The market for Business Development Services (BDS) in Sri Lanka Dr Chris Reichert, Verni Vijayarajah, Maria Vitores Presentation to the National BDS Conference, Colombo February 11, 2003

Contents 1. Introduction 2. The BDS market in Sri Lanka – results of a market survey 3. Conclusions: What do we learn from the survey? 2.1. What did we do? 2.2. The sample 2.3. An overall picture of the BDS market 2.4. Market penetration and ‘market distortion’ 2.5. Market segmentation - who buys or uses BDS? 2.6. The service providers – type, source of information about and reasons for choosing them 2.7. Reasons for not purchasing BDS 2.1. What did we do? 2.2. The sample 2.3. An overall picture of the BDS market 2.4. Market penetration and ‘market distortion’ 2.5. Market segmentation - who buys or uses BDS? 2.6. The service providers – type, source of information about and reasons for choosing them 2.7. Reasons for not purchasing BDS

1. Introduction

 Frustration about the results of 30 years of SME projects, and about the record of public sector interventions  The international discussion on SME promotion and BDS market development  Can markets play a bigger role? And what do we know about BDS markets? Not much!  Let‘s better understand BDS markets!  And use established market research tools!  Questions: Is there a market for BDS in Sri Lanka?  Demand side: Do MSME spend? Who spends? How much? And for what services? What reasoning?  Supply side:: Are providers available? And what do they offer? Context of the study

2. The BDS market in Sri Lanka – results of the market survey

2.1. The study – what did we do?

a modified Usage – Attitude - Image (UAI) market survey on BDS in Sri Lanka Objective: to get an overview of the demand for and supply of various BDS in Sri Lanka modified UAI: included many services rather than 1 less in-depth information designed to get a first overview of the market

The services studied (18) Advertising services Accounting & auditing services Legal & paralegal services Communication (phone, fax, , internet) & correspondence services Participation in trade fairs Business & market information Training on finance management, accounting & taxation Training on human resource development Training on entrepreneurship & business planning Training on marketing & sales Training on energy, water and waste management Training on production, productivity & technical skills Consultancy on finance management, accounting & taxation Consultancy on human resource development Consultancy on business planning and management Consultancy on marketing & sales Consultancy on energy, water and waste management Consultancy on production, productivity & technical matters

N = 696 interviews with MSMEs Micro: 1 – 4 full-time employees (incl. owner) Small: 5 – 20 full-time employees Medium: 21 – 200 full-time employees in 10 districts of Sri Lanka conducted by Key Research, in 2001 funded by GTZ CEFE and ESSP and Swisscontact quota sampling procedure (for locations, enterprise size, economic sector) not representative for enterprises in Sri Lanka in general however, major groups and places are represented, and extrapolations are possible

2.2. The sample structure

The sample composition Locations Economic sectorsEnterprise size groups

2.3.An overall picture of the BDS market in Sri Lanka:

Awareness, trial and retention of BDS by individual services

 Limited awareness and understanding of most services  High trial rates for communication, advertising, accounting  Relatively low trial rates for all other services  High retention only for communication, accounting, marketing consultancies  i.e. even if people tried a service, repeat use is not very probable for most services  2 groups of services: the ones used often and regularly by many people the ones tried occasionally and often not used again

Total spending on all services (last 12 months/ fin. year) Rs. 52 million (N = 696) Total spending on all services (last 12 months/ fin. year) Rs. 52 million (N = 696) Average spending (spenders only: N=621) 75 people (10.8%) did not spend at all (last 12 months) Total spending Rs. 75,266 per business per year Rs. 75,266 per business per year Average spending (incl. non-spenders) Rs. 84,356 per business per year Rs. 84,356 per business per year Extrapolation: total market (9 districts) in 2000/ 01: Rs bn

Total (sample) market by type of BDS (8)

Average spending per BDS (8), last 12 months (Rs.)

 There is a BDS market  with moderate spending  and relatively low awareness and trial rates  strong concentration on a few services, namely communication/ correspondence, advertising, accounting  quite small market for services traditionally promoted by public sector agencies and donors (training, consultancies, information)

2.4. Market penetration and „market distortion“

‚ever used‘ – ‚ever purchased‘ – ‚ever got for free‘ (%) (8)

 Those provided on commercial terms  Those with a strong or majority share of free or subsidized service provision: consultancy, training, information 2 groups of services

2.4.Market segmentation: Who buys BDS? 2.4.Market segmentation: Who buys BDS?

By location By economic sector By respondent education Average spending on all BDS, last 12 months/ fin. year, in Rs. (N=696)

Average spending on BDS, continued By size By business ownership

Average spending on individual BDS, last 12 months, by enterprise size (8)

 Regional variations  Muslim owners spend double.  There is no relationship between economic sector and the size of spending on BDS.  The training market is stronger in manufacturing and services than in other sectors.  Trade and services seem to be more communication-intensive than other sectors.  Strong positive correlation of BDS spending with education (R=.29/.000) and business size (R=.4/.000).  Larger enterprises do not only spend more, they also spend on a larger range of services.  The BDS budget of microenterprises seems to be basically their telephone bill.

2.6. The service providers

Types of providers used

 Service provision mostly dominated by larger firms/ organizations.  Individuals and small firms play a stronger role in advertising, accounting, and legal services.

Sources of information about service providers, % (N=2,121 answers)

Reasons for choosing service provider, % (N=2,138 answers)

 Word of mouth/ recommendations are the most important information sources about service providers.  Mass media and information through organizations (chambers, government offices) are also relevant.  Directories and newsletters are not much used.  In selecting service providers, quality and price considerations compete.  Most arguments (56%) are related to quality (good name, competence, tailored service, recommended)  The second biggest group (29%) is related to price (competitive, cheapest, free service).

2.7. Reasons for not purchasing BDS

Reasons for not buying BDS, summarized, % ( N=8,107 answers)

 The perception that a service is not needed or that it can be done inhouse are the most important reasons for not buying BDS.  On the one hand realistic:  Not everybody needs all the services all the time.  On the other hand: constraint to BDS market development.  Market development will have to overcome the relatively low awareness levels and the perception, that outsourcing and using of BDS are not useful or worthwile.  The perception that a service is not needed or that it can be done inhouse are the most important reasons for not buying BDS.  On the one hand realistic:  Not everybody needs all the services all the time.  On the other hand: constraint to BDS market development.  Market development will have to overcome the relatively low awareness levels and the perception, that outsourcing and using of BDS are not useful or worthwile.

3. Conclusions: What do we learn from the survey?

1.A fresh look at things! We see many things (services, providers, demand) which we did not see before. 2.There is a market – MSME spend on BDS – and there are providers for various types of BDS. 3.The market is divided into a purely commercially functioning part and a sector with a lot of non-market interference or ‚distortion‘. 4.An overview of the BDS market – it can inform the design of project interventions, but it does not provide us with a prescription. 5.We are just starting to learn from international comparison of BDS markets. 6.Data can also inform BDS providers: which market segments to target for what service?

7.Market data can suggest demand as well as supply side interventions.  Weak awareness and demand could justify interventions to generate awareness and stimulate demand (business education, social marketing and marketing of BDS).  Constraints in provision would result in product development and supplier qualification interventions. 8.This survey is a first step and learning experience.  Other market research instruments can be applied to generate more specific information for matching demand and supply in the BDS market:  Focus Group Discussions  Product Concept Tests, etc.

Thank you for your attention! Thank you for your attention!