Management consulting services can have high returns for SMEs in terms of productivity and growth, and they can be well worth the cost.
SMEs are offered one year of subsidised management consulting services to help them to identify and work on the areas that are preventing the firm from growing. The subsidy depends on the size of the firm, with micro firms assuming only 10 per cent of the cost of the services, small firms paying 20 per cent and medium firms meeting up to 30 per cent.
- To improve managerial practices
- To help firms grow
This intervention was tested in a country where firms are typically poorly managed and labour productivity is low by international standards but similar to many developing countries.
SMEs operating in the manufacturing, commerce and services sectors. The majority of the firms are relatively small (only 5 per cent are of medium size) with an average of 14 full-time employees, monthly profits of roughly US$10,000 and monthly sales of around US$60,000.
Of the firm owner-managers, 72 per cent are men, the average age is 43 years old and they have spent an average of 16 years in formal education. The majority have not previously received any formal management training, lack a clear vision and defined future goals, and instead focus on day-to-day operations.
- Initial diagnosis: Firms are matched with a local consulting firm on the basis of the specialist services they need. The assigned consultant works with the firm’s manager to decide jointly the focus and scope of the consulting services based on an initial diagnostic on what is preventing the enterprise from growing.
- Implementation support: The consultant provides four hours of support per week over a one-year period to suggest solutions and help the firm to implement them. The topics covered by the consulting varies between firms depending on their needs but typically include accounting and record-keeping, clearly assigning staff responsibilities, sales strategy and advertising.
- Subsidy: The consulting services cost around US$12,000 per year per firm but are highly subsidised by the government. Micro firms only pay 10 per cent of the market cost, small firms pay 20 per cent and medium-sized enterprises contribute 30 per cent.
The consulting services are provided by private local consulting firms used to working with SMEs.
- Overall, the consulting services didn’t help firms to improve their business practices in the short run.
- Only marketing efforts and formal bookkeeping improved as a result of receiving consultancy support, while innovation, resource seeking and human resources practices remained unaffected.
- In the short run, the consulting services didn’t lead to a higher number of employees, assets, sales or profits.
- However, supported firms used inputs more efficiently and increased their productivity.
- In the longer run, over the following five years, the programme led to important impacts on the number of employees, with the number of full-time employees increasing by 57 per cent and the total wage bill by 72 per cent.
- Some of the firms continued to use the consulting services after the subsidy had ended.
- Annual return on labour didn’t need to be very high for the consulting service to be cost-effective.
- Management consulting services can generate high returns in terms of productivity and growth for SMEs, and they can be well worth the cost.