Should I offer subsidised business consulting to boost SME performance and growth?

promising

Offering subsidised business consulting seems to be an effective way to spur business performance and growth among firms that have at least five workers, but in some cases it might take as long as two years for the positive effects on sales and profits to be revealed.

What’s the rationale behind this?

Good business practices have been repeatedly associated with better business performance and higher productivity. Regardless, many small and medium-sized enterprises (SMEs) around the world are still poorly managed and not harnessing their full potential. To solve this problem and promote SME growth, each year governments and business support organisations invest significant resources into building the managerial skills of business owners and managers, mostly through training.

Business consulting offers an alternative (or a complement) to the traditional business training approach. Consultants work closely with owners and business managers to help them to identify and implement better business practices, as opposed to training them to do it on their own. In business consulting, the support is tailored to the business’s specific needs and challenges, and the focus is on collaboratively identifying and fixing management problems. Business consulting schemes normally include an initial diagnostic of the business to detect weaknesses and opportunities followed by on-site support to implement the resulting recommendations.

Target population

Business owners and managers

Outcomes of interest

Business practices, business performance, business growth

Does it work? Here’s what we know so far…

High-intensity consulting for small, medium and large firms

Offering 90 to 200 hours of business consulting services spread over five to twelve months to SMEs and large firms can help them to adopt better business practices.
The effects are stronger on accounting and finance practices, and are less clear on other areas, such as resource seeking and human resources.
Offering this type of intensive consulting services to SMEs can spur firm growth, at least over the following one to five years.
These effects are most likely not immediate. They require implementing and adapting to changes, so the results are only expected to show several months after the start of the intervention.
In some cases, business consulting can also help firms to use resources more efficiently to increase productivity, but that isn’t always the case.

Low-intensity consulting for micro and small firms

A few hours of management consulting over several months can trigger the adoption of some very basic business practices, like bookkeeping or paying themselves a fixed salary, among microentrepreneurs that don’t have such practices in place.
Low-intensity Kaizen consulting can help manufacturing firms to adopt better production management practices.
Neither type of business consulting seems to lead to better average performance of micro and small firms during the first two years after receiving the support.
In the case of Kaizen consulting, after two years, manufacturing firms that received on-site consulting sessions and have the flexibility required to modify their plant layouts easily seem to perform better, in terms of higher sales and value added.
This is consistent with the existence of an assimilation period during which micro and small firms try out different practices to identify and focus on the useful ones and abandon those that prove to be unprofitable.
Unfortunately, the studies looking at low-to-medium-intensity standard management consulting programmes for micro and small firms do not report effects beyond the two-year window, so we cannot know whether positive effects on performance also appear in the medium run in these cases.

Support to implement recommendations

Adding support to implement recommendations on top of the initial diagnostic can boost the adoption of recommended business practices among small, medium and large manufacturing firms.
The support to implement recommendations seems to help manufacturing firms try out increasingly complex business practices, some (but not all) of which are abandoned over time.
The higher rate of adoption resulting from the specific support to implement recommendations seems to translate into improved performance for small, medium and large manufacturing firms.

Who benefits the most?

Business consulting seems to be particularly beneficial for firms with at least five employees, while the effects for smaller businesses are less clear.
Among microbusinesses with fewer than five employees, only those led by highly entrepreneurial individuals seem to benefit from business consulting.
Low-intensity Kaizen consulting seems more effective for manufacturing firms that can easily experiment with new plant layouts (like firms in the garment industry) than for firms that use bulky and heavy equipment, materials and products (like firms in the steel industry).

Return on investment

Offering ongoing business consulting to SMEs can lead to business growth in just a couple of years. That likely makes such schemes worth their cost regardless of usually costing a few thousand dollars per firm.
Offering a few hours of Kaizen consulting over several months to microentrepreneurs can give a good return on investment, even if the positive value-added effects can take as long as two years to show up.

Indirect positive effects

In firms with several plants or units, the effects of business consulting can spread within the firm to allow areas of the business not directly targeted by the consulting services to improve their practices.

Ideas worth trying

If you’re interested in improving business performance in the medium run, try offering subsidised consulting sessions to SMEs with at least five employees.
If you’re interested in offering consulting services to improve the performance of firms with fewer than five employees, try focusing on firms run by highly entrepreneurial individuals.
Try including in your business consulting scheme specific support for implementing the recommendations from the initial diagnosis.

What to avoid

If offering tailored business consulting, avoid targeting firms with fewer than five employees as they’re likely to benefit the least.

Studies reviewed

This summary is based on experimental evaluations of the following programmes and tweaks: