|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.)|
|1. Introduction to business development services|
Following the review and assessment of institutional business services development (BDS) providers in Thailand (see working paper 1 prepared under this ILO/UNDP project), this working paper elaborates on the coverage, concepts and issues relating to the design and provision of, and access to business development services and provides examples of international best practice.
Micro and small enterprises (MSEs) require two types of services: financial services and non-financial services - more commonly referred to as "business development services" or by the acronym "BDS". Financial services help existing or would-be entrepreneurs acquire the means for establishing or expanding a business (e.g. finance for machinery, production premises, and working capital). In the majority of cases, these services refer to bank loans or credit made available through wide-ranging credit schemes. In recent years, new types of financial services have been offered to MSEs. These include the leasing of equipment, joint ventures, and special types of subcontracting arrangements. The working paper on financial services (number 4), prepared under the ILO/UNDP project, provides information on financial services available for MSEs in Thailand.
Business development services (BDS) refer to the provision of information, knowledge and skills, as well as advice on the various aspects of a business. This definition of BDS implies a conscious action performed by the service provider for the benefit of the receiver of the service. Thus, the action of an individual using savings for establishing a business may not be considered as a "financial service". Similarly, information obtained inadvertently by an entrepreneur (e.g. on a supplier of materials) may not be considered an "information service". This is an important distinction that is not made by some practitioners who tend to use the term business development services whether a service provider is involved or not.
BDS are provided to help owners of enterprises get new ideas on how to improve their business through, for example, increasing productivity, reducing production costs, or accessing a more profitable market. These services include the transfer of information in various forms through, for example, consulting services or special events (e.g. exhibitions and trade fairs). The impact of this category of BDS depends on how the owners of enterprises make use of the new ideas.
Business development services may also be required for the establishment and operation of an enterprise. Services required in this instance may include legal services (e.g. registration of the enterprise), training of owners and workers, special laboratory services for testing goods produced by the enterprise, and assistance in arranging contracts with larger firms.
Formal BDS are those provided through special arrangements, conditions or contracts between a business development agency and the owner of the business. They include services provided by public and private sector organizations, private sector consultants and consulting firms, as well as services specifically included in a contract between the owner of the enterprise and a supplier or contractor. These services may be provided free-of-charge or for a fee. Informal BDS are those that are not provided by service providers. They include information and advice provided by the relatives, friends or employees of the owner of the enterprise, as well as those services provided in the context of normal commercial transactions with suppliers, clients or contractors. Informal BDS also include information obtained from media programmes (e.g. radio and television). These services are usually obtained free-of-charge. In many situations, these are generally the most important sources of BDS used by MSEs.
Business development services can be provided by commercial, for-profit agencies, or by institutions that are not-for-private-profit organisations. Those services provided on a commercial basis include the services made available by private consultants and consulting firms, as well as those provided under contract in the context of commercial transactions with suppliers, contractors or firms offering specialised services (e.g. repair and maintenance of equipment). The fees applied in these cases cover the full cost of the services. Making profits is the main motivation of these service providers. These services are demand-driven and client satisfaction plays an important role in the growth of these service providers. BDS provided on an institutional basis includes those made available by private sector organizations (e.g. chambers of commerce), government organizations and institutions or associations of MSEs and NGOs, under various arrangements and conditions. These services are usually provided free-of-charge or at subsidised fees, for non-private-profit motives, as part of the organization's mandate to promote the MSE sector. These services may or may not be demand driven. Indeed, good quality BDS providers respond to quantifiable demands of the MSE sector.
In most developing countries and emerging economies, those involved in MSE development usually pay more attention to financial services than to the non-financial BDS. Working paper 1 indicates that this is also the case in Thailand. This emphasis, however, is often misplaced. Many studies show that the large majority of micro-enterprises, and to some extent small enterprises, use their own savings for establishing a business or their accumulated profits for expanding an existing one. They do not attempt to obtain finance from external sources. Furthermore, MSEs are often discouraged by banks from applying for finance, and available credit schemes usually only reach a small proportion of the total population of MSEs. A large proportion of people wishing to establish a business are doing so, therefore, without the benefit of financial services.
Few existing or potential entrepreneurs can establish or expand a business without access to some form of business development services, as defined earlier. These may be formal or informal services, provided through commercial or institutional sources. The proportion of MSEs that never use development services of one sort or other is very small. Most MSEs need some information and training, whether this is provided through formal or informal channels. They may also need to deal with contractors or intermediaries if they are involved in subcontracting, or the services of a technician may be required for major repairs to their equipment. Access to quality BDS by MSEs can boost the growth and competitiveness of the enterprises. It can also increase the impact of existing financial services and improve the capacity to repay loans.
The impact of BDS depends on the proficiency of the service provider and on the use made by MSEs of other services. BDS should be demand driven, and the owner of the enterprise should recognise the need for BDS assistance. However, the service provider may also have a role in helping the entrepreneur to identify the specific problems of the enterprise, and in offering appropriate assistance. This should ensure that the BDS services are relevant.
Service providers should be sufficiently qualified to provide good quality services. Consulting services should be based on a good understanding of the problems faced by the enterprise. The entrepreneur should have confidence and trust in the BDS provider, and this should increase the chances of the entrepreneur adopting and applying the relevant advice of the service provider.
MSE owners and managers are a mixed group. There are those that exhibit a high degree of initiative and who are able to actively seek and take full advantage of information. There are those who are more passive. Studies in several countries have shown that the former group comprises only five per cent of MSE owners, although this group contributes to over 50 per cent of new jobs. They manage what is called "growth-oriented firms", and are frequently referred to as the "gazelles". Therefore, a large proportion of the total impact of BDS could be attributed to this small group of entrepreneurs. If this is true, it can have important policy implications in relation to the provision of institutional BDS. Due to their limited resources, current providers can only reach a small proportion of all entrepreneurs. Therefore, they need to decide to give priority to the "gazelles" among entrepreneurs, or to assist any entrepreneur seeking such services.
The provision of BDS to this small group of entrepreneurs exhibiting a high degree of entrepreneurial spirit could be justified according to the criterion of maximum impact. However, from an ethical and political point of view, a formal policy on this issue may not be feasible. Furthermore, it can be a difficult, if not impossible task, to identify and find these "gazelles" or "winners".
The involvement of government and non-government organizations in the provision of subsidised BDS is prevalent in many developing countries and countries in economic transition. Few governments in industrialised countries are involved in the direct (or even indirect) provision of BDS. Some NGOs are involved in these activities, but they are few and mostly deal with vulnerable groups in society.
In industrialised countries, the provision of BDS is largely the job of the private sector, and is manifest in many forms. In relation to technology transfer, equipment manufacturers compete with each other in order to increase their share of the MSE market. They constantly develop equipment that is more advanced and use aggressive advertising to attract MSEs. The equipment is made available through a wide network of dealers, which also provide maintenance and repair services. Leasing of equipment is also available to interested entrepreneurs who may fear that equipment may quickly become obsolete. Innovators develop more advanced production technologies and sell their patents to larger firms for their commercialisation. Entrepreneurs subscribe to a wide range of technical magazine which provide information on the latest technologies and equipment. They visit specialised fairs and exhibitions where they can get first hand information on developments in their trade. Thus, it can be seen that many of the most important aspects of technology transfer are dealt with by the private sector.
The same applies to marketing information. In industrialised economies, many owners of MSEs tend to subscribe to various specialised magazines which provide the latest market information on their field of business. They become members of trade associations or chambers of commerce which represent the MSE sector. These organizations carry out research on market trends and manage information centres, which provide up-to-date market information to their members. This information can also be obtained from specialised fairs. A well-developed network of wholesalers and retailers, and good telecommunications, transport and financial networks facilitate commercial transactions and the quick processing of orders. More recently, many MSEs are making use of electronic commerce (called "e-commerce") through the Internet. However, such marketing information is not so easily accessed in developing countries.
The situation in the area of consulting services is somewhat different as MSEs in both industrialised and developing countries do not appear eager to use the services of consultants. A recent study in one part of Switzerland shows that a very small proportion of MSEs have used the services of a private consultant or consulting firm in order to find a solution to a particular problem or to get advice on how to improve their business. However, there are a few important differences between industrialised and developing countries in this respect. The majority of owners of MSEs in industrialised countries use the services of an accountant to help them prepare their yearly statement for the relevant authorities. Accountants also help in assessing the financial situation of the enterprise. Another difference is in the increasing use that MSE owners make of software to carry out various assessments of the enterprise, and to help decide on the best course of action. This software may be partly considered as a substitute for consultants.
Linkages between MSEs and larger enterprises, as well as among MSEs themselves offer additional possibilities for access to BDS. These linkages can take the form of joint ventures, subcontracting arrangements, technology transfer and marketing contracts. Such linkages are essential for the growth and international competitiveness of the larger enterprises, particularly in the face of globalisation and trade liberalisation. They also contribute to the development and growth of MSEs.
Similarities and differences between BDS in industrialised countries and developing countries and countries in economic transition can be found. The main similarity is that the large majority of MSEs access BDS from the private sector - either formally or informally. Studies carried out in a number of developing countries show that one of the most important sources of business services for MSEs are their suppliers and clients, as well as larger firms with which they have established subcontracting arrangements. Approximately five per cent of MSEs access business services provided by government agencies and NGOs. Another similarity is the infrequent use of consultants, the main difference being that accountants are generally used by MSEs in industrialised countries. However, the main difference between industrialised countries and developing countries is that MSEs in industrialised countries make a greater use of formal business development services. Furthermore, the average educational level of owners of MSEs in industrialised countries is generally higher than that of developing countries and emerging economies. These higher educational levels facilitate a more effective use of available services, especially those with a literacy requirement - such as many forms of training.
There are more sources of information in industrialised countries than in developing countries. Thus, entrepreneurs in industrialised countries are quickly informed about new technological changes, market trends, etc. This can help the entrepreneurs to make quick adjustments in the enterprise and maintain their competitive edge.
In contrast to MSEs in developing countries, those in industrialised countries are generally considered as equal players with the larger ones. They are associated to the larger enterprises through a dense web of linkages, which significantly increase the inter- dependence between all sizes of enterprises. These strong linkages facilitate further access by MSEs to a wide range of services. Furthermore, MSEs are well represented in private sector organizations and can play an important role in decision-making within these organizations. On the other hand, these linkages are still weak in developing countries, and few MSEs are members of private sector organizations.
In industrialised economics, many large equipment manufacturers and suppliers of raw materials and intermediate inputs are aware of the importance of the MSE market, and are active in responding to demand for capital goods, services and inputs from this market. In developing countries, large enterprises are less responsive to this market for reasons not clearly established. Thus, MSEs are frequently obliged to depend on suppliers of expensive imported equipment or sub-standard second hand equipment. Furthermore, maintenance and repair services are not easily available for this type of equipment.
Investment in education by both governments and the private sector should promote a new breed of better-educated entrepreneurs capable of competing with their counterparts in industrialised countries, and capable of using new information and other technologies in their business. Promoting more use of new information technologies and the facilities provided by the Internet for e-commerce or for accessing all types of information of interest to MSEs is also essential.
In expanding the role of the private sector in BDS provision, private sector organizations should promote a broader membership base to increase the representation of MSEs. They should take measures to strengthen, expand and diversify linkages between all sizes and types of enterprises. Larger firms should be encouraged to review their current strategy for growth to determine whether such strategy pays sufficient attention to possibilities for expanding and strengthening linkages with MSEs, and improving the business performance of their "smaller" (MSE) business partners.
These guiding principles are based on international best practice in the delivery of quality business services to micro and small enterprises. Several practitioners have shared their experiences and ideas at a series of workshops and other similar events over the past few years. The driving force behind these guiding principles is the Committee of Donor Agencies for Small and Medium Enterprise Development, which is made up of a large number of international donors, UN agencies (including the ILO) and international NGOs. These guiding principles are considered to be sufficiently elaborated for application under most socio-economic environments. They are summarised below.
i. Ensuring that BDS services are provided to the right clientele: The main objective of facilitating access to good BDS by MSEs is to help them to grow and become more competitive and profitable. This objective implies that BDS should be provided to those who exhibit good entrepreneurial characteristics and can make a good use of the services. Whether full fees are charged for the services or not, the provision of BDS should be considered as a commercial transaction between the entrepreneur and the service provider. Both the client and the provider of services should be satisfied with the transaction. Therefore, a clear distinction should be made between this type of business transaction and one based on social welfare considerations involving individuals with no real capacity to establish and run a business. (Such is the case with many income generating activities intended for people who would otherwise have been forced to depend on charity or welfare for their livelihood.)
ii. Ensuring that BDS are demand-driven: Experience shows that institutional service providers often neglect to assess the type of services needed by their clients. In these cases, services (especially information services and training) are mostly supply-driven and do not reflect the real needs of the clients. Under normal commercial conditions, service providers would make a loss because clients would not pay for services that do not correspond to their needs. In cases where services are free of charge or highly subsidised, clients may accept the service although it may be of little use to them. This is often found in training, when trainees are provided with financial or other incentives for participating in training courses. Thus, ensuring that services are demand-driven presents two advantages: it can create a greater and more positive impact on the business, and it can encourage clients to start paying for the services they value.
iii. Ensuring a strong sense of ownership: International experience shows that the best business providers are people working in environment, which induce commitment and a strong sense of ownership. This is often found amongst not-for-profit organizations or commercial firms where the managers and staff members have a clear idea about the objectives of the organization and long-term plans for growth within the organization. These conditions do not generally apply to large bureaucracies where staff rotation may be the norm, achievements are not always recognised and goals not clearly defined.
iv. Ensuring maximum outreach: MSEs have always been able to access some basic services without the assistance of institutional service providers. Most studies show that 90 to 95 per cent of MSEs receive BDS services as part of their commercial transactions with clients, suppliers or contractors. They get useful information from friends, relatives or people in the same business. Owners and workers are often trained on-the-job. This does not mean that these services are all of the best quality. They are, however, sufficient for their immediate needs. Therefore, the objective of maximum outreach - in terms of helping MSEs all over the country to obtain good quality services that have a positive impact on their business - should be established. This is often best achieved by strengthening private sector service providers, creating better networks between service providers, and promoting informal systems of learning.
v. Ensuring integration of BDS and financial services: Whilst there are differences in opinion as to whether the same organization should provide both BDS and financial support services, it is generally agreed that integrating these supports is essential. One approach to achieving this is to accommodate both services in the same organization, whilst ensuring that the unit in charge of financial services operates independently from the one providing BDS. Also, it is generally agreed that clients should not be forced to pay for business services in order to get a loan.
vi. Ensuring cost-effectiveness: Any enterprise strives to control costs to remain competitive or increase profits. This should also be the case for service providers, whatever their legal status. Achieving maximum cost-effectiveness yields many positive effects. More clients can be served with the same available resources and the cost of services can be reduced. The reduction of costs may be achieved in a number of ways. There may be improvements in working procedures or in the introduction of office automation. Staff productivity may be enhanced through performance-based bonuses. Some services can be sub-contracted, and preference may be given to providing services to groups or associations of MSEs with a view to simultaneously reducing costs and reaching a larger number of clients.
vii. Ensuring that BDS services achieve the greatest impact: The growth of an enterprise can depend, among other things, on the entrepreneurial spirit and qualifications of its owner and on the quality of BDS services it can access. Service providers should be concerned with the impact of their services on the enterprise and, therefore strive to provide services that are responding to demand and of sufficient quality. It is important that BDS providers regularly assess the impact of their services. This can be done through a variety of ways and can be complemented by the development of performance indicators to measure the desired impact.
viii. Ensuring financial sustainability: Sustainability in BDS can be defined at two related levels. Firstly, sustainability is concerned with the delivery of effective, demand-led services to MSEs on a sustainable basis. This means building the institutional capacity of service providers as well as their financial viability. Secondly, sustainability is about ensuring that the MSEs themselves are sustainable, making long-term contributions to the generation of high-quality employment, and to economic growth. However, the term "sustainability" is most often associated with the financial sustainability of the service provider. When used in relation to the enterprise that benefits from BDS, this term refers to the long-term impact of the services on the enterprise.