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from 10.10.00 on: Employment and Income Division Service Sectoriel Industrie, Formation professionnelle et développement urbain

SED-Issue Paper 5

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Developing Markets for Business Development

Services:

Designing and Implementing More Effective Interventions

June 2000

ISSUE PAPER no 5

visit our new website on SED at Intercooperation : «http://www.intercoop.ch/sed/»

THE FOLLOWING PUBLICATIONS CONCERNED WITH SMALL ENTERPRISE DEVELOPMENT ARE CURRENTLY AVAILABLE: ο CIP/SED Sector Policy (1992)

available in German, French, English, Spanish SED TOOLS AND ISSUE PAPERS: SED Tool No 1 "Developing a Country Concept": The CIP-Cube, October 1994 (new

version of September 1997)

SED Tool No 1 – vol II "The Tool Box" (Annexes tool no 1)

SED Tool No 1a English French

ο "Developing a Country Concept": Guideline/Checklist for Preparing Rapid Appraisals at Macro, Meso and Micro Level, August 1997

ο "Développer un concept par pays": Aide mémoire pour les collectes d’informations au niveau macro, meso et micro

SED Tool No 2 English French

ο "Developing a Country Concept": Instruments of Small Enterprise Development

ο "Développer un concept par pays": Instruments de promotion de la petite entreprise

ISSUE PAPER No 1 German

English French Spanish

ο Der Gender-Ansatz in der Handwerks- und Industrieförderung ο The Gender-Approach in Small Enterprise Development

ο L'approche genre dans l'appui à la promotion de la petite et moyenne entreprise

ο El enfoque de género en la promoción de la pequeña empresa y la industria

ISSUE PAPER No 2 Promotion de la petite entreprise en Afrique de l'Ouest

ISSUE PAPER No 3 The Business Centre Approach to Business Development Services – Assessing the Experience of Swisscontact’s Business Centre Approach in Latin America.

ISSUE PAPER No 4 SDCs’ CIP/SED Program in the Nineties: Review and Challenges ahead

SED TOOLS CURRENTLY IN PREPARATION: No 3: Developing indicators in small enterprise development projects – a tool for people involved

in designing, implementing and evaluating SED projects OUT OF SERIES: Poverty alleviation as a business – The market creation approach to development. A study by Urs Heierli with support and contribution from Paul Polak (110 pages) è will be available on SED website in August 2000 è can be ordered at SDC : sabine.brueschweiler@deza.admin.ch

CONTENTS

CONTENTS

PREFACE

EXECUTIVE SUMMARY

1. INTRODUCTION 1

1.1 ABOUT THE ISSUE PAPER...............................................................................................1 1.1.1 What the paper isn't ..............................................................................................................................................1

1.2 HOW TO READ THE PAPER .............................................................................................2 1.2.1 Frequently asked questions (FAQs)...................................................................................................................2

1.3 BACKGROUND: A NEW BDS PARADIGM.......................................................................4 1.3.1 What lies at the heart of the new BDS paradigm? ...........................................................................................4

2. WHAT IS BDS MARKET DEVELOPMENT? 5

2.2 WHY SUPPORT SMES AT ALL? ........................................................................................7 2.3 WHY DO SMES NEED BUSINESS DEVELOPMENT SERVICES? .....................................7 2.4 WHAT'S NEW ABOUT BDS MARKET DEVELOPMENT? ................................................9

3. INTERVENTION RATIONALE & DESIGN 12

3.1 UNDERSTANDING BDS MARKETS............................................................................... 12 3.1.1 Businesses and BDS ...........................................................................................................................................12 3.1.2 Rationale: why do we need to intervene in BDS markets?..........................................................................13 3.1.3 What's gone wrong: why isn't the market working? .....................................................................................14 3.1.4 What is an effective BDS market? (Some basic economics!) .....................................................................15

3.2 ASSESSING BDS MARKETS........................................................................................... 17 3.2.1 Profiling BDS demand and supply...................................................................................................................17 3.2.3 How to conduct market assessment.................................................................................................................18

3.3 USING MARKET ANALYSIS FOR INTERVENTION DESIGN........................................ 19 3.4 LINKING MARKET ANALYSIS TO INTERVENTION OPTIONS.................................... 20

3.4.1 Defining wh ich market we are talking about .................................................................................................24

4. SUSTAINABILITY: GETTING THE STRATEGY RIGHT 25

4.1 WHAT DOES SUSTAINABILITY MEAN IN BDS MARKET DEVELOPMENT?.............. 25 4.2 A FRAMEWORK FOR SUSTAINABILITY IN BDS.......................................................... 26

4.2.1 What would a sustainability picture look like? ..............................................................................................28

5. HOW TO INTERVENE 30

5.1 HOW TO CONDUCT MARKET ANALYSIS .................................................................... 30 5.2 HOW SHOULD SUPPORT FOR BDS PROVISION BE STRUCTURED?........................... 31

5.2.1 Invasiveness of support ......................................................................................................................................31 5.2.2 Intensity of intervention.....................................................................................................................................33 5.2.3 Intervention leverage ..........................................................................................................................................36 5.2.4 How should we design BDS interventions to address equity objectives?.................................................41

5.3 WHO SHOULD WE WORK WITH? (SEE ANNEX 3) .......................................................... 43 5.3.1 Identifying and selecting partners ....................................................................................................................43 5.3.2 Key characteristics of successful service providers ......................................................................................44 5.3.3 Partner selection techniques..............................................................................................................................45

6. TYPES OF INSTRUMENT 47

6.1 DEMAND-SIDE INSTRUMENTS..................................................................................... 47 6.2 SUPPLY-SIDE INSTRUMENTS ....................................................................................... 52

ANNEXES I

ANNEX 1: DEFINITIONS........................................................................................................ I ANNEX 2: SUMMARY OF THE DONOR COMMITTEE PRINCIPLES OF GOOD PRACTICE IN BDS................................................................................................................ II ANNEX 3: ASSESSING BDS PROVIDERS............................................................................III ANNEX 4: KEY LESSONS FROM MICROFINANCE..............................................................V ANNEX 5: SELECTED REFERENCES...................................................................................VI

FIGURES & BOXES

BOX 1: INTERVENTIONS, INSTRUMENTS AND SERVICES ........................................................2 FIGURE 1: MAIN COMPONENTS OF THE SME ENVIRONMENT.......................................................6 FIGURE 2: BRINGING COHERENCE TO BDS: NEEDS, SERVICES, AND PROVIDERS ...........................8 BOX 2: IS THE NEW BDS PARADIGM CONSISTENT WITH POVERTY REDUCTION STRATEGIES? . 11 FIGURE 3: THE ANATOMY OF A BDS TRANSACTION................................................................. 13 BOX 3: THE PROBLEM WITH CONVENTIONAL RATIONALE FOR INTERVENTION ...................... 14 FIGURE 4: DEMAND AND SUPPLY SCHEDULE............................................................................ 15 FIGURE 5: UNDERSTANDING MARKET FAILURE........................................................................ 16 FIGURE 6: PROFILING DEMAND FOR BDS................................................................................. 17 FIGURE 7: PROFILING BDS SUPPLY ......................................................................................... 18 FIGURE 8: BDS MARKET DEVELOPMENT AND THE POTENTIAL FOR INTERVENTION..................... 21 FIGURE 9: MATCHING MARKET ANALYSIS TO INTERVENTION OPTIONS ...................................... 22 FIGURE 10: MATCHING MARKET ANALYSIS TO INSTRUMENT CHOICE........................................... 23 BOX 4: UNDERSTANDING MARKETS IS VITAL FOR INTERVENTION DESIGN ........................... 24 BOX 5: THE EQUITY ARGUMENT: SUBSIDISING SERVICES FOR THE POOR.............................. 26 FIGURE 11: SUSTAINABILITY IN BDS........................................................................................ 29 BOX 6: WHY IS SUSTAINABILITY IMPORTANT?................................................................... 29 FIGURE 12: WHERE TO INTERVENE TO REDUCE THE RISK OF DISTORTION .................................... 31 BOX 7: OVERLOADING A BDS PROVIDER IN KENYA .......................................................... 34 BOX 8: OVERLOADING TRAINING IN UGANDA ................................................................... 35 BOX 9: USING A PORTFOLIO APPROACH TO ACHIEVE CROSS-CUTTING DEVELOPMENT OBJECTIVES ......................................................................................................... 36 BOX 10: USING INCENTIVE-BASED SUPPORT........................................................................ 38 BOX 11: DESTROYING OWNERSHIP..................................................................................... 39 FIGURE 13: OPTIONS FOR SUPPORT : SUPPORT EXISTING OR DEVELOP NEW? ................................. 40 BOX 12: TIPS FOR PROVIDING BDS TO DISADVANTAGED GROUPS.......................................... 42 BOX 13: CHANGING VIEWS OF THE MESO-LEVEL IN NEPAL ................................................... 44 BOX 14: THE DANGERS OF A 'CHECKLIST ' APPROACH TO PARTNER SELECTION........................ 45

ACRONYMS AND ABBREVIATIONS

BDS Business Development Services CIP Craft and Industry Promotion CEFE Competency-based Economics for Enterprise GTZ Deutsche Gesellschaft für Technische Zusammenarbeit (German Agency for

Technical Cooperation) IADB Inter-American Development Bank ILO International Labour Organisation MBP Microentreprise Best Practice Project (USAID) NGO Non-Governmental Organisation ODA Overseas Development Administration (UK), Department for International

Development (DFID) SDC Swiss Agency for Development and Co-operation SED Small Enterprise Development SIYB Start/Improve Your Business (ILO business training product) SME Small and Medium Enterprise (also includes microenterprise) TA Technical Assistance UAI Usage, Attitude, Image (consumer survey) USAID United States Agency for International Development

PREFACE We have the pleasure to announce the publication of the SED/HIF Issue-paper No 5 'Developing Markets for Business Development Services: Designing and Implementing more Effective Interventions'. With this paper we would like to make a contribution to future guidelines for the support of Business Development Services in SDC programmes. In its objective to support the Swiss SED community with instruments for planning and implementing SED-programmes, FD IBU has published this analysis of the actual 'new thinking' in SED, where the market development for Business Development Services becomes the main policy. While elaborating this paper FD IBU itself went through a learning process. In the mid-term programme it had planned to produce a 'tool' on the so-called 'Meso- level' interventions. In December '98 a first workshop was organised to know more about definitions and support to 'Meso-level' organisations1. In the meantime progress has also been made on this topic with workshops and conferences at international level. The focus has changed to the issue of 'Developing Markets for Business Development Services'. Thus, the strategy in Small Enterprise Development (SED) is currently undergoing fundamental changes. The Donors’ Committee is in its process of working out new guidelines for Business Development Services and within SDC programmes new approaches are being tested. We are confident that the reader will find the 'current state of the work' in 'Developing Markets for Business Development Services' in this Issue-paper and we hope to bring additional value to the current discussion. It is our intention to follow-up this topic and to have a closer look at the practice made and the lessons learnt in this respect in the future. We would like to thank the author, Rob Hitchins of the Springfield Centre for Business in Development, for the work accomplished in order to present and analyse the current 'state of thinking' on the rationale, the design of interventions, the type of instruments to use and the type of sustainability that should be achieved in programmes to foster Business Development Services in Small Enterprise Development Programmes. Hilmar Stetter, SED-Backstopping-Mandate

1 See proceedings of this workshop and SED/HIF Newsletter No. 8, 1999, Article of M. Reichmuth "What do we mean with 'Meso-Level'

EXECUTIVE SUMMARY The recent, intensive scrutiny of business development services (BDS) has resulted in what some observers have referred to as a paradigm shift. While the extent to which such a climactic or monumental change has taken place may be justifiably challenged, unquestionably a change in thinking has taken place. This change can be characterised by: • Recognition that 'something is not right' with current approaches to BDS promotion; • Concern that diverse, appropriate, sustainable BDS remains an elusive objective; • Acceptance that market mechanisms may offer a more effective route to achieving this

objective. The paradigm shift, at its core therefore, is about development of BDS markets. The market development approach represents a move away from supply-driven state or donor-subsidised services towards developing more effective market environments that permit the delivery of demand-led services for small businesses. The challenge for development organisations is to comprehend the implications of this shift and then translate new thinking into practical guidelines that ultimately will lead to more effective interventions. The journey will be a long and difficult one. The purpose of this issue paper is to try and bridge this gap between new thinking and improved future practice. In some respects therefore it is part-issue paper - considering the theory and rationale of intervention, and part-guideline, focusing on the practical implications for intervention design and implementation of BDS programmes. The paper: • Establishes the basic rationale for BDS market development and summarises its

distinctive features compared with previous approaches. In doing so it examines the role of BDS in small enterprise or private sector development, its relation to the wider enterprise environment, and offers a new definition of BDS.

• Considers the dynamics of BDS markets and the constraints to BDS market development. It develops a conceptual framework for assessing BDS markets, and outlines how market assessment should be used as the basis for intervention design.

• Defines sustainability in BDS and sets out the reasons why an explicit view of sustainability in BDS is important. It presents a framework linking key actors with supply-side functions and summarises what this sustainability picture should look like.

• Addresses the practical issues of how interventions might be designed more effectively in response to these changes in thinking, rationale and objectives: conducting market analysis, structuring support for BDS, selecting and working with partners.

The paper is written for those involved in the funding, design and implementation of programmes that facilitate the delivery of BDS to small businesses. It should assist them in critically examining current, and shaping future, policy and practice.

1

1. INTRODUCTION

1.1 ABOUT THE ISSUE PAPER This paper is intended to assist SDC staff and partners who are involved in the design and implementation of interventions that facilitate the delivery of BDS to small businesses2 to interpret what the implications of 'good practice' principles and the emerging 'market development' approach (1) actually mean for BDS interventions. The purpose of the paper is to underpin the development of future official policy and practical guidelines for the support of BDS for SMEs. The paper draws on international experience and BDS good practice guidelines (2), and tries both to reflect the current state of the art in BDS and to make good practice principles as real and as meaningful as possible. By drawing on international experience it tries both to reflect the current state of the art in BDS and to make good practice principles as real and as meaningful as possible. In doing so two caveats must be made. Firstly the state of the art is always shifting! Secondly in representing the current state of the art, this paper deliberately aims to be provocative: it challenges conventional views about support for BDS provision.

1.1.1 What the paper isn't To be useful this paper has to have focus. It therefore concentrates on the core issues surrounding the design and implementation of BDS interventions. It is not aimed directly at service providers and therefore does not focus on specific business development services for SMEs. More detailed explorations of specific services are widely available; any attempt to focus on them here would only be superficial and serve to make the paper excessively lengthy and unwieldy. Equally the paper does not cover the wider enterprise environment and macro- level issues (policy, regulation etc.); it is not the purpose of BDS interventions to address these issues. However, Section 2 recognises the critical importance of the macro-level environment, and tries to place BDS interventions in the wider context of private sector development and poverty reduction strategies. Finally the paper does not consider monitoring and evaluation for BDS. This is the subject of separate SDC tools on Planning, Evaluation, Monitoring, Transference into Action (PEMT), Indicators and also CIP Tool No.2.

2 The paper uses the terms 'small business' or 'SME' to refer to all sizes of enterprise from micro to medium. Definitions can be found in Annex 1.

2

Box 1: Interventions, Instruments and Services

1.2 HOW TO READ THE PAPER The paper is structured in 5 main sections in addition to this introduction: 1. Introduction 2. What is BDS market development? 3. Intervention rationale and design 4. Sustainability: getting the strategy right 5. How to intervene 6. Types of instruments used for intervention The paper also contains several annexes, including key definitions, a summary of BDS good practice principles, a framework for assessing BDS providers, a summary of key lessons from microfinance, and selected references. The paper has been written in such a way that the reader should be able to focus on particular sections of interest without recourse to reading the whole document. Necessarily this means that there is some repetition of important points and concepts throughout. Clearly, greatest benefit will be derived from a good working knowledge of all the topics covered.

1.2.1 Frequently asked questions (FAQs) As an aid to navigation around the paper a list of frequently asked questions have been compiled, together with a reference to where the appropriate response or information can be found in the paper. FAQs can be found on page 3.

When the paper refers to instruments it means the type of approach or methodology that a BDS intervention (project) adopts - it is the implement that the donor or facilitating agency will use to affect change. By definition an instrument is a temporary or transient device. It is not the service offered to SMEs. Thus in a voucher programme the instrument is a voucher, but the service is whatever the SME chooses to buy with that voucher - e.g. training (even though the SME physically receives a voucher).

MARKET

SMEs

services

Donor / facilitator

Intervention(project)

instruments

Temporary facilitation Sustainable outcome

3

# FAQs REFERENCE(S)

1. What are business development services and why are they important? Sections 2.3, 2.4, 3.1.1

2. What are the principles of good practice in BDS? Annex 2

3. What about the wider environment, lobbying and advocacy? Sections 2.1, 2.2, 2.3

4. What about financial services (microfinance)? Section 2.3

5. What is BDS market development? Section 2

6. How is BDS market development different from what we did before? Section 2.4

7. Why do we need to intervene in BDS? Section 3.1

8. How do we assess markets? Sections 3.2, 5.1

9. What are the key constraints to BDS provision? Sections 3.2.1, 3.3, 3.4, Figure 9

10. Why bother with sustainability? Section 4

11. What should you do if SMEs can't pay for services? Box 5, Section 5.2

12. Who should provide BDS to SMEs? Sections 4.2, 5.3

13. What's the most appropriate role for governments and donors? Sections 2, 4, Box 13

14. Should we subsidise service delivery? Section 5.2.1

15. How can we make our support more market-oriented? Section 5

16. How can we make our support more effective? Section 5.2.3

17. How should we select partners? Section 5.3.3

18. How do we assess service providers? Section 5.3, Annex 3

19. Should we support existing service providers or develop new ones? Section 5.2.3, Figure 13

20. How can we design BDS interventions to reach disadvantaged groups? Section 5.2.4

21. What types of instrument are available for intervention? Section 6

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1.3 BACKGROUND: A NEW BDS PARADIGM There has been a shift in prevailing views on BDS for small businesses - termed a 'new paradigm' by some observers. Beginning with the publication of the Donor Committee’s good practice guidelines (2) and continuing through such high profile events as the Harare, Rio and Hanoi (3) conferences and the virtual conference on performance measurement in BDS, a major collective learning process has been taking place. These events and developments in the BDS field have influenced considerably the need for, and the nature of, this paper. Therefore it is instructive to look more closely at the background of these developments.

1.3.1 What lies at the heart of the new BDS paradigm?

Learning from microfinance A starting point for many observers and practitioners has been disappointment with the historical underachievement of BDS interventions, particularly in contrast with the microfinance 'revolution'. Clear guidelines on microfinance intervention and delivery are widely accepted, tight systems of measurement have been developed, and a discernible microfinance 'industry' has emerged, achieving both sound financial returns and developmental outreach. A drive for greater sustainability has been at the heart of this revolution. BDS, in contrast, has been typified (although not universally) by disparate and inconsistent methodologies, opaque approaches to measurement, and high cost - low outreach programmes dependent on continuous subsidies. Given this contrast, the question that arises in many minds is "what has microfinance got right, and what can BDS learn from this?" (See Annex 4.)3

Moving towards more private sector provision There is increasing recognition that public sector organisations have not proved to be effective providers of BDS to SMEs; they are not sufficiently business- like or 'close' to small businesses in terms of their cultures, staff or structures. Furthermore pervasive subsidies for state business support have created distortions that hinder the development of private sector service provision. More attention is therefore being focused on the private sector - both formal and informal - as the natural suppliers of services to other businesses.

Emphasis on market development These experiences have led to an increasing emphasis on the development of BDS markets. This represents a move away from supply-driven state or donor-subsidised services, and support for individual organisations, towards developing more effective market environments that permit the delivery of demand-led services. Development of markets for services to which small businesses turn

'to carry out important business functions that solve day-to-day problems as well as position their enterprise for future growth'4

is seen as a means of achieving the scale and sustainability (and implied impact) that microfinance has apparently achieved but through different means. The next section considers BDS market development in greater depth.

3 Parallels with microfinance, while valuable, must be used with caution. Microfinance experience and practice is not universally successful; many examples of best practice have only been achieved as result of costly past mistakes and learning. More importantly, unlike BDS, microfinance lends itself to economies of scale and standardisation. 4 Field, M, R. Hitchins & M. Bear, Designing BDS Interventions as if Markets Mattered, MBP Discussion Paper (2000) (4).

5

2. WHAT IS BDS MARKET DEVELOPMENT? The purpose of this section is to establish the basic rationale for BDS market development and summarise its distinctive features compared with previous approaches. In doing so it offers a new definition of BDS and lays the basis for the remainder of the document. As with all donor interventions, ultimately donors' role in BDS market development has to be justified on the basis of the contribution it can make to wider development objectives, especially poverty reduction. 5

2.1 WHY IS PRIVATE SECTOR DEVELOPMENT IMPORTANT? Fundamentally, people are poor because they lack access to income-earning opportunities or the capacity to respond to these. The objective of development agencies is to develop an environment that addresses these causes of poverty. For the last decade at least, the general approach pursued by most donor agencies in pursuit of this objective has been the so-called market friendly strategy based around four related elements (see Fig.1): 6 (a) Stable macro economy: including sound fiscal and monetary management, appropriate

taxation policies, reducing corruption and privatisation of non-core activities. (b) Competitive micro economy: including freeing markets to restore the allocative power of

prices, reforming unnecessary regulation, enshrining property rights, ending anti-competitive practices and delivering key 'public goods' such as infrastructure.

(c) Global linkages: including opening domestic markets to international trade and

investment in goods and services. (d) Investing in people: including state investment in basic health care, nutrition, family

planning and children's education. The essence of this strategy is a more focused role for the state and greater freedom for markets to function properly so allowing more vigorous private sectors to develop. The benefits to the poor are seen to be: • Opportunities for employment • Opportunities for self-employment • Improved access (as consumers) to goods and services All of the above empower the poor by embedding them into markets - for labour, for services, for goods - and the opportunities for earning (and for learning) that markets present. This view doesn't underestimate the importance of welfare provision and social protection but it does make clear that the only way for the poor to advance is within an environment where they - like everyone else - are included within the market place.

5 While other disadvantaged groups are important, poverty reduction is clearly the main objective of donors. 6 Summarised in the World Development Report, World Bank (1991).

6

Figure 1: Main components of the SME environment

MARKET

SMEs

Macroeconomy Inflation Interest rates Exchange rates Trade policy Industrial policy Financial sector policy

Government and Politics (National, local)

Legislative and policy-making process Judiciary Security and stability

SME support architecture

Financial services BDS Advocacy

Regulation and bureaucracy

Licences and permits Laws and regulations Tax Compliance costs Corruption

Government services

Basic services: health, education Infrastructure Utilities Security services

Materials and equipment

Labour

Skills and technology

BARRIERS TO ENTRY, EXIT, GROWTH OF ENTERPRISE

DISTORTION OR REDUCED ACCESSIBILITY TO

MARKETS

External

Society and culture

Climate and environment

BURDENS ON OPERATIONS

Networks

Capital

Customer

Information

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2.2 WHY SUPPORT SMEs AT ALL? While private sector development overall can be seen to be a key goal for development agencies, why should SME development be a particular focus? (a) The private sector is mainly SMEs: depending on the definition one uses, in most

economies, most people are employed (or self-employed) within SMEs. We can't look at private sector development without looking at SMEs.

(b) Entrepreneurial economies need SMEs: in a changing economic context, SMEs are a

strong source of innovation, dynamism and job creation. (c) But we can't forget the bigger private sector picture: we need to be aware that there is

nothing magical or unique about SMEs. Larger businesses - including foreign companies - have access to resources that allow them to play a role beyond SMEs in many sectors. This is not a case of "big is bad; small is good".

2.3 WHY DO SMEs NEED BUSINESS DEVELOPMENT SERVICES? A focus on SME development grows directly from development agencies' overarching poverty-reduction objective and, in pursuit of this, their commitment to a conducive environment for private sector development. The critical components of this wider environment are, of course, the macro-economic context and public investment in people. However, more immediately for SMEs, access to services is a vital dimension in their business environment (Fig. 2) and a key factor in determining the competitiveness of economies. • SMEs have a range of different 'needs'7 that are critical to their operation, survival and

growth. The nature of these will be influenced by sector and stage of SME development but will relate to their ability to, for example, find customers, design products, enhance productivity, improve administration, communicate effectively, and access new technology. The degree to which these needs are met will have a major influence on business success.

• Financial services are a critical part of this immediate environment but cannot meet all

business needs. • Environments that are conducive to SME development provide relevant differentiated

services to meet these needs on an informal or formal basis. • Potentially, a range of providers offer these services to SMEs. In the most entrepreneurial

situations, private sector companies and formal and informal networks are the most important players.

The importance of BDS for SMEs has been re-emphasised strongly by the explosion in services in industrialised nations in recent years. Lying behind these figures are two key, related trends:

7 The paper uses the word 'needs' in terms of businesses' requirements or functions, which may or may not require an externally sourced service. Needs are distinct from 'demand' as no consideration is made of intention to purchase or actual purchase of a service. Needs are concerned with inputs to (administration, people, technology etc.) and outputs from (access to markets, customers etc.) SMEs.

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• In a global economy, competitive markets are increasingly complex and specialised; • In this context, a realisation that to remain competitive, businesses can't be good at

everything, and need to focus on their own core competence, relying on external sources for other functions.

Figure 2: Bringing coherence to BDS: needs, services, and providers

PROVIDERS

SERVICES

NEEDS IN RELATION TO:

TECHNOLOGY

INFORMATION

PERSONNEL

BUSINESS SPACE

LINKAGES

LAWS/ REGULATIONS

PRODUCTION

RAW MATERIALS

SECURITY

MARKETS

ADMINISTRATION

TRANSPORT

SMEs

EQUIPMENT

TRAINING

ADVICE + COUNSELLING

CONSULTING

BROKERING/ LINKING

COMPONENTS

RAW MATERIALS

INFRASTRUCTURE

UTILITIES

PREMISES

TRANSPORT

INFORMAL

STATE

FOR-PROFIT

PRIVATE SECTOR

FAMILY

FRIENDS

CUSTOMERS

BUSINESS NETWORKS

NATIONAL GOVT.

LOCAL GOVT.

PARASTATALS

POLICE

BANKS

FINANCE COMPANIES

ACCOUNTANTS

OTHER SUPPLIERS

NOT-FOR-PROFIT

PRIVATE SECTOR

CLUBS

ASSOCIATIONS

NGOs

UNIVERSITIES/ COLLEGES

MUTUAL GUARANTEE ASSOCIATES

CONSULTANTS

DESIGNERS

(EQUIPMENT + SERVICES)

FINANCE

LAWS & REGULATION

SECURITY

9

2.4 WHAT'S NEW ABOUT BDS MARKET DEVELOPMENT? There are four key differences between the new paradigm of BDS market development and previous 'conventional' approaches to BDS8: (a) what we believe, (b) how we define BDS, (c) our intervention objectives, and (d) approaches to intervention. a) What we believe

OLD VIEW

NEW VIEW

SSMMEEss aass:: Grateful beneficiaries of charity Discerning consumers of services

Key Providers:

Government organisations, NGOs Private sector in functioning markets

BDS as: Primarily public goods Private goods

BDS financed: Primarily by the state

Through consumer-provider transactions

b) Definition of BDS THE OLD: previously, definitions of BDS, reflecting the above beliefs, emphasised donors’ (supply-side) view of what was good for SMEs, focusing on training and counselling. THE NEW: from a market development perspective the definition of BDS is one that reflects SMEs own view (demand-side) and is therefore much broader, in keeping with the breadth of services suggested by Figure 2. A business development service is:

Any non-financial service to business, offered on either a formal or informal basis

Such a brief but broad definition requires further clarification. We need to break it down further to make sense of it.

Included: services such as: training/skills development, design, advertising, network brokering, courier delivery, computer services, business consultancy, security services, legal services, commission sales, accountancy/audit, market research, technical information, website design and management, equipment repair and maintenance and conference organising. These correspond approximately to intermediate or producer services (within the broad tertiary or services sector) as defined in standard industrial classification; i.e. services that are sold from one business to another (and not to the final consumer). Included: 'services' where no formal fee-paying transaction takes place and which are hidden in economic statistics but which, nonetheless, are important. Especially important here are services offered formally or informally from one business to another (e.g. advice, training, introductions, market information). Excluded: • financial services9 • physical products: manufactured goods or raw materials • utilities: water, electricity and gas

8 In reality, there have been gradations of change among agencies over a number of years rather than a distinct shift For further consideration of the BDS market development approach see Gibson 1999 (1). 9 These are business services but are the subject of many other guides and are not the focus here.

10

• government services aimed at the wider community, including but not only for, business such as infrastructure, community and social services and basic health care and education

• advocacy Exceptions: while the above provides a basis for understanding BDS, it would be foolhardy to strive for a perfect definition of BDS. When services are such a vital component at the heart of economies, linked closely with manufacture and trade, there will always be blurred edges around any definition. For example: • some services such as design advice and market information are part of a trading relationship in

physical goods – e.g. after-sales service in the retail and manufacture of goods or the advice and services in a managed workspace environment. To unbundle services from products in these situations may be pointless.10

• Technology development (and privatisation) has allowed a range of new services to be developed associated with utilities.

BDS is therefore best thought of in terms of a broad and continuously changing array of services or facilities needed by SMEs to run their businesses effectively. Such a 'picture' would obviously include finance: SMEs do not see neat divisions such as 'BDS' or 'non-financial' services. The diagram in Figure 2 attempts to represent this diversity of needs, services and providers. This element of looseness in definition is inevitable (and to be welcomed) if our notion of BDS is one that will have practical meaning in SME environments. This sets the context for donor interventions. However, it is important that this is not interpreted as a carte blanche justification for donors to intervene 'everywhere'; on the contrary, interventions need to be justified on the basis of rigorous analysis and criteria. c) The main objective THE OLD: previously donor-supported approaches to BDS have focused on building the capacity of organisations – partners of donor agencies – to deliver improved services or on delivering services directly. THE NEW: from a market development perspective, the main objective of interventions should be on improved functioning of BDS markets.11 d) The approach THE OLD: previously, approaches have generally supported organisations – often government-related – in designing and delivering BDS with an implicit assumption of continued subsidy and often standardised BDS. THE NEW: above all, the BDS market development paradigm demands a different approach to intervention on the part of donors. Most of the remainder of this guide outlines the essence of this approach. It is one that is built on three related ideas: (a) The starting point for intervention design should be a rigorous understanding of BDS

markets (Section 3); i.e. where are we now?

10 Indeed 'bundling' services (software) with physical goods (hardware) is seen by some as an effective way of extending services commercially to the poorest e.g. appropriate technology development 11 Among other challenges, therefore, this raises the question of how to assess markets rather than one organisation.

11

(b) Interventions need to develop a clear view of how BDS markets will operate in a sustainable manner by linking key market functions with actors (see Section 4); i.e. where are we going?

(c) In their design and implementation, interventions need to observe, interpret and give more

specific meaning to the BDS principles of good practice (see Sections 5 & 6); i.e. how do we get there?

Box 2: Is the new BDS paradigm consistent with poverty reduction strategies?

The role of BDS interventions in poverty reduction may not be direct. Their goal (as development activities) is to facilitate and stimulate more competitive and successful businesses, and a more vibrant private sector. Like donor-supported microfinance, BDS interventions are unlikely to reach the lowest ranks of the income spectrum. BDS maynot be a priority or appropriate for the extremely poor, survival-oriented microenterprises, in disaster situations. BDS cannot be a substitute for inadequate education, social-welfare provision or basic infrastructure. Such an assertion is not a justification for simply ignoring priority groups (the poor, women, disabled and isolated) and objectives of development agencies in favour of private sector development. In microfinance the challenge became how to provide services to priority groups on a sustainable basis, rather than viewing them as charity cases in need of on-going subsidy, delivered via arbitrary control and direction. This change in thinking, seeing the unserved potentially part of the market (and as market opportunities), led to the development of lower cost and more appropriate products and delivery mechanisms that allowed microfinance to 'reach down' on a sustainable basis to millions of people previously regarded as too disadvantaged to use financial services. The key challenge for the future The BDS industry faces similar challenges in developing products and delivery mechanisms that permit the frontiers of sustainable service provision to be pushed out and made more inclusive. The paper addresses these challenges in more detail in Section 5.

12

3. INTERVENTION RATIONALE & DESIGN This section looks at the dynamics of BDS markets and the constraints to BDS market development. It develops a conceptual framework for assessing BDS markets, and outlines how market assessment should be used as the basis for intervention design. It comprises several important steps (a) Understanding BDS markets (section 3.1): - Businesses and BDS - Rationale: why do we need to intervene in BDS markets? - What is an effective BDS market? (b) Assessing BDS markets (section 3.2): - Profiling demand and supply for BDS (c) Using BDS market assessment for intervention design (section 3.3): - Options for intervention - Intervention and instrument choice Designing BDS interventions in a market context requires analysis of the market for BDS (or lack of it) to understand what is going right or wrong. This in turn determines what the nature of intervention should be. This section develops a conceptual framework for analysing the state of development of BDS markets, and suggests how that analysis might be conducted, and utilised in intervention design.

3.1 UNDERSTANDING BDS MARKETS12

3.1.1 Businesses and BDS Businesses use BDS in order to carry out important business functions that solve day-to-day problems as well as position their enterprise for future growth. Business development services do not actually address SME under-performance. Poor performance is only a symptom of the underlying problems of SMEs. It is these underlying problems that BDS has the potential to address. See Figure 3.

12 This is adapted from work by Field, Hitchins & Bear (4).

13

Figure 3: The anatomy of a BDS transaction

3.1.2 Rationale: why do we need to intervene in BDS markets? The reality for most small businesses is that they are born, live and die entirely within a market context. Their needs are met (or not met) by other businesses or individuals. They are rarely, if ever, touched by government or donor support programmes. Therefore the core rationale for intervention is to address the constraints which prevent SMEs from solving their problems through existing market mechanisms (Fig. 3 'D'). The objective of intervention is to overcome these constraints to facilitate more effective market provision of BDS. Addressing market failure or market development is the overarching rationale for intervention.

SME UNDER- PERFORMANCE

- low profits - high fixed costs - low value-added - stagnant sales - zero growth - insufficient market - excessive

indebtedness - bankruptcy and failure - etc.

SOLUTIONS & REQUIREMENTS Specific 'services' such as

- training - advice - information media - accounting services - after sales product

support - product distribution (e.g.

courier services) - etc.

SME CONSTRAINTS & PROBLEMS

- skills deficiencies - limited market

information - poor financial &

inventory control - inadequate processes,

systems, equipment - inefficient resource

use - etc.

SOURCES OF SERVICES Market mechanisms that can make a 'service' available:

- friends & family - informal networks - other businesses - fee-for- service

providers - etc.

Impact on SME performance

Causes of under-performance are

recognised

Capacity to solve SME problems

Solution is required

Ability to develop an ‘offer’ that SMEs value

Willingness to purchase a service

Demand-side flow

Supply-side flow

A B

CD

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3.1.3 What's gone wrong: why isn't the market working? All BDS interventions are ultimately concerned with improving the performance of SMEs. However conventional BDS interventions have tended to make a leap from SME under-performance to intervention, neglecting to make the situation analysis required to identify the real constraints that need to be addressed. Generally little consideration is made as to why SMEs are unable to solve such problems via existing market mechanisms. For example, in Figure 3, the cause of the SMEs' low profitability ('A') might be poor inventory control ('B'). A specific BDS might address this e.g. inventory management training (box 'C'). A conventional intervention, based on poor performance amongst SMEs, might seek to deliver services directly or via partners to either (a) broadly to improve SME profitability or even (b) specifically to improve inventory management. However little if any consideration will be made as to why SMEs are unable to solve this problem either internally or via existing market mechanisms ('D'). Commonly donor interventions are designed with the objective of addressing equity concerns - i.e. providing BDS to the disadvantaged. Equity objectives are not inconsistent with a market failure rationale. The 'unserved' are still regarded as excluded from the market, and thus in need of some form of intervention. The main point of departure with more conventional approaches is how equity concerns should be addressed; via market mechanisms rather than subsidised delivery. (See section 5.2.4) In order to design BDS market development interventions therefore, market assessment is required to identify the constraints that limit the availability of BDS, i.e. which prevent transactions taking place between consumers and suppliers of BDS. In order to do this we must first consider what a market looks like and how it works. Unfortunately this means a return to elementary economics!

Box 3: The problem with conventional rationale for intervention

More conventional responses to SME under-performance may, in part, explain the historically low outreach and sustainability of BDS interventions. Interventions have often been conceived with a view to simply providing SMEs with 'one-off' assistance, using relatively 'blunt' responses to specific business requirements and relying on donor or government delivery mechanisms. The experience has been that: • Services have been unattractive to businesses, resulting in low take-up or willingness to pay. • Mechanisms for service delivery have remained dependent on donor or government funds, leaving them

both constrained by resource limitations and the vagaries of political will. • Service provision dries up when project support ends.

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3.1.4 What is an effective BDS market? (Some basic economics!) Economic theory describes a market as a set of arrangements by which buyers and sellers are in contact to exchange goods or services.13 The level or volume of exchange or transaction that occurs between the sellers and buyers of a given good or service determines a market's effectiveness. Theory also tells us that transactions between demand and supply are determined by an equilibrium price; the price at which quantity supplied equals the quantity demanded. Supply therefore describes the behaviour of sellers (BDS suppliers) and demand describes the behaviour of buyers (SME consumers): • demand is the quantity of a good or service that buyers wish to purchase at any given price • supply is the quantity of a good or service that sellers wish to sell at any given price Typically this is represented by demand and supply curves such as Figure 4:

Figure 4: Demand and supply schedule

Clearly this is a highly simplified picture; price and quantity are the only factors considered in this analysis. The curves illustrate a 'perfect' functioning market situation where price acts as the market clearing mechanism, with all 'other' factors assumed to be constant or given. In reality a range of 'other' factors - in addition to price - determine demand and supply (the behaviour of buyers and sellers):

13 Begg, D., S. Fischer & R. Dornbusch (5)

Demand - Price (of the service in question) - Price of related services - Incomes of consumers - Tastes of consumers - Information available to consumers

Supply - Price (of the service in question) - Capacity available - Cost of inputs (cost of capacity) - Environmental factors (competition, government,

donors etc.)

PRICE

QUANTITY

demand

supply

equilibrium

16

To recap, markets can be seen to be effective when transactions take place i.e. where there is exchange between supply and demand. In order for this to happen consumers must be ready to purchase something (let's call this effective demand) and providers must have something to sell (let's call this effective supply) at an equilibrium. Understanding the dynamics of this interaction or transaction is the key to market analysis. Figure 5 represents this conceptually. However in trying to understand BDS market failure we need to look beyond price (which in effect causes movements along demand and supply curves). We need to look at the 'other' underlying factors, identified above, which actually shift demand and supply curves - determining their position or shape - and thus determine the nature of demand for and supply of BDS. As discussed above there are different determinants for both, so we need to look at each separately. A key part of the conceptual framework therefore focuses on the determinants of demand and supply. Figure 5: Understanding market failure

BDS Market

Non-existent or weak market

No or few transactions take place

Effective market Extensive

transactions take place

BDS Transactions

Transactions do not take place

Consumers and providers do not come together (Supply or demand are not effective)

Transactions do take place

Supply and demand match

Consumers are ready to purchase something (Effective demand)

AND Providers have something

to sell (Effective supply)

Constraints that

prevent BDS transactions taking

place

MARKET FAILURE

WHY NOT?

We need to understand

this…

… In order to overcome

this

17

3.2 ASSESSING BDS MARKETS

3.2.1 Profiling BDS demand and supply By looking separately at BDS demand and supply we can be more specific about what effective supply and demand might mean. Based on this assessment of supply- and demand-side weaknesses it is possible to ascertain the overall level of market development or effectiveness.

Demand Demand for BDS can be broken down into two elements (see Fig. 6): (a) SMEs' recognition that a solution to a problem is required - the degree to which SMEs

have identified a problem and are ready to seek a solution to that problem (although they may not know what the solution should be). As identified earlier the level of sophistication of SME's knowledge or information determines this recognition.

(b) SMEs' willingness to pay for a solution - the degree to which SMEs are prepared to pay

for an external solution to a problem (this is dependent on SMEs' valuation of a solution or service - what they think it's worth). Willingness to pay is made up of factors identified earlier: the service price, availability and price of alternatives, consumer income and tastes.

When SMEs exhibit both a high level of recognition of need to solve a problem and a high willingness to pay for a solution, demand is effective - they are ready to purchase something. This presents a strong market opportunity for the BDS supplier. Conversely if both recognition of a need to solve a problem and willingness to pay are very low or absent, then demand is non-existent, and market opportunities are negligible. A weak demand situation might be when recognition of a need to solve a problem is well established, but willingness to pay is low or vice versa. The market opportunity in weak demand situation is limited, unless the service provider can overcome the willingness to pay or recognition/awareness problem.

Figure 6: Profiling demand for BDS

WEAK DEMAND

EFFECTIVE DEMAND

NO DEMAND

WEAK DEMAND

high

low

low

high

Demand for BDS

Rec

ogni

tion

that

a s

olut

ion

is

requ

ired

Willingness to pay for a solution or service

18

Supply Supply of BDS can be similarly broken down (see Fig. 7): (a) Service providers' capacity to solve business problems - the degree to which service

providers possess skills, knowledge and capacity to solve SME problems. The availability and nature of capacity (skills, knowledge, technology, resources) is critical therefore, as identified earlier.

(b) Service providers' ability to develop an 'offer' that SMEs want - the degree to which

service providers have the ability to package skills into a product or 'offer' that SMEs value (want to buy). Service providers' offer comprises a combination of factors: price, cost of capacity, service image, and also environmental factors (such as price of similar alternatives).

When service providers have both the appropriate skills and the ability to package those skills into business solutions, supply is effective - they have something to sell. If on the other hand a service provider has appropriate skills, but lacks the ability to sell those skills to customers - or vice versa - supply is weak. Non-existent supply results from service providers lacking both appropriate skills and the ability to make an attractive 'offer' to SMEs. Figure 7: Profiling BDS supply

3.2.3 How to conduct market assessment Market assessment and analysis of this nature lends itself to market research-style studies, rather than more conventional developmental assessments.14 More market-oriented studies

14 Sub-sector analysis may also be useful in analysing BDS markets. See Haggblade & Gamser (6) and SDC CIP Tool no. 1 vol. 2.

NO SUPPLY

WEAK SUPPLY

EFFECTIVE SUPPLY

WEAK SUPPLY

high low

low

high

Supply of BDS

Cap

acity

to s

olve

SM

E

prob

lem

s

Ability to develop an 'offer' that SMEs value

19

focus on SMEs as consumers, rather than as beneficiaries, and focus on BDS products and preferences, rather than broad and ill-defined 'needs'. Such techniques are considered briefly in Section 5.1.

3.3 USING MARKET ANALYSIS FOR INTERVENTION DESIGN The objectives of market analysis should not be to produce voluminous studies, which are subsequently left to gather dust on shelves. The objective of analysing the BDS market (however broadly or narrowly) is to identify specific constraints to the availability of effective BDS for SMEs, which can then be the basis for designing an intervention. The following tables consider the implications of various demand- and supply-side characteristics on intervention rationale and objectives.

DEMAND

DIAGNOSIS CONSUMER PROFILE IMPLICATIONS FOR INTERVENTION

Effective demand High recognition that solution is required High willingness to pay

SMEs know what problems are and will pay for solutions

Rationale for demand-side intervention is limited. However may be justified in order to stimulate specific parts of the population where demand is weaker.

Weak demand High recognition that solution is required Low willingness to pay

Consumers know what the problems are and are looking for solutions. However consumers are sceptical about the value of existing services, and are therefore unwilling to pay. Equally they may have access to more attractive alternatives (free sources, copying etc.).

Rationale for demand-side intervention in this case is to increase consumer perception or awareness of service benefit and value. E.g. through demonstration, trial etc. Note that unwillingness to pay may be related to weak supply 'offer'.

Weak demand Low recognition that solution is required High willingness to pay

Consumers are seeking some form of assistance to solve some form of problem, and are willing to pay for this. However consumers are not certain what the actual problem is. This usually results in consumers choosing the wrong solutions.

Lack of diagnosis or misdiagnosis can have serious implications. Choosing the wrong service to address the real problem will lead to consumer dissatisfaction and unwillingness to use / pay for BDS in the future. The rationale for demand-side intervention is to improve business diagnosis and improve consumer access to information about what benefits specific services can deliver.

Non-existent demand Low recognition that solution is required Low willingness to pay

This is not uncommon amongst entrepreneurs. The consumer does not see there is a problem to be solved, and is not prepared to pay for any form of external assistance.

Rationale for any intervention when demand is entirely absent is limited.

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SUPPLY

DIAGNOSIS PROVIDER PROFILE IMPLICATIONS FOR INTERVENTION

Effective supply High capacity to solve SME problems High offer to businesses

The service provider has good capacity to solve business problems, and the ability to package that into an offer that consumers want

Rationale for supply-side intervention is limited. May be justified by equity concerns e.g. stimulate expansion into underserved market areas.

Weak supply High capacity to solve SME problems Low offer to businesses

Despite having sound skills, the service provider perhaps lacks marketing know-how or has an inappropriate structure (costs, staff, location). They are unable to demonstrate the value of their service. The offer is not attractive.

Rationale for supply-side intervention is increasing service provider capacity to develop and market appropriate products - develop the offer. Note that weak supply 'offer' might be exacerbated by low willingness to pay on the demand-side - no market signals.

Weak supply Low capacity to solve SME problems High offer to businesses

This scenario is not as strange as it seems! BDS providers in many cases promise results and convince SMEs to purchase a service but lack the technical capacity to deliver effective solutions.

Such a scenario is damaging for service provision as it undermines credibility and weakening demand (willingness to pay). The rationale for intervention on the supply-side is to develop provider technical skills. However the question must be asked why support service providers that lack the ability to solve business problems in the first place?

Non-existent supply Low capacity to solve SME problems Low offer to businesses

The service provider lacks any capacity to sell business solutions. Effectively the service provider is nothing more than an empty shell.

Intervention may be warranted if demand is particularly strong. But intervention when supply-side capacity is non-existent is difficult: there is nothing to work with!

It should be emphasised that there is a demand-led flow here. It is not possible for supply to be 'effective', if demand is weak. By definition a service provider's 'offer' is weak if demand for that service is weak, and will remain weak unless it can overcome consumers' scepticism about its service!

3.4 LINKING MARKET ANALYSIS TO INTERVENTION OPTIONS Analysing the separate demand- and supply-sides of the BDS market generates a clearer understanding of the overall market dynamics and level of development of a given market situation. This can be used to: (a) Make assessments of:

• the potential for intervention and feasibility of intervention (see Fig. 8) • the points at which potential intervention may be required to stimulate BDS markets

(see Fig. 9) • the type of intervention and instrument required to do this (see Fig. 10)

(b) Establish criteria or objectives for intervention effectiveness in overcoming identified market constraints (for example the level of market activity or competition that takes place without project support). Indicators for BDS interventions are considered in the SDC Tool Developing indicators in small enterprise development projects.

21

Figure 8: BDS market development and the potential for intervention

Figure 8 simply illustrates the decision that any development agency faces when determining whether it should intervene. The critical point about Figure 8 is that there is an implicit 'Yes/No decision' - yes, intervene or no, don't intervene - to be made right from the outset. In some cases intervention is not justified: in the case of functioning effective markets, for example, this is self-evident. Equally however in the case of extremely dysfunctiona l markets the potential and need for intervention in BDS markets may be negligible. For example in the face of wider, deeper constraints such as emergency conditions or severe macroeconomic instability, intervening in BDS may simply be unfeasible or a diversion of scarce resources from more pressing developmental priorities. Having determined that some form of intervention is warranted, the intervening agency is then faced with the questions 'where specifically is intervention required?' and 'what type of intervention is required?' Figures 9 and 10 consider these questions respectively.

LEVEL OF MARKET DEVELOPMENT Non-existent

market

LOW SUPPLY LOW DEMAND

HIGH SUPPLY HIGH DEMAND

Limited potential for intervention

Nothing to build on In practice total absence of demand & supply-side activity is rare: - remote rural areas - survival level

microenterprises - disaster situations

Need for intervention is limited

Markets are effective and private sector is vibrant Intervention may distort private sector behaviour However intervention may be justified for expansion and equity reasons.

HIGH SUPPLY LOW DEMAND

or LOW SUPPLY HIGH DEMAND

Good potential for intervention

Interventions have the ability to 'leverage' existing activity In practice this is a common situation in most developing economies

Effective market

22

Figure 9: Matching market analysis to intervention options

Market analysis identifies specific constraints to the availability of BDS. This should be used to determine where the intervening agency needs to intervene, and also permits the framing of explicit intervention objectives (i.e. overcoming specific market constraints identified).

Market provides solution that

businesses demand

EFFECTIVE MARKET (SUPPLY = DEMAND)

EFFECTIVE DEMAND

SMEs: - recognise need for solutions - are willing to pay for them

EFFECTIVESUPPLY

Service providers: - have skills to solve problems - have ability to package skills into a service 'offer'

RATIONALE FOR INTERVENTION: ADDRESSING MARKET FAILURE

Overcoming specific constraints to

bring S & D together

Effective BDS for SMEs

CONSTRAINTS

Prevent interaction of supply & demand sides

TYPICAL DEMAND-SIDE CONSTRAINTS Inadequate information or awareness about problems and potential solutions Uncertainty about benefits of services Limited resources to assess and purchase services Distortion (e.g. pervasive subsidy)

TYPICAL SUPPLY-SIDE CONSTRAINTS Limited information about opportunities Unsuitable skills/knowledge Inadequate resources and facilities Inappropriate products Distortion and barriers to activity (e.g. regulation or pervasive subsidy)

CONSTRAINTS Prevent interaction of supply & demand sides

demand-side intervention

supply-side intervention

23

Figure 10: Matching market analysis to instrument choice

Having determined where it needs to intervene, the intervening agency needs to decide what type of intervention should be adopted, by matching the various constraints that impede the availability of BDS to SMEs with specific instruments that can be used in interventions. This depiction is necessarily simplistic. Specific instruments are discussed in Section 6.

Market provides solution that

businesses demand

EFFECTIVE MARKET (SUPPLY = DEMAND)

BDS CONSUMERS (SMEs)

1. Inadequate information or awareness: about problems and solutions

2. Valuation problem: affects willingness to pay

3. Limited resources: to assess and purchase services

4. Environment:: pervasive subsidy reduces willingness to pay

1. Limited information: about market opportunities

2. Skills deficiencies: technical and business

3. Operational deficiencies: structure, systems, resources

4. Inappropriate products 5. Environment:

distortion and barriers to activity (e.g. regulation or pervasive subsidy)

BDS PROVIDERS

SUPPLY SIDE DEMAND SIDE

CONSTRAINED BY CONSTRAINED BY

Supply side Demand side

INTERVENTION OPTIONS

Technical assistance Financial support Product development Venture capital investment

Information provision Vouchers Matching grants

Business linkages

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3.4.1 Defining which market we are talking about The conceptual framework for market analysis and assessment as presented are based on a generic market for the sake of clarity. In the real world markets have parameters and characteristics that must be taken into account. In order to undertake market analysis it is vital to establish which market we are talking about. This may be delineated by market characteristics: • Geography - e.g. a neighbourhood, postal area, town, province, country • Products - e.g. consumers of specific types of service such as telecommunications or

newspaper advertising • Consumers - e.g. female-owned businesses, formally registered businesses • Sub-sector - e.g. small scale manufacturing, textile production, agro-processing, high

growth The market may also be delineated by the criteria of the intervening agency, based on: • Strategic focus - e.g. priority groups, environmental protection etc. • Capacity of intervening agency - i.e. what the agency can do; its experience and

competence in certain types of intervention (e.g. vouchers) or with specific sub-sectors (e.g. metal workshops).

In the latter case, whilst it is clearly sensible to ground our definition of the market in terms of our core competence (our 'offer'), there is a risk of shaping our view of the market (and thus our intervention) by what we want it to be, not what it really is. The basis upon which the market is delineated will determine the nature of analysis. For example if the market is defined narrowly (e.g. management training consumed by fish-processing businesses in one part of a town), analysis can be much more specific and detailed. It will probably be more manageable too. On the other hand a broader market definition (all BDS consumption nationwide by all enterprises) will generally only yield an overview-level of analysis. Box 4: Understandi ng markets is vital for intervention design

Market analysis and diagnosis must precede intervention design; if not we are intervening with 'our eyes shut'. The frameworks covered in this session help identify: • The problem to be addressed - why the market isn't functioning effectively • The rationale and objectives for intervention • The nature of intervention required The frameworks presented serve as the conceptual framework upon which more detailed, specific market analysis can be conducted (market research).

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4. SUSTAINABILITY: GETTING THE STRATEGY RIGHT This section defines sustainability in BDS and sets out the reasons why an explicit view of sustainability in BDS is important. It sets out a framework for sustainability linking key actors with supply-side functions and, briefly, summarises what this sustainability picture might look like. The starting point in any intervention is an understanding of a specific market and of the constraints that inhibit market development. Parallel with this analysis, however, it is important to develop a clear view of where an intervention is going; of how it is envisaged that BDS markets will operate in a sustainable manner in the longer term. While sustainability has long been regarded as a priority in development programmes, rarely is given explicit meaning or operationalised into tangible objectives and activities; this has been especially so in BDS interventions.

4.1 WHAT DOES SUSTAINABILITY MEAN IN BDS MARKET DEVELOPMENT? In order to make sense of sustainability we need to think through the implications flowing from a general definition. In general, sustainability is:15

the capacity to ensure that benefits continue beyond the period of an initial intervention. From the above, a more specific definition of sustainability in the context of BDS market development is: The supply-side capacity to ensure that relevant, differentiated BDS continue to be offered

to and consumed by SMEs beyond the period of an intervention.

A transparent view of long-term sustainability in BDS therefore is one that defines supply-side capacity in more depth, linking market players with market functions by addressing the

core questions of 'who does and who pays?' 15 From Sustainability in NGO development projects; ODA, 1995.

CCaappaacciittyy is concerned with the supply-side capability to continue to offer services and this is likely to be a combination of different actors performing different supply -side functions. 'Capability' can include a wide range of factors – skills, motivations, systems, finances etc. - but in a simplified way can be reduced to two issues: • the ability to do and • the ability to pay for/finance

services.

BBeenneeffii tt ss:: for SMEs are implied by their demand for services from providers (i.e. demand/transactions is a proxy measure for benefits). Since SMEs' needs change and become more differentiated, for benefits to continue services must also change; they cannot simply be a standardised, unchanging product offer.

BBeeyyoonndd tthhee ppeerriioodd of an intervention: usefully, this reminds donors and facilitators that they are there to be transient facilitators of change and not permanent fixtures on the BDS landscape.

26

Why is clarity in sustainability so important? Development agencies are interested generally in generating longer-term change and benefits through their short-term interventions. If, however, the nature of this longer-term picture is not clear it can permit inconsistency between what projects do and what they are trying to achieve. A clear view of sustainability imposes discipline and direction on interventions. Conversely, a vague and ill-considered view allows interventions to drift aimlessly. For example, in microfinance the drive towards financially sustainable microfinance organisations is consistent with tight cost control, positive real interest rates and rigorous repayment collection. In BDS, imprecise views about payment for services (from SME clients) and subsidies (from under-resourced governments) in the longer-term allow interventions to: • Develop products that are too expensive/inappropriate for SMEs; • Let the cost base of providers rise so that they become out-of-tune with SMEs (and in-

tune with donor money); • 'Corrupt' SMEs with the expectation of large subsidies and BDS as a donor creation rather

than a 'normal' product in a market; • Lure governments into involvements that are beyond their capacity. Box 5: The equity argument: subsidising services for the poor

4.2 A FRAMEWORK FOR SUSTAINABILITY IN BDS In order to overcome these problems, it is necessary for interventions to develop explicit, transparent views of sustainability in BDS. Figure 11 offers a simple framework for a transparent sustainability picture. This builds on the earlier definition in BDS and has three key elements.16 (a) Main potential actors on the supply-side of a market (i.e. not SME consumers

themselves) • Government and government organisations: this can be broken down further (local or

regional government, etc.) but is essentially the public sector;

16 There are some parallels here with mapping exercises in sub-sector analysis.

Development agencies often argue that subsidies for service delivery (in other words reducing the price of services below their full cost) are justified on the grounds of equity or priority-group focus. Most commonly this because the poor are seen as being unable to pay full price. There are two problems with this justification: (a) It does not consider how the poor will have access to services once the project period ends: end of

subsidy - end of services. Services are essentially relegated to 'one-off' assistance, the danger being that the poor continue to be excluded from mainstream markets.

(b) Service delivery is dependent on subsidy: therefore the number of people that can receive services is determined by the amount of subsidy available. Outreach is thus restricted.

Thus the capacity to deliver benefit is constrained in scale and in duration.

27

• For-profit businesses, of any size or ownership form, ranging from self-employed to substantial corporations;

• Networks: formal or informal, business networks can be a powerful source of “services” – advice, contacts, skills etc.

• Business membership organisations: sector associations, chambers of commerce and employers’ organisations whose principal role is advocacy;

• Not-for-profit private organisations: this could include NGOs but also universities and educational institutions 17 that may have some autonomy from government;

Donor agencies are not included here; their role is perceived to be facilitative and short-term without a valid longer-term rationale. (b) Key supply-side functions In approximate order of priority, the main supply-side functions that need to be undertaken in any market are: • Delivery of services to SMEs; • Product development: ranging from adaptation of products to existing markets to new

products for new markets; • Skills/capacity enhancement: for providers of services; • Research and development: this is more basic work to develop new insights into market

mechanisms, underlying market trends and changes in SMEs that may eventually be useful in applied product development work;

• Regulation and policy-making: the overarching framework of rules and policies within which markets operate.

In addition there are other functions that are possibly less important generally but may be useful in some situations. These include: • Basic information provision for consumers and providers that, for example, supports the

development of markets generally rather than specific products (and providers); • Advocacy that, it could be argued, is important to ensure appropriately balanced

government involvement in markets; and • Co-ordination: for some BDS, initial co-ordinating work might be necessary to develop

the supply-demand relationship. (c) Linking actors with functions In developing a transparent picture of sustainability for the future18 the core task for each main function is to develop – in as much detail as possible – a clear view of: • Who will undertake this function? (who does?) and • Who will pay for this to happen? (who pays?). Considered responses to these deceptively simple questions provide a transparent basis for rational analysis of the future of particular BDS and for the development of a consensus – between donors, with government and other players – over longer-term objectives. Currently, neither the transparency nor the consensus is often in evidence.

17 Some academic organisations may be for-profit businesses. 18 The period of time to be considered will clearly vary from one situation to another but the end of a project period is the obvious time horizon to consider.

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4.2.1 What would a sustainability picture look like? Given the above framework for developing transparency in sustainability, what should this picture look like for BDS market development interventions? First, it is important to point out that it won't always be the same. There are a number of factors that might lead to legitimate differences between countries: • Business membership organisation traditions: in some countries business membership

organisations have considerable strength and may be able to play a role in, for example, information provision as well as the more traditional advocacy function. In others (more), they have a limited but important advocacy-focused role.

• Government capacity: wealthier governments (say in middle- income countries) with a

stronger human resource base can potentially play a more active role in supporting functions such as research and development or 'co-ordination'. For most low-income countries, however, governments' priority should be to focus on core roles only (as outlined at the beginning of Section 2).

• Entrepreneurial character of NGOs: business- like NGOs have developed in some

countries that, in their culture and capacity, are similar to competent for-profit players. In other cases, they cont inue to be loaded with a welfare legacy and anti-business sentiment and have few relevant skills.

• The strength of networks: more entrepreneurial economies often have networks of

businesses (SMEs and larger firms) that have higher potential for an active role. Second, notwithstanding these differences, the general shape of BDS in the future will be characterised by: • The for-profit sector: the key providers of BDS and responsible for product development

financed directly from revenues from fee-paying SME clients. • Government : policy-maker and regulator, financed by the state (government therefore

should essentially not be a provider of BDS). • Business membership organisations: providers of an articulate advocacy voice for the

business community In other functions - skills enhancement, research and development, information - there is more potential for overlap and local factors may be most important in shaping the desired picture.

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Figure 11: Sustainability in BDS

Box 6: Why is sustainability important?

Why do we need to worry about sustainability? - It makes BDS more appropriate to SMEs: increasing need for payment forces demand-led

orientation. - It expands outreach: reducing external subsidy dependence and encouraging private sector provision

scales up service provision. - It encourages cost effectiveness: in a climate of limited donor funding. Subsidy Being transparent about sustainability does not mean a dogmatic rejection of subsidy. It is precisely the opposite, accepting that subsidy is needed (all interventions are about subsidy of some kind!), but demanding at the same time that subsidy is given explicit structure:

• How much subsidy? • What is subsidy for? • Who will finance subsidy? • How long is subsidy required? • What will happen when subsidy ends?

Government

For-profit private sector

Networks (formal and informal)

Business membership associations

Not-for-profit sector

WHO DOES?

WHO PAYS?

Facilitating interventions from government or donors

Key market players

Supply-side market functions

Product development

Research anddevelopment

Delivery of services

Co-ordination

Skills enhancement

Regulation Advocacy

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5. HOW TO INTERVENE The preceding sections of the paper (2-4) focus on the underpinning foundations of BDS interventions: the rationale for intervention, linking market assessment with intervention options and designing for sustainability. These 'big issues' are the foundation of successful intervention. Their purpose is to: • identify specific market constraints to which interventions can be targeted - intervention points

(market assessment and analysis) • determine options for intervention and instrument choice (options for intervention) • form clear objectives for what intervention will achieve (sustainability) Sections 5 considers in more detail the practical issues of how we should intervene more effectively: • How to conduct market analysis (section 5.1) • How we structure interventions and support (section 5.2). This covers a range of issues, such as

- Invasiveness: where support should be directed (section 5.2.1) - Intensity: how much and what nature of support (section 5.2.2) - Leverage: how to make support more effective (section 5.2.3) - Designing BDS interventions to address equity objectives (section 5.2.4)

• Who we should work with (section 5.3) - Characteristics of successful service providers - Partner selection

Specific instruments that can be used for intervention are reviewed in Section 6.

5.1 HOW TO CONDUCT MARKET ANALYSIS19 Market analysis of this nature lends itself to market research-style studies, rather than more conventional developmental assessments.20 More market-oriented studies focus on SMEs as consumers, rather than as beneficiaries, and focus on BDS products and preferences, rather than broad and ill-defined 'needs'. On the demand-side face-to-face consumer surveys with businesses, such as Usage, Attitude, Image (UAI) surveys, can be conducted. The depth or breadth of survey is dependent on the requirements and focus of the analysis. Generally speaking, the more tightly a 'market' is defined - e.g. by geographical area or sector-type, service type or problem characteristic - the more focused (and manageable) a survey becomes. Such a survey can be expected to generate information on SMEs' awareness of problems and service availability, current and historic BDS consumption, and willingness to pay. Aggregate market size (by value) can also be extrapolated. For more in-depth analysis, interviews or focus group discussions should be used to probe more detailed issues with selected groups of SMEs: features of services that SMEs like/dislike, how purchasing decisions are made, critiques of existing services and providers. For the supply-side a similar survey and focus group or interview process can be used with service providers. Information generated through the demand-side survey and focus group discussions will be valuable in determining the nature of the supply-side analysis. Such techniques are not exact science, and will inevitably have a degree of subjectivity or context dependency. However used correctly they will permit a reasonably rigorous assessment of the relative strength or weakness (high/low/absent) of the various demand-side and supply-side components identified in Figures 6 and 7 above. 19 See Miehlbradt (7). 20 Sub-sector analysis may be useful in analysing BDS markets. See Haggblade & Gamser (6) and SDC CIP Tool no. 1 vol. 2.

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5.2 HOW SHOULD SUPPORT FOR BDS PROVISION BE STRUCTURED? There are four critical factors to consider in structuring support for BDS provision: (a) Invasiveness of support: Where should we direct our support? (Section 5.2.1) (b) Intensity of support: How much and what nature of support is required? (Section 5.2.2) (c) Leverage of support: How to make (limited) support more effective. (Section 5.2.3) (d) Addressing equity objectives: How can support be made more appropriate? (Section 5.2.4) This section addresses each of these in turn.

5.2.1 Invasiveness of support Interventions always have some impact on the market environment and thus they always have the potential to change markets, either positively (develop) or negatively (distort). Any BDS practitioner or facilitator will recognise this reality. One of the most typical responses from BDS programmes when justifying subsidies to reduce the price of BDS to SMEs is that SMEs are not prepared to pay a higher price because they are used to free services from other development programmes or government. This is a classic illustration of intervention distortion at work. There is a fine line between developing and distorting, which intervention design and practice should recognise; planning to minimise market distortion and enhance market development. Where we focus our intervention or support partly determines this balance. We refer to this 'where' as invasive: the closer or more direct an intervention is in relation to the transaction between consumer and service provider, the more invasive it is. (See Fig. 12.) Figure 12: Where to intervene to reduce the risk of di stortion

Ideas

Development:

Products

Delivery:Demand

-side

Delivery:Supply-

side

Development:

People & organisations

Marketing

& Promotion

Assessment of

markets/ products

Pre-delivery Delivery Post-

delivery

MINIMISE POTENTIAL

FOR DISTORTION

Information

for consumers

Feedback & Change

more invasive less invasive less invasive

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Why do subsidies for direct delivery have more potential for market distortion? Subsidy for direct delivery of services, either by artificially reducing the price that consumers have to pay for a service, or by artificially reducing service providers' cost of delivery, are highly invasive types of intervention. That is to say these types of intervention affect the transaction between supplier and consumer, influencing the motivations, dynamics and price signals that lie at the heart of a functioning market. In doing so they have the potential to distort: • Consumers willingness to pay: e.g. price expectations are lowered below the market norm. • Providers’ ability to develop an offer: e.g. fee or margin expectations are raised if delivery

is subsidised; unsubsidised service providers' 'normal' service price becomes unattractive to consumers in the face of subsidised competition.

When might subsidy for direct delivery be justified?

TYPICAL JUSTIFICATIONS COMMENT Necessary to provide tangible incentives and to change behaviour To overcome risk: – there can’t be real change without risk!

Where subsidy-dependence is entrenched, an idea is new, or similar barriers, limited delivery subsidies to test ideas, demonstrate value or lure SMEs into consumption, may be effective. Danger: 'limited' can become 'longer-term'; large-scale subsidies undermine connection between price and value, and crowd out unsubsidised activities.

If delivered correctly, can reinforce market forces and development

Possibly, if used sparingly, to reinforce transactional relationship and address specific constraints. E.g. vouchers, matching grants

They’re poor - they can't afford to pay and therefore need subsidy!

Many dangers here: - Potential for endless subsidy - How is service provision to continue in the long

term? - Limited outreach or replication. - Price- value link is undermined: if people value a

service they’ll pay for it. - BDS provision becomes confused with social

protection. Direct support is highly 'visible' We need to find a way to spend our money!

It is probably true that direct delivery subsidies have higher visibility and permits proportionately greater disbursements. But this is bureaucratic rationale triumphing over development rationale!

Key lessons if supporting direct delivery • Finite period of support : there has to be a clear end point to support, which is related to

measurable and achievable objectives. For example this might focus on volume of transactions taking place between consumers and suppliers without any subsidy (see 'Vouchers', Section 6).

• Limited in scale: there is considerable potential to flood a market place with funds causing long term market distortion (World Bank voucher scheme in Kenya is an oft-cited example).

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• How delivered is important: careful consideration needs to be given to the structure of the support, what incentives it creates, how support is expected to achieve objectives (see 'Transactional support', 'Vouchers' and 'Matching grants', section 6).

• Justified openly in relation to market constraints: as mentioned above support has to have clear justification and objectives for overcoming market constraints and developing sustainable access to services.

• Consistent policies and approaches need to be developed with other facilitators and providers: Learning from microfinance, widely differing approaches and policies on direct delivery among development agencies hinder progress towards sustainable, effective markets and institutions. There is a prerogative for openness and coordination between agencies to develop consensus and avoid damaging practice in BDS interventions.

5.2.2 Intensity of intervention We have stated that the net effect of donor support can be distorting in relation to the objective of developing BDS markets. One factor in this is the level of invasiveness of an intervention - 'where' we intervene. The second important factor is intervention intensity - 'how much' intervention, and 'what' kind of intervention. Interventions are more likely to distort if they are intensive. Typically this means focusing relatively high levels of resources on a single provider, product or even target group. Less intensive interventions try to intervene more lightly or broadly and have a lower potential to distort. Less intensive instruments might include product development, information provision or venture capital support to numerous providers. The effect of excessive intervention intensity can be over-loading.

Over-loading Overloading refers to the (unintended) distorting effects of excessively intensive donor support, creating an unrealistic or unviable pressure on the intended recipient, be that a service provider or a product. The effects of over- loading can be separated as follows: (a) On BDS service providers: (i) strategic or (ii) operational burdens (b) On BDS products: over-engineering (a) Overloading: Service providers (i) Strategic burden = Forcing multiple or unrealistic objectives on a service provider Donor agencies are required to balance objectives for sustainability with developmental priorities. However it can be counterproductive to force or constrain BDS providers to only work with certain target groups, at the same time as trying to promote business- like behaviour and financial sustainability. The danger is that partners are burdened with twin objectives, possibly achieving neither: • Damaging: can affect viability by moving away from 'natural' market and competence • Inconsistent to expect service provider to be market oriented and at the same time tell

them which market they should be focusing on! (ii) Operational burden: control & cost burdens Control burden = Excessive reporting and M&E requirements imposed on service provider

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Donor reporting requirements may not be relevant to the BDS provider’s priorities. Adhering to these requirements may entail BDSPs to develop systems, procedures that are not relevant to BDSPs’ needs. • Reduces flexibility, responsiveness and increases costs • Undermines ownership if the service provider feels it is having to 'dance to donors tune' Cost burden = Excessive investment in service provider Excessive investment in equipment, staff, products or systems, develop inappropriate cost and price structures that reduce BDSPs’ potential for viability (from revenues from SMEs). The core problem is that donor funds and work practices can affect on partner organisations, driving a wedge between it and its clients in terms of systems, culture, costs and scale. The challenge for donors is to develop approaches for intervention that account for such artificiality. This may involve, for example, building a transactional, financial relationship around conditions and performance targets. Alternatively, given the complications of building BDS organisations, there is increasing focus on developing BDS products, rather than institutions, as a more appropriate focus for interventions. Box 7: Overloading a BDS provider in Kenya

(b) Overloading: Products Attempts to develop BDS products either for specific service providers or for wider market distribution has frequently suffered from over-engineering. Typically this has involved importing and adapting products from developed economies (e.g. Business Growth Training from the UK) or committing considerable resources and capacity to developing new generic products such as ILO's SIYB. While these products may be of an extremely high technical quality, there are often criticisms that they are over-engineered: • Trying to develop ‘perfect’ product:

- Overly comprehensive and unwieldy - Expensive and resource dependent

• Overly generic and inappropriate to the specific, ever-changing requirements of SMEs The effects of over-engineering have been: • Products that do not reflect market in terms of cost, price and delivery mechanisms

In 1987 a service provider was started by a local entrepreneur to provide training and counselling services to SMEs, receiving modest amounts of subsidy from local sources. In 1998 it was operating at about 48% financial sustainability (based on full costs). The service provider was regarded as having good potential and attracted additional international donor funding; from 1989 (199% annual increase) and then a major new injection in the period 1994-95 (194% and 55% annual increases). In those same periods the service provider's cost base increased dramatically: 20-40% annually during 1989-91, and from 1994-96 by 32-98% annually. At the same time financial sustainability fell to 30% or less for much of the 1989-96 period, only recovering to 53% in 1997. Donor investment had financed additional facilities, systems and capacity that added dramatically to operational expenditure, without a commensurate effect on revenues. The result: an operating deficit that threatened the viability of the service provider.

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• Future product development is difficult because service providers lack resources or capacity to do so in the absence resource- intensive external support

• Indigenous products and product development can be 'crowded out'

Why does over-loading occur? One of the contributing factors in this tendency to overly intensive intervention is the pressure on donors to achieve results and disburse funds. Quite naturally there is a belief that 'bigger is better' and 'more rather than less'. A second factor is that often intervention design is not grounded in the reality of local market conditions and constraints: donors and facilitators projects have a tendency to develop projects based on their own expectations, experiences and views, and not 'what works' in the market in question. Typical examples would be: • Making large front-end investments to develop prestigious BDS organisations, but in the

process developing capacity (and cost base) that is far in advance of organisation requirement, consumer purchasing power and market demand, with very little consideration of future commercial viability

• Developing conceptually and technically complete or 'perfect' products, rather than products that may be 'quick and dirty' but are more suited to local preferences and delivery mechanisms.21

Box 8: Overloading training in Uganda

Ways of avoiding overloading • Use market assessment and consumer research in intervention design:

21 Low quality products and organisations are often given as reasons for intervention. The question is quality for whom? While low quality by the standards of advanced economies, indigenous products may often be far more appropriate (and viable) for local conditions.

A project was designed to enhance the technical capacity of SMEs involved in the food processing sector (bakery, dairy and fruit and vegetable products). Initially 3-week training courses were delivered via the project and its partner (a business membership organisation). Due to concerns about sustainability of training services after project end, support was subsequently re-focused to developing a pool of local trainer-consultants who would deliver training to SMEs on a commercial basis. Unfortunately, although the training products were of a high technical standard and many of the potential trainer-consultants were well qualified, no trainer-consultants were a commercial success. The causes of this failure attributed to: (a) Overly sophisticated products: too costly and resource intensive to be viable in local conditions (b) The training was too comprehensive and theoretical - did not offer quick and practicable solutions to

business problems (c) Inappropriate delivery mechanisms: because of their qualifications and income from more lucrative

areas, trainer-consultants found fees from SMEs unattractive. Ironically there was an unintended output from the project. One of the initial project trainees - a baker, not one of the trainer-consultants - successfully operated a training sideline business, offering very short focused training (1-2 hours) addressing specific baking problems, to other small bakeries, on a profitable basis!

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- Understanding the characteristics and norms of the market in question allows intervention to be geared to developing appropriate, viable products, organisations, people and mechanisms in terms of cost, price, features, location etc.

• Forget cost recovery, think about profit! The term 'cost recovery' not helpful to

developing sustainable, demand-led BDS, because it is a manifestation of one of the key weaknesses of many BDS interventions: building organisations in advance of need. - Large ‘front-end’ investments are made in facilities, equipment and staff, which result

in a bloated cost base that bears no relation to the earning capacity of the BDS provider.

- The concept of cost recovery promotes an artificial culture of 'clawing back' revenues to finance these cost bases and unproductive investments, in response to donor demands for sustainability.

- Small businesses do not have this luxury: they grow in response to increasing demand and invest, when they can afford to, for productive purposes, to make a profit.

• Use a portfolio approach (see Box 9). A portfolio approach entails working with multip le

partners - a portfolio, rather than just one. Like an investment or lending portfolio, the performance of the entire portfolio is more critical than any single constituent part. The benefits of such an approach are: - Reduces investment in any single organisation (by default less intensive) - A portfolio of partners means that donor strategic objectives can be assigned on the

portfolio in aggregate, rather than multiple objectives for individual service providers (see also 'Intervention leverage', section 5.2.3)

Box 9: Using a portfolio approach to achieve cross-cutting development objectives

5.2.3 Intervention leverage Concerns about distortion should not lead development agencies to adopt interventions that are so minimalist that they achieve nothing. The challenge is to design interventions that find ways to leverage the private sector into investing, trading, developing products etc. (using relatively few resources), rather than replacing private sector activity (through intensive or

In a typical project a partner service provider is given multiple objectives, for example to achieve financial sustainability (based on revenues from SMEs) in 2 years, and also that 65% of clientele must be female. A portfolio approach would be to work with 10 service providers, all of which have a financial sustainability objective. The donor or facilitator does not assign individual service providers with a gender outreach objective however. Instead an aggregate objective for the whole portfolio of service provider is assigned, let's say gender outreach target of 65%. Thus if there are 1000 current clients for whole portfolio - 650 have to be female. The donor/facilitator then manages the portfolio on basis of both objectives: • Partner service providers are selected, assessed or dropped on the basis of financial performance • Partners are also selected on the basis of their ‘offer’ to female entrepreneurs or market segments.

Sufficient partners with such an offer are maintained in the portfolio to ensure aggregate gender objective is achieved

Key points Don’t impose that all service providers have to have 65% of clientele female; select those whose natural offer is to female clients or markets and then measure gender outreach of project as a whole.

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invasive intervention). Leverage might mean attracting matching investment from private sector providers, developing new products for licensing or franchising, or increasing private sector provision in a new market through some form of information provision. Ideally interventions should try and use the lowest appropriate level of intensity possible whilst maintaining effectiveness.22

Achieving leverage in interventions (a) Choosing the right instrument (b) Using a portfolio approach: a range of partners (c) Making support transactional (d) Developing a clear support 'offer' (e) Building on existing ownership (f) Investing in potential (a) Choosing the right instrument Certain types of intervention instrument are more likely to achieve leverage than others, notably those that have the ability for wider replication or to attracting private sector funds to multiply the effects of intervention. Intervention instruments that offer the potential for leverage include: • Product development for distribution, franchising23 or licensing to a range of service

providers • Social venture capital: matching private sector investment

- For new product development - For new market development

• Information provision - Market information for service providers - new market/product development - Service or service provider information for consumers

(b) Portfolio approach: Working with more than one partner Elsewhere reference has been made to a portfolio approach to working with partners. Working with more than one partner reduces the danger of distortion and unfair competition, but an equally important benefit is that it permits leverage: • Project support is spread more widely across the market • An intervention's risk is spread: the intervention is not tied to a single organisation or

mechanism, so can afford to be more innovative and experimental without the fear of losing everything if a partner fails to deliver.

(c) Making support transactional (see Box 10) If the objective of BDS intervention is to foster more effective, business- like BDS provision, intervening agencies themselves must be more business- like in their approach to support; making support more 'transactional' to replicate conventional business relationships. 'Soft' support sends entirely the wrong messages to BDS providers, their clients and the

22 This is similar to the subsidiarity principle discussed in BDS good practice guidelines (2). 23 Franchising of BDS appears attractive; the idea being to develop reputable branded products or methodologies, which can then be sold or distributed under licence to large numbers of service providers, possibly with an accompanying technical support agreement. However there is little experience to date of true franchising (with revenue flowing back from the franchisee to the franchisor). GTZ's CEFE has some of the elements of a franchised product. Like all product development franchising would face challenges of over-standardisation and cost, as well as concerns about developing enforceable brands and intellectual copyright and preventing pirating. See 'Product development', Section 6.

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marketplace; it undermines market signals or incentives and is more likely to distort rather than develop demand-led service provision. The benefits of transactional support are: • Requires reciprocity and thus has potential for leverage • Fosters business-like incentives, behaviour and attitudes • Links support to performance • Attaches a value to support: encourages prudent and effective utilisation Box 10: Using incentive-based support

Ultimately any form of support, transactional or not, is artificial and carries the potential to distort service provision away from business and towards the donor. One solution to this is to transfer support itself to the marketplace, using market mechanisms and pricing. Some

[See Swisscontact: Assessing Business Centre Experience in Latin America and Asia (11)] Some agencies make their support to partners conditional, based on explicit performance criteria; the objective being to replicate market behaviour. Using incentive-based support effectively can present numerous challenges. Link support to performance Some form of conditionality has to be established, whereby funding or technical assistance are extended based on the achievement of performance criteria, such as outreach, activities, financial performance. This may be on an organisation or product-by-product basis. Choosing the right conditionality is the principle challenge here. • Understanding how the chosen incentive will work • What is the objective of the incentive mechanism? • Does the incentive motivate the desired behaviour? The package of support must be clearly defined Recognising that just as there is a transaction between service provider and consumer, so there is a transaction between donor/facilitator and service provider. What does the partner get from the donor/facilitator? It is particularly important that consistency and clarity are maintained over time in respect of both the offer of support and the incentive mechanism. Shifting the goal posts can be extremely damaging.

Develop performance targets Mutually agreed performance targets must be established in advance. Targets need to be realistic and achievable, but should also present enough of a challenge to stimulate change: too low and behaviour or performance is unchanged, too high and the target is de-motivating. A more difficult challenge for many development agencies is that performance-based support also means walking away when partners consistently fail to deliver (rather than keeping them on life-support). If the sanction for under-performance is not credible, incentives will not work. Rigorous measurement systems Because funding and technical support are dependent on performance, measuring performance has to be transparent and credible if disputes, manipulation and fraud are to be avoided. As discussed under 'control and cost burdens' the challenge for the donor/facilitator is to minimise distorting effects whilst maintaining accountability. Problems with incentive mechanisms • Inappropriate conditionality motivates undesired behaviour; for example basing funding only on outreach or sales

income can cause a service provider to maximise sales, without considering the profitability of sales. When support ends the service provider finds both a large operating deficit and inappropriate cost and price structures.

• Loose conditionality and measurement can encourage fraud and manipulation • Incentive schemes, if they are well-run, place considerable demands on donors/facilitators in terms of skills,

systems and procedure and staff time.

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initiatives have experimented with mechanisms as leasing of equipment, debt or equity financing for investment and 'priced' technical assistance. (d) Developing a clear offer If a donor/facilitator is to achieve leverage through a limited intervention, it is essentially that the intervention is shaped into an 'offer' to partners that is clear, unambiguous and attractive. Like any other transaction each party has to know what they are going to get if it is going to work. Often interventions have an extremely ill-defined offer, partly because the range of potential support is extremely broad, and partly because there is a genuine absence of transparency about roles and capabilities. Key questions to be asked when ascertaining an offer to partners are: • What is our distinctive core competence (contrast with other agencies, govt, private

sector)? • Why should someone want our support? • Precisely, what are they going to get? • Precisely, what do we expect in return? (e) Build on and promote existing ownership The most distinctive characteristic of a small business is its ownership structure - usually a single individual who drives the organisation. There is an emerging consensus that the most effective institutions or mechanisms to support SMEs are those that 'look like' SMEs. The challenge for interventions is to build on (or create) this ownership, rather than displacing it through external initiatives and control. Stimulating individual ownership requires exposure to risk and reward, ideally in the form of the partner's personal investment and equity. This is difficult territory for development agencies who are more familiar with 'giving' assistance and reducing risk, and who have a tendency to work with partners most similar to their own institutional culture, often a very different culture from that of entrepreneurs and business.

Box 11: Destroying ownership

Building on existing ownership (what's there) is an effective of way of leveraging an intervention: • Not starting from scratch can be less expensive; • Existing owner can match investment; • Existing owner has a strong stake, which creates:

Ownership can be eroded by intensive interventions: • Excessive ‘investment’ dilutes the ‘equity’ of the original owner: Flooding a partner with cash or

equivalent can have the effect of reducing the relative value of the stake of the original owner • Impose excessive control:

- Accountability - M&E

• Externally-conceived products, systems etc.: Partners have little part in developing: therefore they have little ownership. Moreover partners may lack resources or capacity to maintain, develop or replace products

• High profile role of donor/facilitator, while perhaps lending credibility or prestige to a service provider initially, can eventually generate the perception (both among consumer and staff) that the service provider is part of the development agency, reducing ownership. This can also have an adverse impact on clients' willingness to pay.

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- commitment; - incentives: the risk and reward, which is at the heart of entrepreneurial culture.

(f) Investing in potential Leveraging intervention is similar to investment; donor agencies are looking for a 'return' (achievement of objectives) on their investment (project inputs). The decision of where to invest or who to invest in should be based on identifying 'winners' or potential (either demonstrated potential or latent potential). Donor support is no t best utilised propping up failing organisations and individuals who see donor support as a last respite. The challenge for donor agencies (aside from actually finding potential investments!) is to ascertain whether they should support existing potential and initiatives (which may create nothing additional or be distorting), or support new potential (which carries more risk, but may have less potential for distortion). The options for the donor are somewhat like a business (Figure 13) Figure 13: Options for support: support existing or develop new?

Donors can adopt four basic strategies (or combine several): (a) Work more intensively within existing sectors and existing services and providers,

perhaps to reach disadvantaged groups (market share or market penetration); (b) Increase the range of sectors in which they try to work (new market strategy); (c) Introduce new services and providers (product development strategy); (d) Move into entirely new sectors with new services and providers (diversification). The further donors move from square 1 towards square 4 - into new markets, services and providers - so risk increases. Arguably however the potential for distortion decreases, assuming that the general level of BDS activity is weak in these new areas.

MARKET (sub-sector, enterprise, location)

Existing

PR

OD

UC

TS

(s

ervi

ces,

pro

vid

ers)

New

1

2

3

4

New

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5.2.4 How should we design BDS interventions to address equity objectives? Addressing inequity - reaching the disadvantaged - is the raison d'être of any development agency. The question is not whether the objectives are appropriate, but whether the mechanisms used are appropriate. Typical intervention responses are direct subsidy of service provision or consumption by intervening agency or its partners. Projects are designed with the objective of reaching disadvantaged groups using, for example, subsidised services for microenterprises or target quotas for coverage of female-owned businesses. Intervening in this fashion is a non-market response. As previously highlighted, the risk is that solutions are artificial, delivering short term benefits, but ultimately doing little to incorporate the disadvantaged into mainstream markets: in a sense they are exclusive rather than inclusive. Several concerns arise: • These mechanisms all require some form of control or subsidy that can only be achieved

by government or development agencies. Resource and time constraints limit their scale and longevity. What is the intervention's picture of sustainability: do disadvantaged groups only require transient assistance, or is the goal to integrate them into a market place with a full range of goods and services?

• Subsidising or directing services weakens demand signals, the strongest indication that

services are useful or appropriate to the consumer. What is the intervention's perception of disadvantaged groups: discerning clients or needy recipients of welfare?

• Subsidy and control can distort and discourage private sector service provision of services.

Many interventions fail to observe that disadvantaged groups may already have access to some services, which can be damaged by invasive or intensive intervention. Even if services are not available, how is it anticipated that consumers will progress from highly subsidised services to full cost services in the future?

A more appropriate response? Identify the underlying constraints that prevent disadvantaged groups from being served. Inequity in itself is not a constraint to market provision of services (poor people buy and sell a variety of goods and services all the time). The constraint is that the supply-side (service providers or products) is unable or inappropriate to serve certain segments of the market, defined by income level, gender, ethnicity, ability, geographical location. Consider two examples, (a) microenterprises and (b) female-owned businesses. (a) Microenterprises can't afford to pay for services This may be the case for some 'high-end' services, but for other services, what is it they can't afford? Is it services or the service provider? • Many service providers (particularly partners of development agencies) will have offices,

equipment, a vehicle, well-educated staff etc. which translate into considerable overheads. It is unrealistic to expect that revenues from SMEs will be able to cover these costs. Therefore attempts to incentivise service providers to focus 'downwards' to microenterprises inevitably see service providers creeping upwards again, to their natural level, as they strive to make money. This is hardly surprising: if your MBA gives you the capacity to sell services to large businesses or donors for a generous fee, why work with microenterprises for a fraction of the income?

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• Services themselves might be 'over-engineered'. Aside from the cost of such services, they may well not be what the microenterprise actually needs. Evidence suggests that services that are extremely focused and can be immediately practicable in the business are most valued by SMEs and they will pay for them.

The challenge is to work with service providers who are much closer to their clients in terms of people, service offers, cost bases and expectations of remuneration and to develop products and delivery mechanisms based on local resources, solutions and markets. (b) Reaching female-owned businesses Interventions may adopt quotas of female-owned businesses to be reached. For the development agency there is nothing wrong with this. However it is unrealistic and damaging to try and force a client group on a service provider. As in the case of trying to incentivise service providers to focus on low-income segments of the market, service providers will ultimately gravitate to the clientele that best matches their capacity and experience. It makes little sense trying to encourage a service provider specialising in small-scale metal manufacturing to serve more female-owned businesses, if women are not represented at all in that sector. More effective interventions try to identify and develop people and organisations with genuine offers to segments of the market where women are well represented.

Box 12: Tips for providi ng BDS to disadvantaged groups

Pushing out the frontier of BDS to reach disadvantaged groups is a major challenge for all development agencies. Some important points to consider may be: • Adopt a portfolio approach to partners. Working with a range of service providers permits the

intervention to pick partners who correspond to the particular market segments or target groups of the intervention, rather than trying to develop a single 'one-size-fits-all' partner.

• Develop efficient, low cost and appropriate institutions, mechanisms and products to reach the

disadvantaged, rather than simply subsidising services. As in microfinance, this will require that far greater attention is paid to measurement and costs, if the 'frontier' of BDS is to be extended.

• This means that services have to be designed to be profitable from the beginning for the service

provider… • … And also immediately practicable, with the shortest possible 'pay-back' period for consumer (SMEs). • View disadvantaged groups as potential market niches for private sector providers, rather than pliant

charity cases. • Be realistic. Recognise that BDS is not a solution to all problems. In some cases people will not have the

ability to pay, their situation will be too adverse. It is unlikely that BDS is the solution to their problems at that point in time.

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5.3 WHO SHOULD WE WORK WITH? (See Annex 3)

5.3.1 Identifying and selecting partners A shift in the focus of intervention to development of BDS markets, calls for a similar shift in thinking about the partners24 that we work with. What has changed? Essentially thinking about developing BDS markets has led us to recognise that: (a) The spectrum is broader: we are starting to understand that the range of actual or potential

service providers is much more diverse and different than we originally believed. (b) Our intervention objectives will be different: switching from assisting SMEs directly to

ensuring sustainable access to services, via functioning markets changes the nature and objectives of our interventions, and by extension, influences partner choice.

The combination of these two factors gives us a much less rigid picture of who partners should be. The meso-level can no longer be thought of a distinct institutional 'layer' made up of organisations with specific characteristics or structures. Overall we are faced with a much 'messier' choice, from which the following trends are emerging: • Market development will mean less focus on any single provider • Working with more service providers • Working with a greater diversity of service provider ‘types’ • Greater focus on private sector service providers • Increasingly specialised, differentiated, niche-focused service providers • Smaller service providers:

- informal - individuals

There is considerable evidence to suggest that traditional meso-level partners for small business support - governments and business membership organisations - have not proved to be effective service providers. This experience, and the fact that the majority of services to small businesses are provided by other small businesses, is leading many practitioners to view small businesses as a more appropriate model for service provision. (See Box 13.) We also need to recognise that many businesses access services via networks and other commercial relationships (suppliers, sub-contractors etc) that are in effect 'hidden'. While there can be little rationale for intervening in such hidden BDS (which if it is there and working, by definition does not require a 'helping hand' from donors!), we should take it into account to (a) avoid disrupting it and (b) with a view to learning from it.

24 Partners here is primarily referring to service providers.

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Box 13: Changing views of the meso-level in Nepal

5.3.2 Key characteristics of successful service providers The table in Annex 3 can be used to develop assessment criteria for identifying, assessing or selecting service providers under 6 main headings: (a) Ownership (b) Commercial orientation (c) Offer (d) People (e) Resources and capacity (f) Systems Caution should be exercised in employing a 'check- list' approach to partner selection. The danger of standardised assessment techniques is that they rely on rigid lists of formal (often tangible) requirements, procedures etc. These may not be appropriate for entrepreneurial, dynamic or informal service providers; indeed such assessment procedures (especially accreditation initiatives) often are based on finding the mirror- images of develop agencies or formal organisations, rather than commercial service providers. (See Box 14)

There is a long history of donor agency support for BDS in Nepal. In the early-1980s GTZ undertook pioneering work on training and counselling that eventually led to the development of the well-known CEFE model. By the 1990s, a wide range of donors, including SDC, were involved in supporting BDS. During this period, there has been a discernable evolution in how agencies perceive the meso-level in BDS: • 1980s-early-‘1990s: government and quasi-government organisations as the key deliverers of services

(with donor and government subsidy for almost everything); • early-late ‘1990s: business membership organisations as the main players (with significant donor

support for delivery); • late-‘1990s-now: private sector and other market-oriented providers with market development as the

overarching objective (and with donor support more focused on development rather than delivery) Although perhaps less obvious in some countries, this shift in thinking that is so clearly evident in Nepal is representative of a wider trend that has major implications for partner choice.

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Box 14: The dangers of a 'checklist' approach to partner selection

5.3.3 Partner selection techniques As noted above, unfortunately there is no ideal organisational or institutional form for BDS provision: the market is complex and will vary widely from place to place. Therefore selecting partners almost inevitably has a considerable element of trial and error and needs to be grounded on the basis of 'what works' in any given context. However partner selection can be of the following types: (a) relationship-based (personal knowledge and recommendation) (b) tendering process (c) market research (a) Relationship-based selection Partners can be identified through the personal knowledge, existing networks and acquaintances of donors and facilitators. This approach has much to commend it; it is cheap, working relations may already exist, and uncertainty can be reduced. It does have a number of drawbacks: • It limits the field of selection both in terms of geographic area and the range of potential

partners - you only work with those known to you. • There is some risk of continuing established relationships and expectations: this is particularly

problematic if a donor or facilitator has a high profile, or a history of more conventional or social development assistance.

In South Africa, government formed a national enterprise promotion agency to co-ordinate and enhance BDS for SMEs, primarily by supporting local service providers. This support took two main forms: capacity building/financial support and accreditation. Accreditation means that providers that meet certain standards in relation to services, facilities, approach and personnel are given a formal 'badge of approval' –accreditation – by the agency. In 1999, agency staff visited a service provider seeking accreditation. It had a small office, basic furniture and equipment, no vehicles, operated without subsidy and had a small number of staff sharing the same room who were kept very busy by a regular stream of SME clients, all paying a commercial rate for services. Nearby, an officially accredited provider had more spacious and well furnished offices, vehicles, operated with a generous subsidy from the agency (and others) and a peaceful atmosphere in the office untroubled by too many visits from potential clients. Staff eventually decided that they could not offer approval to the first provider since it did not conform to the requirements of the accreditation standard. However, they were uneasy at the implications of this. Clearly, many SMEs deemed it to be useful and said so with their payments for services. By SMEs’ standards, it was valuable. By the agency’s standards, it was not acceptable whereas an underused, high cost, subsidy dependent and out-of-touch provider was officially classified as valuable. Agency staff wondered openly whose standards really mattered; SMEs or their own?

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This approach to partner selection also underlines the importance of donor/facilitators being business- like themselves; developing linkages and maintaining networks in the marketplace, and not operating from the confines of a 'developmental vacuum'! (b) Tender-based selection Borrowed from the corporate world, a tender-based approach invites applications to bid for donor/facilitator support. In an open or competitive tender, opportunities to apply are advertised, tender documents are drawn up and made available for a fee payable on application, selection criteria and processes established, and selections are made on the basis of information provided and qualitative assessments. The advantage of this kind of selection process is that it allows a wider range of applicants to be considered, and is particularly suitable when knowledge of an area or field is limited. It can also allow the donor/facilitator to project a business-like, focused image and reduce the scope for unrealistic expectations on the part of partners, which is often a risk when donor funds are involved. The drawbacks of tender-based selection include: • If done properly it can be expensive and time consuming (although charging for tender

documents can re-coup significant amounts of the cost, as well as testing the commitment of applicants).

• If criteria selection and assessment are not rigorous, the success of the process will be jeopardised.

• Often requires sifting through a large number of poor applicants to identify a few good ones. Even then tendering is not infallible: a 100% 'strike' rate of perfect partners will never be achieved.

A closed tender strikes a balance between the two approaches, where invitations to bid are extended to a number of potential partners, most or all of which are relatively well known to the donor/facilitator. Application fees are usually not required for this type of tender. (c) Using market analysis for partner selection As a result of the type of market or consumer research described in Section 5.1 information on service providers can come to light. This may either be via consumers or directly from industry surveys and can also generate useful information on service provider strengths and weaknesses.

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6. TYPES OF INSTRUMENT This section presents a brief examination of a variety of demand-side and supply-side instruments for BDS intervention, considering: (a) how each instrument works (b) which constraints an instrument addresses (c) the criteria by which instrument effectiveness can be assessed (d) key lessons and issues arising from use In the interests of brevity the tool cannot cover the minutiae of all BDS instruments; for those interested in more detail on specific instruments, references are given to recent case studies on BDS on the ILO website25. SDC CIP Tool No. 2 also covers specific instruments for BDS interventions. These and additional sources of guidance are listed in the references in Annex 5. SDC's Indicators Tool focuses on developing indicators for small enterprise development, including the instruments summarised here. Some of these instruments are well established and widely used. Others remain in their infancy, but are receiving increasing attention because they are seen to be consistent with the market development objectives of the new paradigm. It is instructive to note that there appears to be a greater range of supply-side instruments than demand-side instruments. This is perhaps a reflection of the historical tendency for donors to 'create' new organisations and deliver tangible outputs, rather than adopt more facilitative roles. Classifying instruments as either demand- or supply-side is inevitably simplistic. In reality instruments will often effect both supply- and demand-sides. The discussion below tries to focus on the primary use of the instrument, but draws attent ion to other effects where relevant. (See also Fig.10.)

6.1 DEMAND-SIDE INSTRUMENTS

Vouchers REFERENCES: See ILO website (3) The Voucher Training Model: What Next After Paraguay? Schor, Goldmark, IPC/IADB Paraguay Vouchers Revisited: Strategies for the Development of Training Markets. Addis Botelho, Goldmark, MBP HOW IT WORKS: The concept behind a voucher programme is that SMEs are given additional purchasing power (in the form of a voucher) to purchase the BDS of their choosing (usually training). Proponents argue that a voucher is a demand-led instrument because SMEs are free to choose the service they want. A voucher is assigned a value against which the cost of training is offset. This might be an absolute sum (e.g. $20), or it might be a proportion of the cost of training (e.g. 50%). SMEs receive a voucher with a certain nominal value, and then pay the service provider using the voucher plus an 'out-of-pocket' cash payment, to reach the full cost of the training in question. Once training has been completed, service providers redeem vouchers from the issuing organisation for cash.

25 http://www.ilo.org/public/english/employment/ent/sed/BDS/donor/index.htm (3).

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Most voucher programmes have an information, referral and accreditation component. The implementing agency (or a third party) develops an inventory of 'qualifying' service providers which are eligible (based on certain criteria) to participate in the programme. Thus SMEs have access to a menu of reputable service providers from which to choose. CONSTRAINTS ADDRESSED: • Overcoming SME scepticism by addressing the valuation or willingness-to-pay problem.

By reducing the amount an SME has to pay to a service provider, vouchers encourage SMEs to try a service that they wouldn't have if they had to pay the full amount. Thus vouchers are claimed to introduce SMEs into the training market.

• Overcomes SME resource constraints (ability to pay, or ability to assess service availability or quality).

• Overcomes information problems through the information component. SMEs are provided with information and choices that were previously unavailable or unaffordable.

• The cash that vouchers inject into the market in the form of increased demand-side purchasing power, is also seen as an incentive to the supply-side to develop and sell services.

CRITERIA FOR EFFECTIVENESS: The objective of a voucher programme is to stimulate training market activity by overcoming demand-side awareness and valuation constraints. Thus criteria for effectiveness are: • Increased levels of training activity during the life of the programme. • Sustained or increasing levels of training service transactions and service development

after the programme has ceased - an effective market. • Price expectations between consumers and providers are more 'harmonious'. LESSONS AND ISSUES: • The proportion of voucher subsidy should be as low as possible, to ensure higher levels of

investment and commitment by the consumer (buy-in). • Fixed, nominal values for vouchers favour smaller enterprises purchasing less costly

services, while proportional schemes favour larger enterprises purchasing more expensive services.26

• 'Contracting out' programme administration to an independent party seems to have been more successful than administration by government, as voucher dispersal does not become swamped by bureaucracy or politicised by interest groups.

• Robust control systems are fundamental. Some programmes have been plagued by fraud problems, such as collusion between consumer and service provider.

• Voucher stimulation does not address underlying supply-side weaknesses, such as lack of capacity; therefore they are most effective where service provision is relatively developed.

• Vouchers are only partially demand-led. By subsidising transactions between consumer and provider, there is evidence that the behaviour of both becomes distorted. Consumers expect lower prices, and providers expect higher prices. Demand-supply mismatch is exacerbated and existing non-subsidised transactions can be damaged

• Does accreditation/referral adversely affect informal (possibly successful) service providers, in favour of more formal (possibly donor-created) providers?

• There is some evidence to suggest that the stimulation effect of vouchers does not persist, and that training market activity declines once the programme has ended.

26 E.g. $10 voucher for a $20 service is 50% subsidy, but for a $100 service only a 10% subsidy. Conversely the subsidy value of 50% voucher for a $20 service is $10, but for a $100 service subsidy is worth $50.

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• The information component is regarded as having a significant value in its own right. How this facility can be made available in the longer term often remains a challenge.

• An argument is made for using vouchers on a permanent basis to promote access to training for disadvantaged groups. The implication of this is a permanent role (and cost) for government, which raises a number of challenges.

Matching grants REFERENCES: See ILO website (3) Matching Grant Schemes for Enterprise Upgrading: A Comparative Analysis Crisafulli, World Bank Mauritius Technology Diffusion Scheme Biggs, World Bank (9)

HOW IT WORKS: Matching grants are a similar instrument to vouchers, but focused on consulting and technical assistance services for small and medium sized businesses. Matching funding (usually on a 50:50 basis) is provided to the business for identified technical assistance 'projects'. The funding component is accompanied by information and support services, all being administered by a facilitating agency. CONSTRAINTS ADDRESSED: • The valuation or willingness-to-pay problem, by reducing the amount the consumer has to

pay, matching grants encourage SMEs to try a service that they wouldn't have if they had to pay the full amount. Like vouchers, matching grants are seen to introduce SMEs into the consulting market.

• Overcomes SME resource constraints (ability to pay, or ability to deal with consultants). • Overcomes information problems through the information component. SMEs are provided

with information and choices that were previously unavailable. • Incentive to the supply-side to develop and sell services, driven by cash injections into the

market in the form of increased demand-side purchasing power. CRITERIA FOR EFFECTIVENESS: As with voucher programmes, the objective of a matching grant programme is to stimulate market activity by overcoming demand-side awareness and valuation constraints. Thus criteria for effectiveness are: • Increased SME use of consulting services during the life of the programme. • Sustained or increasing levels of consulting transactions after the programme has ceased -

an effective market. • Price expectations between consumers and providers are more 'harmonious'. LESSONS AND ISSUES: • The proportion of subsidy in matching grants needs to be small enough to ensure

consumer 'buy- in' to a project; evidence suggests less than 50% subsidy. • Contracted out administration is most effective • The information and support role of the administrating agent is valuable; tantamount to a

service in its own right • Matching grant stimulation does not address underlying supply-side weaknesses, such as

lack of capacity; therefore they are most effective where service provision is relatively developed. In some cases much of the consulting business is 'captured' by foreign consultants - therefore any supply-side effect is negligible.

• By subsidising transactions between consumer and consultant, there is evidence that the behaviour of both becomes distorted. Consumers expect lower prices, and consultants

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expect higher fees. Demand-supply mismatch is exacerbated and existing non-subsidised transactions can be damaged.

• There is some evidence that matching grants do not stimulate additional (new) consumption. However they may stimulate purchase of consulting services either at an earlier stage or in greater intensity, than if matching grants were not available.

• There is concern that the stimulation effect of vouchers does not persist, and that consulting market activity declines once the programme has ended.

Information provision REFERENCES: See ILO website (3) The FIT Programme: Research and Innovation in BDS ILO Developing Sustainable BDS: Experiences from FIT Kenya ILO How to be Demand-led: Lessons for BDS Providers from information and communications services in the Philippines Miehlbradt, USAID HOW IT WORKS: Information-focused instruments are a 'catch-all' heading emerging as a result of the recent focus on market development and the fact that most developing economies are information poor. Information provision is a characteristic component of both supply-side and demand-side instruments (vouchers, matching grants, business linkages, product development, technical assistance). This interest has developed partly because the information components of voucher, matching grant and linkage programmes have been seen to be valuable in their own right, and partly because information instruments have the potential for wider outreach at lower cost, and are less prone to distortion. Instruments may include: • Directories - 'Yellow Pages' listing service providers • Media: such as radio or newspaper promotion vehicles • Events to bring together consumers and service providers CONSTRAINTS ADDRESSED: • Overcoming SMEs limited awareness of problems and possible solutions • Overcoming the valuation problem that arises because SMEs lack the resources to identify

and assess potential services • Addresses some supply-side information problems by bringing consumers and providers

together. CRITERIA FOR EFFECTIVENESS: • Increased awareness of services available • Increased ability to identify and assess services • Increased interaction of demand- and supply-sides, and greater number of transactions LESSONS AND ISSUES: Experience with explicit information-based instruments is limited, so there are few hard and fast rules. However there are a number of challenges: • Temporary information-based instruments may have the potential to become

commercially viable and useful services in their own right (radio features and advertisements, trade newspapers etc.). The challenge in managing the transition from instrument to service is to avoid distortion and unfair competition within the private sector.

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• Conversely some information-based instruments may have a valuable long-term function, but lack any commercial viability whatsoever and will require on-going subsidy. The challenge is to determine how these functions will be paid for. Arguably this may be a legitimate role for the state or business membership organisations.

Business linkages REFERENCES: See ILO website (3) Business Linkages in Zimbabwe Grierson, Mead, NORAD The Network Broker's Handbook Hatch (10)

HOW IT WORKS: The natural source of trade, growth and skills transfer in many economies is inter- firm linkages, particularly between large and small enterprises. These arrangements are often termed 'win-win' relationships: the supplier (SME) gains access to new markets and capacity development support from the buyer (the buyer serves as a BDS provider), while the buyer (large firm) gains lower-cost, flexible production outsourcing. A business linkage instrument is both a demand- and supply-side instrument which tries to foster a 'culture' of inter- firm linkages. Business linkage interventions commonly involve a variety of activities which, attempt to bring buyer and supplier together: • Identification of opportunities (buyer open houses, supplier capacity audits, feasibility

studies). • Promotional activities (workshops, media). • Facilitating supplier capacity development (usually through the buyer firm). • Facilitating access to capital (through the buyer firm, or from financial institutions). CONSTRAINTS ADDRESSED: • Poor information on demand- and supply-side about benefits and opportunities of inter-

firm linkages. • Weak or inappropriate capacity to manage these kinds of relationship. CRITERIA FOR EFFECTIVENESS: • Volume and value of linkages facilitated. • Volume and value of linkages developed independent of project support (uptake of

linkage culture). • Flows of BDS/capacity development downstream (large to small enterprise). LESSONS AND ISSUES: • This type of instrument works most effectively with small-medium or growth oriented

enterprises. • The 'offer' to both parties has to be one of mutual commercial benefit (win-win); not a

social obligation of the large firm.27 • Business linkages should be a minimalist instrument: as far as possible 'hard' functions

like mentoring, supplier capacity development and finance should be delivered by the buyer or contracted out, not undertaken by the intervening agency.

• Knowing when to stop!

27 Some states have tried to encapsulate large-small firm mentoring into law (E.g. Indonesia's 'Bapak Angkat' or Fostering Scheme). However results have not been impressive as large firms see this as a social contribution rather than good business practice.

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Business linkage interventions are promoted by their proponents as facilitative instruments, which aim to overcome information constraints and develop a 'linkage culture', at which point the need for intervention ends. However it is also argued that there is an on-going role for an intermediary to 'manage' linkages. This alters the rationale and objectives for the intervention. The objective for the intervention is no longer short-term facilitation and stimulation, but the development of a permanent player providing a service in the market place. The instrument itself has become a service.

6.2 SUPPLY-SIDE INSTRUMENTS

Technical assistance (TA) HOW IT WORKS: Technical assistance, along with financial support, is the most common form of supply-side instrument and is often a constituent part of other instruments. Indeed it is difficult to describe TA as an instrument because it comprises a wide variety of different activities, including, training, advice, information, product development and transfer. For the purposes of the tool TA is taken to mean any combination of these, but extended on a one-to-one basis, i.e. to a single service provider, with objectives of increasing the capacity of that provider. CONSTRAINTS ADDRESSED: • Technical skills deficiencies, where the service provider lacks the ability to solve business

problems. • Business skills deficiencies, where the service provider lacks the ability to effectively

manage its business and sell its skills to consumers (marketing skills, costing and pricing skills, ability to identify and develop new products etc.)

• Information constraints, where the service provider's information about the market or new products is limited.

CRITERIA FOR EFFECTIVENESS: • More appropriate technical skills (for solving SME problems). • Increased capacity to develop and sell products that consumers want to buy (improved

'offer'). • Enhanced ability to innovate and respond to changes in the market. • Improved service provider performance (sales, client base, market share, profitability). LESSONS AND ISSUES: • TA is most effective when it is owned by the service provider, rather than imposed by its

donor partner. • TA is more likely to be valued by the service provider if it is transactional, i.e. seen as an

'investment', rather than simply as generous, unconditional assistance. For this to happen the 'offer' of TA from the donor has to be transparent and timebound. The service provider needs to know what it is going to get, when it is going to get it, what the benefit will be and what the donor expects in return, if it is going to regard TA as a serious investment.

• Avoid overengineering support and overburdening the service provider. TA creates capacity, and capacity costs the service provider money, be it in terms of skilled labour salaries, facility maintenance or other overheads. It is imperative that the TA provided should match the earning capacity of the service provider and the requirements of local conditions. TA should not burden the service provider with costs it cannot hope to cover. It is particularly important to recognise that the appropriate level of TA is the one that

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satisfies the service provider's clients, and not necessarily textbook standards of perfection.

• TA should be carefully costed and compared with outputs. It does not make sense to pump $50,000 of TA into an organisation that has annual revenues from clients of $5,000.

• Providing TA to a single organisation not only has potential for unfair competition or distortion with un-supported providers, but its ultimate developmental impact is going to be marginal. BDS by its nature does not lend itself to economies of scale (like microfinance), therefore the outreach of a single BDS provider will always relatively small.

• Is there potential for providing TA to groups of service providers, e.g. in market research techniques?

• There is clearly a level at which TA can serve no practical purpose. If a service provider lacks any ability to add value to a business - does not have skills or the experience to address business problems, then TA is hard to justify.

Financial support HOW IT WORKS: Like TA, financial support is common and often an integral part of other supply-side instruments, and may be used to finance initial start up investment, overheads, product and capacity development or even direct service delivery. CONSTRAINTS ADDRESSED: Financial support is infrequently used as an instrument in its own right; it is more commonly used to finance solutions to other service provider problems (e.g. training to improve business skills). However it can address several constraints: • In a weak or distorted market situation, BDS providers lack incentives (market signals) to

behave in a market-oriented way (and thus fail to develop services that businesses want). Financial instruments can be used as incentives to 're-orient' service providers towards the market place (see 'Business centre approach').

• Private sector service providers may have difficulty in accessing finance for investment or working capital; therefore financial instruments can be used to overcome short-term resource constraints to growth and expansion, just like any other business.28

• Demand-side weaknesses - consumer inability to pay. For equity reasons services may be provided to disadvantaged groups at subsidised rates. This subsidy is delivered via the supply-side by financing the delivery or operational costs (losses) of the service provider.

CRITERIA FOR EFFECTIVENESS: This will depend on the type of financial support instrument but may include: • Financial sustainability of the service provider (based on revenues from sales to SMEs). • Other measures of performance (sales revenue growth, profitability, returns). • Reducing subsidy dependence29 • Comparison of inputs to outputs LESSONS AND ISSUES: • Financial support has the potential to be extremely distorting. Excessive support for a

service provider can lead to burdening it with costs that it cannot cover with earnings from

28 Riddle (8) found that that in a study of 14 African and Asian developing/transitional economies, BDS providers could not acquire an overdraft or line of credit against accounts receivable. 29 One way of measuring this is by subsidy content (cost-price/cost).

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revenues, and cannot hope to afford in the long run. The scale of financial support has to be commensurate with the size, structure, revenues, clients and market environment of the service provider if this kind of distortion is to be avoided.

• Providing financial support to a single service provider has the potential to give it an unfair competitive advantage over other un-supported providers or crowd out other private sector activity.

• Financia l support is more likely to be valued and therefore effective if it is matched to investment by the service provider (and made conditional or performance-related), rather than given as an unconditional donation.

• Building conditionality or incentives into financial instruments can be highly effective, if the right modality or formulae are used. However poorly designed incentives have potential to distort behaviour, and are subject to manipulation and fraud (see 'business centre approach').

• Any subsidy has the potential to distort, but financial support for the BDS transaction - permitting the sale of a service below breakeven price - is the most distorting. As with vouchers and matching grants, the result can be to increase the supply-demand mismatch: providers expect high prices, consumers expect lower prices. Increasingly it is being recognised that financial support for transactions should be avoided if possible.

• If such financial support is deemed necessary (e.g. for reasons of equity) then the wider question of how subsidy will be financed in the long term must be addressed transparently.

Product development REFERENCES: See ILO website (3) Application of Market Led Tools in the Design of BDS Interventions Tomecko, GTZ Inside-Out: the Case of CEFE Kolshorn, GTZ HOW IT WORKS: The development or transfer of new BDS products encompasses a broad array of support, including both technical and financial assistance. Product development has come to be regarded as one instrument that may offer the potential to achieve significant levels of outreach, because it can be used with a wide number and variety of service providers, at relatively low cost and with limited distorting effects. There are several different types of product development instrument: • Development and transfer of standard products based on a 'blue-print' (franchise-style)

such as ILO's Start/Improve Your Business (SIYB) or GTZ's Competency-based Economics For Enterprise (CEFE)

• Market research approach to identify and provide information on market niches and product opportunities to service providers

• Permanent or long-term market-based facilitator to behave as an 'innovation agent' identifying, developing and selling/providing new products to service providers.

CONSTRAINTS ADDRESSED: • Services providers face information or skill constraints that prevent innovation • Market barriers to innovation: the market does not provide incentives to encourage service

provider innovation, because of lack of competition, pervasive subsidy or regulation or strong externa lities.

• Service providers lack the resources to identify new opportunities and assess their potential risk and reward.

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CRITERIA FOR EFFECTIVENESS: • Increased variety of service 'offers' by service providers (new products, new markets, new

client profiles). • Increased capacity of service providers to adapt to new market trends, innovate and

develop new products, independent of project support. • Demonstration effect: un-supported service providers also exhibit evidence of increased

innovation. LESSONS AND ISSUES: • Because the point of intervention is some distance away from the point of service

consumption (the transaction), product development instruments are believed to be less distorting than more direct forms of subsidy.

• Similarly product development interventions offer the potential to work with more than one service provider; reducing the potential for distortion and increasing outreach and cost-effectiveness.

• By underwriting some of the risk inherent in new products and market niches, product development instruments can broaden the market more rapidly than service providers would if did not receive support.

• There is a concern that public-funded innovation simply displaces or crowds out private sector innovation.

• Product development does not necessarily address deeper supply-side skill constraints. Transfer of new products does not mean that service providers' capacity to develop new products is increased, therefore innovation may cease after project support has ended.

• Imposition of new products, without ownership of service provider can be damaging. • There is a risk of introducing standardised - often expensive- products that are ill-suited to

market conditions. • Is there a role for more formal sector private-sector arrangements like franchising and

licensing in developing and distributing BDS products?

Business centre approach or social venture capital approach30 REFERENCES: See ILO website (3) Swisscontact: the Business Centre Approach in Indonesia and the Philippines Hitchins, Gibson, SDC The Business Development Centre Approach of Swisscontact Peru Hagnauer, Swisscontact Establishing business development service companies through joint venture in Uganda FIT/ILO The Business Centre Approach in Latin America and Asia Hitchins, Swisscontact/SDC (11) HOW IT WORKS: The business centre approach referred to here derives primarily from Swisscontact's business centre interventions in Latin America and Asia. Support to service providers comprises a package of start up capital, some on-going financing and technical assistance, and is usually limited to less than 3 years. The defining characteristic of this approach is that support to service providers is provided in a transactional way. • Start up capital is provided on a matching or joint venture basis. • Financial support is structured and performance-related (based on the achievement of pre-

agreed targets for financial sustainability).

30 Business centres have come to mean different things to different donors and they are certainly not unified by a single characteristic approach to intervention. The business centre approach here refers to a social venture capital approach utilising incentive-based support.

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Rather than business centre approach, a more accurate name for this instrument is social venture capitalism or an investment approach. The implementing agency: identifies partners (individuals or organisations) with potential as service providers (either new or existing); 'invests' support in these partners; and has a clear expectation of a 'return' (services delivered to SMEs on a profitable basis). CONSTRAINTS ADDRESSED: • Weak or distorted market situations provide few incentives to encourage BDS providers to

behave in a market-oriented way. Service providers' capacity, market positioning and services therefore seldom reflect business demand. Incentivised support provides a short-term stimulus to 're-orient' service providers towards the market place.

CRITERIA FOR EFFECTIVENESS: • Development of profitable private sector BDS providers serving SMEs. • Other performance criteria that assess service providers' ability to react to and take

advantage of market opportunities (product development, market penetration, expansion of client base etc.)

• Assessment of effects on competition: relative prices and demonstration effect (increased number of private sector providers encouraged to enter the market independently).

LESSONS AND ISSUES: • The most effective partners are those where individual ownership (in terms of investment,

control and returns) are high, in contrast to when management has been separated from ownership. The institutional form (individual, company, NGO etc) is less significant than the ownership structure.

• The wrong incentives encourage inappropriate behaviour. For example incentives based only sales will encourage sales maximisation, with little consideration of profit earned on sales, and thus would be detrimental to developing market-oriented behaviour and financial sustainability.

• This investment-style requires different competencies in intervening agencies; tight systems of financial management to control incentive schemes and potential fraud, staff with business and finance skills, entrepreneurial attitudes to risk and innovation, working with a portfolio of partners and the ability to terminate relationships with under performing partners.

• The instrument is only partially transactional. Financial support is still in the form of non-repayable grants, and non-financial assistance is seldom clearly defined. Arguably, to reflect a truly private sector approach and minimise distortion, financial support could be in the form of loans and leases, and technical assistance offered as a distinct and costed bundle of services.

• There is a danger that service providers, if they possess the appropriate capacity, will simply drift upwards and deliver services to larger enterprises or donor agencies, in pursuit of financial sustainability.

• Supporting a small number of service providers can create unfair competitive advantage and artificial 'islands of excellence' in the market. Outreach may also be low.

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ANNEXES

ANNEX 1: DEFINITIONS The paradigm shift in BDS has brought with it a vocabulary of words such as 'markets', 'demand', 'supply', and 'transactions' which is relatively new to development. Unfortunately there is a danger that it is accompanied by a descent into meaningless slogans and imprecision. In the interests of clarity the tool offers a few definitions. Business Development Services (BDS): Any non-financial service to business, offered on either a formal or informal basis. A market: a set of arrangements by which buyers and sellers are in contact to exchange goods or services - the interaction of demand and supply. (Can be delineated by geography, service or product type, consumer profile etc). A market transaction: the exchange between demand and supply is at full market price (The price at which suppliers are prepared to sell and consumers are prepared to buy, in an unsubsidised situation). Demand: the quantity of goods or services that buyers wish to purchase at any conceiveable price. (Describes the behaviour of consumers) Supply: the quantity of goods or services that sellers wish to sell at any conceiveable price. (Describes the behaviour of suppliers) Market development-based or oriented: activities that try to make the interaction between demand and supply more effective. Donor: The funding agency that pays for development activities. Facilitator: The agency which implements interventions - may be also be the donor or may be separate. Service provider: The individual, organisation or mechanism which provides BDS directly to SMEs. Intervention: The temporary, facilitatory mechanism by which donors and facilitators try to affect change (typically a project). Instrument: the type of approach or methodology used for intervention (e.g. vouchers, information provision, product development, technical assistance). Service: the product consumed by SMEs (e.g. a fax service, technical training, a business plan). Sustainability: the capacity to ensure that benefits continue beyond the period of intervention.

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ANNEX 2: SUMMARY OF THE DONOR COMMITTEE PRINCIPLES OF GOOD PRACTICE IN BDS It is recommended that reference should be made, where necessary, to the Donor Committee publication – or the original and larger document from which it was produced. There were originally 12 key principles identified in this document; these have been summarised into 7 core principles. 1. Business-like and demand-led: the best organisations at working with small businesses

are those which are like small businesses – and “close” to them - in terms of their people, systems and values. This basic principle – possibly the most important for BDS organisations - has huge implications for partners and donors in relation to who they are, what they do and how they work.

2. Sustainability: BDS interventions should ideally be based around a credible and shared

picture of how we can develop providers and services in a sustainable way - so that small businesses themselves can experience sustained improvements in their performance. While there is no general consensus on what sustainability means, it is important for organisations themselves to develop their own “picture” of sustainability.

3. Focused with strategic awareness: borrowing from business, good practice suggests that

the most successful interventions are those which focus specifically on their “core competence” and on core clients. In particular, mixing with financial services is generally not useful.

4. Participation: building on ownership: good BDS organisations are likely be led by

someone with a strong sense of ownership. In seeking to develop and work with partners, we need to understand the importance of building on people’s own resources, ideas and plans.

5. Enhancing outreach: interventions should have an explicit approach to achieving greater

outreach, through for example, market mechanisms. 6. Subsidiarity: under this principle, responsibility for services should be left to the

“lowest” possible level to those who are closest geographically and socially to SMEs. This principle is particularly important in defining a role for the state, one that usually does not involve direct delivery of services.

7. Tight performance measurement: BDS should be based on tight measurement of costs

and, in particular, the use of financial information in the decision-making. This requires that adequate systems are established – in donors and implementers - in relation to the allocation of costs to different functions. In the wider sense while there are no real international benchmarks for performance it is important to develop approaches look at core indicators.

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ANNEX 3: ASSESSING BDS PROVIDERS The framework presented below lists some of the key characteristics that can be found in successful BDS providers, and suggests why they are important. The characteristics are consistent with the principles of good practice in BDS outlined above. The framework should be used to develop specific questions or criteria for service provider assessment. Sample questions provided are illustrative and for guidance only; users should develop more detailed, questions that reflect the context of their project environment. The important point is to develop questions that give real meaning to the characteristic outlined (or indeed the BDS good practice principles).

OWNERSHIP: who's in control? Why important? Sample questions Close to client - personal ownership • Is the manager/operator the owner of the service provider? Is defining characteristic of SMEs • Has the manager invested own money in service provider? Legal, organisation structure • Who makes decisions: manager or external party? E.g. Incentives: risk, reward Negotiate contracts; Sign cheques; Authorise significant Responsiveness purchases (e.g. computer); Hire and fire staff. Founder problem? • Is decision-making or other operation delayed or constrained by absence or ability of owner/manager? (Founder problem)

COMMERCIAL ORIENTATION: business-like? Why important? Sample questions Clarity about roles & relationships • Does service provider have a non-business background (e.g. social devt.)? • Historical background • Do people regard themselves as a business or an assistance programme • Organisation culture (Is there a 'mission statement'; Does service provider 'fly a donor flag')?

- Perception: customers or • Do clients regard service provider as a business? beneficiaries? • Does service provider have transactional relationship with clients?

- Motivation: profit or • Does service provider have 'mixed' relationship with clients; e.g. credit cost recovery? with BDS; non-commercial activities with BDS etc?

OFFER: core competence and products

Why important? Sample questions Knowing what you're good at is • Can service provider identify what their core competence/offer to SMEs is? is essential in developi ng a • Is service provider able to differentiate themselves from competitors Transactional relationship (Offer, skills, products etc.')? • Confusing signals to clients • Specifically, what does service provider think that SMEs get from the • Relevance and benefits unclear services it provides (what problems/solutions/benefits)? • Credibility and willingness to • Who are clients? What is market niche?

pay weakened • Can service provider's clients give clear answers to above questions? • Efficiency and cost implications • Has the 'service mix' frequently changed (is the service provider desperately scrambling around to find something that sells)?

PEOPLE: business-like? Why important? Sample questions Service industry is a 'people • Do key people have direct SME experience? Do they have a demonstrable Business'. For BDS this means track record? People who: • What background: eductation, professional, remuneration etc? • Understand SMEs' reality • Is background consistent with expected fees to charged to clients? • Reflect ways of working, • Do key people have a clear understanding of the specific benefits that

remuneration that is appropriate they deliver to smes? for SMEs • Is staff remuneration cost/expectation consistent with service provider's

• Have capacity to deliver tangible prices, revenues, and with clients' financial resources? benefits to SMEs • Is remuneration incentivised (performance-based)?

• Are key people flexible/entrepreneurial or bureaucratic/risk -averse

IV

RESOURCES & CAPACITY: viability or sustainability Why important? Sample questions Key factors in determining • Does service provider have appropriate skills, people, facilities to Future viability: deliver services sustainably? • Skills/ability to deliver • Can service provider finance capacity (and new capacity development)

services: technical/business from client revenues? • Staff mix • Where does the service provider's money come from? • Sources of finance: equity • What is the balance of revenue-earning to non-revenue earning staff?

debt, client over-dependency? • Does the service provider depend on a small no. of clients for bulk of • Over-capacity: overloading or revenues? (Also are main clients SMEs or other donor projects?)

burden • Are financial projections realistic? • Networks and linkages

SYSTEMS: getting information and measuring performance Why important? Sample questions Information is required to • Do existing 'systems' or procedures produce info that is really needed? manage and make decisions. (are systems appropriate for service provider - inputs/outputs?) • Costing and pricing • Are systems 'owned' by service provider or imposed by external party?

Resource allocation and • Do financial controls allow staff time, money use etc. to be be assessed? investment • How are pricing decisions made? How are costs accounted and allocated?

• Client care and development • Is client feedback captured? How is it utilised? • New product and market • Who are clients and where do they come from?

development • Systems need to be appropriate:

control and cost burden

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ANNEX 4: KEY LESSONS FROM MICROFINANCE Businesses are not pliant beneficiaries, they are discerning consumers The majority of small businesses never receive government or donor support; their entire existence is spent in a market context and underpinned by transactional relationships, where they are discerning consumers of goods and services. Conventional approaches to BDS have tended to be paternalistic or 'welfare- like' where, because the business is only a recipient of 'help' rather than a paying customer, they have little discretionary power over what they receive in terms of service relevance, utility or delivery mechanism. Recent experience shows that, as in microfinance, SMEs want and will pay for services that are relevant and useful. Payment is important Payment is a key ingredient in developing a transactional relationship and a business's willingness to pay for a service is a strong indication of service utility or relevance. Providing services free of charge dilutes this market signal. Moreover, free services have to be rationed and directed, and like microfinance, with no guarantee that those targeted are those reached i.e. free services are often 'captured' by people who can afford to pay. Clarity about sustainability matters Microfinance interventions usually have a clear picture of sustainability; financially sustainable organisations delivering services to (poor) clients. In BDS this clarity is often lacking. The issue about sustainability is not cost recovery per se, but about being transparent about how access to services is to continue after intervention ends. The simple fact is that if service delivery requires continual subsidy, reaching more SMEs will always mean more subsidised funds: outreach is constrained. A full range of services: going beyond training and counselling Given the importance of access to services, it is clear that SMEs will require a range of continuously changing services that they find useful, rather than one-off assistance in the form of a single standardised product (which the development community thinks that SMEs need!). In practical terms this means that what we consider to be BDS - conventionally formal training, consulting and counselling - has broadened to include the whole array of non-financial services: from market access to workspace management, from technical training to business tourism, from business linkages to communication and secretarial services. The importance of measurement A key underpinning of the development of microfinance has been measurement e.g. portfolio quality, organisational performance and productivity. BDS interventions often lack credible information, and this vacuum has hindered analysis and improvement. The need for better measurement in BDS has been widely recognised, and is now the focus of considerable attention from development agencies, aimed especially at the development of performance measurement standards.

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ANNEX 5: SELECTED REFERENCES Referenced in text: (1) Gibson, A. The Development of Markets for Business Development Services: where we

are and how to go further (1999), ILO (2) The Committee for Donor Agencies for Small Enterprise Development Business

development services for SME development: preliminary guidelines for donor-funded interventions (1998)

(3) ILO website containing case studies, guidelines and other documents from BDS

conferences in Harare, Rio de Janeiro and Hanoi:

http://www.ilo.org/public/english/employment/ent/sed/BDS/donor/index.htm (4) Field, M, R. Hitchins & M. Bear, Designing BDS Interventions as if Markets Mattered

(2000) USAID Microenterprise Best Practices Discussion Paper - draft, Development Alternatives, Inc.

(5) Begg, D., Fischer, S. & Dornbusch, R. Economics (1987) McGraw-Hill Book Company

(UK) Ltd. (6) Haggblade, S & M. Gamser A field manual for Sub-sector Practioners (1991) USAID

GEMINI Project, Development Alternatives, Inc. (7) Miehlbradt, A.O.Applying market research tools to the design and improvement of

business development services: technical note (1999) USAID Microenterprise Best Practices, Development Alternatives, Inc.

(8) Riddle, D. What do we know about BDS markets? (2000) Service-Growth Consultants,

Mekong Project Development Facility (MPDF). (9) Biggs, T. A Microeconomic Evaluation of the Mauritius Technology Diffusion Scheme

(1999) World Bank. (10) Hatch, R. The Network Broker's Handbook, National Institute of Standards and

Technology, Technology Administration, US Department of Commerce. (11) Hitchins, R. Assessing the Experience of Swisscontact's Business Centre Approach in

Latin America and Asia (1999), Swisscontact/SDC (SDC Issue Paper No. 3).

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Other references: Anderson, G. The Hidden MSE Service Sector: Research into Commercial BDS Provision to MSEs in Vietnam and Thailand (2000), ILO. Hitchins, R. A benchmarking guide for Swisscontact's business centre approach in Indonesia (1999) Swisscontact. Riddle, D. Service-Led Growth: The Role of the Service Sector in World Development (1992) Praeger Publishers (USA). Künzi, P, SDC's CIP/SED Program in the Nineties: Review and Challenges Ahead (1999) SDC (SDC Issue Paper No. 4).