April 3, 2017
Historically across the developing world, the donor community invested significant amounts of money to promote small-scale enterprises with Business Development Services, (BDS), providers acting as the agents of governments and the donor community. However, it became increasingly clear by the mid-1990s that these subsidized programs had not achieved much success in terms of outreach and impact, nor were they self-sustaining.
Therefore, development theorists introduced what is commonly referred to as the “BDS market development paradigm”, focusing on the commercial provision of BDS through local markets, generally using a cross-sector approach. This approach proved to be more difficult to implement, especially for the micro and smaller segments of the MSME sector (enterprises with fewer than 50 employees). And so in the mid-2000s, another shift was made to the so-called market “systems” approach, with greater emphasis on the macro level and the vertical integration of MSMEs into domestic and international value chains. The idea is that larger actors who stand to benefit from the inclusion of smaller firms would assume the responsibility and costs associated with developing the smaller firms.
Lack of a market-oriented approach
Although the small business sector (SMEs) is well recognized as the engine of growth in both developed and developing counties, there is little evidence of either a market development or market systems approach to BDS in most developing countries. Rather, the supply of BDS is dominated by NGOs and governmental agencies that tend to treat enterprises as “beneficiaries” of off-the-shelf BDS products rather than as “clients”, whose needs shape the design and delivery of BDS products.
Firms are not treated as clients
BDS providers who follow a “consulting process” (i.e., who listen to the client and help determine their real, versus perceived, needs before delivering the service) are rare. Furthermore, NGO, government and donor driven BDS services are typically provided for free or at significantly subsidized rates. Thus, only a small percentage of BDS providers can charge clients for their services or have the aim of becoming financially self-sufficient from fee-based services.
BDS market gaps and constraints
There are numerous gaps and constraints within the BDS market which undermine the overall market’s development and subsequently the development of the MSME sector. The main ones include the generally low number of qualified and active BDS providers, especially trainers, mentors, and consultants providing strategic BDS; the lack of available information to raise awareness among MSMEs of the value of externally provided BDS; and the lack of information regarding the demand (volume and need specific) for BDS among MSMEs.
Sub-optimal provision of services
Another common disconnect is the concentration of the vast majority of attention and activity in the capital or main city (or cities). The market dynamics are usually distinctly different in rural areas. Thus it is evident that prior to project implantation of any kind, more research needs to be done on MSMEs’ demand for and the supply of BDS at the regional/provincial/district levels. While there may be a true lack of capacity among BDS providers to research their respective local markets, the greater likelihood is that they are not undertaking market research due to the prohibitive cost and perceived return on investment. This is an area where the public and private sectors should and could cooperate.
BDS providers not well organized
So oddly enough, while BDS providers focus on developing the business of their clients, they expend little effort on how to grow and develop themselves. This is exacerbated by many of the owner/managers having other jobs and sources of income, running the BDS entity as a sideline on an opportunistic basis. One of the inputs most needed in this sector is to help them examine and structure their organizations from the perspective of a sustainable business. In other words, evaluate the opportunity and requirements to invest, diversify, and grow their businesses instead of a laissez faire “slow but sure” paradigm. This may include a need to create new products, target new clients, and/or explore additional geographies (aka “adjacency growth”).
Lack of coordination between public and private sector BDS actors
This is a common constraint to the sustainable and consistent provision of BDS services. In most developing countries, there are several public entities and agencies providing BDS. These are often located at the national, regional and district levels. However, not only do these various entities, all reporting into different ministries and spheres of government, not coordinate amongst themselves, but they also tend to operate independently from the BDS providers in the private sector.
Lack of coordination
More specifically, there seems to be little research and information sharing, and/or market segmentation or collaboration between the two. Both are critical stakeholders in the effort to promote entrepreneurship and enterprise development, but the lack of clarity as to the role of government driven “public-good” BDS, as well as the disconnect between private sector supply and demand, continues to impede the development of a vibrant BDS market.
The disconnect between supply and demand in the BDS market is mainly due to the market processes of bidding, buying and selling BDS, which requires the following:
Challenges for MSMEs
Entrepreneurs and MSMEs face messy, real world challenges. To address the many challenges, businesses often require long-term assistance from diverse experts. It is unrealistic to assume that one single delivery system can provide comprehensive “one stop shop” services that are tailored to the unique needs of entrepreneurs and owners of MSMEs, let alone the further differentiated needs of women entrepreneurs, youth, rural based enterprises and sector specific requirements.
Thus, better coordination of subsidized and un-subsidized BDS is clearly in the interest of all parties, including but not limited to public and private BDS providers, entrepreneurs, the MSME community, financial institutions supporting the sector, and ultimately job seekers.
How it works in the U.S. and in Europe
In the U.S. and Europe, for example, gatekeeper and brokerage functions are embedded within Small Business Development Centers (U.S.) and Business Support Centers (EU), both of which are partially financed by national and/or sub-national governments. These centers serve as gateways to an array of BDS and help clients stay on track through monitoring and on-going needs assessments at key points in each client’s entrepreneurial/enterprise development journey.
Critical gatekeeping function
As gatekeepers, the Centers perform the critical functions of client intake, screening and initial assessment of the client’s needs. This gatekeeping function assures an efficient and effective match between client need and service level, some being subsidized and others being 100% fee for service.
By using this approach, the Centers establish long-term relationships with clients, while bringing BDS network members into service delivery roles as needed to serve evolving client needs. Since the Centers are the primary sources of information relating to new initiatives and programs that are targeting MSMEs, outreach and information flows become more efficient. Thus, clients are more likely to experience a continuity of service, especially when they have an intermediary to help facilitate the client/service provider relationship, including the negotiation of fees and quality assurance.
Need to improve the quality of BDS services
It is in the self-interest of private-sector BDS providers to cooperate with such Centers since they provide important market research and often underwrite the costs of new training and consulting product development. Moreover, such a system enables access to professional development programs, as described in the case of the U.S. Small Business Administration’s SBDCs. Experience tells us that, provided the quality is good, most professional BDS providers will pay to enhance their skills since they know they can re-sell that knowledge to clients. This type of organizational structure also lays the ground work for an accreditation or certification scheme for either individual consultants, training courses, and/or BDS providers.
Adam Saffer is a Global Policy Institute Senior Adviser. He is a seasoned international business executive with over 35 years’ experience promoting entrepreneurship, intrapreneurship, and innovation in the developing world. He has served as a CEO, COO, EVP, Country Manager, Chief of Party, board member, and consultant for public and private multinationals as well as international non-governmental organizations. He has worked extensively on donor-funded initiatives with host country ministries, government agencies, development banks, and private companies aimed at industrial development, technology transfer, job creation, workforce development, private sector development, public-private sector dialogue, and policy reform. He currently serves as the CEO of Gateway Development International, a private sector consulting practice with a focus on economic development strategies in emerging and frontier markets. Prior to this he was the President of the Americas for Coffey International (purchased by Tetra Tech in 2016). Mr. Saffer holds a Bachelor of Science degree in Mechanical Engineering from Cornell University and an MBA from the Harvard Business School. He currently resides in Cairo, Egypt and Eastham, Massachusetts.
The views and opinions expressed in this issue brief are those of the authors and do not necessarily reflect the policy of GPI.