|International Best Practice in Micro and Small Enterprise Development - Working Paper 2 - Micro and Small Enterprise Development and Poverty Alleviation in Thailand - Project ILO/UNDP: THA/99/003 (ILO-ISEP - ILO - UNDP, 2000, 80 p.)|
|4. Providing business development services|
Business development organizations should practice what they preach and operate in a business-like manner. This implies that they should have a good understanding of the needs of their clients. Their staff should be aware that their long-term position in the organization depends on its overall performance and, therefore, their own performance should contribute positively to this. They should be able to quickly adjust to changes in demand. BDS managers should be fully convinced of the need to achieve full or at least some agreed upon level of financial sustainability over a given period, and strive to meet this commitment. They should also be aware of the comparative performance of other business development service providers in the same market, in the same way that private entrepreneurs should follow closely the performance of their competitors.
BDS organizations such as these can be promoted in a number of ways. Firstly, the various support agencies such as government and donors need to be clear about what is expected from the BDS providers. There should be no ambiguities in the objectives to be achieved. For example, if some level of financial sustainability is to be achieved, then the service provider should be free to select its clients, to setting the level of fees it may apply, or to other various ways of generating revenue.
In terms of organizational capacity, the BDS service provider should use a businesslike vision and promote a corporate culture. It should maintain a transactional relationship with its clients, and client satisfaction should be a constant concern. The legal status of the service provider should facilitate an open and business-like management style, and it should have the capacity to freely select its staff; the freedom to adopt a salary structure which will help attract staff with the right qualifications, and have the possibility of providing bonuses to the better performing staff members. In addition, the service provider should be close to its clients. Thus, it should not be required to cover too large a geographical area. It would also be useful that representatives of MSEs be members of the board of directors (or similar body) of the business development organization.
In terms of technical capacity, it is important that the service provider focuses on a narrow range of functions in order to ensure the provision of quality services. Finally, it is important that the service provider uses various approaches to achieve some level of financial sustainability, such as finding ways to make the charging of fees more attractive for the entrepreneurs; diversifying funding sources; and finding ways to reduce costs.
A very important factor in the success of a service provider is the selection of the chief executive of the organization. In addition to meeting solid qualifications for the job, this person should exhibit the best characteristics expected from successful entrepreneurs, particularly a keen entrepreneurial spirit. This implies that a routine bureaucratic transfer of a civil servant from a ministry to the business development organization is likely to defeat the whole purpose of establishing this type of organization.
Another important factor is the need for the business development organization to specialise in a small number of technical areas, rather than trying to cover the whole field of BDS. Service providers may specialise in one or two services (e.g. training), sectors or clientele. The trend towards specialisation is being complemented by a parallel trend towards networking. Thus, a specialised service provider may refer a client to other BDS providers specialised in other services.
The issue of cost-effectiveness is also very important in the growth of a BDS provider. It implies two sets of complementary measures. On the one hand, this involves reducing the cost of specific activities, and seeking additional external resources for particular tasks. One the other hand, cost-effectiveness should result in greater outreach and impact and should attract further funding by donors and the government. (A service provider is like a private enterprise - the more competitive it is, the more clients will use its services).
In relation to membership associations, governments and donors should carefully assess the relevance and effectiveness of these organizations, including their "internal politics", before allocating funds for their BDS activities. Funding should be allocated on a priority basis for services that are not usually provided by service delivery organizations. For example, funds could be allocated for social services provided by organizations to their members (e.g. some embryonic form of social security), as well as assistance to members to participate in fairs, supply of raw materials, and other development services.
The past few years have witnessed the development of a large number of innovations related to the establishment of new types of business development organization. Out of these, three models have been selected for further elaboration in this working paper. These have attracted the interest of a large number of donors and governments. One of the models relates to the long-term strategy for facilitating access to BDS by MSEs discussed earlier. The second model is based on the establishment of various types of business centres. The third model is a recent adaptation of an approach used over ten to fifteen years ago in relation to the informal sector. This model focuses on the establishment of MSE associations that could play a similar role to that played by professional organizations of medium and large enterprises.
4.3.1 Promoting private sector business development organizations
Earlier, it was noted that the provision of BDS to MSEs in industrialised countries was mostly the result of private sector transactions, and benefits from the active involvement of a wide range of private sector organizations. The profit motive is, in many cases, the driving force behind the provision of BDS. In other cases, it may be the realisation that all enterprises, whatever their size, should join forces to achieve common goals. Thus, MSEs in industrialised countries do not face major problems in accessing business services - obtaining information, procuring the most modern type of equipment, finding clients, etc. Most of these services are provided through normal commercial transactions. In other cases, the MSE gets the services from professional organizations where the interests of the MSEs are well represented. The provision of BDS in developing countries should, in the long-term, follow the above model.
4.3.2 Promoting business development centres
The establishment of business development centres is an approach that was intitiated a few years ago by a number of donors and international organizations, including the ILO. Interestingly, many such centres were established in Central Europe, probably because there were few government agencies already involved in providing business services, and there were also few MSEs before the adoption of a market economy by these countries.
Business development centres are known under various names, including enterprise development agencies (EDAs) or simply business centres. Business centres are usually established as semi-private bodies enjoying a large degree of operational autonomy under the aegis of a board of directors or similar body. In practice, they are very close to private consulting firms in the way they operate. There are few restrictions on the type of clientele that they should serve, or the way any generated surplus should be used. Although there have been cases of political interference, the large majority of business centres have been free from this type of interference. The main reason why business centres were not established as private sector firms from the start is that their establishment required initial "pump priming" funding from donors or governments. It was not possible to transfer funds in the form of a grant directly to a group of private individuals.
While there are a number of models of business centres, the following one encompasses all the features one may find in the best-known, established centres. It is based on business centres established with ILO assistance in a number of countries in Central Europe under the name of Enterprise Development Agencies (EDAs).
The EDAs were established after a careful study involving identifying the needs of the entrepreneurs, highlighting the potential of a number of economic sectors, and reviewing the existence of other local business development organizations. In order to be able to operate in a business-like way and to achieve financial sustainability, it was essential for EDAs to be granted maximum autonomy to operate based on commercial principles. To achieve this the centres were granted the legal status of an autonomous, not-for-profit agency, operating under the aegis of a board of directors. The membership of the board included representatives of the local authorities, associations of private entrepreneurs, local development agencies, the banks and other local bodies involved directly or indirectly in MSE development. Any possible surplus generated by the EDAs was to be strictly used for non-commercial development activities and/or for expanding the capacity of the centres.
The board of directors tend to have three main functions: firstly, to formulate and approve the broad policy guidelines and procedures under which the centres will operate; secondly, to oversee the financial transactions and activities of the centres (the board ensures that the centres do not deviate from their original objectives, and that the revenues generated are used properly); thirdly, to perform the role of an intermediary between, on the one hand. the staff and, on the other hand, the local authorities, donors and other relevant bodies.
The EDAs perform some or all of the following functions, depending on local circumstances and market demand.
· Business and vocational training - either directly or through other training institutions - to both the owners of the enterprises and their workers, using training materials such as the ILO's Start and Improve Your Business (SIYB);
· Assistance in preparing business plans that will help entrepreneurs secure loans from banks;
· Technical information, such as information on processing techniques; procurement of equipment and materials; local, regional and international market opportunities; the policies and regulations related to the establishment and the operation of businesses;
· Accounting, secretarial and other services;
· Counselling and other consultancy services that help entrepreneurs improve and expand their business.
In addition to delivering various types of services to MSEs, the EDAs undertake the following activities required for the effective delivery of these services:
· Carry out various types of studies, such as general market studies concerning priority sectors, needs surveys of MSEs, studies on technology selection, and identifying the availability of skilled labour;
· Establish and maintain an information centre for MSEs which can include operating a
computerised database, collecting and storing information, operating a question and
answer service, operating a library, and even publishing a newsletter;
· A credit delivery scheme in situations where there are no credit providers in the area covered by the EDAs, or where suitable forms of credit are not available;
· Undertake feasibility studies for the establishment of MSE industrial estates or common facility services centres, and facilitating the establishment of these in close collaboration with the MSEs themselves, as well as associations of private entrepreneurs and local authorities;
· Assist entrepreneurs to establish subcontracting arrangements with local or foreign firms;
· Develop local promotional activities for the benefit of MSEs;
· Train staff of EDAs established at the regional, provincial or district level, and provide them with various services they require for their work;
· Liaise with local authorities to help them in assisting MSEs to overcome various constraints, such as the lack of infrastructure or premises, or cumbersome registration procedures;
· Various commercial activities for the dual purpose of achieving financial sustainability and providing assistance to MSEs in a number of ways.
Several EDAs have been established in recent years as part of MSE support projects, and it is still too early to determine the extent of their success. However, preliminary evaluations show that they are performing well. Their impact on the local economies is starting to be felt, with hundreds of MSEs having been established in relatively small countries with little experience of a free market economy, and some of the EDAs are recovering over 50 per cent of their running costs. It is hoped that this proportion will be increased to 90 per cent by the end of the first five years of their operation.
4.3.3 Promoting associations of MSEs
Many associations of MSEs have been established over the past 20 years, mostly made up of micro enterprises in the informal sector. The ILO has been very active in the promotion of such associations, especially in Africa and Latin America. These associations can provide a variety of services to their members, including some level of social security protection.
More recently, activities were initiated to promote associations of larger and more established MSEs, such as those existing in industrialised countries. The rationale behind these initiatives is that the majority of small enterprises do not join as members of professional organizations, as these are mostly made up of medium and large enterprises. They MSEs are, therefore, somewhat isolated with little possibility of playing an active lobbying role as a group, or availing of various services available to members of the organizations of larger enterprises. Large numbers of such associations can be found in Africa, Latin America and some countries in Asia (e.g. the Philippines), yet few associations have been established in many other Asian countries such as Thailand.
In many countries, associations of MSEs have established national federations and in Africa and Latin America such federations have joined forces to establish regional federations. One very successful regional federation covers the national federations of seven Central American countries, under the name of PROMICRO. This regional federation organises many useful events for the benefit of its members. It has established a Web site that can be accessed by the MSEs in these countries in order to obtain information, or even to establish commercial transactions with other members.
Associations of MSEs are often based on a sector or location. Some are small, while others may number tens of thousands of members. This is the case of the association of street vendors in Metro Manila, and this association was recently able to establish a commercial bank for the benefit of its members.
While some associations were established without any outside assistance, the majority of them did receive some assistance from the government or donors. The following principles should guide those involved in promoting and establishing MSE associations.
· They should use a bottom-up approach to ensure the full commitment of the members to the objectives of the association, and sufficient time should be taken to promote the idea among potential members;
· Promoting associations should avoid any political interference, as in some countries such interference has ended up in the destruction of the associations;
· The selection of an association leader who is highly respected by the majority of the members is an important factor;
· The efficient management of an association is a necessary condition if it is to provide quality services to its members, as well as for its long-term survival. This may require some initial technical assistance to train association managers. In some cases, associations have hired professional managers;
· Associations should reach financial sustainability after a certain period.
Associations can provide a variety of services to their members in areas such as information, training, consultancy services, financial services, and even some form of social security coverage. Some associations are also involved in commercial activities, such as the sale of raw materials to their members at preferential prices. Some play the role of intermediaries in subcontracting arrangements, organise trade fairs, or run common facility services centres. In many cases, these commercial activities are operated as separate profit centres, and they help the associations cover the cost of their other non-revenue-generating activities. In some countries, associations play an important lobbying role similar to that played by professional membership organizations. In other countries, they are not in a position to play such a role, and consequently restrict them to servicing the needs of their members.
Associations can become effective service providers, but they may require some limited assistance from donors and governments in the early stages. They can be in an excellent position to assess the needs of their members, moreso than other organizations. It should be possible for them to establish separate units that will provide specific services, such as training, marketing or consultancy services, and this would probably require the recruitment of specialists to run these units. However, this approach should be much more efficient and effective than one based on the establishment of new government-funded business centres.