To maintain their social objectives, many Australian Disability Enterprises (ADEs) need to focus on business essentials. SVA has helped a number of these ADEs understand the viability of their business model and how to operate more commercially to enhance their sustainability and ability to deliver a social impact.

Like the wider disability services sector, the 200 or so Australian Disability Enterprises (ADEs) that provide employment opportunities to around 20,000 people with a disability are facing major reform.

The origin of many ADEs can be traced back to the 1950s or 1960s, when sheltered workshops, as they were known at the time, were set up by parents or carers of people with a disability to provide employment opportunities outside the open employment market. These workplaces were created to suit the needs of employees rather than to meet a market demand for a particular product or service. As a result, they were concentrated in a narrow range of predominantly labour-intensive service industries such as packaging and gardening where work could be tailored to employee skill and support needs.

Many ADEs are low-value businesses with marginal profits and little growth.

Today, many ADEs are still operating in low skilled service sectors that are under pressure and crowded with other ADEs. As a result, they can find themselves in a tough operating environment with low sales revenue and a relatively high cost base. This often means that ADEs are heavily reliant on government and, frequently, parent organisation funding as well to meet their commitment to employing and supporting people with a disability. There are some ADEs, however, which have already become much more commercially viable.

The ADEs’ environment is changing

The National Disability Insurance Scheme (NDIS) will give people with a disability greater choice and control in accessing support services through being able to nominate where their support funds are spent. This includes a choice about where they are employed, and the type of work they want to do. As a result, ADEs will need to become employers of choice to attract employees. This means that attracting income through the NDIS will require ADEs to meet the interests and needs of potential employees, for example by offering reliable, interesting work in a thriving business, or enhanced vocational training.

To be sustainable in this environment some ADEs will need to improve their commercial viability. To do this, they may need to change their operating model.

In 2013, SVA led a consortium of Social Firms Australia, Social Traders, and Matrix on Board to assist ADEs to make the transition to a more commercially sustainable operation through a series of workshops and one-on-one business reviews. This work was commissioned by the Department of Social Services (formerly known as Federal Department of Families, Housing, Community Services and Indigenous Affairs).

In working through a business review, some ADEs were encouraged to rethink ‘business as usual’.

As part of the business reviews, the consortium provided a framework for ADEs to better understand their current operations and how they could transition to more commercially viable businesses. Options for transition that were explored included moving to either a social enterprise model where over half of revenue comes from commercial sales, or to a social firm which is a form of social enterprise that also has a diverse workforce mix with between 50-75% of workers without a disability.^[ii]

SVA Consulting worked with a number of ADEs to review their business and provide recommendations to increase commercial viability.

In working through a business review, some ADEs were encouraged to rethink ‘business as usual’. For some, the recommendations reinforced changes they were already making.

Helping ADEs to understand the commercial viability of their operations

Many ADE managers have historically focused on the social side of the equation, and some do not fully understand the commercial viability of their business. In addition, government and philanthropic funding can obscure the reality of the businesses’ bottom line. As a result, ADEs are often unclear about the revenue and costs coming from the commercial business as separate from those related to the activities that support employees.

…it was apparent that some ADEs were running at a significant commercial loss…

The first step in better understanding this is to create a profit driver tree. This is a visual representation of a traditional profit and loss statement. It is a simple way of understanding the levers driving an organisation’s performance. In the business reviews, these profit driver trees helped the ADEs to conceptualise the two parts of their operations, the commercial and the social. This led to a better understanding of where the most significant issues lay, and what changes would have the biggest impact on profit.

Figure 1. Profit driver tree separating commercial and employment support activities

To calculate the employment support costs (the costs required to support employees with a disability over and above any traditional business employee costs), SVA Consulting used SVA’s Employment Support Cost Analysis tool (see The hidden business of social enterprises). This tool can help ADEs think about their employment support activities by asking a series of questions about the types of support provided and breaking down the associated costs. For example, labour costs associated with training and supervising employees are broken down in detail and separated from the commercial costs.

Once income streams were split out and the employment costs were calculated, it was apparent that some ADEs were running at a significant commercial loss, and that these losses were covered by the various forms of employment support funding. For most ADEs, the profit driver tree highlighted that low commercial sales was the most significant problem. Low sales were frequently a function of low volume and/or few customers, as well as pricing at or below cost. Generally, there is little scope for major cost reduction – apart from labour, costs are low and reducing headcount defeats their social goal.

Through this process many ADE managers developed a deeper understanding of their income streams and costs and the size of the task necessary to become more financially sustainable. This provided an impetus to review their business practices.

Building the commercial competencies of ADEs

After ADEs understand their revenue and cost structure, there are four steps they can take to improve their commercial focus and thus their bottom line.

First, it is important for ADEs to identify and have a good understanding of their customers in order to develop the right solutions, at the right price for the right market segment. In many cases ADEs think of both their commercial clients and employees with disabilities as their customers, leading to internal confusion about who their customer is. ADEs need to recognise that their customers are their commercial clients. For many ADEs, this is a significant cultural shift that needs buy-in at all levels of the business from operational staff to the board.

Then, categorising sales by customer type and across product or service lines can help ADEs think about their value proposition (that is, the statement of what the customer will gain from using the products or services). It will also help with pricing strategies and marketing and sales approaches.

Second, some ADEs need to gain a better understanding of their profit margins and their employment support costs across product lines. While many ADEs can allocate material production costs to each business line, labour costs are often not allocated between products or services. Staff and supported employee costs, as well as overhead costs, need to be allocated across the business lines. Comparing these figures with the sales figures will show the profit margins for each line. This can enable ADEs to improve labour and asset allocation and utilisation across the whole business.

ADEs need to ensure that their pricing strategy reflects… the full costs of producing the product or delivering the service…

Further refining the employment support cost analysis will continue to help ADEs understand, explain and price their employee support activities in preparation for the changes under the NDIS. Being able to understand, measure and communicate the support costs and then the outcomes they can bring can help attract employees, improve their employment outcomes, and potentially increase commercial sales.

Recyclery – a social enterprise that employs people with a disability.

Third, some ADEs need to develop clear pricing models and think strategically about how they engage their customers. ADEs need to ensure that their pricing strategy reflects not just the market environment, but also the full costs of producing the product or delivering the service, with a profit margin built in. Many ADEs traditionally undervalue their products and services.

Once pricing strategies have been enhanced, it is important to maximise the value of customer relationships which have limited interaction. Developing more strategic partnerships with key customers can capture more of their business. In the example above, Print35’s management needed to create a differentiated pricing structure for different customer categories, and to target those customers differently.

Fourth, to be able to improve their commercial acuity (through the three steps outlined above), some ADEs need to build the capabilities of staff, management, and the board. Some ADEs have realised the need for new management with strong commercial backgrounds. Others need to conduct a skills gap analysis of their staff as a basis for building capabilities. In particular, sales and marketing skills are often missing. Many ADEs deprioritise business development failing to recognise that they cannot continue to support employees without sufficient sales.

To grow, ADEs need a clear vision and a strategy to get there

As part of achieving commercial sustainability there may be opportunities for ADEs to seek additional growth. For an ADE to thrive, the management team and the board need alignment on a clear vision of where they want to be and a strategy to get there. There are a number of possible strategies for growth, including:

• Accessing new contracts (e.g. government social procurement tenders)
• Selling a service that is currently provided for free
• Cross-selling additional products or services to existing customers or networks
• Replicating another successful business model
• Acquiring or merging with another ADE or commercial business
• Plugging the leaks in local community purchasing
• Meeting gaps or developments in the market through innovative products or approaches.

To prioritise new opportunities for growth, ADEs can use a framework for assessing options based on maximising financial sustainability and social impact. Applying these filters will ensure opportunities both contribute to achieving financial sustainability and are aligned to the organisation’s vision and mission.

Summary

To ensure their viability in the changing landscape, the first steps for ADEs are to understand the commercial and social bottom lines of their business, articulate their value proposition, invest in understanding their markets, and build strategic partnerships with customers. This process will take some time. Staff, management and boards will need to be aligned in setting clear growth goals to increase commercial revenue and managing performance to meet these goals. This will put ADEs in a good position in the lead up to the NDIS. From there, ADEs can continue to increase commercial profitability and expand their social impact.