Ipyet/Providing BDS

Module 5.1: Providing Business Development Services to Youth Enterprises

A discussion paper by

Jealous Chirove

''Welcome to this topic on business development services for youth enterprises. This is an important topic as it basically covers all the services and support that can be given to an enterprise to help it start, improve or expand. As we will go through the topic, you will find that some of the content will be familiar; but we will put it into context. I will strongly encourage that we actively engage and debate this issue, share good practices and case studies so that we can in our small way influence the sustainable provision of business development services to youth enterprises. ''

The session will introduce the whole subject of Business Development Services provision to micro, small and medium enterprises, especially as they relate to youth owned businesses. Apart from defining BDS and explaining the various types of BDS, and its importance to the growth of micro and small enterprises, the session will focus a lot on the different roles of players in BDS provision – facilitators, providers, governments, donors, and small enterprises. The session will introduce more sustainable approaches to BDS provision, in particular dwelling on payment developing, packaging, pricing and promotion and payment for BDS products, to ensure outreach and impact. The discussion will also recommend some of the key steps to be taken in developing and implementing effective and demand driven BDS programmes.

Part 1: Introduction
Business development services in enterprise development as a field has been a developing field over the last 10-15 years, when the whole concept of BDS started to popular. Today, ‘new’ approaches have developed or are emerging, including for example value chain development and upgrading, business linkages, incubator programmes and voucher schemes. The session will look at the role of BDS in programmes that follow any of these approaches.

Part 2: What are Business Development Services?
Business Development Services (BDS) refers to the wide range of services used by entrepreneurs to help them operate efficiently and grow their businesses with the broader purpose of contributing to economic growth, employment generation, and poverty alleviation.

These include: information, training, business counselling, consultancy, business plans, business linkages, incubators, infrastructure, export promotion, feasibility studies, quality and productivity improvement, inputs supply, technical assistance, networks and associations, ICT etc.

BDS work for many international organizations focuses on promoting access to and use of these services by micro, small and medium scale enterprises.

Key Assumptions in BDS Provision
The process of providing or facilitating BDS to small and medium enterprises makes certain assumptions. This is because over the past decade or so, the concept of providing BDS has changed. While in the past you could have various donors or the government could provide BDS through a subsidy arrangement or directly, that does not obtain today. Many donors and governments no longer have that much money today. Even then, the thinking and practicing has moved away from the practice of the 90’s. Increasingly now, small scale enterprises are expected to pay for the services rendered – if not the whole at least a significant fraction.

Assumption 1

One of the very first assumptions is that SMEs, if well-informed, are “rational” consumers. This means they are willing to pay for services that improve their performance. They are willing to pay for something that brings value to their enterprises. What is therefore important for BDS providers is to focus on developing and offering those products that meet the needs and expectations of buyers, both quality and price wise, for a transaction to take place.

Assumption 2

The second assumption is that business development services (or products) and delivery mechanisms can be developed to meet the needs and willingness-to-pay of SMEs. This is important as often times, there is little flexibility offered to SMEs to try and make it easy for SMEs to buy and pay for the services they need. In the end they simply ignore the BDS being offered and do not benefit from them.

Assumption 3

The third assumption is that BDS providers can be commercially viable without permanent subsidies. The issue of subsidies in BDS provision has been around for probably as long as the subject of BDS has been discussed. Should there be subsides for BDS provision? If yes, for what type of target groups? What should be the modalities for the subsidies? Who should qualify? For how long should the subsidies remain? What experiences do subsidized BDS show? These are some of the questions which need to be discussed.

Assumption 4

The final assumption considered is that BDS market development can be stimulated or accelerated by well-targeted donor / government interventions. BDS markets should be seen just like all other markets – stock exchange market or the market for tomatoes in your local area. In any market there are demand and supply forces. These forces interact to determine the price for the product, in this case, BDS. The market sustains itself, sets prices of a commodity, and, if it is near perfect, it can also regulate itself. If there are too few suppliers (BDS providers), relative to demand, the price (cost of BDS) goes up. If there are bad suppliers (BDS providers) they will find it difficult to get buyers (SMEs). Likewise, if there is competition and too many suppliers, the providers compete on price (and other attributes) and the price goes down. If demand is subdued, it can be stimulated by an external factor, like a government or donor agency buying BDS products in bulk for small enterprise.

Part 3: How are Business Development Services Provided?
Two schools of thought site the ‘traditional approach to providing BDS’ as well as ‘the market development approach’ provision or facilitation of business development services. The traditional approach model was being implemented by governments and donor agencies in the past. The objective of the approach is to provide quality BDS to SMEs, and it mainly involves direct provision of services. The classical example for this modality was for a donor who comes on board and sets up a project that recruits staff and goes around training small scale enterprises. The reason for this was that the system, or the market would have failed provide the needed services to the target groups. But, in most cases, the provision of services stopped just at the end of the project.

The market development approach, on the other hand, promotes the idea of stimulating the market to interact and provide BDS to SMEs. Stimulation of the market can be done from both the supply and demand side. Supply side interventions will be aimed at encouraging BDS providers to develop and offer their services to SMEs. This can be done through co-financing the development costs for appropriate business development services based on needs and demand. Demand side interventions would be aimed at encouraging SMEs to buy or pay for business development services offered by BDS providers. This has been done in some countries through programmes that are called voucher schemes, or schemes to subsidize the cost of the first and second business service received by the SME. Thus the objective of the market development approach is to encourage other to provide quality services to MSMEs for which MSMEs are willing to pay. The point of intervention is top facilitate regulate and work with more than one provider.

Payment for BDS
In addition to different types of services and types of delivery mechanisms, there are different types of payment mechanisms for BDS. The price of the service may be charged as a direct fee, as a component of the price of a bundled service (e.g., when small enterprises accept a lower price for their products in exchange for technology assistance from buyers), or on a commission basis (e.g., when marketing service providers are paid upon successful sale of small enterprise products). There is some evidence that mall enterprises are more willing to use services offered on a commission basis than on a fee basis, since this type of payment mechanism reduces risks and cash-flow requirements.

Part 4: Business Development Services Actors and Their Roles
Following a typical market development approach, there are various actors involved in BDS markets, and these perform different roles. These include the small and medium scale enterprises themselves, BDS providers, BDS facilitators, donors and governments. The following briefly explains some of the possible roles;

(a) Small enterprises, the demand side of the market, are microenterprises and SMEs that are mostly profit-oriented and are the actual or potential clients of BDS providers. These, in a normal market exchange, are the buyers of BDS.

(b) BDS providers provide services directly to small enterprises. They may be individuals, private for-profit firms, NGOs, parastatals, national or sub national government agencies. Self-employment and “survivalist” microenterprises may also benefit from development of BDS products suited to the lower end of the market, and their awareness of business principles and the value of BDS may be enhanced through programmes such as “grassroots management training,” which are justified primarily on social and equity terms (e.g., to compensate for inadequate education in rural areas), industry associations, etc.

(c) BDS facilitators support BDS providers, for example by developing new service products, promoting good practice, and building provider capacity. BDS facilitators can also work on the demand side, for example by educating small enterprise owners about the potential benefits of services or providing incentives to try them. Other BDS market facilitation functions include the external evaluation of the impact of BDS providers, quality assurance, and advocacy for a better policy environment for the local BDS market. BDS facilitation is a function normally carried out by development-oriented institutions having the objective of BDS market development, which may include NGOs, industry and employers’ associations, government agencies and others.

(d) Donors who provide funding for BDS projects and programmes. In some cases, the facilitator is the project office of a donor.

(e) Governments who, like donors, may provide funding for BDS projects and programmes. Beyond BDS interventions, the principal role of governments is to provide an enabling policy, legal and regulatory environment for small enterprises and BDS providers, as well as public goods such as basic infrastructure, education and information services. There are also many facilitating functions which governments can play in the future, to promote more vibrant service markets.

Part 5: How Can We Make BDS Provision Sustainable?
Traditionally, donors and governments have intervened in BDS markets at the level of the BDS transaction: directly providing services to small enterprises via public BDS providers, or permanently subsidizing services delivered by other BDS providers. In the traditional approach, donors and governments have tended to substitute for underdeveloped BDS markets, crowding out existing or potential commercial providers of services. Traditional approaches have failed to achieve high outreach (access to services by a large proportion of the target population of small enterprises), since the numbers of small enterprises served is limited by the amount of subsidies available. In addition, institutional sustainability has been low, since programmes often cease when public funds are exhausted. This effect has often been masked in industrialized countries by the much greater level of funding available.

The BDS market development paradigm is driven by the belief that the objectives of outreach and sustainability can only be achieved in well-developed markets for BDS, and not by direct provision by donors and governments. This shifts the focus of public and donor intervention away from direct provision and subsidies at the level of the BDS transaction, toward the facilitation of a sustained increase in the demand and supply of services. In the market development paradigm, subsidization of transactions should be replaced by private payment for services. Similarly, donor and government support should be shifted away from direct support to particular BDS providers toward facilitation functions that develop the market in a sustainable way. The objective of BDS market development challenges donors to push the commercial orientation of the BDS market as far as possible through strategic investment with a development orientation.

(a) Conduct a BDS market assessment first
Before designing and implementing interventions to develop BDS markets, it is critical to understand existing markets—in order to identify weaknesses and opportunities, the reasons behind the lack of demand for or supply of services, and the extent of market distortions. This understanding can help to identify local mechanisms of service delivery and payment, choose the intervention strategy and instruments, identify local institutions and networks to build upon, and provide a baseline for measuring progress in market development. BDS market assessments need not be large studies; the scope should fit the objectives of the institution doing it, and in many cases a rapid assessment may suffice. Donors and BDS facilitators doing initial market assessments may choose a broad scope that will allow them to benchmark the stage of development of BDS markets, identify existing or potential BDS providers to work with, and measure progress in expanding the demand and supply of services and the range of products available. For individual BDS providers, the market analysis is likely to be very narrow in scope, focusing on the specific service to be supplied, the characteristics of the target market, and existing or potential competitors. For both BDS facilitators and BDS providers, the relevant "BDS market" will need to be defined according to the specific type of service, target clientele, and geographical coverage.

(b) Agree on Delivery and Payment Mechanisms
Reducing the risks and costs of BDS requires attention to delivery and payment mechanisms as part of the design of BDS products. Particularly for the smallest microenterprises, flexible and innovative approaches to delivery and payment mechanisms are needed to boost demand for services. The use of indirect payment mechanisms for BDS—commissions and mark -ups rather than direct fees—can reduce the cash flow burden on small enterprises, allow them to share the risk that benefits from BDS will not occur, and reduce administrative costs for BDS providers. Donors should encourage BDS providers to design payment mechanisms that are appropriate to the local situation and the characteristics of their clients.

(c) Have an Exit Strategy at the Start
Consistent with the temporary nature of subsidies, BDS interventions should have a clear exit strategy defined from the beginning. The exit strategy should not be thought about mid-way or towards the end of the project. It needs to be built in the implementation and roll out of the project. Many traditional BDS programmes have failed because they did not have the exit strategy, linked to the sustainability of the interventions at the end of the project. The exit strategy should be linked to the achievement of the intervention’s market development objectives—for example, the creation of sustainable BDS providers or the development of viable products tailored to the lower end of the market.

(d) Properly Select the Partner Institutions
Successful BDS providers deliver services in a business-like manner. They are demand-led, entrepreneurial, and act as commercial market players. Often, successful BDS providers focus on a limited range of core businesses and do them well, rather than diversifying too broadly. BDS providers should develop transactional relationships with small enterprises clients based on exchange rather than charity, and develop a sound understanding of the needs of their clients as part of their business strategy. Private, for-profit providers or business partners providing the services as part of a business relationship tend to demonstrate these characteristics best. It is therefore important to select and work with the BDS facilitators and providers who share the same understanding.

In reality however, there are often many not-for-profit BDS providers already in the marketplace, and during the transition to a commercially-oriented model there is much work to be done to assist NGOs and other not-for-profit providers to become more sustainable and business-like. For BDS interventions to be both sustainable and locally owned, they must build on what is already there rather than replacing it with imported visions or models. The choice of partner institutions should also be guided by the principle of subsidiarity: delegating responsibility to the lowest possible level and to those who are closest to small enterprises, both geographic ally and socially.

Part 6: Performance Measurement and Assessment of BDS Programmes
Systematic performance measurement of business development interventions provides a good basis for institutions to improve the design of instruments in response to client demand, as well as facilitating decisions by donors on types of interventions to improve the extent and quality of the market. You have a choice of making the performance measurement simple or more complicated, depending on a number of factors such as size of project budget, donor requirements and your reporting requirements.

Three categories of performance measurement are relevant in BDS: (a) Client impact, in terms of changes in small enterprises performance (e.g., sales, value added, profitability), or broader social and economic impact (employment, poverty alleviation, etc.). (b) Institutional performance, according to indicators of outreach, cost effectiveness, and sustainability. (c) Market development, measured for example by the price and quality of services available, small enterprises awareness, trial and repeat usage, the level of satisfaction of small enterprises, and the extent to which BDS providers are reaching previously underserved populations.