5 keys to successfully supporting small & medium enterprises

December 6, 2019

     By Duncan Green     

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Guest post from Exfamer Nicholas Colloff, who now runs Argidius, a private family foundation that supports intermediaries that help businesses grow and create quality employment in low income communities.

A diversified, resilient economy has 30-40% of its GDP in the SME sector, but in a more fragile emerging one, this can go as low as 10%. Yet small and growing businesses are often the engine of innovation, employment growth and in blazing a trail in the provision of new social and environmental goods. Foundations like Argidius therefore want to build the capacity of SMEs, but what works and what doesn’t?

In 2013, we decided to find out. Since then we have supported over fifty different interventions in Latin America and Africa, supporting three different types of business (‘formalizing micro, dynamic established and venturesome’) and measured three key measures of performance – incremental revenue, full time job creation and capital raised. These indicators give us our comparative data on what works and how much it costs the donor.

We had two simple questions: Do high performing interventions share common characteristics in building successful businesses; and, could organizations use this knowledge to design more effective interventions? The answer to both is yes.

We identified five core characteristics of a successful intervention.

Selecting right. Both the entrepreneur and the programme are doing the selecting, so do both parties have the right information to make an informed choice? Is the programme reaching the right market segment for its type of programme? Are the entrepreneurs themselves genuinely buying in? (Because programmes where the donor is effectively buying the participation of the enterprise do not work.) Multi-stage selection over the course of a programme helps both parties develop commitment to each other. For example Technoserve’s Impulsa tu Empresa programme in Central America selects at both entry point and in a second stage for a subset of the most promising businesses, which then receive more intensive support. Other effective programmes use ‘taster’ events as ‘first dates’ to test mutual viability.

It pays to pay. Contributions from the Enterprise (as well as the donor) are both possible and desirable. They build a relationship where what matters is the value added to the business rather than the perception of charity. The business is the client, the intervention the provider of a valuable service. When BPeace introduced charges for their accelerator programme in Guatemala, they got fewer applicants than before but of higher quality, with entrepreneurs who showed greater commitment. But charging is not, in most cases, the magic bullet to sustainability for the intervention. Business development services are a public good, and delivered as such in developed markets, but charging does offer a diversifying revenue stream for the intervention and is a good signaling mechanism to help improve performance.

We learn best when we solve problems together. Most people learn in response to a live challenge. They begin by solving it before reversing into the knowledge they might need not to face that problem again. In other words, how many of us read the manual of our new washing machine before plugging it in and washing our socks? Virtually nobody, except those learned types who like knowledge for the sake of it and are probably overly and unhelpfully represented in the design of learning programmes! In the jargon, successful programmes have reversed their curriculum – collective real time problem-solving and peer learning is followed by opportunities to learn the necessary core skills. The African Management Institute, for example, blends offline real time, peer-led problem solving, backed by a diagnostic tool that focuses on key business practices, with online learning resources that managers can utilize in their own time to hone skills and top up on knowledge. Meanwhile, yes, planning and selling are the two fundamental topics every business needs, more important than financial management (often over-emphasized) or marketing (which is often a comfortable diversion from actually selling)!

We need to learn too. Interventions perform better when they embed their own monitoring and evaluation into what they do and intelligently use the data that they collect. Indicators of performance work best when they are seen by the business as a value add rather than an extractive distraction, and when they are focused. Too many indicators, ill-understood, are a favorite of international NGOs working in this space; one programme had its business consultants spending more time collecting data from their clients than actually consulting for them! Meanwhile, too many imagine ‘satisfaction’, certainly nice to have, indicates ‘behavioral change’ and ‘improved business performance’. It does not. ‘The women feel empowered’, I was told; ‘But their business is often stalled or going backwards‘, I replied! Not much empowering about that in the long run! Satisfaction rates are, also, culturally conditioned – great for bathing in a warm glow in Latin America, not so encouraging as a measure in Eastern Europe!

Practice what you preach. It can be surprising to discover organizations helping businesses grow that themselves have weak governance, poor planning skills and alarming levels of staff turnover.  High performing organizations have a strategy delivering a good balance between focus and growth, a well-organized, empowered and capable team who are eager to learn, curious, keen on continuous improvement (but not on ‘innovation’ for its own sake!) Ideally this includes the involvement of successful entrepreneurs who know what it takes to significantly grow a business. This often means rural-based programmes can be at a disadvantage – and what makes experiments in ‘distance’ mentoring so interesting and important.

Most important of all, this year we have the first evidence to answer our second question. Do partners that exhibit these characteristics get significantly better results in helping enterprises develop? An unequivocal yes. For example, BPeace cut their course length from two years to 18 months and had entrepreneurs working on one rather than two improvement projects. Adjusting the workload to better reflect what an entrepreneur can manage effectively significantly improved their ability to put into actual practice what they were learning. For less cost, they are delivering significantly more consistent impact in increased revenue and employment for the businesses they support.

As the strategy appears to be working, we will stick with it. We now know stuff, it is corroborated by what others are learning, and we can factor it in to our own due diligence, help our partners improve, and share it with the sector beyond.

More information here.

December 6, 2019
Duncan Green