BDS market development guide.pdf - PACA

BDS Market
Development:
A Guide for Agencies
on the Emerging
Market Development
Approach to
Business
Development
Services

BDS Market Development:
A Guide for Agencies
by
Alan Gibson
Rob Hitchins
Marshall Bear
For the BDS 2000 Training Programme, Glasgow, Scotland (UK)
The Springfield Centre for Business in Development, UK
June 2001
This work was supported by the U.S. Agency for International Development, Bureau for
Global Programs, Center for Economic Growth and Agricultural Development, Office of
Microenterprise Development, through funding to the Microenterprise Best Practices (MBP)
Project, contract number PCE-C-00-96-90004-00.

Alan Gibson is a co-founder of The Springfield Centre for Business in Development. With a
background in economic and business consultancy, he has particular expertise in business
development services (BDS). In 1996–1997, he led the consultancy assignment that led to the
Committee of Donor Agencies’ publication BDS for SMEs: Preliminary Guidelines for Donor-
Funded Interventions, which established the basic principles of good practice that have underpinned
the recent revival of interest in BDS. Since then, Mr. Gibson has been responsible for managing and
editing seven major case studies on BDS practice, advised many agencies on BDS design and
development, and has co-facilitated real and virtual conferences on BDS. He is co-director of the
BDS 2000 Training Programme, for which this publication was written.
Rob Hitchins is a member of The Springfield Centre for Business in Development. He has worked
with BDS programs in a range of countries in Africa, Asia, and Latin America and has written
extensively on BDS. Recent works include a major issues paper on the implications of “good
practice” principles and the emerging market development approach for the Swiss Agency for
Development and Co-operation (SDC); assessing business centers in Asia and Latin America;
advising on the introduction of incentive-based support for BDS providers in Pakistan; and assisting
agencies in southern Africa on applying BDS good practice principles in their projects. An
economist by training, Mr. Hitchins worked for the accountancy and audit firm KPMG before setting
up his own tourism business in Indonesia. He is co-director of the BDS 2000 Training Programme.
Marshall Bear has worked in international development for 27 years as a manager, microenterprise
specialist, trainer, and author. Most recently, he coordinated the MBP project initiative on BDS, in
which he explored various topics, including how to build markets for BDS and how to measure the
performance of donor- supported BDS projects. His most recent publication explores the use of
information and communication technologies for small and medium-sized enterprise development.
Mr. Bear is one of the three core trainers for the BDS 2000 Training Programme.

i
TABLE OF CONTENTS
CHAPTER ONE
WHY BDS MARKET DEVELOPMENT?
WHY IT’S IMPORTANT AND WHAT IT IS 1
WHY BDS FOR SMES?..............................................................................................................1
Common Starting Point................................................................................................1
Business Need for Services .........................................................................................2
Traditionally a Low Priority…....................................................................................4
….Despite their Obvious (and Increasing) Importance.............................................4
Focusing on Business Services....................................................................................4
WHY BDS MARKET DEVELOPMENT?.......................................................................................7
WHAT’S NEW ABOUT BDS MARKET DEVELOPMENT?............................................................8
What BDS Is.................................................................................................................9
Main Objective ...........................................................................................................10
Approach ....................................................................................................................11
CHAPTER TWO
WHERE WE ARE NOW—A FRAMEWORK FOR MARKET
ASSESSMENT AND INTERVENTION CHOICE 13
FRAMEWORK FOR BDS MARKET ANALYSIS ..........................................................................13
WHY ISN’T THE MARKET WORKING?.....................................................................................14
KEY CHARACTERISTICS OF EFFECTIVE DEMAND...................................................................17
KEY CHARACTERISTICS OF EFFECTIVE SUPPLY .....................................................................18
DETERMINING BOUNDARIES AND LEVEL OF EFFORT IN ANALYZING A MARKET.................19
Market Boundaries.....................................................................................................19
Level of Effort ............................................................................................................21
IS THERE POTENTIAL FOR INTERVENTION?.............................................................................22
WHERE SHOULD INTERVENTIONS FOCUS? .............................................................................23
WHAT TYPE OF INTERVENTION IS USEFUL?...........................................................................24
CONCLUDING COMMENTS .......................................................................................................25
CHAPTER THREE
WHERE DO WE WANT TO GO?—DEVELOPING A CLEAR
PICTURE OF SUSTAINABILITY 27
WHAT DOES SUSTAINABILITY MEAN IN BDS MARKET DEVELOPMENT?.............................27
WHY IS CLARITY IN SUSTAINABILITY SO IMPORTANT? .........................................................29
WHY HAS IT BEEN SO DIFFICULT TO DEVELOP CLEAR VIEWS OF SUSTAINABILITY
IN BDS?.......................................................................................................................29
A TRANSPARENT FRAMEWORK FOR SUSTAINABILITY IN BDS..............................................30
What Needs to Be Done?—Key Supply-side Functions.........................................31
Who Are the Main Players?—Main Potential Actors on the
Supply-side of a Market..................................................................................32
Who Will Undertake the Function (who does)? Who Will Pay for This to
Happen (who pays)?—Linking Actors with Functions.................................35
WHAT WOULD A SUSTAINABILITY PICTURE LOOK LIKE? .....................................................36

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CHAPTER FOUR
HOW DO WE GET THERE?—CORE IMPLEMENTATION CHALLENGES 39
COMMON SIGNS OF MARKET DEVELOPMENT OR DISTORTION IN BDS INTERVENTIONS .....39
HOW SUPPORT FOR BDS SHOULD BE STRUCTURED? ............................................................40
Invasiveness of Support.............................................................................................40
Intensity of Support....................................................................................................43
Intervention Leverage ................................................................................................48
Factors to Take Account of in Pursuing Poverty Reduction/Equity Objectives....53
WITH WHOM SHOULD WE WORK?.........................................................................................56
Criteria for Selecting Partners ...................................................................................57
Selection of Partners ..................................................................................................57
WHAT ARE THE IMPLICATIONS FOR THE CAPACITIES OF DONORS AND FACILITATORS?......59
CHAPTER FIVE
HOW DO WE ASSESS OUR PERFORMANCE?—MONITORING AND
EVALUATION BDS INTERVENTIONS 61
COMMON BASIS OF MONITORING AND EVALUATION: SOME THINGS DON’T CHANGE........61
Dimensions of Performance ......................................................................................61
Questions to Be Answered ........................................................................................62
Factors to Consider in Developing Indicators ..........................................................62
Big Problems that Don’t Go Away...........................................................................63
WHAT’S NEW IN MONITORING AND EVALUATION: WHAT IS MEASURED ............................64
New Focus on the Marketplace for BDS..................................................................65
Providers—Commercial Players Means Commercially Based Indicators .............65
SMEs—Getting “Real” over Assessing Performance .............................................66
Beyond SMEs—Unchanged Indicators....................................................................67
WHAT’S NEW IN MONITORING AND EVALUATION: HOW WE MEASURE..............................67
Market-Level—The Same Tools in Evaluation as in Design..................................67
Providers—Using Standard Business-Analysis Tools.............................................67
SMEs—Practical and More-Market Focused Approaches......................................69
WHAT’S NEW IN MONITORING AND EVALUATION: WHY WE MEASURE..............................70
OUTSTANDING ISSUES .............................................................................................................71
ANNEX A: REFERENCES A-1

iii
LIST OF FIGURES, BOXES, AND TABLES
Figure
1 Bringing Coherence to BDS: Needs, Services, and Providers ..................................3
2 Flows of Services in the Economy..............................................................................5
3 What We Believe..........................................................................................................7
4 Framework for Understanding the Effectiveness of BDS Markets.........................12
5 Anatomy of a BDS Transaction ................................................................................13
6 Quadrant of Demand-side Conditions ......................................................................16
7 Quadrant of Supply-side Conditions.........................................................................17
8 BDS Market Development and the Potential for Intervention................................20
9 The Process of Overcoming a Supply Constraint ....................................................22
10 Matching Market Analysis to Intervention Options ................................................23
11 Sustainability in BDS.................................................................................................29
12 Functions of the State.................................................................................................33
13 Where to Intervene to Reduce the Risk of Distortion..............................................39
14 Options for Support: Support Existing or Develop New.........................................49
15 Indicators in BDS: Emerging Trends........................................................................60
16 Measurement Methods in BDS Monitoring and Evaluation: Emerging Trends....64
17 Why We Measure in BDS: Emerging Trends..........................................................66
Box
1 What’s in a Name?.....................................................................................................10
2 Some Rudimentary Economics .................................................................................12
3 Influences on Demand and Supply ...........................................................................14
4 Market-Analysis Tools...............................................................................................19
5 Matching Intervention to Identified Market Weakness in Gaza .............................21
6 Interventions Affecting Demand and Supply Sides.................................................23
7 Key Conditions in Assessing the Role of the State in BDS ....................................31
8 Key Considerations in Assessing the Role of Business Membership
Organizations in BDS..........................................................................................32
9 Key Considerations in Assessing the Role of Not-for-Profit Organizations
in BDS...................................................................................................................32
10 Overloading a Provider in Kenya..............................................................................42
11 Overloading Training in Uganda...............................................................................43
12 Using a Portfolio Approach to Achieve Cross-cutting Development
Objectives.............................................................................................................44
13 Using Incentive-based Support .................................................................................47
14 Changing Views of the Meso-level in Nepal............................................................52
15 The Problem with Employment as an Indicator in BDS..........................................62

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Table
1 Implications of Different Market Conditions for Interventions..............................18
2 Sustainability Framework in Matrix Form ...............................................................35
3 Common Signs of Market Development and Market Distortion............................38
4 Possible Justifications for Direct-Delivery Subsidies..............................................40

v
INTRODUCTION
A revival of interest among development agencies in business development services (BDS)
for small and medium-sized enterprise (SME) development has resulted in agreement on
guiding principles of sound practice and the development of more rigorous performance
frameworks, mirroring earlier developments in microfinance. It is now clear that the priority
of organizations in the BDS industry globally is to turn this wave of interest and learning into
improved practice in the design and management of effective BDS.
This guide seeks to contribute to this challenge by laying out a set of core skills and
frameworks that take these guiding principles and move them closer to foundation
practices when the goal—and this is the key difference compared with “traditional”
approaches—is to make BDS markets work for SMEs. The pursuit of this goal requires a
new, or at least modified, set of core skills and practices in conceptualizing BDS in the new
market development paradigm; diagnosing market problems as the basis for intervention;
making informed decisions on strategy, intervention options, and partners and their roles;
financing interventions with the right type of incentives and subsidies; and evaluating desired
changes and monitoring the impact of BDS interventions.
This guide draws on recent experience from BDS projects, case study research, workshops,
and seminars that have identified the critical gaps in what we know and what we need to
know to turn these guiding principles into best practices. To date, there is no body of
practical experience in the BDS market development approach that could provide irrefutable
evidence that BDS markets are working better for SMEs as a result of specific interventions.
However, a body of practical experience is emerging, as pioneering initiatives are launched
that focus on developing new BDS products, managing voucher schemes, fostering business
networks and linkages, and experimenting with cost-effective management information
systems, to name a few.
This guide is a call to action for relevant parties—donors, providers, facilitators, and
researchers—that have as their goal to make BDS markets work for SMEs. The authors
hope that the concepts, frameworks, and tools presented serve as useful and practical guides
in the pursuit of this goal.

vi
How to Use This Guide: A Quick Road Map
Section
1. Why BDS Market
Development?
BDS market
development: why it is
important and what is
new about it
Key Questions
• Why is BDS so important for privatesector
development?
• Why should we think of BDS market
development?
• What is so new about BDS market
development compared with how we
have done things in the past?
Go Here If You
Want to…
…find out about the basic
rationale for market
development and how this
links with wider
development goals
2. Where Are We
Now?
Market assessment and
intervention choice
• What overall framework can we use to
make sense of markets?
• What tools can we use to assess markets
and identify constraints?
• How does market analysis feed into
intervention design?
…ensure that the design and
management of interventions
are shaped by a practical
understanding of BDS market
conditions
3. Where Do We
Want to Go?
Sustainability:
developing a clear picture
of the way ahead
• Everyone agrees sustainability is
“important,” but what does it mean in the
context of BDS?
• What are the key market functions, and
who are the key players who make up a
picture of sustainability?
• What kind of picture of sustainability
should we aim for?
…operationalize
sustainability as an
objective in BDS market
development
4. How Do We Get
There?
Core implementation
challenges
• How should support be structured to
minimize distortion and maximize
development?
• Who should we work with in BDS
interventions?
• What are the implications for donor and
facilitator capacities?
…focus specifically on the
range of design and
management issues that need
to be confronted in any
successful intervention
5. How Do We
Assess Our
Performance?
M&E in BDS market
development
• Given the emergence of the BDS
market development approach, what
should we measure?
• What changes in measurement methods
are necessary?
• What outstanding issues still remain in
monitoring and evaluation in BDS?
…develop more practical
and appropriate
approaches to monitoring
and evaluation that are
consistent with a market
development focus
Annex
Key References • Where do I go to find out more?
…… delve deeper into
any aspect of the BDS
market development
approach

1
CHAPTER ONE
WHY BDS MARKET DEVELOPMENT?
WHY IT IS IMPORTANT AND WHAT IS NEW ABOUT IT
Previously, we saw business development services (BDS) as a small, leftover bundle of activities
to be filled primarily by government—the kind of services we thought businesses needed even if
they did not know it themselves. Now we know that a broad range of services is increasingly
important in every economy and that such services are best offered in a business-oriented
manner within the context of functioning markets. Most previous interventions have actually
undermined the development of these markets. Difficult though it may be to accept, we have often
made things worse. Learning from past mistakes, we now focus interventions on helping markets
work more effectively.
This chapter provides a rationale for BDS market development interventions. It summarizes key
reasons for the growth of services globally and outlines the main conclusions reached by
development agencies through intensive review of their own experience supporting BDS in recent
years. It concludes by highlighting the key differences between BDS market development and
previous approaches with regard to the beliefs that underpin BDS, its definition, objectives, and
overall approach.
Key Questions:
1. Why is BDS so important for private-sector development, especially the development of small
and medium-sized enterprises (SMEs)?
2. Even if BDS is important, why should we think of BDS market development?
3. Given that BDS market development is important, what is so new about it in relation to how
we have done things in the past?
WHY BDS FOR SMES?
Common Starting Point
BDS market development—as with all interventions supported with aid—needs to be
justified with respect to its ability to reduce poverty. Before looking at BDS in depth, we
need to set out clearly the common starting point for this link between poverty and BDS. In
brief, this is based on a mainstream view of development articulated most coherently by the
World Bank but, with minor reservations from some, espoused by all major bilateral
agencies. The starting point essentially is built on the following core tenets:
• Poverty, although complex, is primarily about people’s lack of access to and limited
capacity to respond to income-earning opportunities.
Chapter One—Why BDS Market Development?
Why It Is Important and What Is New about It

2
• To address poverty, governments and development agencies need to pursue a marketfriendly
approach to development, based on sound macroeconomic management,
competent delivery of public services, structural reform, and open trade.
• Inherent in this approach are two implications: that government focus on its areas of core
competence and that the private sector be recognized and encouraged as the prime engine
of economic growth. 1
• Private-sector development—of which SME development is an important part—is
therefore an intrinsic part of any effective poverty-reduction strategy.
Business Need for Services
A focus on private-sector and SME development grows directly from development agencies’
commitment to an environment promoting the private sector. Key aspects of this
environment are the macroeconomic context and public investment in people. However,
more immediately for SMEs, access to services is a vitally important dimension in their
business environment (see Figure 1) and a key factor in determining the competitiveness of
economies.
• SMEs have a range of different “needs” that are critical to their survival and growth. 2 The
nature of these needs will be influenced by sector and stage of SME development but will
also relate to their ability to, for example, find customers, design products, enhance
productivity, reduce fixed costs, improve administration, communicate effectively, and
access new technology. The degree to which these needs are met will have a major
influence on business success.
• Although business needs differ, needs can be understood as basic, practical questions
(such as how to, with whom, where to, and what about) in relation to essential business
functions. These are questions faced by all businesses. Indeed, businesses, and SMEs in
particular, are associated with independence. Yet, to a considerable degree, success as a
small business stems from the owner–manager’s ability to manage his or her business in
an interdependent manner and to develop appropriate working relationships with
providers of services (and other stakeholders) in the environment.
• Financial services are a critical part of this immediate environment but cannot meet all
business needs.
• Environments that are conducive to SME development provide relevant, differentiated
services to meet these needs on an informal or formal basis.
1
Economic growth is not seen as a guarantee of poverty reduction but as a necessary condition for it.
2
Needs are concerned with inputs to (administration, people, technology) and outputs from (access to markets,
customers) SMEs.
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Figure 1: Bringing Coherence to BDS: Needs, Services, and Providers
PROVIDERS
FAMILY
FRIENDS
CUSTOMERS
BUSINESS
NETWORKS
NETWORKS
(FORMAL AND
INFORMAL)
INSPECTION AND
TESTING
TECHNOLOGY
SERVICES
NEEDS
IN RELATION TO:
PRODUCTION
FOR-PROFIT
PRIVATE
SECTOR
FINANCE
BANKS
FINANCE COMPANIES
ACCOUNTANTS
CONSULTANTS
DESIGNERS
OTHER SUPPLIERS
(EQUIPMENT +
SERVICES)
ACCOUNTANCY/
AUDIT
TRAINING
PERSONNEL
BUSINESS
SPACE
SMEs
RAW
MATERIALS
SECURITY
MARKETS
TECHNICAL
INFORMATION
COURIER DELIVERY
STATE
NATIONAL GOVT.
LOCAL GOVT.
PARASTATALS
CONSULTANCY
REPAIR AND
MAINTENANCE
LINKAGES
LAWS/
REGULATIONS
COMPUTER SERVICES
BROKERING/
LINKING
ADMINISTRATION
TRANSPORT
TELECOMMUNICATION
SERVICES
WEB-SITE DESIGN
AND MANAGEMENT
LEGAL SERVICES
ASSOCIATIONS
UNIVERSITIES/
COLLEGES
MUTUAL GUARANTEE
ASSOCIATIONS
NOT-FOR-
PROFIT
SECTOR
NGOs
CLUBS
Chapter One—Why BDS Market Development?
Why It Is Important and What Is New about It

4
• Potentially, a range of providers offers these services to SMEs. In the most
entrepreneurial situations, private-sector companies and formal and informal networks
are the most important players.
Traditionally a Low Priority…
• The crucial role of services in successful economies is now beginning to be appreciated
after a history of neglect. Services are referred to conventionally as the tertiary sector
following the primary (extractive—agriculture, fishing, mining, and so on) and secondary
(manufacturing) sectors. 3
• The implied priority—with services least important—has been commonly accepted.
Economic writers from Smith to Marx have labeled services as unproductive. They were
referred to as residual—a leftover category of minimal importance compared with the
“real” endeavor of producing commodities and manufacturing goods.
• This sense of what was important has been one that development agencies and
governments have often adopted without much critical attention. The perceived
intangibility of services can be easily (and understandably) interpreted as nebulous and
weak in comparison with the tangible certainties of physical commodities and goods. For
many, production is associated with a kind of moral wholesomeness that renders it
positive—sometimes irrespective of its cost, quality, or appropriateness.
…Despite Their Obvious (and Increasing) Importance
• This lack of priority for services is especially surprising, given their importance in successful
economies. In 1998, services accounted for 61 percent of value added in the world economy
(up from 56 percent in 1980). In high-income countries, this figure was 65 percent (up from
59 percent); in low-income economies, it was 38 percent (up from 30 percent). 4
Focusing on Business Services
• One main reason for agencies’ and governments’ reluctance to make services a priority is
the absence of a pleasingly tight definition. Figure 2 shows one common classification
using the following services:
− Public Administration Services—“core” state functions, such as health, education,
security, and some types of infrastructure;
3
4
The discussion on services draws considerably from Riddle (1992).
Figures are from the World Bank (1999).
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Development Alternatives, Inc.

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Chapter One—Why BDS Market Development?
Why It Is Important and What Is New about It

6
Figure 2: Flows of Services in the Economy
The Primary
Sector—Extractive
(commodities)
Public
Administration
Services
Business
Services
Consumer
Services
Service
Sector
The Secondary
Sector—
Manufacturing
(goods)
Source: Adapted from Riddle (1992)
− Business Services—these are supplied from business to business and aimed at
improving business performance through, for example, improved market access,
operational efficiency, reduced costs, better designs, and greater skill levels; and
− Consumer Services—such as leisure, tourism, retail, and household services—many
of which are related to personal wealth.
• Business services are the focus of attention here. It is difficult to be precise about how
much of the wider service sector is accounted for by business services, but it has been
estimated to be one-half in high-income economies and one-third in low-income
countries.
• Business services are an increasing proportion of overall service-sector activity. Indeed,
business services are among the highest growth areas in many economies. Why is this so?
Several points can be made:
− There is increasing recognition that services add value to commodities and goods that
allow businesses in these sectors to compete more effectively, access new markets,
and operate efficiently.
− In an increasingly complex and competitive global environment, and even at a local
level, businesses have to focus on their core areas of competence, staying with what
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Development Alternatives, Inc.

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they know best rather than trying to do everything in-house. This means developing
effective working relationships with a range of external specialists.
− This trend has been hastened by technology developments and the opportunities (and
threats) posed by them. Business service specialization is particularly evident, for
example, in Internet services in which services increasingly need to be highly
specific.
Although some of these trends may appear distant from the hard realities of low-income
economies, they are equally relevant here. A conducive environment for business
development offers appropriate services to businesses to enable them to survive, develop, and
grow. This has always been the case but is becoming even more important now.
The World Bank (1999) highlights this trend concisely:
Economic output has traditionally been visualized as commodities and goods—
wheat, coffee, shirts, or automobiles. This economic vision grows less accurate
each year… . The growing importance of services means that knowledge—how
to do things, how to communicate, how to work with other people—is becoming
ever more important, overshadowing the natural resource base.
WHY BDS MARKET DEVELOPMENT?
Many donors have long held the view that SMEs need more than finance and so have
intervened to support the provision of nonfinancial services to SMEs. But why has this
understanding led to a new, different focus on market development?
The origins of BDS market development lie in the early-to-mid-1990s, when it became clear
to many development agencies that—in comparison with the results of microfinance—BDS,
after many years of funding and endeavor, had disappointing results, specifically with regard
to the following:
• Outreach—Only a small number of SMEs were being reached with officially supported
services. Most were untouched.
• Sustainability—Public organizations supported to deliver services consumed resources
but, with little or no income from their SME clients, depended on aid. The apparatus of
BDS required never-ending subsidization.
• Impact—There were few signs of major impact—although, in the absence of a price-based
transactional relationship and the signals this would send about client satisfaction, this was
difficult to judge. Certainly, there seemed to be little perceived value on the part of SME
clients.
Chapter One—Why BDS Market Development?
Why It Is Important and What Is New about It

8
• Efficiency—The cost bases of providers and their ways of working seemed more
appropriate to the world of donors than did those of SMEs.
Drawing on the microfinance experience, in which open comparison and learning had been a
key foundation of progress, practitioners instigated a major review, resulting in, in the first
instance, preliminary guidelines based on core principles of good practice. 5 Among the key
conclusions reached were the following:
• A key cause of poor performance had been a supply-led orientation, by which
development agencies decreed what was good for SMEs (rather than listening
intelligently to them).
• The key general points in a “market-friendly” environment had not been transferred to
BDS for SMEs; the prevailing view had been that many BDS should be an extension of
the state. Indeed, many donor-supported interventions, especially in low-income
countries, had contributed to massive market distortion and led to governments playing
inappropriate roles and to the development of “fat” providers.
• Donors failed to learn key lessons from microfinance—notably that poor people (and
SMEs) are prepared to pay realistic prices for useful services and that they are discerning
consumers, desirous of good services, not charity.
• The best providers of BDS were close to SMEs in terms of their systems, values, and people.
The lesson emerging from this process was clear: The basis for effective and sustainable
BDS is business and market relationships between providers and SMEs. On the basis of this
finding, a new approach has evolved.
WHAT IS NEW ABOUT BDS MARKET DEVELOPMENT?
The above rationale encapsulates four major differences between the new approach of BDS
market development and “conventional” approaches to BDS. 6
Figure 3: What Is Believed (stated or implied)
SMEs as:
Key providers:
The Old
Thankful beneficiaries of
charity
Government/government
organizations
The New
Discerning consumers
of services
Private sector in
functioning markets
BDS as: Primarily public goods Private services
5
6
Committee of Donor Agencies for Small Enterprise Development (January 1998).
In reality, there have been gradations of change among agencies over several years rather than the sudden,
dramatic shift implied here.
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BDS financed: Primarily by the state Through provider–
consumer transactions
What BDS Is
The Old: Previously, definitions of BDS, reflecting the above beliefs, emphasized donors’
(supply-side) view of what was good for SMEs, focusing on training and counseling.
The New: From a market development perspective, the new definition of BDS reflects
SMEs’ own views (demand-side) and is therefore much broader, in keeping with the breadth
of services suggested by Figure 3. BDS is:
any nonfinancial service to business, offered on either a formal or an informal basis.
This definition requires further clarification. Included in the definition are services such as
training/skills development, design, advertising, network brokering, courier delivery,
computer services, business consultancy, security services, legal services, commission sales,
accounting/auditing, market research, technical information, Web-site design and
management, equipment repair and maintenance, and conference organizing.
These correspond to intermediate or producer services (within the broad tertiary, or services,
sector) as defined in the standard industrial classification—that is, services that are sold from
one business to another (and not to the final consumer).
Also included are services in which no formal fee-paying transaction takes place and services
that are hidden in economic statistics but that nonetheless are important. 7 Especially
important are services offered formally or informally from one business to another—such as
advice, training, introductions, and market information.
Excluded from the definition are:
• Financial services; 8
• Physical products: manufactured goods or raw materials;
• Utilities: water, electricity, and gas;
• Government services aimed at the wider community, including infrastructure, community
and social services, and basic health care and education;
7 Anderson (April 2000) presents findings from a survey he conducted on the access to and use of BDS in these
countries by microenterprises. The revealing finding of this study is that many BDS are embedded in
existing trade relationships or in informal networks, and that these are the primary channels for service access
for small firms. This finding requires BDS practitioners to look beyond fee-for-service transactions to a
range of different service-delivery channels and payment options.
8
These are business services but are the subject of many other guides and are not the focus here.
Chapter One—Why BDS Market Development?
Why It Is Important and What Is New about It

10
• Advocacy: for the business community as a whole (rather than for individual businesses);
and
• Buying services: in which the provider buys products from SMEs (rather than the other way
around).
[stopped 8/2]
There are some exceptions to the above discussion. Although the definition above provides a
basis for understanding BDS, it would be foolhardy to strive for a “watertight” definition of
BDS. When services are such a vital component of economies, linked closely with
manufacture and trade, there will always be blurred edges around any definition. For
example:
• Some services are part of a trading relationship in physical goods—for example, design
advice and market information between retailers and manufacturers or the advice and
services offered in a managed workspace environment. To unbundle services from
products in these situations may be pointless.
• Technology development (and privatization) has allowed a range of new services to be
developed associated with utilities.
It is also important to distinguish between buyer-seller relationships for goods—which we
have classified here as not BDS—and commission-sales relationships—which we have
classified as BDS. In the former, the buyer pays the money, takes title and ownership of a
product; in the latter, products are sold on behalf of a producer without title passing to the
other party. Clearly, this is a fine line—but while the latter is providing a service (and being
paid for it) the former is buying a product (and paying for it). 9
This element of looseness in definition is inevitable (and to be welcomed) if our notion of
BDS is one that has practical meaning in business environments. This sets the context for
donor interventions. However, it is important that this is not interpreted as a blanket
justification for donor interventions “everywhere”; on the contrary, interventions need to be
justified on the basis of rigorous analysis and criteria.
Main Objective
The Old: donor-supported approaches to BDS have focused on building the capacity of
organizations—partners of donor agencies—to deliver improved services or on delivering
services directly.
The New: from a market development perspective, the main objective of interventions
should be improved functioning of BDS markets.
9
A further complication arises here because often buyers of products provide services—design, market
information, and access—bundled within their purchase. However, this does not contradict the basic
difference between providing a service and buying a product.
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Approach
The Old: previously, approaches have supported
organizations—usually government-related—in
designing and delivering BDS with an implicit
assumption of continued subsidy and often
standardized BDS.
The New: above all, the BDS market
development paradigm demands a different
approach to intervention on the part of donors. It
is one built on four related ideas: 10
1. The starting point for intervention design
should be a rigorous understanding of BDS
markets; market-research tools can be a
valuable means of achieving this—that is,
where are we now? (Chapter Two)
2. Interventions need to develop a clear view of
how BDS markets will operate in a
sustainable manner by linking key market
functions with actors —that is, where do we
want to go? (Chapter Three)
3. In their design and implementation,
interventions need to observe, interpret, and
give more specific meaning to the BDS
principles of good practice—that is, how do
we get there? (Chapter Four)
4. Given a market development approach, we
need to determine what defines success in a
BDS intervention and what can and cannot be
usefully measured to improve or prove
success needs to be determined—that is, how
do we assess our performance? (Chapter
Five)
10 These issues form the basis of the remainder of this guide.
Box 1: What’s in a Name?
Ten years ago, BDS was an unknown
abbreviation in the development world. Its
birth and development in many ways
represent the underlying changes that have
taken place in development agencies’
thinking in this field.
First, donors talked about non-financial
services. The problem is that it described
what services weren’t rather than what they
were and—obviously—these services to a
rather unimportant, leftover second place
behind financial services. It was hardly a
name to inspire.
Second came BDS. This is an improvement,
but the reason for the inclusion of
“development” is unclear. Some donors try to
make a distinction between development
services and other services, but what this
means is far from clear. From a business
perspective—the consumer of services—
”development” is a meaningless term;
consumers purchase services that are useful,
and are unlikely to want services that do not,
in some way, contribute to the development
of their business. Businesses are much more
likely to define services with regard to the
benefits they gain from it. Once again, it
seems that development here means some
services are deemed by the supply-side
(donors, governments, etc.) to be good and
correspond to a public goods view of services
rather than private services in markets.
Third, BDS is where we are but business
services is where we are going. Faced with
the above arguments, it would be consistent
and logical now for agencies to drop
“development” and embrace terminology that
is consistent with market realities.
Do names matter? It depends. No, because
substance matters more than labels. Yes,
because inaccurate titles can prevent us from
confronting the full implications of the BDS
market development approach.
Chapter One—Why BDS Market Development?
Why It Is Important and What Is New about It

13
CHAPTER TWO
WHERE WE ARE NOW—A FRAMEWORK FOR MARKET ASSESSMENT
AND INTERVENTION CHOICE
In the past, we designed projects by talking with SMEs. We learned they faced numerous constraints
to growth, assumed there was no market to meet their needs, and from this level of understanding,
we designed BDS interventions to unblock these constraints. But, when you take a closer look at how
SMEs solve problems, who they turn to, what services they use, what they spend, three core design
assumptions change: SMEs have much fewer wants than service needs; SMEs do pay—in one form
or another—for services they want, and the market may be weak but it’s there. SMEs live and die
within a market context. Few are actually touched by donors. Designers need to ask why the market
fails to serve SMEs with services they want. This requires that some form of market analysis should
precede intervention.
This chapter presents a framework to analyze BDS markets, focusing on demand and supply-side
constraints that may prevent effective market operations. Building on this, the chapter identifies
options to delineate BDS markets for study and appropriate research tools. It concludes by linking
market diagnosis to intervention choice. 11
Key Questions:
1. What makes markets effective?
2. Why don’t markets work for SMEs?
3. Is there potential for intervention?
4. Where should interventions focus?
5. What type of intervention is appropriate?
FRAMEWORK FOR BDS MARKET ANALYSIS
The starting point for interventions pursuing a market development approach is an in-depth
understanding of BDS market conditions and, in particular, of the factors preventing markets
from working effectively. Figure 4 presents a framework for understanding the relative
effectiveness of the market for a BDS.
Markets can be seen to be effective when transactions take place—that is, where there is
exchange between supply and demand at a market price. 12 For this to happen, customers must
be ready to purchase something (let’s call this “effective demand”) and providers must have
something to sell (let’s call this “effective supply”). Understanding the dynamics of this
interaction or transaction is the key to market analysis.
11 This chapter is drawn from the MBP publication, “Designing BDS Interventions as if Markets Matter,” by M.
Field, R. Hitchins, and M. Bear, November 2000. Available on www.mip.org.
12 The price at which suppliers are prepared to sell and consumers are prepared to buy, in an unsubsidized
situation.
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Figure 4: Framework for Understanding the Effectiveness of BDS Markets
Non-existent market
No transactions between
consumer and providers
No
demand
Weak
demand
Effective
demand
BDS MARKET
Level of Market
Development
BDS TRANSACTION
Provider has something to
sell
AND
Consumer is ready to buy
Effective market
Extensive transactions between
consumers and providers
Effective
supply
Weak
supply
No supply
WHY ISN’T THE MARKET WORKING?
Figure 5 shows the anatomy of an effective
interaction—transaction—between a consumer
and a service provider. The consumer (follow the
black arrow) recognizes the causes of
underperformance, concludes that a solution is
required, and is willing to pay for a problemsolving
service. The provider (follow the white
arrow) has the ability to present an attractive offer
that the consumer wants, and has the technical
know-how to solve the problem with demonstrated
positive impact on business performance.
The elements of an effective transaction can also
help explain why market mechanisms fail to serve
SMEs: consumers may confuse symptoms with
causes, they may not know about the existence of
solutions or services or seek the wrong solutions;
providers may not have presented offers SMEs
value or want, or if they do, they may lack the
technical know-how to deliver the results
promised in their offer. The core rationale for an
intervention is to address the demand and/or
supply-side constraints that prevent markets from
serving the service demands of SMEs.
Box 2: Some Rudimentary
Economics
Economic theory describes a market as
a set of arrangements by which buyers
and sellers are in contact to exchange
goods or services.* The level or volume
of exchange or transaction that occurs
between the sellers and buyers of a
given good or service determines a
market’s effectiveness. Theory also tells
us that transactions between demand
and supply are determined by an
equilibrium price—that is, the price at
which quantity supplied equals the
quantity demanded. In trying to
understand BDS market failure, we
need to look beyond price (which in
effect causes movements along demand
and supply curves). We need to look at
the other underlying factors, described
below, which actually shift demand and
supply curves—determining their
position or shape—and thus determine
the nature of demand for and supply of
BDS.
*Begg, D., Fischer, S., and Dornbusch, R.
Economics (1987). McGraw-Hill Book
Company (UK) Ltd.
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The flow diagram of an effective transaction shows that demand and supply for BDS are
composed of different elements, each of which in turn can be influenced by a range of
internal and external factors (see Box 3). Demand and supply must be considered separately
to understand how the two interact for a transaction to take place. Based on this assessment
of demand- and supply-side weaknesses (or strengths), it is possible to ascertain the level of
market effectiveness and determine which interventions (market-based instruments and
incentives) are consistent with the goal of developing more effective BDS markets for SMEs.
Figure 5: Anatomy of a BDS Transaction
SME UNDER-
PERFORMANCE A
• low profits
• high fixed costs
• low value-added
• stagnant sales
• zero growth
• insufficient market
• excessive indebtedness
• bankruptcy and failure
• etc.
Impact on SME
performance
Causes of underperformance
are
recognized
SME CONSTRAINTS
& PROBLEMS
• skills deficiencies
• limited market information
• poor financial & inventory
control
• inadequate processes,
systems, equipment
• inefficient resource use
• etc.
B
Demand-side flow
Supply-side flow
Solution is
required
Technical
know-how to
solve SME
problems
SOURCES OF SERVICES D
Market mechanisms
that can make a 'service'
available:
• friends & family
• informal networks
• other businesses
• fee-for- service providers
• etc.
Willingness to
purchase a service
Ability to present an
‘offer’ that SMEs want
SOLUTIONS &
REQUIREMENTS C
Specific 'services' such as
• training
• advice
• information media
• accounting services
• after sales product support
• product distribution (e.g.
courier services)
• etc.
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Box 3: Influences on Demand and Supply
Demand
Recognition of need for a solution can be affected by a variety of internal and external factors. For
example:
Internal: SMEs’ education, physical location, and exposure to peers and competition may all affect
awareness of business problems and available solutions.
External: In most low-income countries, market information is limited or distorted; subsidies to reduce
service price below market rate can encourage an SME to use a service that may not be appropriate;
difficult economic and political environment may discourage use of a service (such as financial
management in a tax harsh setting) and disguise internal problems within the business; donor
programs to promote other activities (e.g. credit) may distort businesses’ preferences for and
recognition of services.
Willingness to pay can be similarly affected. For example:
Internal: SMEs’ education, physical location, exposure to peers and competition, and their networks
(access to informal sources) may all affect their valuation of services.
External: Subsidies to reduce service price may stimulate consumption of services in the short term,
but, if those services fail to address business requirements or expectations, willingness to pay can be
adversely affected. Equally, willingness to pay for the services of an unsubsidized provider will be
reduced (see below). The prestige of the donor can also affect businesses’ willingness to pay: SMEs
may expect to receive cheap or free services, and they may perceive donor-supported services to be
superior to those offered by local competitors. In fact, continuous donor subsidy may indicate lack of
any real market value for the service.
Supply
Ability to present an attractive offer that consumers want can be affected by a variety of internal and
external factors. For example:
Internal: Service providers’ marketing skills and information are highly influential, but, equally if the
service provider has a high cost base (arising from expensive staff, premises, or equipment), this
feeds through into a high price, undermining the attractiveness of its service offer, no matter how
good it is. An inconvenient location or staff with the wrong culture or background can have the same
effect.
External factors: Donor support for competitors (for example, in the form of subsidized services) can
weaken an unsubsidized provider offer. Equally intensive donor support for capacity building can
develop the kind of inappropriate structures described above, with adverse effects on costs, price,
and the like.
Technical know-how to solve business problems can be similarly affected. For example:
Internal: The technical and experience of key people, the networks, and the ability of service provider
to access new information, technology, and develop products are important.
External: There are wider constraints to information and knowledge, such as inadequate education;
donor support for capacity development that is inappropriate for SMEs; and donor support for
importing generic products from advanced economies (this does not develop service providers’
capacity to develop their own products on an ongoing basis in response to changing and evolving
local requirements.
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KEY CHARACTERISTICS OF EFFECTIVE DEMAND
Effective demand, as defined in this paper, is when recognition of the need to solve a
problem intersects with willingness to pay for a solution to the problem. We choose
“recognition of the need to solve a problem” to indicate the consumer’s readiness to act on a
problem: the consumer may not know the best solution to his or her business or market
problem, for example, but she or he knows there is a problem that needs to be solved by
outside sources. 13 We are looking to determine if customers have no knowledge of their
problem (lost), whether there is knowledge of a problem but not sure which one (searching),
or whether they know their specific problem and want to solve it (found). This is not static;
this can be influenced by both internal and external factors including education, experience,
actions of peers, and supplier promotion. We choose “willingness to pay” as the second key
characteristic of demand. Willingness to pay is indicative of the buyers’ motivation to seek
outside assistance to effect a change. Willingness to pay ranges from no willingness, some
willingness (skeptical), to high willingness (has the money and is ready to put it on the
table). 14 Again external factors can be highly influential, particularly in terms of consumers’
attitude to valuation and price (Figure 6).
When SMEs exhibit a high level of recognition of need to solve a problem and a high
willingness to pay for a solution, demand is effective—they are ready to purchase something.
This presents a strong market opportunity for the BDS supplier. Conversely, if both
recognition of a need to solve a problem and willingness to pay are very low or absent,
demand is non-existent and market opportunities are negligible. A weak-demand situation
might be when recognition of a need to solve a problem is well established, but willingness
to pay is low or conversely when there is willingness to pay but little or no recognition of a
problem, or a combination of both. The market opportunity in a weak-demand situation is
limited, unless the service provider can overcome the willingness to pay problem or assist
consumers to increase awareness of business problems and the availability (and value) of
relevant solutions.
13 Modern marketing teaches us that the purchase decision goes through different stages, starting with need
recognition, the search for information on options, and the weighing of alternatives. In many developingcountry
markets, consumers have a difficult time assessing options because of the information-poor
environments in which they operate.
14 Capacity to pay is not tracked separately. Willingness is a better proxy for motivation than capacity.
Willingness is a precondition for a successful market transaction. Low capacity to pay is something that can
be fixed—for example, through credit or different payment terms.
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Figure 6: Quadrant of Demand-side Conditions
Recognition
of a need for
a solution
high
low
WEAK
DEMAND
NO DEMAND
EFFECTIVE
DEMAND
WEAK
DEMAND
low
high
Willingness to pay for a solution
KEY CHARACTERISTICS OF EFFECTIVE SUPPLY
We choose two factors to define effective supply: the ability to present an attractive offer
(such as products) that SMEs want and the technical know-how to solve problems. Like the
demand side of the market equation, these factors must be present and they are likely to
evolve along separate paths. Specifically, one could imagine a situation where a BDS
supplier is very good at packaging an attractive offer—convincing the consumer to purchase
a service—but is unable to deliver a solution to the SME’s problem. The supplier may be
effective at marketing a training product, for example, but is unable to deliver a business
solution as advertised. The converse is also true when a supplier has the technical know-how
to solve the problem (it has skills, a track record), but it lacks the ability to package an
attractive offer, perhaps because it lacks marketing skills or because of more fundamental
structural problems like cost base or location (see Box 3). Suppliers may begin to sell their
service below costs, or may not be able to develop repeat clients because the client did not
perceive the benefit to be worth the cost even though the problem was actually solved. Both
of these factors—an attractive offer consumers want and the technical know-how to
deliver—must be present to develop effective supply over time.
When service providers have both the offer and the technical know-how, supply is effective.
If, in contrast, a service provider has the technical know-how but lacks the ability to package
and present attractive offers, supply is weak. The converse also describes weak supply—
suppliers are good at marketing but are unable to solve problems with their products. (In
reality, a combination of both scenarios often lies behind supply-side weakness.) Nonexistent
supply results from service providers lacking both appropriate skills and the ability to
make an attractive offer to SMEs.
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Figure 7: Quadrant of Supply-side Conditions
Technical
know how to
solve SME
problems
high
low
WEAK
SUPPLY
NO SUPPLY
EFFECTIVE
SUPPLY
WEAK
SUPPLY
low
high
Ability to present an offer
consumers want
The objective of analyzing demand and supply is to identify specific constraints to the
availability of effective BDS for SMEs, which can then be the basis for designing an
intervention. Table 1 considers the implications of various demand- and supply-side
characteristics on intervention rationale.
Separate analysis of BDS demand and supply generates an understanding of the overall
market dynamics and level of development of a given market situation.
DETERMINING BOUNDARIES AND LEVEL OF EFFORT IN ANALYZING A MARKET
Market Boundaries
This generic picture of a market needs to get more specific when conducting an analysis. An
important first step is to identify the boundaries of a market analysis. This will determine the
nature of analysis and its outcome. For example, if the market is defined narrowly (for
example, small business users of public calling offices), analysis can be much more specific
and detailed. It will probably be more manageable too. In contrast, a broader market
definition (all BDS consumption nationwide by all enterprises) will generally yield only an
overview-level of analysis.
Market parameters are frequently pre-determined by governments or donors and include:
• Geography—such as a neighborhood, postal area, town, province, and country;
• Products—such as consumers of specific types of service such as telecommunications or
newspaper advertising;
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Table 1: Implications of Different Market Conditions for Interventions
DEMAND
Analysis Consumer Profile (SMEs) Implications for Intervention
SMEs know what their problems are and will Rationale for demand-side
pay for solutions. They are looking for a intervention is limited. However,
BDS provider to deliver a solution at a rationale may be justified to stimulate
reasonable price.
specific parts of the population where
Effective Demand
• High recognition of
problem
• High willingness to
pay
Weak Demand
• High recognition of
problem
• Low willingness to
pay
Weak Demand
• Low recognition of
problem
• High willingness to
pay
Non-existent Demand
• Low recognition of
problem
• Low willingness to
pay
Effective Supply
• High skills to solve
business problems
• High offer to
businesses
Weak Supply
• High skills to solve
business problems
• Low offer to
businesses
SMEs know what the problems are and are
looking for solutions but are skeptical about
the value of existing services and are,
therefore, unwilling to pay.
SMEs seek some form of assistance to
solve a problem and will to pay for this.
However, they are uncertain what the actual
problem is, often resulting in wrong choice of
solution. This, in turn, can lead to SME
dissatisfaction and unwillingness to use or
pay for BDS in the future.
This is not uncommon among
entrepreneurs. SMEs do not see there is a
problem to be solved, and are not prepared
to pay for any form of external assistance.
Often, firms externalize their problems and
conclude there is nothing they can do to fix
them because it is out of their control.
SUPPLY
demand is weaker.
Rationale for demand-side
intervention is to increase SME
perception or awareness of service
benefit and value, such as through
demonstration or trial. Note that
unwillingness to pay may be related
to weak supply offer.
The rationale for demand-side
intervention is to improve business
diagnosis and improve consumer
access to information about what
benefits specific services can deliver.
Rationale for any intervention when
demand is entirely absent is limited.
Analysis Provider Profile Implications for Intervention
The service provider has good capacity to Rationale for supply-side intervention
solve business problems and the ability to is limited. It may be justified by equity
package that into an offer that consumers concerns—for example, stimulate
want.
expansion into underserved market
Weak Supply
• Low skills to solve
business problems
• High offer to
businesses
Non-existent Supply
• Low skills to solve
business problems
• Low offer to
businesses
Despite having sound skills, the service
provider lacks marketing know-how; It is
unable to demonstrate the value of its
service, a common problem for suppliers
because of the difficulty of showing the
value of a product prior to its use. The offer
is not attractive.
This scenario is not as strange as it seems!
BDS providers in many cases promise
results but lack the technical capacity to
deliver effective solutions.
Such a scenario is damaging for service
provision as it undermines credibility and
damages demand.
The service provider lacks any capacity to
sell business solutions. Effectively the
service provider is nothing more than an
empty shell.
areas.
Rationale for supply-side intervention
is to develop the capacity of service
providers to develop and market
appropriate products—develop the
offer. Note that weak supply offer
might be exacerbated by low
willingness to pay on the demand
side.
The rationale for intervention is to
develop provider technical skills.
However the question must be asked
why support service providers lack
the ability to solve business problems
in the first place?
Rationale for intervention when
supply-side capacity is non-existent is
dubious: there is nothing to work with!
Intervention may be warranted if
demand is particularly strong.
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• Consumers—such as female-owned businesses and formally registered businesses; and
• Sub-sector—such as small-scale manufacturing, textile production, and agro-processing.
The market may also be delineated by the criteria of the intervening agency, based on:
• Strategic focus—such as priority groups and environmental protection; and
• Capacity of Intervening Agency—that is, what the agency can do; its experience and
competence in certain types of intervention (for example, vouchers) or with specific subsectors
(such as metal workshops).
Although it is sensible to delineate the market in terms
of a facilitators’ core competence, there is a risk of
shaping the view of the market problem (and thus the
intervention) by what we want it to be, not what it
really is. We need to guard against this risk by looking
at both sides of the market equation—what consumers
want and what providers can do—and developing an
accurate market picture on the basis of a more wellrounded
view.
Level of Effort
How much research is required is typically a function
of two variables: who’s doing the assessment, and the
relative closeness of the assessor to the market. The
further away from the market an organization is and
the bigger—and more complex—it is, the more formal
and extensive should be the market assessment.
Donors are typically far from markets and should rely
on formal research techniques as the basis for making
decisions on intervention options. Large commercial
providers of services—and because of their market
reach and organizational complex—perform formal
and structure market research as the basis for business
decisions. In contrast, the closer to the market (or in
the market) and the smaller the organization or firm
(less complex), the more market analysis can be based
Box 4: Market-Analysis Tools
The nature of this analysis lends itself to
market-research-style studies, rather
than more conventional developmental
assessments. A usage, attitude, and
image (UAI) survey is a market-research
tool used by firms to take a broad look
at the current market for a specific
service from known suppliers. It can
also be used to assess demand of
multiple BDS products from different
markets. Focus-group discussions is a
qualitative market research tool used to
better understand how consumers
experience the use of services by
exploring with “qualified respondents”
how they perceive, choose, evaluate,
and value BDS. When used in
combination, these market-research
tools can be used to form a picture of
the market and to better pinpoint market
weaknesses. The information permits an
analysis of demand but also offers a
consumer’s perspective on supply by
looking at sources of services,
satisfaction by different providers, and
the use of substitutes. Consumer
research methods can ‘prepare the
ground’ for a closer look at the supply
side of the market using tailored
institutional assessment tools. 15
15 For more detail on the UAI and other market research tools, see MBP publication, “Applying Market
Research Tools to the Design and Improvement of Business Development Services,” Alexandra Overy
Miehlbradt, July 1999.
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22
on learning by doing and on more informal market assessment tools. Facilitators are better
positioned in the market than donors but not in it; the market research they do should be
systematic and appropriate to the context. Small commercial providers—by virtue of their
market position—can rely more on customer feedback and test marketing than on formal, upfront
market assessment because they are in frequent contact with customers. They receive
regular feedback both in the comments of customers and their willingness to pay for services.
The outcome of a market analysis will be used to answer the following questions:
• Is there potential for intervention?
• Where should interventions focus?
• What type of intervention is appropriate?
IS THERE POTENTIAL FOR INTERVENTION?
The forgoing analysis looked separately at the relative effectiveness of demand and supply
for a service. What makes a market is the interaction between the two: the greater the
overlap, the more developed the market. The relative development of the market informs the
potential for intervention. Figure 8 shows the relationship between the analysis of demand
and supply and the potential for outside intervention. At either ends of the market continuum,
there is little potential for intervention for different reasons. In a non-existent market, there is
little to build on, especially for higher-end services such as training and consulting. There is
also limited potential for intervention in effective markets because intervention might do
more to distort than develop the market. Potential is greatest for intervention when there is
some overlap, however weak, between demand or supply.
Figure 8: BDS Market Development and the Potential for Intervention
NON-EXISTENT
LEVEL OF MARKET DEVELOPMENT
EFFECTIVE
No Supply
No Demand
Effective Supply/Weak, No Demand
Effective Demand/Weak, No Supply
Weak Supply/Weak Demand
Effective Supply
Effective Demand
LIMITED POTENTIAL
FOR INTERVENTION
There is nothing to build
on.
In practice, total absence
of demand and supplyside
activity is rare:
- Remote rural areas
- Survival level
microenterprises
- Disaster situations.
GOOD POTENTIAL FOR
INTERVENTION
Interventions have the ability
to 'leverage' existing activity.
In practice, this is a common
situation in most developing
economies.
NEED FOR INTERVENTION
IS LIMITED
Markets are effective and
the private sector is vibrant.
Intervention may distort
private sector behavior.
However, intervention may
be justified for expansion and
equity reasons.
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WHERE SHOULD INTERVENTIONS FOCUS?
Where potential does exist to develop markets for BDS, interventions should focus on
overcoming the most critical constraints—on either the supply or demand side—that prevent
the market from functioning more effectively for
SMEs. Box 5 provides an illustrative real life
example of matching interventions to an
identified market weakness; it describes a case—
an export promotion project in West Bank and
Gaza—where effective demand for export
services existed but supply of services was weak
or non-existent.
The Venn diagram in Figure 9 shows
conceptually how this example illustrates the
link between market diagnosis and intervention
focus. The market evolves from a non-existent to
an effective market as supply enlarges and aligns
itself with demand. Demand for quality export
services is high and is depicted by the large size
of the ‘D’ circle. Supply ‘S’, however, is weak
because there are few if any suppliers with the
right type of export marketing services. Supply is
depicted by the smaller ‘S’ circle. This scenario
shows supply enlarging over time and eventually
aligning itself with demand. The enlarged supply
circle was the result of different interventions,
including:
• Supplier capacity building through links with
foreign firms;
• Information provision about requirements for
exporters;
• Bottom-line performance criteria to assess
value; and
• Matching grants for suppliers to overcome
high initial start-up costs of developing the
appropriate offer for exporters.
Box 5: Matching Intervention to
Identified Market Weakness in Gaza
The Small Business Support Project
(SBSP), working in the West Bank and
Gaza, identified the service-supply
constraint as the weak market factor
and initiated a commercial approach to
develop a reliable consulting service
capacity locally for quality assurance
services—such as ISO 9000 series
manufacturing processes. Through a
competitive procurement process, the
project identified and selected three
local companies that had the potential to
deliver these services. With local
demand in place and local service
providers ready to team up with
international experts, the project
negotiated and facilitated commercial
relationships between the local service
providers and local manufacturers to
cement the relationships and promote
quality export services. Bottom-line
targets, such as reduction in waste,
increases in profitability and efficiency,
and improved production management
systems, changed perceived customer
value over time. The initial ISO
consulting project in 1996 took 12
months and cost $35,000, with the
project financing 75 percent of the cost.
By the end of the project in 1999, ISO
projects took 6 months and cost only
$16,000 on average. Today, more than
60 firms have achieved ISO certification
with improved competitive performance.
By focusing on the specific market
weakness—attractive offers to SME
exporters—the project was able to build
the market for export consulting
services. Three local consulting firms
report continuing demand for ISO
services without SBSP financial or
technical involvement.
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Market Assessment and Intervention Choice

24
As supply expands, the overlap becomes larger, and it is this overlap that is defined as an
effective market—supply and demand meeting each other’s needs, causing many transactions
to take place at market prices.
Figure 9: The Process of Overcoming a Supply Constraint
Non-Existent
BDS Market
Effective
S
D
S
D
S
D S D
WHAT TYPE OF INTERVENTION IS USEFUL?
The goal of intervention is to develop markets so they can provide solutions to SME business
service needs. Figure 10 shows intervention options that have been used to overcome
consumer demand and/or supplier constraints to effective markets. Interventions options such
as vouchers, matching grants, and information (including media campaigns and directories
listing service providers) have been used to stimulate consumer demand by overcoming
problems of awareness and understanding and the valuation of benefits and costs or their
willingness to pay for business services. Intervention options such as product development,
skills and management development, and venture finance have been used to remove supply
constraint by addressing provider skills deficiencies, motivating entrepreneurial behavior,
providing information on consumer preferences on products and features, and joint-funding
to innovate and test new markets and products. Business linkages is both a demand-side and
a supply-side intervention that tries to foster a culture of inter-firm linkages between SMEs
(suppliers) and larger-firm buyers (providers of BDS). 16
16 Emerging Good Practices in Business Development Services, The First Annual Seminar
Turin Italy, 4-8 September, 2000, BDS Seminar Reader by Mary McVay and Alexandra
Overy Meihlbradt provides case examples of the different interventions options noted here.
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Figure 10: Matching Market Analysis to Intervention Options
BDS Providers
Constrained by:
Limited Information—
about market
opportunities
Skills Deficiencies—
technical or business
Operational
Deficiencies—resources,
systems, structures
Inappropriate Products
Environment—distortions
and barriers to activity
Intervention Options
Supply-side
Product
development
Venture finance
Technical
assistance
Training
EFFECTIVE
MARKET
Supply =
Demand
Market provides
solutions that
SMEs want
Demand-side
Vouchers
Matching
grants
Information
Business Linkages
BDS Consumers
Constrained by:
Limited Information
or Awareness—about
problems or solutions
Valuation Problems—
affecting willingness to
pay
Limited Resources—
to assess or purchase
services
Environment—
pervasive subsidy
reduces willingness to
pay
Figure 10 is necessarily simplistic. In reality,
interventions will often affect both supply and demand
sides. Box 6 provides an example from a pilot voucher
project in the Ukraine.
CONCLUDING COMMENTS
From the preceding discussion, and the conceptual
framework for market analysis presented, four key
points emerge:
1. SMEs live and die within a market context. Few are
actually touched by donors 18 . Designers need to
first ask why the market fails to serve SMEs with
Box 6: Interventions Affecting Demand
and Supply Sides
In a post-test survey, 17 voucher users said
that they would have paid the full cost of
training in computers and business
accounting had they known that these
services were available. This finding
indicates that vouchers were able to
overcome a demand-side problem of limited
information, which inhibited SMEs to
recognize a business problem and seek an
appropriate solution. The value of the
voucher was as much in the information it
conveyed as the discount it offered
consumers to try to services once
consumers learned about their availability.
The same survey revealed that providers of
computer training were encouraged to
develop new courses based on the feedback
they received from the trainees. The
injection of demand stimulated and
17 Field et al., Report on NewBizNet Pilot Voucher Scheme, 1999. motivated suppliers to develop products,
18 “The Application of Market Led Tools in the Design of BDS Interventions enter new (Influencing markets, the and Price develop of Soup new in
Nepal)” by Jim Tomecko of GTZ presented at the Donor Committee’s relationships. Asia conference The in survey Hanoi results reported illustrates the
finding from a nationwide survey of BDS consumption across multiple the sectors twin effects and learned of some that instruments.
“free
services” – those offered by donor partners – were a fraction of the overall BDS market estimated at
$320,000 per year.
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26
services they want. This requires that some form of market analysis should precede
intervention.
2. Markets are formed through the interaction of supply and demand, which, even though
they affect each other, are independent. This means that to understand why a market fails
to serve SME one must understand the weaknesses in both supply and demand.
3. Interventions should be tailored to the weaknesses of supply and/or demand, and should
minimize long-term distortions by limiting subsidies and planning exit strategies.
4. Sustainable access to BDS is not organization driven, but market driven. This means that
measuring sustainability should be based on a dynamic BDS market where transactions
are ongoing and increasing, not on the success or failure of an individual organization.
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CHAPTER THREE
WHERE DO WE WANT TO GO?—DEVELOPING A CLEAR
PICTURE OF SUSTAINABILITY
We’ve always been interested in generating longer-term SME sector change and growth through
our short-term interventions. The picture of BDS sustainability was clear: the state would continue
to offer and pay for services because it was good for the country. Or is it: the picture depends on
continued subsidy, and it blurs expectations between SMEs and suppliers. A more-focused picture
for the future is one where the capacity of markets is strengthened to ensure sustainable access to
BDS. Developing sustainable markets is not just concerned with transactions between BDS
consumers and suppliers but with a range of functions—information, research, product
development, and regulation—without which transactions won’t take place.
This chapter defines sustainability in BDS and sets out the reasons why an explicit view of
sustainability in BDS is so important. The chapter sets out a framework for sustainability, linking key
actors (and their core areas of competence) with supply-side functions, and summarizes what this
sustainability picture might look like.
Key Questions:
1. What are core market functions?
2. Who are the key market players?
3. Which player performs what function best?
4. Who pays for this function to be performed?
WHAT DOES SUSTAINABILITY MEAN IN BDS MARKET DEVELOPMENT?
The starting point in any intervention is an understanding of the market in which we’re
interested and, in particular, of the constraints that inhibit market development. Parallel with
this analysis, however, it is important to develop a clear view of where an intervention is
going—that is, of how it is envisaged that BDS markets will operate in a sustainable manner
in the longer term. Although sustainability has long-held a prominent place in development
vocabulary and is generally seen to be important, it is seldom defined tightly or
operationalized into tangible objectives and activities. This has been especially so in BDS
interventions, and it is a flaw that needs to be remedied if BDS interventions, are to become
more successful.
To make sense of sustainability, we need to think through the implications flowing from a
general definition. In general, sustainability is: 19
19 From Sustainability in NGO development projects; ODA, 1995.
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28
the capacity to ensure that benefits continue beyond the period of an initial intervention.
Capacity is concerned with the market
capability to continue to offer services, and
this is likely to be a combination of different
actors performing different supply-side
functions.
“Capability” can include a wide range of
factors—skills, motivations, systems, finances
etc.—but in a simplified way can be reduced
to two issues:
⇒ The ability to do; and
⇒ The ability to pay for/finance services.
Beyond the period of an intervention:
usefully, this reminds donors and facilitators
they are there to be transient facilitators of
change and not permanent fixtures on the
BDS landscape.
Benefits for SMEs are implied by their demand
for services from providers—that is,
demand/transactions is a proxy measure for
benefits.
Since SMEs need change and to become more
differentiated, for benefits to continue services
must also change; they cannot simply be a
standardized, unchanging product offer.
From this broad view, a general definition of sustainability in the context of BDS market
development is:
The market capacity to ensure that relevant, differentiated BDS continue to
be offered to and consumed by SMEs beyond the period of an intervention.
Building on this, more specifically, we can say that:
A transparent view of long-term sustainability in BDS therefore is one that
defines market capacity in more depth, linking market players with market
functions by addressing the core questions of who does and who pays.
Central to this definition is an institutional rather than organizational view of development.
Although the terms “institution” and “organization” are often used inter-changeably, strictly
speaking they are different.
• Organizations are collections of individuals in a specific, recognizable entity and formal
structure with internal rules.
• Institutions are wider structures of individuals and organizations—formal and
informal—in society or economy defined by mechanisms, relationships, values, and
skills.
Organizations are important and contribute to development objectives, but, ultimately, only
institutional change can bring about lasting improvement. Although organizational
development is concerned with developing individuals, managerial effectiveness, and
systems and investing in physical assets, institutional development is aimed at overcoming
the constraints that prevent people and organizations from working effectively together—
such as information and linkages.
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Markets are institutions. Developing sustainable markets, therefore, is not just concerned
with individual organizations in a marketplace or only with the delivery and consumption of
services—although this is the central activity in any market—but with the other functions
that are needed to support core transactions. We return to these support functions in Chapter
Five.
WHY IS CLARITY IN SUSTAINABILITY SO IMPORTANT?
Development agencies are interested in generating longer-term change and benefits through
their short-term interventions. 20 If, however, the nature of this longer-term picture is not
clear, it can permit inconsistency between what projects do and what they are trying to
achieve. A clear view of sustainability imposes discipline and direction on interventions.
Conversely, a vague and ill-considered view allows interventions to drift aimlessly.
The contrast with microfinance is instructive. Whereas in microfinance the drive toward
financially sustainable microfinance institutions is consistent with tight cost control, positive
real interest rates, and rigorous repayment collection, in BDS imprecise views about payment
for services (from SME clients) and subsidies (from under-resourced governments) in the
longer-term allow interventions to:
• Develop products that are too expensive or inappropriate for SMEs;
• Let the cost base of providers rise so they become out of tune with SMEs (and in tune
with donor money);
• Corrupt SMEs with the expectation of large subsidies and BDS as a donor creation rather
than a normal product in a market; and
• Lure governments into involvements that are beyond their capacity.
WHY HAS IT BEEN SO DIFFICULT TO DEVELOP CLEAR VIEWS OF SUSTAINABILITY IN BDS?
This characteristic problem of lack of clarity about sustainability in BDS interventions stems
from a number of factors:
• Not a Neat Organization, an Unruly Market: whereas in microfinance our focus is on
specific organizations and this provides real boundaries for analysis, in BDS we deal with
markets that, inevitably, are more elusive, being characterized by many more players,
multiple relationships, and loose boundaries.
20 As opposed to relief agencies whose goals are inherently more short term.
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• A Failure to Place BDS in a Market Context: related to the above point, most BDS
interventions have not tried to place their work in a market context and their view of
sustainability, therefore, is inappropriate.
• The Breadth of the Term: BDS as defined here covers a wide variety of services. This
means that interventions need to be clear about what kind of services are being
considered.
• Some Areas of Legitimate Government Involvement …….: there are some services
and functions that are likely to remain within the legitimate remit of governments. For
example, basic research and development and some types of information provision are
close to the education and knowledge base justifying state involvement. More capable
governments may see themselves as the only actor capable of wider cluster development
or network coordination and brokering. However, the list is not especially long.
• ……… But a History of Messy Government Involvement: partially stemming from
public goods arguments but more often for other social and political factors, governments
have been (and are) involved in BDS as subsidizers or organizers. The often-troubled
history of interventions that have supported government in this role has been a key factor
in leading agencies to market development. Governments in industrialized countries do
often intervene extensively in BDS, and this agreement is sometimes used for continued
efforts to raise low-income country governments’ capacity to provide BDS directly
(rather than facilitate BDS markets). However, as we discuss below, this argument is
fundamentally flawed. 21
The above factors complicate the BDS context but none excuse failure to develop a
sustainability picture for BDS. On the contrary, it is precisely because of this prevailing
complexity that striving for a transparent view of the future in BDS is so important.
A TRANSPARENT FRAMEWORK FOR SUSTAINABILITY IN BDS
To overcome these problems, interventions should develop explicit, transparent views of
sustainability in BDS. Figure 11 offers a simple framework for a transparent sustainability
picture. This graphic builds on the earlier definition in BDS and in particular on four key
questions: what needs to be done, who are the main players, who does, and who pays. 22 Each
is discussed below.
21 See R. Bennett and P. Robson (1999); The market for external business advice services in Britain; ESRC.
The Centre for Business Research for an example of a BDS market in a high-income country where the
rationale for government involvement is very unclear.
22 There are some parallels here with mapping exercises in sub-sector analysis.
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What Needs to Be Done?—Key Supply-side Functions
Markets are dynamic because the factors influencing them are changing and SMEs needs and
circumstances change. For markets to be sustainable—to meet the changing needs of and to
deliver benefits to their SME consumers through transactions—a number of support
functions need to be undertaken. In thinking about what needs to be done in a market, we
need to identify these key functions. Our perspective here is supply side; the demand-side
function is consumption of services. In reality, most interventions focus on the supply side.
Figure 11: Sustainability in BDS
1. Market Functions
Delivery of Services Product Development
Coordination Research and Development
Information
Skills Enhancement Regulation Advocacy
Facilitating
interventions
from
government
or donors
3. Who Does?
4. Who Pays?
State
Private
sector
(for-profit)
Not-for-profit
sector
2. Key Supply-side Players
Business
membership
organization
s
Business
networks
In order of priority, the main supply-side functions that need to be undertaken in any market are:
• Delivery of Services: the supply-side of the transaction—the central function in any
market;
• Product Development: ranging from adaptation of products to existing markets to new
products for new markets; responding to new customer requirements or using new
information to pro-actively offer services in advance of customer recognition;
• Skills/Capacity Enhancement: for providers of BDS, services to ensure that skills and
knowledge in developing and delivering BDS are updated and refreshed;
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32
• Research and Development: to develop new insights into market mechanisms,
underlying market trends, and changes in SMEs that may eventually be useful in applied
product development work; and
• Regulation and Policy-making: the overarching framework of rules and policies within
which markets operate. Often, regulation requires only a light touch to ensure that
markets work effectively and reasonably freely.
In addition, there are other functions that are possibly less important but may be useful in
some situations. These include:
• Basic Information Provision, which, for example, supports the development of markets
generally rather than specific products (and providers). In many markets, information will
be contained within products. Moreover, advances in technology, in urban and more
developed economies, have created information-rich environments that reduce the need
for a separate effort to provide information.
• Advocacy, which, it could be argued, is important to ensure appropriately balanced
government involvement in markets; and
• Coordination: for some BDS, initial coordinating work might be necessary to develop
the supply-demand relationship or to break down organizational barriers to cooperation
(such as in cluster development or networks involving universities and the private sector).
In many markets, of course, there is no coordination or any need for coordination.
Who Are the Main Players?—Main Potential Actors on the
Supply-side of a Market
Having identified the key supply-side functions in the marketplace, we then need to think
about who may undertake these. There are only a few options:
a) Government and Government Organizations: this can be broken down further (local
or regional government, etc.) but is essentially the public sector;
b) For-profit Businesses, of any size or ownership form, ranging from self-employed to
substantial corporations;
c) Networks: formal or informal, business networks can be a powerful source of services—
advice, contacts, skills, and the like;
d) Business Membership Organizations: sector associations, chambers of commerce, and
employers’ organizations whose principal role is advocacy; and
e) Not-for-Profit Business: this could include nongovernmental organizations but also
universities and educational institutions that may have some autonomy from government.
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Box 7: Key Considerations in Assessing the Role of the State in BDS
Any valid picture of sustainability in BDS markets has to consider the role of government—what governments should and should
not do. In doing so, a number of factors need to be taken into account.
Key Principles and Issues: from the broad consensus on a market-friendly approach, the key priorities for governments
pursuing poverty reduction are those functions that only they can do or that they can do better than others—meaning health,
education, security, macroeconomic management, etc. Focus on core competence and subsidiary—delegating to the lowest
possible level—is the key principle.
Rationale: governments’ involvement in marketplaces (such as BDS) can be justified on two grounds: market failure and equity
concerns. Within these two headings, governments should focus on:
• Public Goods—which are non-rival and non-excludable, meaning that consumption by one user doesn’t reduce supply to
another and users can’t be prevented from consuming the good. These are regarded as a top priority for state intervention.
• Markets Where Externalities and Imperfect Information Are Particularly Evident—where there are wider benefits to society
from the consumption of a good beyond the individual consumer and where consumers and/or suppliers don’t have enough
information to make the right decisions. These markets—where there are public goods aspects—are regarded as a
secondary priority for state intervention.
In fact, there are very few pure public goods. There are many more goods that fall into the second category—such as training—
where there may be positive externalities, but the case is hardly clear-cut. There can be major information constraints in some
markets, such as training—benefits from training are often not immediate or tangible. However, although public subsidy for
training is common, there are also vigorous and completely private training markets in many low-income countries.
The key problem here is that these arguments for intervention—drawn from economic theory—can be used to justify state
intervention in most markets. Markets are never perfect, and there’s always inequality. Does this mean we should always
intervene? Clearly not!
Capacity: a more practical way of thinking through governments’ potential role is to consider a hierarchy of functions of the
state (Figure 11). From this, governments with limited capacities should focus on doing a small number of basic things well,
rather than many things badly. In terms of BDS, this might mean, for example, only appropriate regulation or funding for core
research.
What About the Example of High-income Economies? In many wealthy countries, government involvement in BDS is
widespread, posing the question of whether low-income countries should seek to emulate this role. Several points need to be
made here:
• In some countries, there is a historic, relatively close relationship between competent states and the private sector that
allows governments to play a more active role in BDS. More commonly, governments intervene for a variety of social and
political reasons that have little to do with improved market functioning. Unfortunately, it is often this latter approach that is
exported to low-income countries through aid-funded projects.
• Despite the efforts of governments, for most businesses in most industrialized economies, BDS is provided through the
marketplace. In the United Kingdom, for example, one study showed that only 14 percent of business advice—a
cornerstone of SME policy—is provided by official government-supported agencies.
• The quality and effectiveness of much officially supported BDS in these countries is highly questionable and, at its worst,
akin to a welfare state for struggling enterprise. In the United Kingdom, there is a negative correlation between usage of
public sector sources of advice and profitability; in other words, subsidized advice has been taken up by badly performing
SMEs (many of which were actually seeking financial assistance).
• The resource base of industrialized countries dwarfs that of low-income countries, and the practices that have developed
are those of rich states where sustainability concerns press only lightly.
In short, the role of governments in BDS often followed in high-income countries are typically ineffective and/or hugely
expensive and depend on subsidies. BDS projects that are modeled on these approaches are inappropriate—and indeed
damaging—for low-income countries.
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Box 8: Key Considerations in Assessing the Role of Business Membership Organizations in BDS
Business membership organizations (BMOs) are a fixture on the business and BDS scene in most countries. Although in Europe
some BMOs have a public law status that makes business membership compulsory, more commonly they are voluntary
organizations formed to serve their members’ interests.
What’s Unique About BMOs?
BMOs are the only collective organizations owned by and for business and representing business. Although local traditions vary
greatly, from a donor perspective BMOs can offer an extensive presence and outreach to businesses, a good understanding of
business needs, a means of tapping into business talents, and good connections with state decision-makers.
Donor Experience
Drawn by the apparent potential of BMOs to provide demand-oriented services to their members, considerable resources have
been focused on BMOs over recent years. Overall, this experience has not been especially positive. It is clear now that
businesses join BMOs for a variety of reasons—social, political, and personal; that relations between BMOs and members are
often not strictly business-like or transactional; that capacity varies hugely; and that often BMOs don’t wish to expand their core
roles beyond that which they know and own.
Core Roles?
In general, BMOs’ comparative advantage is around the roles of advocacy (first priority), information, and networking. Roles
beyond these core areas—such as developing new ideas, enhancing skills, and assuming delegated government functions—are
dependent on capacity and market considerations, but there is nothing in BMOs that makes them inherently suited for these. 23
Box 9: Key Considerations in Assessing the Role of Not-for-Profit Organizations in BDS
Not-for-profit organizations include a wide range of voluntary, semi-state, and other organizations (including BMOs). Our focus
here is on two of these; higher educational organizations and nongovernmental organizations (NGOs). Both have a wider public
purpose (beyond profit) similar to government but, it is argued, without the bureaucracy and other disadvantages of governments.
The core roles of higher educational organizations are concerned with teaching students and undertaking research—that is, with
developing and disseminating knowledge for society as a whole. In many countries, educational organizations like business
schools are active as providers of BDS—especially training—to business. This role is valid only if they can develop the right skills
and culture to develop and deliver on a commercial basis to the private sector—that is, to extend their core knowledge role to
include training to business. However, in many instances, traditional academic culture has been shown to be even more distant
from business than government and to be completely unsuited to BDS provision.
Less controversially, it is clearly within the natural role of higher educational organizations to undertake basic research, which
ultimately should feed into new and better BDS.
NGOs, although highly diverse, are commonly seen to posses an advantage because of their driven and informal culture, their
commitment to reach disadvantaged groups and their flexibility (in part, stemming from their lack of accountability). Although
difficult to prove, NGOs may be able to reach difficult (peripheral, socially excluded, etc.) groups better than others. However,
although some NGOs have developed a business-like culture that allows them to work in a market-oriented manner, others bring
with them less-helpful welfare-oriented attitudes that hinder BDS market development.
In the longer-term, as direct providers of BDS there is probably a limited role for NGOs. More likely, their longer-term role will draw
on their core strengths of closeness to and understanding of disadvantaged groups and of innovation and flexibility to enable them
to test and develop new ideas. In the short term, they can—if they have suitable capacity—act as BDS market development
facilitators.
23 A 1999 survey of BMOs in Nepal showed that more than three-quarters of members saw BMOs’ most
important function as advocacy, information provision, or networking.
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Figure 12: Functions of the State
Minimal
Functions
Intermediate
Functions
Activist
Functions
Addressing
Externalities:
Basic education
Environmental
protection
Addressing Market Failure
Providing Pure Public Goods:
Defense
Law and order
Property rights
Macroeconomic management
Public health
Regulating
Monopoly:
Utility regulation
Antitrust policy
Coordinating Private Activity:
Fostering markets
Cluster initiatives
Overcoming
Imperfect
Information:
Insurance (health,
life, pensions)
Financial regulation
Consumer protection
Improving Equity
Protecting the Poor:
Antipoverty programs
Disaster relief
Providing Social
Insurance:
Redistributive
pensions
Family allowances
Unemployment
insurance
Redistribution:
Asset redistribution
Source: World Development Report 1997.
Donor agencies are not included here; their role is perceived to be facilitative and short term
without a valid longer-term rationale. It may be that foreign-funded donor agencies will
continue to be active in low-income countries, but to build them into one’s picture of
sustainability as long-term players is to run the risk of cementing countries into debilitating
dependence.
Similarly, we don’t here include SMEs—they are clearly important but are on the demandside
of the market. The focus here is on supply-side functions.
Who Will Undertake the Function (who does)? Who Will Pay for This to Happen
(who pays)?—Linking Actors with Functions
In developing a transparent picture of sustainability for the future, 24 the core task for each
main function is to develop—in as much detail as possible—a clear view of:
• Who will undertake this function? (who does?); and
• Who will pay for this to happen? (who pays?).
24 The period of time to be considered will clearly vary from one situation to another, but the end of a project period is the
obvious time horizon to consider.
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36
In answering these questions, we need to assess the comparative advantage of each key
player in the local context and their realistic capacity to do and to pay (Boxes 7-9).
Considered responses to these deceptively simple questions provide a transparent basis for
rational analysis of the future of particular BDS and for the development of a consensus—
among donors and with government and other players—over longer-term objectives.
Currently, neither the transparency nor the consensus is often in evidence.
One structured way in which to organize information related to sustainability is to use a
matrix (Table 2). This involves direct comparison of a current situation with an ideal at some
point in time and sets the specific direction in which interventions should go. However, there
are no easy or formulaic answers to questions of sustainability; Table 2 is a convenient
means of gathering and presenting information; it is not a prescriptive tool. There is no
substitute for wrestling with the hard issues that a candid, rigorous assessment of
sustainability poses.
WHAT WOULD A SUSTAINABILITY PICTURE LOOK LIKE?
Given the above framework for developing transparency in sustainability, what should this
picture look like for BDS market development interventions? First, it is important to point
out that it won’t always be the same. There are factors that might lead to legitimate
differences between countries:
• Business Membership Organization Traditions: in some countries, BMOs have
considerable strength and may be able to play a role in, for example, information
provision as well as the more traditional advocacy function. In other countries, this is
more common, they have a limited but important advocacy-focused role.
• Government Capacity: wealthier governments (say, in middle-income countries) with a
stronger human resource base can potentially play a more active role in supporting
functions such as research and development and coordination. For most low-income
countries, however, governments’ priority should be to focus on core roles only.
• Entrepreneurial Character of NGOs: business-like NGOs have developed in some
countries that, in their culture and capacity, are similar to competent for-profit players. In
other cases, NGOs continue to be loaded with a welfare legacy and anti-business
sentiment, and have few relevant skills.
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Table 2: Sustainability Framework in Matrix Form
Functions
Players
Who Does?
Who Pays?
Current Future Current Future
Delivery
Product
development
Skills
enhancement
Research and
development
Information
Advocacy
Regulation
Coordination
• The Strength of Networks: more-entrepreneurial economies often have networks of
businesses (SMEs and larger firms) that have higher potential for an active role.
• The Degree of Market Openness: markets that are open to foreign investment and trade
are more likely to graduate toward a functioning, primarily private sector market than one
where there are constraints to global, external market influences.
Second, notwithstanding these differences, the general shape of BDS in the future will be
characterized by:
• The For-Profit Sector: the key providers of BDS and responsible for product
development financed directly from revenues from fee-paying SME clients. Increasingly
also, one should expect that support functions in markets—skills provision, product
development, information flows, etc.—become internalized within markets, with
advocacy and regulation the principal non-traded functions;
• Business Networks: supplementing the private sector, through a variety of selfsustaining
arrangements; should develop to provide services informally and formally;
• Government: policy maker and regulator, financed by the state (government therefore
should essentially not be a provider of BDS). In some instances, government may also
play a role in basic research and development and in coordination;
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• Business Membership Organizations: providers of an articulate advocacy voice for the
business community and of information through their networks; and
• Not-For-Profit Organizations: building on core strengths in research and/or knowledge
of peripheral and disadvantaged groups; may develop as product testers/developers,
researchers, and specialist skills development providers.
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CHAPTER FOUR
HOW DO WE GET THERE?—CORE IMPLEMENTATION CHALLENGES
All forms of outside support are a subsidy in one way or another. A market development approach to
BDS does not mean no subsidy, no way, no how. Instead, it means how much subsidy, in what form,
and how long so that SMEs future service needs can be met through the private provision of BDS in
sustainable markets. All subsidies will distort markets in some way—we to need to anticipate future
implementation challenges so our subsidy develops more than it distorts the market. And, finally, we
need to ask ourselves, as managers of short-term subsidies, how must we change to be effective
practitioners of BDS market development interventions.
This chapter outlines common issues that need to be confronted in designing and managing
interventions. It focuses particularly on how support should be structured to enhance market
development and minimize market distortion and on the selection and management of partner
relationships. It concludes by listing some key implications for donors and facilitators inherent within
the BDS market development approach.
Key Questions:
1. Where should we intervene in the project cycle to minimize the risk of distortion?
2. Is there any justification for subsidizing the transaction between BDS consumer and supplier?
3. How much intervention—in terms of time and resources—is enough? How much is too much?
4. How do we leverage additional private sector investment in BDS?
5. How do we identify and select implementation partners?
6. How do we assess donor skills and capacities to be effective?
COMMON SIGNS OF MARKET DEVELOPMENT OR DISTORTION IN BDS INTERVENTIONS
The overall shape of interventions in BDS is guided by:
1. Analysis of the market in which we are interested and the constraints to market
development revealed by this analysis; and
2. Our view of sustainability in the longer term.
Clearly, interventions built on these foundations may take different forms and each of these
raises its own distinctive problems. However, there are more general issues that commonly
need to be confronted in BDS interventions if they are to be successful. These fall under
three broad categories:
• How support for BDS should be structured;
• Whom we should work with; and
• What are the implications for the capacities of donors and facilitators?
Before assessing these issues, we must be clear about what we mean by market development
and, its converse, market distortion. We need to know what these mean and recognize signs
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of both. All donor-financed support is a form of subsidy and has some impact on the BDS
marketplace and therefore the potential to be positive or negative (that is, distorting) with
regard to the objective of market development. Any BDS provider or facilitator will
recognize this reality. One typical response from BDS programs when justifying subsidies to
reduce the price of BDS to SMEs is that SMEs are not prepared to pay a higher price because
they are used to free services from other development programs or government. This is a
classic illustration of intervention distortion at work. Table 3 highlights some obvious signs
of both market development and distortion.
Table 3: Common Signs of Market Development and Market Distortion
Services
Providers
Consumers
Develop
The acid test: increased transaction
volume; larger market size
Range of products for different
consumers; innovation to meet new
needs
Greater number of differentiated
providers; financed by consumer fees;
cost base appropriate to financial
realities of market
Assertive consumers demanding good
value from providers; prepared to pay the
right price for the right product
Distort
Lower transaction volume; smaller
market size; standardized products;
minimal differentiation or innovation
Small number of providers; existence of
parallel providers (official subsidized and
unofficial market-based); increasing or
prevailing high degree of subsidy
dependence; bloated cost base from high
donor support and (expectation of more)
Continued expectations of subsidy;
reluctance to consider BDS as any other
product; low value placed on BDS
HOW SUPPORT FOR BDS SHOULD BE STRUCTURED?
There are three critical factors to consider in structuring support for BDS provision:
1. Invasiveness of Support: Where should we direct our support?
2. Intensity of Support: How much support and what nature of support is required?
3. Leverage of Support: How do we make (limited) support more effective?
Invasiveness of Support
There is a fine line between developing and distorting. Where we focus our intervention or
support partly determines this balance. We refer to this where as invasive: the closer or more
direct an intervention is in relation to the transaction between consumer and service provider,
the more invasive it is (Figure 13).
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Figure 13: Where to Intervene to Reduce the Risk of Distortion
Feedback and Change
Ideas
Development:
Products
Development:
People &
Organizations
Marketing
&
Promotion
Information
for
Consumers
Delivery:
Supplyside
Delivery:
Demand
-side
Assessment
of
Markets/
Products
Pre-delivery
less invasive
Delivery
more invasive
Postdelivery
less invasive
MINIMIZE
POTENTIAL
FOR
DISTORTION
Artificially reducing the price that consumers have to pay for a service and artificially
reducing service providers’ cost of delivery are highly invasive types of interventions that
have relatively high potential for market distortion. These types of interventions impinge
directly on the transaction between supplier and consumer, influencing the motivations,
behavior, dynamics, and price signals that lie at the heart of a functioning market. In doing
so, they have the potential to distort:
• Consumers’ Willingness to Pay: for example, price expectations are lowered below the
market norm; and
• Providers’ Ability to Develop an Offer: for example, fee or margin expectations are raised
if delivery is subsidized; unsubsidized providers’ normal-service price becomes
unattractive to consumers in the face of subsidized competition.
This characteristic high risk of distortion does not imply that direct delivery subsidies can’t
be justified (see Table 4). However, it does mean that we need to be aware of the potential
downside risk of such interventions as well as the possible upsides.
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Table 4: Possible Justifications for Direct-Delivery Subsidies
Typical Justifications
Necessary to provide tangible incentives and to
change behavior
To overcome risk—there can’t be real change
without risk
If delivered correctly, can reinforce market forces
and development
They’re poor—they can’t afford to pay and
therefore need subsidy!
Direct support is highly visible
We need to find a way to spend our money
Comment
Where subsidy dependence is entrenched, an
idea is new, or similar barriers exist, limited
delivery subsidies to test ideas, demonstrate
value, or lure SMEs into consumption, may be
effective.
Danger: limited can become longer term; largescale
subsidies undermine connection between
price and value, and crowd out unsubsidized
activities
Possibly, if used sparingly, to reinforce
transactional relationship and address specific
constraints. For example, vouchers, matching
grants
Many dangers here:
Potential for endless subsidy
How is service provision to continue in the long
term?
Limited outreach or replication.
Price-value link is undermined: if people value a
service they’ll pay for it.
BDS provision becomes confused with social
protection.
Direct-delivery subsidies have higher visibility and
permit proportionately greater disbursements. But
this is bureaucratic rationale triumphing over
development rationale.
General lessons can be drawn for those considering direct-delivery support:
• Finite Period of Support: there has to be a clear end-point to support related to
measurable and achievable objectives. For example, this might focus on volume of
transactions taking place between consumers and suppliers without any subsidy.
• Limited in Scale: there are real dangers of flooding a marketplace with funds, causing
long-term market distortion.
• How Delivered Is Important: careful consideration needs to be given to the structure of
the support, what incentives it creates, and how support is expected to achieve objectives
(see below).
• Justified Openly in Relation to Market Constraints: support has to have clear
justification and objectives for overcoming market constraints and developing sustainable
access to services 25 .
25 See Biggs, T; "A Microeconometric Evaluation of the Mauritius Technology Diffusion Scheme"; World
Bank, November 1999 as an example of a project that may not have matched an analysis of real market
constraints with intervention design.
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• Consistent Policies and Approaches Need to Be Developed with Other Facilitators and
Providers: learning from microfinance, widely differing approaches and policies on
direct delivery among development agencies hinder progress toward sustainable,
effective markets and institutions. There is a prerogative for openness and coordination
between agencies to develop consensus and avoid undercutting between agencies.
Intensity of Support
In addition to where we intervene, a second important factor impinging on market
development and distortion is intervention intensity—how much intervention and what kind
of intervention.
Interventions are more likely to distort if they are intensive. Typically, this means focusing
relatively high levels of resources on a single provider, product, or even target group. Lessintensive
interventions try to intervene more lightly or broadly and have a lower potential to
distort. Less-intensive interventions might include product development, information
provision, or venture-capital support to numerous providers. The effect of excessive
intervention intensity can be overloading.
Overloading refers to the (unintended) distorting effects of excessively intensive donor
support, creating an unrealistic or unviable pressure on the intended recipient, be that a
service provider or a product. The effects of overloading can be separated as follows:
1. On providers: strategic or operational burdens; and
2. On BDS products: over-engineering.
Overloading: Providers
Strategic Burden = Forcing Multiple or Unrealistic Objectives on a Provider.
Donor agencies are required to balance objectives for sustainability with developmental
priorities. However, it can be counterproductive to force or constrain BDS providers to work
only with certain target groups, while trying to promote business-like behavior and financial
sustainability. The danger is that partners are burdened with twin objectives, possibly
achieving neither. This can be damaging for providers, undermining their viability by moving
them away from their natural market and competence, and is inconsistent—expecting
providers to be market oriented while telling them which market they should focus on.
Operational Burden: Control and Cost Burdens.
# Control Burden = Excessive Reporting and Monitoring and Evaluation
Requirements Imposed on Provider. Donor reporting requirements may not be
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relevant to the provider’s priorities. Adhering to these requirements may entail
developing systems and procedures that are not relevant to providers’ needs. This can:
— Reduce flexibility and responsiveness and increase costs; and
— Undermine ownership if the provider feels it has to do want the donor wants.
# Cost Burden = Excessive Investment in Service Provider. Excessive investment in
equipment, staff, products, or systems develops inappropriate cost and price structures
that reduce providers’ potential for viability (from revenues from SMEs).
The problem is that donor funds and work
practices may impact adversely on a partner
organization, driving a wedge between it and its
clients in terms of systems, culture, costs, and
scale. The challenge for donors is to develop
approaches for intervention that account for such
artificiality. This may involve, for example,
building a transactional, financial relationship
around conditions and performance targets.
Alternatively, given the complications of building
BDS organizations, there is increasing focus on
developing BDS products, rather than
organizations, as an appropriate focus for
interventions.
Overloading: Products
Attempts to develop BDS products either for
specific providers or for wider market distribution
have frequently suffered from over-engineering.
Typically, these interventions involve importing
and adapting products from developed economies
(such as business growth training from the United
Kingdom) or committing considerable resources to
developing new generic products such as
International Labour Organization’s Start and
Improve Your Business. Although these products
may be of high technical quality, there are often
criticisms that they are over-engineered because
they:
Box 10: Overloading a Provider in
Kenya 26
In 1987, a service provider was started
by a local entrepreneur to provide
training and counseling services to
SMEs, receiving modest amounts of
subsidy from local sources. In 1998, it
was operating at 48 percent financial
sustainability (based on full costs). The
service provider was regarded as having
good potential and attracted additional
international donor funding: from 1989
(199-percent annual increase) and then
a major new injection in the period
1994-95 (194-percent and 55-percent
annual increases).
In those same periods, the service
provider’s cost base increased
dramatically: 20-40 percent annually
during 1989-91; and 1994-96, by 32-98
percent annually. At the same time,
financial sustainability fell to 30 percent
or less for much of the 1989-96 period,
only recovering to 53 percent in 1997.
Donor investment had financed
additional facilities, systems, and
capacity that added dramatically to
operational expenditure, without a
commensurate effect on revenues. The
result was an operating deficit that
threatened the viability of the service
provider.
26 Hitchins, R and Gibson, A; "The Kenya Management Assistance Programme - innovative delivery of
counselling and training"; Paper presented to the workshop on BDS for SMEs, "How sustainable can
business development services really be?"; Harare, 29 th September - 1 st October, 1998
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• Have been developed to be perfect products but are:
C Overly comprehensive and unwieldy, and
C Expensive and resource dependent; and
• Are overly generic and inappropriate to the specific, ever-changing requirements of
SMEs.
The effects of over-engineering have been:
• Products that do not reflect market in terms of
cost, price and delivery mechanisms;
• Difficulty in developing future products
because providers lack resources or capacity to
do so in the absence of resource-intensive
external support; and
• Crowding-out of indigenous products and
product development.
Why Does Overloading Occur? One reason
for overly intensive interventions is the pressure on
donors to achieve results and disburse funds.
Naturally, there is a belief that bigger is better and
more rather than less. A second factor is that often
intervention design is not grounded in the reality of
local market conditions and constraints: donors and
facilitators projects have a tendency to develop
projects based on their own expectations,
experiences, and views, and not what works in the
market in question. Typical examples include:
• Making large front-end investments to develop
prestigious BDS organizations 27 , but in the
process developing capacity (and a cost base)
that is far in advance of organization
requirement, consumer purchasing power, and
market demand, with very little consideration
of future commercial viability; and
Box 11: Overloading Training in Uganda
A project was designed to enhance the
technical capacity of SMEs involved in the
food-processing sector (bakery, dairy, and
fruit and vegetable products). Initially threeweek
training courses were delivered via the
project and its partner (a business
membership organization). Because of
concerns about sustainability of training
services after project end, support was
subsequently re-focused to develop a pool
of local trainer-consultants who would
deliver training to SMEs on a commercial
basis.
Unfortunately, although the training products
were of a high technical standard and many
of the potential trainer-consultants were well
qualified, no trainer-consultants were a
commercial success. The causes of this
failure attributed to:
• Overly sophisticated products, they were
too costly and resource intensive to be
viable in local conditions;
• The training was too comprehensive and
theoretical—it did not offer quick and
practicable solutions to business
problems; and
• Inappropriate delivery mechanisms:
because of their qualifications and income
from more lucrative areas, trainerconsultants
found fees from SMEs
unattractive.
Ironically, there was an unintended output
from the project. One initial project trainee—
a baker, not a trainer-consultant—
27 successfully operated a training business on
“Business Service Centers in Ukraine” an MBP study conducted
the
by
side,
Yoo-Mi
offering
Lee reported
very short
how
focused
excessive
training
upfront
support within business service centers created cost structures
(1-2
that
hours)
could
addressing
only be supported
specific
by
baking
serving
larger firms. The conflict between business center financial viability
problems
and outreach
to other
to
small
small
bakeries,
firms was
on
partly
a
due to high – and largely unnecessary – donor investments in existing
profitable
providers
basis.
to create them more in the
image of Western business center models.
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• Developing conceptually and technically complete or perfect products, rather than
products that are more suited to local preferences and delivery mechanisms. 28
28 Low-quality products and organizations are often given as reasons for intervention. The question is quality
for whom? Although low quality by the standards of advanced economies, indigenous products may often be
far more appropriate (and viable) for local conditions. See “Sustainable MSE training through grassroots
training business”, a paper presented by Enoth Mbiene and Gavin Anderson at the Donor Committee’s
Harare conference for insight on low priced training courses --$4 to $12 /course -- with high demand in rural
communities.
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Avoiding overloading may involve different approaches:
• Use market assessment and consumer research in intervention design:
C Understanding the characteristics and norms of the market in question allows
intervention to be geared to developing appropriate, viable products, organizations,
people, and mechanisms in terms of cost, price, features, location, and the like.
• Forget cost recovery, think about profit. The term “cost recovery” not helpful to
developing sustainable, demand-led BDS
because it is a manifestation of one key
weakness of many BDS interventions:
building organizations in advance of need:
Box 12: Using a Portfolio Approach to
Achieve Cross-cutting Development
Objectives
C Large front-end investments are made in
facilities, equipment, and staff, which
result in a bloated cost base that bears no
relation to the earning capacity of the BDS
provider.
C The concept of cost recovery promotes an
artificial culture of clawing back revenues
to finance these cost bases and
unproductive investments, in response to
donor demands for sustainability.
C Small businesses do not have this luxury;
they grow in response to increasing
demand and invest, when they can afford
to, for productive purposes, to make a
profit.
• Use a portfolio approach (see Box 12). A
portfolio approach entails working with
multiple partners—a portfolio—rather than
just one. Like an investment or lending
portfolio, the performance of the entire
portfolio is more critical than any single
constituent part. The benefits of such an
approach are:
C This approach reduces investment in any
single organization (by default, it is less
intensive); and
In a typical project, a partner service provider
is given multiple objectives—for example, to
achieve financial sustainability (based on
revenues from SMEs) in two years and also
that 65 percent of clientele must be female.
A portfolio approach would be to work with 10
service providers, all of which have a
financial-sustainability objective. The donor or
facilitator does not assign individual service
providers with a gender-outreach objective,
however. Instead, an aggregate objective for
the whole portfolio of the service provider is
assigned—for example, gender outreach
target of 65 percent. Thus, if there are 1,000
current clients for whole portfolio, 650 have to
be female. The donor/facilitator then
manages the portfolio on basis of both
objectives:
• Partner service providers are selected,
assessed, or dropped on the basis of
financial performance.
• Partners are also selected on the basis of
their offer to female entrepreneurs or
market segments. Sufficient partners with
such an offer are maintained in the
portfolio to ensure aggregate gender
objective is achieved.
Key Points:
Don’t impose that all service providers have
to have 65 percent of clientele female; select
those whose natural offer is to female clients
or markets and then measure gender
outreach of project as a whole.
C A portfolio of partners means that donor
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strategic objectives can be assigned on the portfolio in aggregate, rather than multiple
objectives for individual service providers.
Intervention Leverage
Concerns about distortion should not lead development agencies to adopt interventions that
are so minimalist they achieve nothing. The challenge is to design interventions find ways to
leverage the private sector into investing, trading, and developing products (using relatively
few resources), rather than replacing private sector activity (through intensive or invasive
intervention) 29 . Leverage might mean attracting matching investment from private sector
providers, developing new products for licensing or franchising, or increasing private sector
provision in a new market through some form of information provision. Ideally, interventions
should try and use the lowest appropriate level of intensity possible while maintaining
effectiveness. 30 Six key factors need to be taken account of in designing interventions to
achieve leverage:
1. Choosing the right instrument;
2. Using a portfolio approach: a range of partners;
3. Making support transactional;
4. Developing a clear support offer;
5. Building on existing ownership; and
6. Investing in potential.
Choosing the Right Instrument
Certain types of intervention instruments are more likely to achieve leverage than others—
notably, those that have the ability for wider replication or to attract private sector funds to
multiply the effects of intervention. Intervention instruments that offer the potential for
leverage include:
• Product development for distribution, franchising 31 or licensing to a range of service
providers;
• Social venture capital: matching private sector investment;
29 IDE’s work with treadle pumps – described in the Polak/Downing paper “The Development and
Commercialization of the Treadle Pump in Bangladesh presented at the Donor Committee’s Asia BDS
workshop -- illustrates how the introduction of a new technology leveraged an almost 3 to 1 response from
the private sector.
30 This is similar to the subsidiary principle discussed in BDS good practice guidelines.
31 Franchising of BDS appears attractive—that is, the idea of being able to develop reputable branded products
or methodologies, which can then be sold or distributed under license to large numbers of service providers,
possibly with an accompanying technical support agreement. However, there is little experience to date of
true franchising (with revenue flowing back from the franchisee to the franchiser). GTZ's CEFE has some of
the elements of a franchised product. Like all product development, franchising may face challenges of overstandardization
and cost, as well as concerns about developing enforceable brands and preventing pirating.
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C For new product development, and
C For new market development;
# Information provision;
C Market information for service providers—new market/product development; and
C Service or service provider information for consumers.
Portfolio Approach: Working with More than One Partner
Elsewhere reference has been made to a portfolio approach to working with partners.
Working with more than one partner reduces the danger of distortion and unfair competition,
but an equally important benefit is that it permits leverage:
• Project support is spread more widely across the market; and
• An intervention’s risk is spread: the intervention is not tied to a single organization or
mechanism, so this approach can be more innovative and experimental without the fear of
losing everything if a partner fails to deliver.
Making Support Transactional (see Box 13)
If the objective of BDS intervention is to foster more effective, business-like BDS provision,
intervening agencies themselves must be more business-like in their approach to support,
making support more transactional to replicate conventional business relationships. Soft
support sends entirely the wrong messages to BDS providers, their clients, and the
marketplace; it undermines market signals or incentives and is more likely to distort rather
than develop demand-led service provision. The benefits of transactional support are that it:
• Requires reciprocity and thus has potential for leverage;
• Fosters business-like incentives, behavior, and attitudes;
• Links support to performance; and
• Attaches a value to support—that is, it encourages prudent and effective utilization.
Ultimately, any form of support, transactional or not, is artificial and carries the potential to
distort service provision away from business and toward the donor. One solution is to
transfer support itself to the marketplace, using market mechanisms and pricing. Some
initiatives have experimented with mechanisms such as leasing of equipment, debt or equity
financing for investment, and priced technical assistance.
Developing a Clear Offer
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If a donor/facilitator is to achieve leverage through a limited intervention, the intervention
must be shaped into an offer to partners that is clear, unambiguous, and attractive. As with
any other transaction, each party has to know what it is going to get if the offer is going to
work. Often, interventions have an extremely ill-defined offer, partly because the range of
potential support is extremely broad and partly because there is a genuine absence of
transparency about roles and capabilities. Key questions to be asked when ascertaining an
offer to partners are:
• What is our distinctive core competence (especially in contrast with other agencies,
government, and private sector)?
• Why should someone want our support?
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• Precisely, what are they going to get?
Box 13: Using Incentive-based Support 32
Some agencies make their support to partners conditional, based on explicit performance criteria; the objective is to
replicate market behavior. Using incentive-based support effectively can present numerous challenges.
Link support to performance:
Some form of conditionality has to be established, whereby funding or technical assistance is extended based on the
achievement of performance criteria, such as outreach, activities, and financial performance. This may be on an
organization or product-by-product basis. Choosing the right conditionality is the principal challenge here.
• How will the chosen incentive work?
• What is the objective of the incentive mechanism?
• Does the incentive motivate the desired behavior?
Define the package of support:
Recognizing that just as there is a transaction between service provider and consumer, so there is a transaction between
donor/facilitator and service provider. What does the partner get from the donor/facilitator? It is particularly important that
consistency and clarity are maintained over time with respect to both the offer of support and the incentive mechanism.
Shifting the goal-posts can be extremely damaging.
Develop performance targets:
Mutually agreed performance targets must be established in advance. Targets need to be realistic and achievable, but
should also present enough of a challenge to stimulate change: too low, behavior or performance is unchanged; too high,
the target is de-motivating.
A more difficult challenge for many development agencies is that performance-based support also means walking away
when partners consistently fail to deliver (rather than keeping them on life-support). If the sanction for under-performance
is not credible, incentives will not work.
Implement rigorous measurement systems:
Because funding and technical support are dependent on performance, measuring performance has to be transparent
and credible if disputes, manipulation, and fraud are to be avoided. The challenge for the donor/facilitator is to minimize
distorting effects while maintaining accountability.
Problems with Incentive Mechanisms:
• Inappropriate conditionality motivates undesired behavior—for example, basing funding only on outreach or sales
income can cause a service provider to maximize sales, without considering the profitability of sales. When support
ends, the service provider finds both a large operating deficit and inappropriate cost and price structures.
• Loose conditionality and measurement can encourage fraud and manipulation.
• Incentive schemes, if they are well run, place considerable demands on donors/facilitators in terms of skills, systems
and procedures, and staff time.
Building on Existing Ownership
The most distinctive characteristic of a small business is its ownership structure—usually a
single individual who drives the organization. There is an emerging consensus that the most
32 See Hitchins, R; "Assessing the experience of Swisscontact's business centre approach in Latin America and
Asia"; Swisscontact; SDC Issue paper No.3, 1999
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52
effective institutions or mechanisms to support SMEs are those that look like SMEs. 33 The
challenge for interventions is to build on (or create) this ownership, rather than displacing it
through external initiatives and control. Stimulating individual ownership requires exposure
to risk and reward, ideally in the form of the partner’s personal investment and equity. This is
difficult territory for development agencies that are more familiar with giving assistance and
reducing risk, and that have a tendency to work with partners most similar to their own
institutional culture, often a very different culture from that of entrepreneurs and business.
Building on existing ownership (what’s there) is an effective of way of leveraging an
intervention because:
• Not starting from scratch can be less expensive;
• An existing owner should be able to match investment from a facilitator; and
• An existing owner has a strong stake, which creates:
C Commitment; and
C Incentives: the risk and reward, which is at the heart of entrepreneurial behavior.
Investing in Potential
Leveraging intervention is similar to investment; donor agencies are looking for a return
(achievement of objectives) on their investment (project inputs). The decision of where to
invest or who to invest in should be based on identifying winners or potential (either
demonstrated potential or latent potential). Donor support is not best utilized propping up
failing organizations and individuals who see donor support as a last respite.
The challenge for agencies (aside from actually finding potential investments) is to ascertain
whether they should support existing potential (which may create nothing additional or be
distorting) or support new potential (which carries more risk, but may have less potential for
distortion). The options for the donor are somewhat like a business (Figure 14).
Figure14: Options for Support: Support Existing or Develop New
33 This point is at the core of the BDS good practice principles.
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Existing
MARKET
(sub-sector, enterprise, location)
New
PRODUCTS
(services, providers)
1 2
3 4
New
Agencies can adopt four basic strategies (or combine several):
# Work more intensively within existing sectors and existing services and providers,
perhaps to reach disadvantaged groups (market share or market penetration);
# Increase the range of sectors in which they try to work (new market strategy);
# Introduce new services and providers (product development strategy); and
# Move into entirely new sectors with new services and providers (diversification).
The further donors move from square 1 toward square 4—into new markets, services, and
providers—the more risk increases. The potential for distortion decreases, however,
assuming that the general level of BDS activity is weak in these new areas.
Factors to Take Account of in Pursuing Poverty Reduction/Equity Objectives
All of the preceding analysis applies equally to the poor as it does to the non-poor. These
challenges need to be addressed generally if BDS markets are to be developed and,
specifically, if the poor are to be included within markets and poverty/inequity addressed.
The approach is all about making markets work more effectively for the poor—as well as for
everybody else—rather than isolating them in enclaves of welfare and charity.
Yet, commonly, intervention responses that seek to be especially poverty-focused are often
based on direct subsidy of service provision or consumption. Projects are designed to reach
disadvantaged groups using, for example, subsidized services for microenterprises or target
quotas for coverage of female-owned businesses.
Intervening in this fashion is a non-market response. The risk is that solutions are artificial,
delivering short-term benefits but ultimately doing little to incorporate the disadvantaged into
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mainstream markets; in a sense, solutions can be exclusive rather than inclusive. Several
concerns arise:
• These mechanisms all require some form of control or subsidy that can be achieved only
by government or development agencies. Resource and time constraints limit their scale
and longevity. With no clear picture of sustainability, interventions become, at best,
short-term welfare for the disadvantaged.
• Subsidizing or directing services weakens demand signals, the strongest indication that
services are useful or appropriate to the consumer. Deprived of this, consumers become
recipients of welfare.
• Subsidy and control can distort and discourage private sector service provision of
services. Many interventions fail to observe that disadvantaged groups may already have
access to some services, which can be damaged by invasive or intensive intervention.
Even if services are not available, how is it anticipated that consumers will progress from
highly subsidized services to full-cost services in the future?
Inequity in itself is not a constraint to market provision of services (poor people buy and sell
a variety of goods and services all the time). The constraint is that the supply side (service
providers or products) is unable or inappropriate to serve certain segments of the market,
defined by income level, gender, ethnicity, ability, and geographic location.
Microenterprises that Cannot Afford to Pay for Services
This may be the case for some ‘high-end’ services, but for other services, what is it they can’t
afford? Is it services or the service provider?
• Many providers (particularly partners of development agencies) will have offices,
equipment, a vehicle, and well-educated staff, all of which translate into considerable
overhead. It is unrealistic to expect that revenues from SMEs will cover these costs.
Therefore, attempts to incentivize providers to focus downward to microenterprises
inevitably see service providers creeping upward again, to their natural level, as they
strive to make money. This is hardly surprising; if your M.B.A. degree gives you the
capacity to sell services to large businesses or donors for a generous fee, why would you
work with microenterprises for a fraction of the income?
• Services themselves might be over-engineered. Aside from the cost of such services, they
may well not be what the microenterprise actually needs. Evidence suggests that services
that are extremely focused and can be immediately practicable in the business are most
valued by SMEs and they will pay for them.
The challenge is to work with providers who are much closer to their clients in terms of
people, service offers, cost bases, and expectations of remuneration and to develop products
and delivery mechanisms based on local resources, solutions, and markets.
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To Reach Female-Owned Businesses
Interventions may adopt quotas of female-owned businesses to be reached. For the development
agency, there is nothing wrong with this. However, it is unrealistic and damaging to try and force
a client group on a service provider. As in the case of trying to incentivize service providers to
focus on low-income segments of the market, service providers will ultimately gravitate to the
clientele that best matches their capacity and experience. It makes little sense to encourage a
service provider specializing in small-scale metal manufacturing to serve more female-owned
businesses, for example, if women are not represented in that sector. More effective interventions
try to identify and develop people and organizations with genuine offers to segments of the
market where women are well represented.
In general, in considering how to push out the frontiers for providing BDS to disadvantaged
groups, a number of points need to be considered.
• Adopt a portfolio approach to partners (Box 12): by working with a range of providers
an intervention can pick partners who correspond to relevant market segments or target
groups rather than trying to develop a single one-size-fits-all partner.
• Develop efficient, low-cost and appropriate institutions, mechanisms and products to
reach the disadvantaged rather than simply subsidising services. As in microfinance, this
will require that far greater attention is paid to measurement and costs, if the frontier of
BDS is to be extended 34 .
• This means that, from the beginning, services have to be designed to be profitable for the
provider……
• …….. And also immediately practicable with the shortest possible pay-back period for
the SME consumer.
• View disadvantaged groups as potential market niches for private sector providers rather
than as pliant charity cases.
Be realistic: recognize that BDS is not a solution to all problems. In some cases, people will
not have the ability to pay, their situation will be too adverse. It is unlikely that BDS is the
solution to their problems at that point in time.
34 See Newnham, J, "BRAC Poultry programme in Bangladesh"; Paper presented to conference on "Business
services for small enterprises in Asia: developing markets and measuring performance"; Hanoi, 3 rd -6 th April,
2000. The origins of BRAC’s poultry project was to replace a targeted subsidies for the very poor with an
intervention designed to integrate rural women into viable occupations within a growing subsector, BRAC
filled gaps in critical services – hatchery and veterinary – by moving rural women to fill these gaps.
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WITH WHOM SHOULD WE WORK?
A shift in the focus of intervention to development of BDS markets calls for a similar shift in
thinking about the partners 35 with whom we work. What has changed? Essentially thinking
about developing BDS markets has led us to recognize that:
# The spectrum is broader: we are starting to understand that the range of actual or
potential service providers is much more diverse
and different than we originally believed.
# Our intervention objectives will be different:
switching from assisting SMEs directly to ensuring
sustainable access to services, via functioning
markets, changes the nature and objectives of our
interventions and, by extension, influences partner
choice.
The combination of these two factors gives us a much
less rigid picture of who partners should be. The mesolevel
(Box 16) can no longer be thought of a distinct
institutional layer made up of organizations with
specific characteristics or structures. Overall, we are
faced with a much messier choice regarding market
development, from which the following trends are
emerging:
Box 14: Changing Views of the
Meso-level in Nepal
There is a long history of donor agency
support for BDS in Nepal. In the early-
1980s, GTZ undertook pioneering work
on training and counseling that
eventually led to the development of the
well-known CEFE model. By the 1990s,
a wide range of donors, including SDC,
were involved in supporting BDS. During
this period, there has been a discernible
evolution in how agencies perceive the
meso-level in BDS:
• 1980s-Early-1990s: government and
quasi-government organizations as
the key deliverers of services (with
donor and government subsidy for
almost everything);
• Focusing less on any single provider;
• Working with more service providers; 36
• Working with a greater diversity of service
provider types;
• Focusing more on private sector service providers;
• Increasingly specialized, differentiated, nichefocused
service providers; and
• Smaller service providers:
• Early-Late 1990s: business
membership organizations as the
main players (with significant donor
support for delivery); and
• Late-1990s-Now: private sector and
other market-oriented providers with
market development as the
overarching objective (and with
donor support more focused on
development rather than delivery).
Although perhaps less obvious in some
countries, this shift in thinking that is so
evident in Nepal is representative of a
wider trend that has major implications
for partner choice.
35 “Partners” here refers to service providers.
36 See McKenzie, J, "Creating a market in management training for Vietnam's private firms: MPDF's
experience"; Paper presented to conference on "Business services for small enterprises in Asia: developing
markets and measuring performance"; Hanoi, 3 rd -6 th April, 2000. Leila Webster reported at an April 2001
BDS workshop that the new business management training products stimulated by the project is resulting in a
new range of tailored management courses offered by a range of local providers.
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C Informal, and
C Individuals.
The move toward BDS market development, therefore, often means that agencies need to
work with different kinds of organizations. In particular, agencies may need to consider
working with for-profit private sector companies as the main providers of BDS.
Criteria for Selecting Partners
Criteria for selection should draw on the key design principles in BDS relating to factors
such as ownership, commercial orientation, offer, people, resources and capacity, and
systems. These should be formulated as questions or, if possible, as specific indicators. For
example, the key questions might be the following:
1. Do the people have the right skills and motivations, personal ownership, and working
culture to enable them to work in a business-like manner?
2. Does the structure—legal and operational—allow organizations to behave in an
entrepreneurial way?
3. Are internal systems—for example, payment structures, systems of performance
assessment, and cost control—appropriate?
4. Do partners have transactional relationships with their clients, manifested, for example,
in their approach to pricing and client selection?
5. Is the cost base of the organization consistent with the client group it seeks to serve?
6. Are partners’ current approaches to product pricing fed by accurate cost information and
consistent with longer-term sustainability?
7. Do partners allocate costs to their products and activities to allow a clear view of the real
costs of delivering products?
8. Is the client base clearly defined?
9. Is there consistency between the product offer and the client base?
Although developing clear and specific criteria for selection is essential, it is important to
recognize that—as with any business investment—this is not a full-proof process and, like
business investors, personal factors (such as belief in the providers) play an important role in
selection, even if they are difficult to capture in a list of criteria.
Selection of Partners
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Unfortunately, there is no ideal organizational or institutional form for BDS provision, the
market is complex and will vary widely from place to place. Therefore, selecting partners
almost inevitably has a considerable element of trial and error and needs to be grounded on
the basis of what works in any given context.
Partner selection can be of the following types:
# Relationship-based (personal knowledge and recommendation);
# Tendering process; and
# Market research.
Relationship-based Selection
Partners can be identified through the personal knowledge, existing networks, and
acquaintances of donors and facilitators. This approach has much to commend it; it is cheap,
working relations may already exist, and uncertainty can be reduced. It does have drawbacks:
• It limits the field of selection both in terms of geographic area and the range of potential
partners—you only work with those known to you.
• There is some risk of continuing established relationships and expectations. This is
particularly problematic if a donor or facilitator has a high profile or a history of more
conventional or social development assistance 37 .
This approach to partner selection also underlines the importance of donor/facilitators being
business-like themselves, developing linkages and maintaining networks in the marketplace,
and not operating from the confines of a developmental vacuum.
Tender-based Selection
Borrowed from the corporate world, a tender-based approach invites applications to bid for
donor/facilitator support. In an open or competitive tender, opportunities to apply are
advertised, tender documents are drawn up and made available for a fee payable on
application, selection criteria and processes are established, and selections are made on the
basis of information provided and qualitative assessments. This kind of selection process
allows a wider range of applicants to be considered and is particularly suitable when
knowledge of an area or field is limited. It can also allow the donor/facilitator to project a
business-like, focused image and reduce the scope for unrealistic expectations on the part of
partners, which is often a risk when donor funds are involved. 38
37 Many traditional BDS partners of donor agencies accustomed to working in a particular way and at a
particular pace will certainly not be able to change to play the demand-oriented role necessary for success in
a BDS market.
38 Tenders or work orders have used by DAI in its BDS program in the Ukraine to induce trial of services and
stimulate new provider entrants into serving SMEs instead of larger firms. DAI’s experience with work
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The drawbacks of tender-based selection include:
• If done properly, it can be expensive and time consuming (although charging for tender
documents can re-coup significant amounts of the cost, as well as testing the commitment
of applicants).
• If criteria selection and assessment are not rigorous, the success of the process will be
jeopardized.
• It often requires sifting through a large number of poor applicants to identify a few good
ones. Even then tendering is not infallible, a 100 percent strike rate of perfect partners
will never be achieved.
A closed tender strikes a balance between the two approaches, where invitations to bid are
extended to potential partners, most or all of which are relatively well known to the
donor/facilitator. Application fees are usually not required for this type of tender.
Using Market Analysis for Partner Selection
As a result of market or consumer research (described earlier), information on service
providers can come to light. This may either be via consumers or directly from industry
surveys and can also generate useful information on service-provider strengths and
weaknesses.
WHAT ARE THE IMPLICATIONS FOR THE CAPACITIES OF DONORS AND FACILITATORS?
The change, from more traditional approaches to the BDS market development paradigm, is
significant. Built on a different view of SME development and BDS, it envisages new types
of intervention, often with new partners and based on new relationships. For many agencies
seeking to follow this approach, the change inherent within it will have major implications
for their internal capacities and systems. Indeed, it is likely that for some agencies the kind of
change required to pursue BDS market development may be beyond their capability. 39
Among the potential key challenges to be faced are:
# Organizational Structure: facilitating agencies dealing with providers and other market
players need to be able to develop transactional, business-like relations with them. This
may need a degree of closeness and entrepreneurial flexibility that is difficult to achieve
orders is described in a forthcoming paper by Mike Field entitled From Concept to Project Implementation -
A Market Development Strategy for BDS in a Transition Economy.
39 In these cases, if structural reasons prevent donors playing a valid role, their focus should move to other
areas—such as the policy environment.
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within the confines of a formal and accountable donor agency. In these circumstances,
working with a buffer facilitator (probably a business or an NGO) may be necessary.
# Accountability and Flexibility in Project Designs: inherent within any move toward a
more facilitative approach (and arguably any move towards institutional rather than
organizational development) is a need for greater flexibility in project designs. Although
market development projects will still have activities and outputs that aim to achieve
positive impacts (so logframes are still applicable), when dealing with something as
elusive as a dynamic market, planning frameworks need to take account of this reality by
giving facilitators themselves an opportunity to be pro-active and entrepreneurial.
# People: intervening to support market development requires a good understanding of
business and markets that is often foreign to people from a conventional development
background. Staff selection and development therefore need to focus on building this
capacity.
# Scale of Support: many of the failings of the past in BDS have stemmed from donors’
priority to spend budgets efficiently rather than to have a positive impact on markets. The
history of BDS is littered with severe and lasting distortions caused by too much donor
money in the wrong place at the wrong time. Unlike say, microfinance, where large-scale
disbursements (for on-lending) are possible, 40 interventions that achieve BDS market
development will usually be relatively small-scale, with multiple partners, and,
inevitably, involve hands-on management. Using umbrella project structures as well as
facilitators may help to overcome this problem.
# Criteria for Assessment: measuring performance in relation to market indicators has
clear implications for approaches to evaluation. Furthermore, in some instances, as part
of a transactional relationship, provider rewards may be based on performance against
agreed targets.
# Beyond the Mantra of Donor Collaboration: BDS markets in developing countries,
especially those that are poorest and least developed, are often fragile, having been
subject to a variety of more or less (usually less) positive influences over many years.
The BDS market-development approach cannot hope to work if donors don’t agree to its
basic tenets and, if not in harmony, agree not to undermine one another’s efforts. This
places greater pressure on donors to work meaningfully with one another and with
governments to create a consensus over the long-term picture and how to get there.
40 Although many would argue that this is also distorting capital markets.
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CHAPTER FIVE
HOW DO WE ASSESS OUR PERFORMANCE?—MONITORING AND
EVALUATION BDS INTERVENTIONS
Common approaches to monitoring and evaluation in BDS aren’t of much value to anyone. They
neither help organizations improve their performance nor prove impact in a rigorous manner. New
approaches need to reflect the different focus of market development interventions and practice a
more-balanced realism about what why we measure and what we can and cannot measure.
This chapter outlines some distinctive features of approaches to monitoring and evaluation from a
market-development perspective. The chapter first summarizes key common characteristics of
monitoring and evaluation but then focuses on major differences with regard to what is measured, how
we measure, and why we measure. The chapter concludes by highlighting some outstanding issues in
monitoring and evaluation that are the subject of current debates.
Key Questions:
1. The basics of monitoring and evaluation don’t change—so what are they?
2. Given the emergence of the BDS market development approach, what should we measure? What
should be our priority indicators?
3. What changes in measurement methods are necessary?
4. What are the implications of this new approach on the reasons for measurement?
5. What outstanding issues still remain in monitoring and evaluation in BDS?
COMMON BASIS OF MONITORING AND EVALUATION:
SOME THINGS DON’T CHANGE
Although many things are significantly different from a BDS market development
perspective, much remains the same. This applies particularly in monitoring and evaluation
—a “standard” function in all development interventions. Although BDS market
development poses major challenges for monitoring and evaluation practices, much else is
shared with the “old” approaches. The basics of monitoring and evaluation are unchanged,
and these need to be summarized briefly before we focus on key differences between the
“old” and the “new.”
Dimensions of Performance
Monitoring and evaluation is about assessing performance according to four broad
dimensions or criteria. Together, these offer a comprehensive picture of an intervention’s
characteristics—a filter with which to assess performance:
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1. Outreach: how many (breadth) and who are they (depth)?—the quantitative scale of a
project and the identity of people, SMEs, and providers touched by it.
2. Efficiency: are we doing things right?—the rate at which inputs are turned into outputs.
3. Effectiveness: are we doing the right thing?—the extent to which higher-order
impacts—related to changes in the real world of SMEs—have been achieved.
4. Sustainability: will it last?—as previously defined, this refers to the market capacity to
ensure that relevant, differentiated BDS continue to be offered and consumed by SMEs
beyond the period of an intervention.
Questions to Be Answered
As in any business development project, in designing monitoring and evaluation systems the
big questions to be asked (and answered) are the same here:
• What do we need to know?—(defined in the form of indicators).
• Who needs to know?—(understanding the needs of different stakeholders such as donors,
facilitators, and providers).
• When do they need to know? (timely availability of information for decision making).
• How will this information be collected and analyzed? (methods and tools of analysis).
• Who will be responsible for this process? (who does what in a donor-supported
intervention).
Factors to Consider in Developing Indicators
Again, as in any business development project, the process of developing indicators needs to
take into account a checklist of other factors such as 41 :
• Relevant?—throwing light on the right area: indicators need to relate directly to the
objective they seek to measure.
• How much?—ambitious yet achievable: indicators should contain targets. How much
these should be is a matter of discussion and, in the absence of benchmark “industry
standards,” can be assessed only within the confines of an individual project.
41 See Gibson, A; "Developing indicators in small enterprise development (SED) - a tool for people involved in
designing, implementing and evaluating SED projects"; SDC-SED Working Paper No. 1; SDC, May 2001
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• How well?—the quality dimension to performance: indicators should offer insight into
the quality of the change they have helped to bring about.
• Is it feasible to measure? there really is a difference between what we would like to learn
and what can be learned: indicators need to be set that can be measured given the
practical limitations of resources and expertise available.
• Are there “intermediate indicators”?- a plausible pathway to the bottom line: indicators
should reflect changes closer to the point of consumption of BDS and not rely only on
bottom-line changes in SME performance that may be influenced by many other factors.
• Precise?—”tightness” in definition: without real specificity in the definition of indicators,
interventions lack focus.
• Is it business-like?—the overarching need to “think business”: indicators need to reflect
SMEs and providers own priorities and business realities. Anything else undermines the
general business-like message of BDS.
Big Problems that Don’t Go Away
The world of small businesses that BDS interventions seek to improve in some way is
inherently complicated. SMEs do not exist by themselves; they compete in markets against
other businesses, have relationships with a range of suppliers, are influenced by government
actions, and are subject to the whims of market trends. Their world is complex. Indeed, often
in small informal businesses where the distinction between business and household is
blurred, this complexity is greater than in the formal sector.
This complexity poses great challenges for monitoring and evaluation. A question illustrates
this point: if an SME has changed positively apparently as a result of a project, how do we
know that?
• This change would not have happened without us; all the other myriad influences on a
business have not caused change, rather than our project alone; and
• This change is not at the expense of another SME nearby; it does not merely displace
economic activity from one place to another without any real net addition.
These issues of attribution are always relevant in business development situations, and
(regrettably) there is no magical fix to call on to address them 42 .
42 See Oldsman, E; "Evaluation as an effective management toool"; Paper presented to conference on "Business
services for small enterprises in Asia: developing markets and measuring performance"; Hanoi, 3 rd -6 th April,
2000 for a more detailed analysis of fundamental challenges inherent in rigorous approaches to evaluation.
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WHAT’S NEW IN MONITORING AND EVALUATION: WHAT IS MEASURED
The key differences between the new and the old are summarized in Figure 15. This presents
key indicators in relation to different levels within BDS: the market as a whole, providers,
and SME consumers (its key actors) and the wider social/economic change that arises from
enhanced BDS provision. 43
Figure 15: Indicators in BDS: Emerging Trends
Level The Old The New
The major focus. Key indicators
include change in:
The Market for
BDS
Providers of
BDS
SMEs—
Consumers of
BDS
Beyond SME—
Wider Social or
Economic
Change
Not assessed
Tend to focus on:
• Delivery of subsidized
outputs versus targets
• Qualitative assessment of
provider capacity
• Cost recovery
• Outreach
• Qualitative feedback from
SMEs
Based on change in “bottom-line”
performance:
• Employment
• Sales
Seldom assessed
Standard poverty indicators
defined by the Development
Assistance Committee (DAC)
such as the proportion of the
population living below $1 per
• Market size: number of
SMEs purchasing services
• Volume of transactions:
amount of sales by BDS
providers
• number of BDS providers
• the proportion of potential
SME market reached by a
BDS
Priority is:
• Finance-based ratios
assessing profitability
• Outreach
• Productivity ratios
Based on SMEs’ own
perceptions of BDS (more than
project assisted), for example,
change in:
• Customer satisfaction
• Customer awareness
• Customer usage
• Customer retention
Seldom assessed directly—
greater acceptance of marketbased
proxies
43 Donors or facilitators, of course, may be interested in change and performance at different levels. Providers
also, as well as their own performance, may benefit from knowledge of the wider market and of SME
perceptions of the market.
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day income
* This highlights key differences between old and new only: it is not an exhaustive list.
Underpinning these differences are several factors.
New Focus on the Marketplace for BDS
Previously, BDS interventions focused only on developing individual organizations; the
wider market was a secondary contextual consideration only. Here, market development
becomes a major focus for intervention objectives and therefore for measurement. This
market theme runs through all the indicators highlighted in Figure 15. Just as the main thrust
of interventions should be to address market constraints, so indicators should also be marketrelated.
For example:
Constraint/Problem
Lack of information among SMEs of
available BDS
Low levels of confidence and satisfaction
among SMEs in available BDS
Inappropriate and/or low levels of
product quality among BDS providers
Low levels of business skills and
knowledge among providers
Possible Indicator
Change in proportion of SMEs aware of
particular BDS and providers
Change in proportion of SMEs satisfied
with particular BDS
Change in SME customers’ perception of
quality of BDS available
Change in providers’ awareness and use
of new sources of technical/product
information
Providers—Commercial Players Means Commercially Based Indicators
Previously, indicators of provider performance tended to be based on the delivery of
(subsidized) outputs—for example, number of training programs and number of marketing
events—with cost recovery as an afterthought. The new focus is on business and marketbased
ratios that place the provider as a commercial entity in a market.
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SMEs—Getting “Real” over Assessing Performance
Donors and facilitators spend inordinate amounts of time trying to assess change within
SMEs that may (or may not) result from interventions. In the complex world of businesses,
many factors affect performance and to isolate the influence of one of these—a BDS
supported by donor funds—is difficult and of questionable value. Moreover, one of donors’
favorite indicators—employment—is inherently (and severely) problematic (Box 17).
Markets presume that a BDS offers benefits and real value to the SME. A more realistic and
practical approach to assessing impact at the level of the firm is based on SMEs’ own
perceptions and experiences of services. Although some may complain that this is not
objective, what matters ultimately—in a market context—is what consumers think.
Box 15: The Problem with Employment as an Indicator in BDS
Although employment change is perhaps the most common indicator used by development agencies
to assess performance, in practice it is a flawed indicator. Aside from the pervasive difficulties of
attribution, there are three main problems associated with it:
1. What is a job? The value of employment—jobs created—as a useful indicator for comparative
analysis rests on an assumption that the unit of comparison (a job) is broadly similar from one place
to another. In fact, there are a number of factors that mean what is termed “a job,” and these may
vary greatly.
• Income—how much is earned? In many family-owned businesses, family members working receive
nothing. Informal sector trainees may have to pay to be trained and pay for the opportunity to work.
In most developing economies, minimum wage legislation is widely ignored.
• Job “size”: is there a minimum length of time per week that employment needs to reach before it can
be regarded as a job? The ILO has used a threshold of 1 hour per week—but clearly this is very
different from someone working a 40 or 50 hours week.
• Job duration: for how long will a job last? In informal sector enterprises, in particular, there is great
volatility in employment patterns that makes it difficult to ascertain job duration.
• Other issues include working conditions with regard to safety and health, working hours, employee
rights, satisfaction, and opportunities for further training.
2. Employment is not an indicator shared by SMEs: despite the insistence of many development
agencies, most businesses do not exist to employ people. Using employment as an indicator of
business development can be misleading. Businesses may expand and become more competitive
and in the process lose labor.
3. The pressures of political manipulation: no other indicator has been abused so much by agencies
and their sponsors. Employment is an emotive subject; unemployment is seen to be a major
symptom and cause of poverty. Organizations are under pressure to produce politically pleasing
numbers and few questions are asked about their accuracy. The supposedly hard numbers of
employment have an alluring certainty and precision surrounding them, encouraging the belief that
they have a rigorous, scientific basis—a belief that is usually false.
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Beyond SMEs—Unchanged Indicators
The emergence of the market development approach to BDS does not affect the ultimate
objectives of interventions or the indicators applied to them. 44 However, in practice, because
of the difficulty of measuring these, greater acceptance of proxy indicators may be necessary.
For example, growing usage of BDS by SMEs owned by priority groups (such as women—
characteristically relatively poor) may be used as proxy indicator for poverty reduction.
Market-based monitoring and evaluation means greater use and acceptance of proxy
indicators. Underpinning the entire approach to performance measurement in BDS is a
practical recognition that greater reliance on proxy indicators is inevitable, necessary, and to
be welcomed. Proxies are, of course, not new in development—they are an inherent part of
the flow of cause and effect that interventions seek to initiate. 45 However, here we place
proxy market-based indicators at the forefront of monitoring and evaluation because:
• The analysis at the heart of BDS market development is explicit—better-functioning
markets are good for business and ultimately good for the poor; and
• There is growing acceptance that either (1) we can’t or (2) it’s too expensive to know
directly the final impact of interventions on business and on people.
For many in development agencies, this assertion may be difficult to accept. But anything
else is less than realistic.
WHAT’S NEW IN MONITORING AND EVALUATION: HOW WE MEASURE
Differences in approaches to measurement follow on from the different emphasis in
indicators, as shown in Figure 16. Some of factors should be noted.
Market-Level—The Same Tools in Evaluation as in Design
A market focus requires that we use the same kind of tools—UAI, FGDs, etc.—throughout
the cycle of an intervention (see Chapter Two).
Providers—Using Standard Business-Analysis Tools
Assessing the performance in-depth of providers—as commercial players in a marketplace—requires
use of the kind of approaches used in “normal” business (outside the
44
Development agencies increasingly agree on what these are through the DAC.
45
This causal flow is, of course, the logic at the heart of key planning tools such as the logframe.
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development domain) analysis. For agencies, this requires a level of business knowledge and
skill that many currently do not possess and this is clearly a challenge to be faced. 46
46 There are similarities here with the sea-change in agency capacities required by the microfinance revolution.
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Figure 16: Measurement Methods in BDS Monitoring and Evaluation:
Emerging Trends
Level The Old The New
The Market for
BDS
Providers of
BDS
SMEs—
Consumers of
BDS
Beyond SME—
Wider Social or
Economic
Change
Not assessed
Range of methods such as
• Simple comparison of planned
versus actual outputs
• Training assessment sheets
• Comparison of direct costs
versus revenues
Follow-up surveys or meeting
with SMEs to assess change.
However:
• Often no baseline
• Attribution issues commonly
ignored or dangerously
simplified
Case studies add strong
qualitative understanding of
dynamics of business change
and use of services
Requiring very large-scale,
resource-intensive methods
Adapting market-research tools
such as usage, attitude, and
image (UAI) surveys and focus
group discussions to the BDS
context
Ideally, these should be used in
any case in identifying market
constraints and shaping the
nature of an intervention.
“Standard” business-analysis
tools, for example, allocation of
costs and revenues to profit
centers and use of timesheets
for staff
Based on surveys of SMEs’ own
perceptions (thereby reducing
the attribution problem)
Similar use of case studies
“Objective” assessment of
change (proving impact) left to
full-scale experimental, quasiexperimental
approaches
Same
SMEs—Practical and More-Market Focused Approaches
Until now, common methods have been based on follow-up surveys with samples of SME
clients. However, in practice, these ignore basic rules on survey design, have no valid
baseline and other comparative data, and generate information that neither proves anything
nor is useful in improving performance. The issue is not simply that rough approaches
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produce roughly accurate data—they may be wildly misleading. 47 Although case studies may
generate valuable qualitative insights, in general there is widespread dissatisfaction with the
usefulness of monitoring and evaluation for project managers. Responding to this situation,
market development perspective assesses change within SMEs by:
# Using common market-research tools to assess their perception and use of services as
consumers;
# Using case studies to gain a deeper understanding of how BDS can impact on business
processes and performance; and
# Leaving rigorous impact assessment to “one-off” scientific approaches (these will usually
need to be instigated and resourced externally).
WHAT’S NEW IN MONITORING AND EVALUATION: WHY WE MEASURE
Although monitoring and evaluation generally is concerned with performance measurement
for management decision-making, accountability, and learning purposes, in specific terms it
has two objectives:
• Improving Performance: helping organizations (and their managers)—donors,
facilitators, and providers—improve what they do, that is, offering them the right kind of
information at the right time so they can make the right decisions.
• Proving Impact: helping prove that a BDS intervention has led to positive and significant
change.
Both of these reasons—improving performance and proving impact—are important and
valid. But it is also important to realize they are different. The first serves an operational and
business-oriented interest; the second is associated with a wider, strategic, economic, and
social (and political) perspective—especially those of development agency funders. Knowing
why monitoring and evaluation information is required leads to different conclusions about
what should be measured and therefore on how they are measured. For example:
• Providers’ direct interest is the profitability of services and the direct feedback from
SMEs on quality and satisfaction; with this knowledge, they can make appropriate
improvements.
• Facilitators are also interested in the above but, pursuing the overall objective of market
development, want to know about the volume of transactions, number of providers, and
the like.
47 Commonly (if privately) development professionals will admit to having little confidence in the data
generated through such surveys.
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• Donors may be interested in both of these perspectives but, given their immediate
exposure to more political pressures, may also want to prove that public funds are
generating employment gains in SMEs or having a wider positive impact on society.
A major problem associated with monitoring and evaluation in BDS (and in other spheres) is
a blurring of improve and prove agendas. Practical management decision-making,
accountability, and learning purposes are lumped uncomfortably together. Characteristically,
this can lead, on the one hand, to organizations not getting the information they need to make
rational decisions and, on the other, to half-hearted (and doomed) attempts to measure impact
that do not prove impact because there are so many caveats associated with the data.
Underpinning new approaches to monitoring and evaluation in BDS market development
(Figure 17) is a new and candid transparency over why we measure.
• Most monitoring and evaluation is concerned with improving performance; this should be
the immediate priority and be used on a regular basis. Common methods— marketresearch
tools, case studies, provider financial analysis, and surveys—are focused on this
goal.
• Monitoring and evaluation methods that can result in valid, generalizable findings—
proving impact—that take account of attribution are difficult and expensive. If one is
serious about proving impact there is no real alternative to these; for most organizations,
these kinds of studies will not be possible or justifiable.
Figure 17: Why We Measure in BDS: Emerging Trends
The Old
The purposes of monitoring and
evaluation often ill-defined and
ambiguous
In particular, the objectives of
improving performance and
proving impact often blurred
Result?—neither objective is
achieved
Recognition that:
The New
• Prove and improve objectives
are both valid but are different
• Reasons for monitoring and
evaluation (why) “drive” choice
of indicators (what) and
methods (how)
Consequently we need:
• Greater clarity in monitoring and
evaluation objectives
• Separation of improve and
prove approaches to monitoring
and evaluation
OUTSTANDING ISSUES
Although the general trends and overall direction in monitoring and evaluation in BDS are
clear, there are still many aspects where there is no consensus among agencies and where
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substantial questions remain unanswered. Many of these are the subject of applied research,
and this should generate useful insights in the coming period. In particular, under the
auspices of USAID Microenterprise Best Practices (MBP) Project, the performance
measurement framework developed in 1999 is being tested in different situations by a team
of researchers. 48 Many of these are also important considerations for the design of
interventions. Among the key issues where further work is required are the following:
1. How should markets be defined? Setting parameters—as outlined in Chapter Two—by
geography, product, consumer, or sub-sector or a combination of these brings with it
advantages and disadvantages. What guidelines should agencies follow in developing
such boundaries?
2. What are the most cost-effective indicators for assessing market development?
Potentially, markets are very large and trying to track changes in them may be expensive.
Are there useful proxies more immediately measurable through the supply-side, or is it
always necessary to go directly to the demand-side?
3. How can monitoring and evaluation methods be adapted to make sure that hidden
BDS are still captured as part of the overall market picture? Many important
services—often concerned with advice and knowledge—are offered without a financial
transaction but still within the confines of a transactional relationship. They are still BDS;
what tools make sure that we include them?
4. Can benchmarks be used in BDS in the same way as in normal industries? The
potential benefits of benchmarks are clear: they offer standard, objective ways of
comparing the performance of different organizations in different places. Under what
circumstances can benchmarking be pursued for providers (or others), and what
indicators should be used?
5. How can changes in organizations—who may not be direct partners of a project—
be assessed? Inherent in a facilitating approach to market development is the view that a
range of actors will be encouraged to behave differently—influenced by interventions if
not the focus of direct investments: how can we understand change here?
6. How can the ultimate impact of BDS on bottom-line indicators of SME
performance—profitability and productivity—as well as employment be assessed?
Methodologies to assess this relationship will be expensive, but can general, valid rules
about the relationship between BDS interventions and SME performance be developed
that obviate the (expensive) need to always try to measure this step of the chain from
intervention to final change? 49
7. How can the relationship among BDS, SME development, and poverty reduction be
assessed? Can valid proxy relationships be established between, for example, use of BDS
48 See www.mip.org and follow links to BDS Performance Framework Field Research.
49 ILO, supported by other bilateral donors, plans to assess impact of BDS on SMEs, employment, and poverty
reduction.
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and poverty reduction? Or is the relationship one that is more indirect (if still valid)
through the contribution of more efficient markets to firm competitiveness and economic
growth.
8. Can costs-benefit analysis be adapted appropriately to BDS market development?
Although a comparison of costs and benefits is clearly important, in practice, cost-benefit
analysis has proved a difficult and impractical methodology; it is not yet clear how it
might be adapted for wider use.
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ANNEX A
REFERENCES

A-3
KEY REFERENCES
Anderson, Gavin, “The Hidden MSE Service Sector – Research Into Commercial BDS
Provision to Micro and Small Enterprises in Vietnam and Thailand”, International
Labour Organisation. Prepared for the Donors Committee Conference on Business
Services for Small Enterprises in Asia: Developing Markets and Measuring
Performance, Hanoi, April 2000.
Bennett R. and P. Robson; The Market for External Business Advice Services in Britain;
ESRC, 1999.
Biggs, Tyler; "A microeconomic evaluation of the Mauritius Technology Diffusion Scheme";
RPED Discussion Paper, The World Bank, November 1999
Botelho, Caren Addis and Lara Goldmark, “Paraguay Vouchers Revisited: Strategies for the
Development of Training Markets”, United States Agency for International
Development Microenterprise Best Practices managed by Development Alternatives,
Inc.. Prepared for the Donors Committee Conference on Business Services for Small
Enterprises in Asia: Developing Markets and Measuring Performance, Hanoi, April
2000.
Ceglie, Giovanna and Marco Dini, “Clusters and Network Development in Developing
Countries” in Levitsky, Jacob (ed.), Business Development Services: A Review of
International Experience. IT Publications, London, 2000.
Committee of Donor Agencies for Small Enterprise Development (Jim Tanburn – ILO,
Gabriele Trah – GTZ and Kris Hallberg – Word Bank), “Business Development
Services for Small Enterprises: Guidelines for Donor Interventions”. Revision 15,
June, 2000.
Committee of Donor Agencies for Small Enterprise Development (Alan Gibson, Springfield
Center) “Business Development Services for SMEs: Preliminary Guidelines for
Donor-Funded Interventions,” January 1998.
Crisafulli, Daniel, “Matching Grant Schemes” in Levitsky, Jacob (ed.), Business
Development Services: A Review of International Experience. IT Publications,
London, 2000.
Field, Michael, Rob Hitchins and Marshall Bear, “Designing BDS Interventions as if
Markets Matter.” United States Agency for International Development
Microenterprise Best Practices managed by Development Alternatives, Inc., July
2000.
Gibson, Alan, “The Development of Markets for Business Development Services: Where
We Are Now and How to Go Further”, Springfield Centre for Business in
Development, for the International Labour Organisation. Prepared for the Donors

A-4
Committee Conference on Business Services for Small Enterprises in Asia:
Developing Markets and Measuring Performance, Hanoi, April 2000.
Gibson, Alan; "Developing Indicators in Small Enterprise Development Projects"; Swiss
Agency for Development and Cooperation, 2000.
Gibson, A; "Developing Indicators in Small Enterprise Development (SED) - A Tool For
People Involved in Designing, Implementing and Evaluating SED Projects"; SDC-
SED Working Paper No. 1; SDC, May 2001.
Gibson, Alan and Robert Hitchins, “Swisscontact: Business Centre Approach in Indonesia
and the Philippines” in Levitsky, Jacob (ed.), Business Development Services: A
Review of International Experience. IT Publications, London, 2000.
Goldmark, Lara, “Sorting Out the Truth: Financial Viability of BDS,” IDB. Prepared for the
Donors Committee Conference on Business Development Services: Building a
Modern and Effective Business Service Sector for Small Enterprises. Rio de Janeiro
Brazil, 1999.
Goldmark, Lara, “Voucher Programs: What Next After Paraguay,” IDB. Prepared for the
Donors Committee Conference on Business Development Services: Building a
Modern and Effective Business Service Sector for Small Enterprises. Rio de Janeiro
Brazil, 1999.
Hagblade, Steve and Matt Gamser, “A Field Manual for Subsector Practitioners,” a USAID
GEMINI publication, Pact Publication, 1991.
Hallberg, Kristin, “A Market-Oriented Strategy for Small and Medium Scale Enterprises”.
IFC Discussion Paper, February 2000.
Hanna, James and Ton de Wilde, “Jamaica MicroNET,” World Bank. Prepared for the
Donors Committee Conference on Building a Modern and Effective Business
Development Services Industry for Small Enterprises, Brazil, April 1999.
Havers, Mark, “ApproTEC: Developing Technology Based Business Opportunities,” DFID,
Prepared for the Donors Committee Conference on Business Development Services:
How sustainable can they really be?” Zimbabwe, 1998.
Hitchins, Rob, "Developing Markets for BDS: Designing and Implementing More Effective
Interventions"; SDC Issue Paper No. 5; Swiss Agency for Development and
Cooperation, 2000.
Hitchins, R; "Assessing the Experience of Swisscontact's Business Centre Approach in Latin
America and Asia"; Swisscontact; SDC Issue paper No.3, 1999.

A-5
Hitchins, R and Gibson, A; "The Kenya Management Assistance Program- Innovative
Delivery of Counseling and Training"; Paper presented to the Workshop on BDS for
SMEs, "How sustainable Can Business Development Services Really Be?"; Harare,
29 th September - 1 st October, 1998.
Hileman, Milena and Jim Tanburn, The Wheels of Trade – Developing Markets for Business
Services. IT Publications, London, 2000.
Lee, Yoo-Mi, and Marshall Bear, “Business Service Centers in Ukraine: A Study of the
Agency for the Development of Enterprise, the L'viv NewBizNet Business Service
Center, and the Vinnytsia Consulting Center,” Development Alternatives, Inc. August
1999.
Lusby, Frank, “Sector Approach to Enterprise Development, Action for Enterprise, August,
1999.
McKenzie, John, “Creating a Market in Management Training for Vietnamese’s Private
Firms: MPDF’s Experience”, Mekong Project Development Facility (IFC). Prepared
for the Donors Committee Conference on Business Services for Small Enterprises in
Asia: Developing Markets and Measuring Performance, Hanoi, April 2000.
McVay, Mary, “Measuring the Performance of Business Development Services for Small
Enterprises: Guide to the Preparation of Case Studies for the BDS Conference in
Hanoi, Vietnam 2000. USAID Microenterprise Best Practices Project and ILO’s
ISEP programme. September, 1999.
McVay, Mary, “Micorenterprise Marketing: Trends, Lessons Learned and Challenges,”
SEEP 1999.
Miehlbradt, Alexandra Overy with contributions from Ronald T. Chua, “Technical Note:
Applying Marketing Research Tools to the Design and Improvement of Business
Development Services”. United States Agency for International Development
Microenterprise Best Practices managed by Development Alternatives, Inc., June
1999.
Mikkelsen, Lene, “Good Practice in Microenterprise marketing: Cases from Latin America,”
IDB, Prepared for the Donors Committee Conference on Business Development
Services: Building a Modern and Effective Business Service Sector for Small
Enterprises. Rio de Janeiro Brazil, 1999.
Newnham Jack,“BRAC Poultry Programme in Bangladesh,” DFID, Donors Committee
Conference on Business Services for Small Enterprises in Asia: Developing Markets
and Measuring Performance, April 2000.

A-6
Oldsman, E: "Evaluation as an Effective Management Tool," Paper prepared for the Donor
Committee Conference on Business Services for Small Enterprises in Asia:
Developing Markets and Measuring Performance, Hanoi, April 2000.
Riddle, Dorothy; "Service-Led Growth: The Role of the Service Sector in World
Development," Praeger Publications (USA); 1992.
Riddle, Dorothy, “What Do We Know About BDS Markets?” Service-Growth Consultants
Inc., sponsored by the Mekong Project Development Facility (IFC). Prepared for the
Donors Committee Conference on Business Services for Small Enterprises in Asia:
Developing Markets and Measuring Performance, Hanoi, April 2000.
Sandee, Henry and Sandra C. van Hulsen, “Business Development Services for Small and
Cottage Industry Clusters in Indonesia: A Review of Case Studies from Central
Java”, Vrije Universiteit Amsterdam, sponsored by the Ministry of Foreign Affairs of
The Netherlands. Prepared for the Donors Committee Conference on Business
Services for Small Enterprises in Asia: Developing Markets and Measuring
Performance, Hanoi, April 2000.
Schor, Gabriel and Lara Goldmark, “Voucher Programs: Potential, Problems and Prospects”.
Prepared for the Donors Committee Conference on Building a Modern and Effective
Business Development Services Industry in Latin America and the Caribbean, Rio de
Janeiro, March 1999.
Tomecko, Jim, “The Application of Market Led Tools in the Design of BDS Interventions Or
(Influencing the Price of Soup in Nepal)”, GTZ/IEDI Nepal. Prepared for the Donors
Committee Conference on Business Services for Small Enterprises in Asia:
Developing Markets and Measuring Performance, Hanoi, April 2000.
World Bank; "World development report: the state in a changing world"; Oxford University
Press (1999).