HOW TO SUPPORT BUSINESS DEVELOPMENT SERVICES Why are we interested in Business Development? Poverty reduction relies on sustained economic growth, with the benefits shared equitably throughout society. Enterprises generate growth. Given an environment that encourages them to start or grow, businesses will provide jobs and incomes for poor people, and contribute to taxation to fund public services. Donors have invested heavily in business development in the past, because these benefits flow to society at large, increasing employment and reducing social tensions. “SMEs play an essential role in distributing the benefits of economic growth to a wider segment of Bangladesh’s population, creating the bulk of paid employment, and linking the large business sector with the informal microenterprise sector” – DFID Bangladesh This paper is about building business productivity and competitiveness by developing markets for non-financial services to businesses. It explains: • What are business development services (BDS)? • How BDS help develop the private sector • How not to make BDS interventions! • How good practice in BDS can make markets work for the poor • How DFID is leading the shift to “market-centred” BDS • How to support BDS in practice What are Business Development Services? BDS are any non-financial service to business, offered on either a formal or informal basis. They include: • • • • • Training & skills development Product & packaging design Networking & brokering Business advice & counselling Courier & delivery • • • • • IT services & advice Market information & research Advertising and trade fairs Technology information and advice Strategy & operations consulting Sometimes businesses pay a fee for such services; sometimes they are “embedded” in a commercial transaction (such as when agricultural seed suppliers offer free advice on planting and crop care). How can BDS help the Private Sector? A sound macro-economic environment, sensible regulation, and adequate infrastructure are all vital elements helping businesses grow (See How to Note 2: How to Assess and Improve the Investment Climate). However, in all HTN4: Supporting Business Development Services 10 December 2003 1 economies start-up and young businesses need additional support. Small and medium sized enterprises (SMEs) need access to a diverse range of services that enable them to become more efficient and competitive, building their capacity and reducing unit costs. Very often it is BDS that enable a firm to find customers, design products, improve administration, communicate effectively, and access new technology. How Not to Support BDS! Until fairly recently, governments and international agencies promoting BDS tended to focus on delivering generic business services that they perceived to meet the needs of SMEs, yet which were often not tailored to particular circumstances. The result was that in developing countries many agencies have supported supply-led training courses or subsidised business advice. These interventions tend to be relatively high cost, to serve only few firms, to be unsuitable for poor or unskilled participants. In addition, donors frequently supported BDS providers with full subsidies - thereby creating no incentive for demand-driven services (through willingness to pay) or any strategy for sustainability. Being donor dependant, such services were apt to disappear as soon as donor funding dried up. Case - Business Advice Centres in Transition Economies The UK’s own domestic approach of promoting a network of enterprise support centres spread to transition and developing countries in the 1990s. In these environments, experience has now shown that the variety of funding subsidies available in developed countries (central and local government sources as well as private sponsorship) is not widely available elsewhere. This gave rise to poor sustainability in cases where institutional income depended on supply-led services. To achieve sustainability, services must respond more explicitly to client demand. As donor support diminishes, BDS must be tailored to the needs of small business, identifying the services that poor clients believe can raise their business income, and for which they are prepared to pay. The challenge is to demonstrate benefits that convert latent demand for services into actual demand. See “Business Service Centres in Ukraine” www.mip.org/pubs/mbp/business_service.htm How Good BDS Makes Markets Work for the Poor The development community has learned from previous poor practice. In 2000, following several regional conferences and an international consultation process involving a wide range of stakeholders, the Committee of Donor Agencies for Small Enterprise Development published ‘Business Development Services: Guiding Principles for Donor Intervention’1 (popularly known as the “Blue Book”). This publication broke new ground in advocating a 1 See: http://oracle02.ilo.org/dyn/empent/empent.portal?p_docid=DONORGUIDES&p_prog=S&p_su bprog=BD HTN4: Supporting Business Development Services 10 December 2003 2 market-oriented approach to BDS. Central to these guidelines are the principles of: • • • Providing services that respond to market demand Building sustainability through early phasing out of donor support Measuring performance of BDS and providers of BDS. It is now widely agreed by the donor community that the purpose of BDS is to facilitate the development of markets that stimulate supply and demand of BDS, rather than to subsidise direct service delivery. Moreover, direct service delivery should be carried out by commercially-oriented organisations that understand and respond to business trends, rather than by government, donors or their local agencies. The new BDS principles start from the basis that it is market forces, rather than donor and partner perceptions, that are the major driver for increasing BDS delivery. BDS is most effective for businesses needing relatively sophisticated technical, marketing or management skills. This, and the need for clients as far as possible to pay for such services may lead to the development of SMEs rather than microenterprises. Thus the main impact on poor people is likely to be in the form of secondary benefits arising from the increased employment, higher incomes and positive microenterprise linkages generated by a larger SME sector and a stronger economy. In order to promote a BDS intervention with maximum impact on the poor, consider whether it will: • • • Contribute to increasing employment generally, and for women or minorities in particular; Improve the quality of jobs or work environment for SME employees; Improve the outreach of services to businesses in difficult geographic areas (mountainous or rural locations) where many poor people live and work, or towards disadvantaged social groups with high proportions of poor people (e.g. economic migrants). How DFID is leading the Shift to “Market-Centred” BDS DFID has been one of the major supporters of the “paradigm shift” from supply-led towards more market-centred BDS. Once the BDS market for a single service, or range of services, is understood, then donor programmes can build on existing provision to ease the constraints to growth in incomes, employment, and business activity. In Bangladesh, Uganda, Kenya, Swaziland and South Africa, DFID is re-designing BDS programmes to better incorporate the principles of the new market-centred approach. HTN4: Supporting Business Development Services 10 December 2003 3 Drawing from seven country surveys of BDS markets, a recent paper illustrates the variety of market development of business services. In some countries, such as Nepal, enterprises have used a wide range of services, whilst in others, such as Ghana, only a few services have been used by a reasonably large proportion of small enterprises. See “Assessing Markets for BDS: What have we learned so far?” A. Miehlbradt for ILO (2002). More recent DFID programmes have learnt from the emerging BDS paradigm: • A multi-donor project in Bangladesh is putting customer needs first by building on a survey of the markets for BDS by a Swiss NGO, and tracking SME service needs throughout the life of the project. • In China and Bosnia-Herzegovina, DFID’s State-Owned Enterprise Reform and enterprise development projects have invited enterprises to bid in the open market for project services, instead of being wholly selected by funding partners. • In Mozambique, DFID supports a “matching grant” approach where SME trainees fund a proportion of the costs of business service inputs, whilst retaining wide choice about which services they use. How to Support BDS in Practice DFID’s approach is to operationalise the donor BDS guidelines, and focus on making BDS markets work for the poor. Subject to context and available resources, consider following these steps: • Survey the existing indigenous market for BDS: who already supplies what services at what price and quality? Who are the buyers? How are the services paid for? What are the core services demanded? Analyse any supply and demand mis-match. In other words, take a “market approach”. • Cross-examine the survey findings to see where building BDS capacity might either directly contribute to the growth of the SME sector, leading to employment and incomes for poor people, and/or directly contribute to serving poor people • Focus on certain locations and/or sectors, and consider how to facilitate growth in or productivity of existing providers of demand-driven BDS services. Instead of working direct with these providers, identify BDS “facilitators”, organisations that help service providers improve or further commercialise their service to SMEs. • Whilst looking at facilitating approaches, also examine whether the enabling environment for business service providers can be improved, and work with government to achieve this. HTN4: Supporting Business Development Services 10 December 2003 4 • Always keep in mind exit strategies for BDS inputs and aim for sustainability from day one. This is easier if capacity building work is carried out by existing providers that already have other sources of income, and by building appropriate incentive structures from the outset. • Don’t forget to measure performance of facilitators, of DFID’s investment in them, and of service providers. Case: Developing BDS Providers in Russia In Russia, DFID took two approaches to building capacity for business services. One project’s objective was to increase private investment. A British Business School worked with more than 20 existing Russian management consultancies and accounting firms to build their capacity to offer investment advice. A second project had wider objectives to promote the supply of management and business consulting services through two new business support centres. Whilst the latter are still in operation serving mainly donor and government customers, the former approach has much greater prospects of sustainability through its diversity of partners, each already operating in local markets . The moral repeats an old development lesson – consider building on existing institutions rather than risking more on new ones. BDS Resources Information of interest can be accessed at: • BDS Market Development: A Guide for Agencies on the Emerging Market Development Approach to Business Development Services (2001): Microenterprise Best Practices/The Springfield Centre for Business in Development www.mip.org/pubs/mbp • IFC discussion paper 40: Hallberg (2000) A Market-Oriented Strategy For Small and Medium-Scale Enterprises”, World Bank http://www.ifc.org/economics/pubs/discuss.htm • Making Markets Work Better for the Poor - A Framework Paper, DFID Private Sector Policy Department & Oxford Policy Management (2000) • Joining up Donors’ approaches to Small and Medium Enterprise Development, DFID (September 2001) • DFID Economist’s Guide (section 4.6) http://10.1.1.30/econ_guide/frameset.asp?dID=16 • The Strategic Framework for DFID’s Role in Business Services in East Africa DFID (2001) HTN4: Supporting Business Development Services 10 December 2003 5 For further information contact: Investment, Competition and Business Development Services Team Policy Division, DFID, London. This Teams belongs to the Pro-Poor Growth Cluster in Policy Division and has drafted this Note, which forms part of a series of short “How To Notes” intended to be of practical value to all those working on Private Sector Development agendas in DFID Country Offices and Regional Policy Departments. The series is being co-ordinated by PD’s Investment, Competition and Business Development Services Team, to whom comments on this Note and recommendations for further Notes should be addressed: [email protected] HTN4: Supporting Business Development Services 10 December 2003 6