State Society Services and Programs for PwMS

Lifestyle Services are a group of programs covering:

• Health and lifestyle assessment and consultation by our multidisciplinary allied health team

• Counselling

• Country team visits, peer support and family coordination

• Education programs on symptom and lifestyle management

• Employment support.



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Moving Forward

The more the decision makers at New South Wales and Victorian MS societies talked, the more they began to sense that joining forces could yield compelling fi nancial advantages, as well as improved and expanded client services programs. Paul commented:

Each of the organisations in MSA was linked together in a federal structure, with the State organisations focused on services and programs for people with MS. People had different ideas about what the federation was supposed to do; perform functions the States could not do on their own; serve as a vehicle for national integration; or as a mechanism to move towards a single national entity. Those confl icting ideas were causing a lot of debate and angst, but the economic pressures created by the growth in numbers of people with MS was even more painful. We fi gured that since a merger would provide signifi cant economies of scale, we would be making better use of the limited funds available. It also would remove the whole debate about the role of the MSA, which after the merger would operate as a straightforward federation.

In 2002, MS Australia had begun to sponsor meetings of the National Executive Management Team (NEMT)—the collective CEO leadership from the seven State MS societies comprising MS Australia. The goal of these

EXHIBIT 2 ( C O N T I N U E D )

Outreach Services are provided by staff located throughout regional areas which include:

• Information and education

• Individual and family casework

• Service coordination

• Individual advocacy

• Flexible short-term assistance packages.

Newly Diagnosed Program providing a source of support at the time of diagnosis and access to information and education on MS and its management, including:

• A newly diagnosed package containing introductory information

• Information sessions and telephone conferences about MS and our programs

• Education sessions on a range of symptoms and healthy lifestyle factors

• Immunotherapy education and support.

Accommodation and Nursing Services include:

• The MS society clinics at various hospitals, Immunotherapy Support Program and urology clinics

• Attendant Care Programs, Community Nursing Home Support Program

• Flexible individual assistance packages

• Residential and respite accommodation

• Volunteer Services Program and the Community Visitors Scheme.

Information and Education Services which provide people with:

• Library and Information Services, the Information Line

• Web page

• GP Focus on MS (communications to doctors)

• Country and Metropolitan Health and Community Services Professional Networks

• Country Education Forums.

Medical services are also provided using both the society’s medical directors and consultant specialists, including:

• MS clinics offering specialist neurological consultation

• Continence Advisory Service and urology clinic

• ‘Ask the Doctor’ email.



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sessions — held in Sydney and in Melbourne — was to foster more frequent and constructive communication and to focus on a common framework for support for people with MS. In Paul’s words:

We started to get together for one or two days every couple of months. Previously, the CEOs might have met once or twice a year—if they were lucky. The States had not cooperated much, and the fi rst task was to develop a common language. We soon discovered that although we used different words to describe our goals and motivations, we were all on the same page with our commitment to providing a high level of service to the customer; Australians with MS and their families.

With a combined staff of over 400 employees, 2700 volunteers, 12 offi ces/facilities, and with over 50 per cent of the MS patients in the country, the MS societies in Victoria and New South Wales took a leadership role in fostering a useful dialogue about streamlining the whole of MS Australia. Paul noted that with meetings being held in either Sydney or Melbourne, it was hard to escape the perception that the other States were less important to the process:

We were not trying to take over, as some of the other States feared. They were looking at us as the 600 pound gorilla in the room, but we had no plans to take them over, nor could we in any way since they were separate entities. We had enough problems of our own. But [the New South Wales and Victoria directors] were certainly leading this initiative, so they could not disregard us.

A number of us wanted to get more national. There were lots of areas where we could gain benefi ts—seven accounting departments—we only need one. Seven IT departments, we only need one. Seven HR departments, we need one with some local staff. It is so hard to raise money and deliver services, and yet we were squandering our energies on useless competition over scarce resources. We fi gured that if we could take out more than 15 per cent of our combined New South Wales and Victorian costs and expand services at the same time, some sort of integration between New South Wales and Victoria was worth doing.

In a move to push the talks forward and develop a more constructive framework, in late 2003 the directors of both societies invited their counterparts to nominate an independent director to each other’s board. The two States started to exchange board papers, research papers and other information. To keep all the other State societies in the loop, the chairmen in each of the other States received hard copies of the New South Wales and Victorian board papers, and were given access to both societies’ board intranets. Despite some sense of progress with the NEMT meetings, including the development of important common Australian policies in certain areas, Paul said New South Wales and Victoria fi nally decided to take action:

We were getting frustrated with the speed of progress. It is very diffi cult to get seven organisations to agree to integrate. I was thinking I would be retired before this thing got done. So after a couple more meetings, [MS NSW and Victoria] unilaterally announced to the other State societies our intention to integrate our back offi ce functions; we cannot wait for you guys. There was an initial negative reaction to that, although by that time, I think they all knew it was inevitable New South Wales and Victoria were going to have to act sooner or later.

Due Diligence

The Victorian and New South Wales boards pushed ahead, and by late 2004 they had developed a clearer picture of their combined capabilities. New South Wales had a solid investment portfolio, while Victoria had a growing for-profi t business that helped fund their services. Both societies had valuable property assets and distinctive skills in different areas. Paul said that the overall combined group would be quite complementary, especially with regard to the ‘people’ component:

In addition to our staff, we have lots of volunteers fundraising, visiting people at hospitals and in their homes, as well as performing a wide range of other services. For legal reasons especially, there is a whole lot of training that goes with that. Coordinating the management of these valuable people, we fi gured, would improve our training capabilities. Between the two States we have a lot of specialised skills. New South Wales was much more clinically based with psychologists and other specialists, while Victoria has more expertise with wellness practices. That also points to a cultural difference; New South Wales people say prove it, and Victorian people leave a meeting feeling good and all pumped up—both ends of the spectrum, right?



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The New South Wales and Victorian societies spent the fi rst half of 2005 conducting due diligence. Teams of executives in each functional area were formed. Advised by directors and outside consultants, the groups examined the operating metrics and outlined the qualitative benefi ts of an integrated structure (see Exhibits 3 and 4).

Paul noted that following the completion of the departmental summaries (see Exhibit 5), the effort gained momentum:

We asked the staff to tell us what the costs and the best structure of the organisation would be; what does each divisional team look like? What services do they provide? What new service programs could we introduce? Where are the cost savings? Some amount of downsizing was clearly a given, so there was an inherent confl ict; their own jobs were on the line. They were defi nitely buying into the process—and building a case for a merged organisation—but I also think some were thinking we would never do it. We drove them pretty hard, sending them back a number of times to fl esh out the new services strategy and to cut more costs. We banned the word synergy because it is a waffl ey word; we wanted hard numbers and specifi c new services as well as cost savings. In mid-June 2005 the teams presented their recommendations to the combined boards. They recommended that we do a full merger, not just a back-offi ce services integration.

The resulting 800-page document articulated some harsh realities, including the benefi ts of eliminating redundant positions and departments. Paul offered an example:

There was a six-person team in a Victorian society subsidiary processing a very large volume of payables down in a suburb of Melbourne. Since payables in both States were electronic, the team suggested transferring the Sydney payables processing to Victoria. They calculated that this move would lower direct costs by increasing effi ciency, and by reducing headcount. How could you not move ahead? But facing realities like that was really tough. The non-profi t sector is not comfortable with change, and certainly does not have a lot of experience with mergers and acquisitions. This was defi nitely threatening to our people. Nevertheless, it was pretty clear to nearly everyone that we were heading in the right direction and that the status quo or doing nothing was not an option.

Painful Progress

That winter, the teams fi ne-tuned their recommendations as to what aspects of each department they needed to keep, developed detailed timetables for the merger process, and evaluated different legal structure options. A transition agreement was signed, stipulating that, until full approval was given by each society’s members for a formal merger, that the two State societies would be run by a transition committee comprising of both chairmen, two directors from each State, and the two CEOs; Lindsay McMillan in Victoria, and Bill Northcote in New South

EXHIBIT 3 F I N A N C I A L S N A P S H O T : I N T E G R AT I O N

Outcomes of integration plans

Realistic Scenarios

Spending 5 Year TotalOngoing

per annum

Improved/Increased Client Services (9.9) (3.2)

Upgraded IT&C Systems (2.6) (0.4)

Funded by:

M&D Net Income 7.7 2.0

Integration Synergies 6.8 2.0

Total Surplus 2.0 0.3



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EXHIBIT 4 M E R G E R A D VA N TA G E S

The benefi ts of the merger include:

Client Services:

• Greater services fl exibility, economies of scale

• Centralised program development and delivery; especially education and information services

• More applied research capacity

• Better management of volunteers

• Sharing of specialist staff skills and experience.

Finance and Administration:

• Operating cost savings; eliminating duplicated resources

• Better asset utilisation (e.g. real estate)

• Greater fi nancial capacity to support unavoidable costs (e.g. IT)

• Reduced board support and compliance costs

• Greater ability to support AHCS expansion

• Reduced risk (diversifi ed geography and other risks).

People and Culture:

• More capacity to invest in professional development and career opportunities

• Better volunteers management practices.

Marketing and Development:

• Increased sponsorship and fundraising opportunities

• Centralised programs, common branded products, new partnership opportunities across a larger geographical area

• Sharing of staff skills and expertise.

Information Technology:

• New shared hardware and common technologies

• Larger common databases for advocacy, applied research and client services development.

Corporate Affairs:

• Higher general profi le via more effective combined voice

• Increased resources for advocacy.

Wales. As merger planning proceeded, the executive team began merging aspects of the two societies’ activities in advance of the formal vote.

Looking back on those early days, Terry Winters commented:

The most important lesson of the merger was the need for clear communications which built an environment of trust and a framework for how relationships at all levels would be handled. Trust is the reciprocal of uncertainty—honest, open communications reduced ambiguity and fostered opportunities for the necessary fearless exchange of ideas at the board and executive levels. We wanted everyone to have a clear understanding about what we were doing and what were the outcomes we wanted—expanded services, reduced costs and a more performance-oriented culture.

Recognising the need for strong member and staff support for the merger, the directors and the transition committee put in place a comprehensive communications program leading up to the formal vote, including frequent letters and newsletters to members, staff memos, website notices, and staff meetings. The MSL merger would not be inexpensive, especially since it was being driven by Corporations Act provisions that were often inappropriate for nonprofi t organisations. There had to be a clear understanding of the merger benefi ts to people with MS.



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EXHIBIT 5 O R G A N I S AT I O N A L S T R U C T U R E S

Merged organisational structure

One Joint BoardNSW/VIC

AdvisoryCouncil

MS NSW/V/CAHCS Board

AHCS

CEO x1

Currentstructure less

Finance, Admin &IT & CA – Shared provisionMngr CA & Shared Services.

AHCS NationalPlanning Manager to

direct implementationof QMS across the Societies

CEO x1

GMClient

ServicesNSW & VIC

GM M&DNSW & VIC

GM HR(1) (2)

Fin (1) Admin (1) IT (1)

Notes: (1) Spt to both MS NSW/VIC and AHCS(2) HR functions remain in Societies & AHCS–policy and procedures to be approved by GM HR, supported by a common HRMS linked to payroll

Mngr CorpAffairs (1)

GM SharedSvcs (1)

Client Services CommRemuneration & IntegrationCommFinance & Risk ManagementComm

GOVERNANCE AND STRUCTURE FOR MS NSW/VIC AND AHCS

The relationships between the MS societies in Australia after the merger

MS SOCIETYWA

Members of MS Research Australia

ResearchReview Board &

ManagementCouncil

• Research Strategy• Fund Research Programs @ $3.0m/yr • Pure Research • Applied Research• Research Accountability & Audits• Communication - Research

ExecutiveDirectorMSRA

National RevenueGeneration• Readathon• Direct Mail Marketing• Branding• Other programs later

National Activities• Corporate Sponsorship• Strategy• National Service Model• Advocacy – Federal Govt.

Minimum 2MSA Directors

General ManagerMSA

National ExecutiveManagement

Team

MS RESEARCHAUSTRALIA BOARD

MS AUSTRALIA BOARDDirectors – State Presidents & some State

Directors

EXCOExecutive Commitee

Members of MS Australia

MS SOCIETYQLD

MS SOCIETYSA

MS SOCIETYTAS

MS SOCIETYACT

MS LimitedNSW & Victoria



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Lindsay recalled that although the staff clearly identifi ed with the reasons for the merger, they needed some reassurance:

The essence of what the MS Society does is to deliver services to families with MS, and because of that, we said that no one in the services area will lose their job; in essence, they were quarantined. Everybody else was put on notice in a soft way; yes, it is possible that you may lose your job, but this is the end result we are trying to accomplish. Some people were working on designing the merger knowing full well that their job would go. That was pretty impressive, and I do not think that was fully recognised by the board. The value system at nonprofi ts is such that people are there not for the money, but to be part of delivering an important service. I have to say that I was very impressed with the way everybody went into this process with that in mind. The value system was clear; let’s make this work because more people with MS need more services. There was huge goodwill around that overall mission.

Lindsay added that by the last half of 2005, he had begun to feel increasingly swept up in circumstances beyond his infl uence:

The board was driving the process, and we were responding to their decisions. That was very tough since it became hard to know where we stood in the process. For example, in September the board sent the senior executive team away on a cultural change program, and that set into place an expectation that this group would be the future executive team for the new merged organisation. But as we worked towards the end outcome, we recognised a very clear intent that a number of us would be leaving. It was scary; there was a lot of heartache; immense heartache for Bill and myself.

Paul said that the board appreciated that tough dynamic but, like the CEOs, board members were struggling to devise the best solution for the organisation:

No question the two CEOs had talent, commitment and passion, but they also had different ways of getting things done. We recognised that if we let those guys go we would be losing a great base of experience—over 30 years’ combined MS experience—but we had to balance that with what we had to do to get to the next level as an organisation. We needed to become more business-like without becoming a business. We were running with a dual CEO structure because both CEOs were quite well known to society members and we felt they were integral in getting the formal merger approved. We also had ‘business as usual’ to operate while the merger process took its course. At the same time, keeping the two CEOs on board seemed to be slowing the integration process.

In November 2005 the members of both State societies voted unanimously in favour of the merger. A week later, the combined board of MSL announced that they would be conducting a search for a single CEO, and that Lindsay and Bill would be on the short list for consideration.

Taking Care of Business

As might be expected, many nonprofi t managers tended to favour work related to delivering services, as opposed to quantitative tasks such as estimating spending and costs. The bottom-line investigations and calculations leading up to the merger had brought the numbers into focus, and in early 2006, the board served notice to managers throughout the organisation that expectations had changed. Paul explained:

Our people work in this organisation because they are emotionally and professionally connected to people with MS. They often come through the [government sponsored] public health system, where they never really had to worry about where the money was coming from. Many were also very much focused on their own jobs and were less involved in the activities of other divisions. We have to move away from that mindset, especially how we think about the numbers. To build a sustainable operation, for example, we probably need to retain about 5 per cent of our revenues—not a huge profi t, but enough to reinvest and grow the business. To do that, our managers need to be more directly accountable for the outcomes.

Paul understood from his experience with for-profi t mergers that two-thirds of those mergers either fail outright, or fail to meet the expectations they had going in. Since those challenges were often associated with people



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issues, the board spent a lot of time working to get the MSL staff to pull together. The need for excellent people skills was also a key consideration in the selection of the new CEO who would lead the new organisation.

In May of 2006, the board announced that they had selected Bill Younger, an outsider, for the post of CEO. Paul said that it was a tough decision, but that Bill had some outsider advantages:

It became clear as we carried out the CEO search process that we wanted a different type of person to take the combined society forward and to build a dynamic culture focused on serving people with MS. We felt we needed greater clarity of strategy focused on delivering needed services. I think the board wanted someone who could offer a fresh look at the project, especially since the ultimate goal is to work much more closely with the other States as well. Apart from overhead savings and effi ciencies that could come from a more coordinated approach, we could see that a larger more robust organisation would have greater sway and infl uence with State and federal governments, other funding bodies and in general fundraising. We felt that, given the context, we had to do something dramatic. As I have said, we were bringing two very different teams of people together. A new CEO was a circuit-breaker. Bill came out of the for-profi t sector, but he is extremely motivated in a nonprofi t way.

Bill’s people skills came to the fore shortly after his appointment:

In July 2006, after observing the lack of face-to-face communication and the lack of understanding between the different functional groups, I instituted a no-email Friday in order to encourage staff to talk to each other face to face. We got all the people together, and some were amazed to discover that the people they thought they had been emailing (for months!) were not even those people. That was a real learning experience for them to see how much a cultural thing it was to be hunkered down in their own silos. The main problem was in the Nerve Centre [in Blackburn, Victoria] where the staff lunch room area between the Clients Services Team and [other departments like] administration, marketing, IT, fi nance and HR was referred to as the Gaza Strip—no one was prepared to cross it! The end result is that now internal email traffi c in the Nerve Centre has dropped and we have better communications and understanding across the various functional teams.

Another cultural and fi nancial management issue was Australian Home Care Services (AHCS), a subsidiary of MS Victoria. Founded in 1986, the AHCS mission was to ‘provide a variety of in-home care services to a wide range of people with different care requirements, affording them the reassurance and comfort of being in their own environment’. It provided in-home services for the frail aged and disabled sectors, tailored to the client’s needs and developed in collaboration with the client, their case manager, doctors and allied health professionals, hospital staff and/or family members. It is the largest such provider in Victoria and was growing rapidly in New South Wales (MS NSW had sold its similar business to AHCS the year prior to the merger) and the Australian Capital Territory.

In the previous year, AHCS had brought in profi ts of just over $2 million on turnover of $45 million. As of mid winter 2006 the company was tracking towards a $3 million profi t for that year on turnover of approximately $40 million. Terry Winters described the company as an interesting enterprise in a dynamic sector:

This business is a high volume, low margin service. That said, we feel we can increase the annual profi ts to say $5 million over the next few years. Given the ageing demographics in Australia, this is a hot spot to be in. AHCS is in a consolidating and growing sector, and we have completed four acquisitions in the last couple of years. We have had approaches to buy the business for potentially multimillion dollar amounts. That is a huge amount of money for a nonprofi t, and it could be worth a lot more. The board intends to continue building the AHCS business and apply the profi ts to funding services for people with MS. The company has 2500 workers in a for-profi t culture, but since a lot of their business and funding comes from the government, they are price takers to a signifi cant extent. Businesses are usually the ones that seek to control the price, so being a price taker is certainly not optimal. It is a complex business in a number of ways, and we have to be very careful how we manage the risks.

Outcomes

By early spring 2006, the news was encouraging. The board had committed to continuity of its membership to ensure it met its obligations to members, supporters and staff and retained their support. Staff members in both States were adjusting well to the merger, and the organisation had savings in key operating areas that exceeded its minimum goal. The merger plans called for a 30 per cent increase in services spending over the fi rst four



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years, partly funded by about 15 per cent savings in back offi ce costs (and excluding merger costs, redundancies, etc.), as well as more effective general fundraising. Even better from a fi nancial standpoint was that the costs of the merger—about $2.5 million—had been substantially covered in the fi rst year of merger by a fortuitous and generous $2 million gift from a benefactor.

While the fi nancial results supported the idea of moving towards the eventual unifi cation of all the MS societies in Australia, Lindsay McMillan underscored the importance of the service side of the equation:

As the organisation becomes bigger, more cost-effective, and more centralised, does bigger mean better to the end user—the person with MS and their family—and how does that translate at a local level—to the person living out in the suburbs and beyond? They are asking—and rightly so; how will these changes translate into improved services? I think that we are all in agreement, that at the end of the day, that’s all that really matters.

Terry Winters agreed:

MSL is hopefully the fi rst step in a journey towards greater national integration and coordination by all MS societies. It is about improved and more cost-effective services to people with MS, and in the long term, the cultural changes needed to deliver this.

Further, most of the remaining State organisations were reviewing the numbers for MSL (see Exhibit 6) with a view towards merging into the group if the results continue to be positive. The one exception was MS WA,

EXHIBIT 6 F I N A N C I A L S N A P S H O T

The historical fi nancial information of MSNSW and MSVIC as well as the historical aggregated statements of fi nancial performance of the merged Group for the fi nancial year ended 30 June 2005 are set out below:

Financial Performance MSNSW MSVIC* Merged Group$000 $000 $000

Operating revenue 5 006 45 358 50 367

Fundraising income 5 222 3 773 8 995

Non-Operating revenue 532 319 851

Total Revenue from ordinary activities 10 763 49 450 60 213

Charitable purpose expenses (9 340) (10 222) (19 562)

Other operating expenses – (35 439) (35 439)

Fundraising expenses (1 991) (2 255) (4 246)

Borrowing costs – (524) (524)

Profi t/(loss) from ordinary activities before related income tax expense (568) 1 010 442

Income tax expense relating to ordinary activities

– – –

Net profi t/(loss) (568) 1 010 442

*The operating revenue and operating expenses for MSVIC include AHCS’ revenue and expenses.

The historical fi nancial position of MSNSW and MSVIC, as well as the historical aggregated statements of fi nancial position of the merged group, for the fi nancial year ended 30 June 2005 are set out below:

Financial Position MSNSW MSVIC Merged Group$000 $000 $000

Current assets

Cash assets 228 2 256 2 484

Receivables 125 2 810 2 935

Other fi nancial assets 303 – 303



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which continued to be opposed to a single national entity. Nevertheless, the MSL merger had demonstrated that States could participate and receive benefi ts by sharing some, or all, of their back offi ce functions while remaining separate legal entities. As had always been the case, each State was still free to choose its own course.

The Journey Forward

The Qantas 767 performed a graceful wing turn over Sydney as Paul Murnane settled in for his fl ight to Melbourne. Although he had made this journey from Sydney many times, this would be his last trip as Chairman of Multiple Sclerosis Limited (MSL), the merged Multiple Sclerosis Societies of New South Wales and Victoria. He had now handed the baton over to his successor, Terry Winters.

Over three years had passed since talks began about merging the two State societies. While the effort had gone well — at times better than expected—it had not been easy, or inexpensive. A seasoned investment banker and businessman, Paul had not been surprised at all by the challenges they had encountered. As the plane reached cruising altitude, he sat back and refl ected:

What could we have been done better and how might our experience serve as a model for other organisations?

EXHIBIT 6 ( C O N T I N U E D )

Financial Position MSNSW MSVIC Merged Group$000 $000 $000

Other 735 459 1 194

Total current assets 1 391 5 525 6 916

Non-current assets

Receivables – – –

Other fi nancial assets 2 585 41 2 626

Property, plant and equipment 5 100 11 906 18 851

Intangible assets 5 590 5 590

Total non-current assets 7 685 17 537 27 067

Total assets 9 076 23 062 33 983

Current liabilities

Paybles 1 203 6 073 7 276

Interest bearing liabilities – 2 300 2 300

Provisions 773 2 144 2 917

Total current liabilities 1 976 10 517 12 493

Non-current liabilities

Interest bearing liabilities – 3 330 3 330

Provisions 57 314 371

Total non-current liabilities 57 3 644 3701

Total liabilities 2 033 14 161 16 194

Net assets 7 043 8 901 17 789

Equity

Retained profi ts 7 043 8 901 15 933

Asset revaluation reserve – – 1 845

Total members’ funds 7 043 8901 17 789



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N o t e o n t h e V e n t u r e C a p i t a l I n v e s t i n g P r o c e s s ★

Venture capitalists and entrepreneurs engage in a process whereby they assume and manage the risks associated

with investing in compelling new business opportunities. Their aim is long-term value creation for themselves, their

companies, their communities and other stakeholders. The process begins with the conceptualisation of an investment

opportunity. A prospectus is then written to articulate the strategy and outline the qualifi cations and track record of

the investment team. Raising the money is a networking and sales undertaking that typically gains momentum only

after an institutional investment advisor—known as a gatekeeper—has committed capital to the fund. 2

Once the money is raised, the venture capital fi rm seeks to add value in many ways: identifying and evaluating

business opportunities, negotiating and closing investments, tracking and coaching companies, providing technical and

management assistance, and attracting additional capital, directors, management, suppliers and other key resources

(see Exhibit 14.2 in Chapter 14). Given the fortuitous convergence of factors (e.g. management talent, market timing,

strategic vision) required for a startup to reach a profi table harvest event such as an acquisition or an initial public

offering (IPO), home runs are rare. In fact, historical data indicate that only about one out of every 15 of these

investments ever realise a return of 10 times or more on invested capital.

The dominant legal structure for private venture capital funds has been the limited partnership for a specifi c term

of years, with the venture capitalists assuming the role of general partners and the investors as limited partners

(see Exhibit 14.6 in Chapter 14). The general partners act as organisers and investment managers of the fund, while

the limited partners enjoy a passive role in fund management as well as limited liability for any fund activity. As

compensation for their direct participation and risk exposure, general partners can reap substantial capital gains—

known as carried interest—as successful portfolio ventures are harvested.

Between 1980 and the early 2000s, there were two recessions (in 1981–2 and in 1990–2) and a stock market panic in

late 1987 that sent share prices plummeting 22 per cent in a single day in October that year. Nevertheless, according

to Venture Economics—a private equity database compiler—venture investments during that time yielded a 19.3 per

cent average annual return after fees and expenses. Over the same period, the S&P 500 and the Russell 2000 index of

small companies generated average annual returns, respectively, of 15.7 per cent and 13.3 per cent.

Equity funds are typically conceived, invested, and exited on an eight to 12-year cycle, with preparation for follow-on

funds beginning in Years 3 and 4. To a large degree, that time frame is driven by the reality that, on average, it takes

fi ve to seven years to build and harvest a successful portfolio investment.

Successful funds yield a signifi cant fi nancial upside. In the early 2000s the average total pay packages (salary plus

bonus) for managing general partners and senior partners were $1.24 million and $1.04 million, respectively. Carried

interest distributions to a general partner of a top fi rm averaged $2.5 million over the life of the fund.

See Chapter 14 for further discussion of venture funding.

2 Institutional investors such as corporations, foundations and pension funds invest as limited partners in hundreds of venture capital and buyout funds. Many of these investors, having neither the resources nor the expertise to evaluate and manage fund investments, delegate these duties to investment advisors with expertise in the venture capital industry. These advisors pool the assets of their various clients and invest those proceeds on behalf of their limited partners into a venture or buyout fund currently raising capital. For this service, the advisors collect a fee of 1 per cent of committed capital per annum. Because these investment experts exert a tremendous amount of infl uence over the allocation of capital to new and existing venture teams and funds, they are referred to as ‘gatekeepers’.



opportunities for social entrepreneurship

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