SME Consulting: Best Bet or Bad Buy?

Why can’t SMEs just consult their way out of low productivity?

The economies of developing countries are dense with small and medium sized enterprises (SMEs). Such enterprises aren’t terribly productive. And reliably scaling them up is hard work. But surely equipping the people who run these businesses with the skills they need to grow would go some way to letting 1,000 flowers bloom? To its boosters, the evidence that business coaches, often consultants working with SME owners, improve firm level productivity and by extension economic growth, is robust. Business training courses and entrepreneurship incubators are widely funded by development and aid agencies. 

Innovations for Poverty Action has ‘Consulting Services to SMEs’ as one of its “Best Bets”. Jonathan Mazumdar over at Growth Teams clearly agrees as he is already thinking about how to scale this intervention. 

Figure 1: Jonathan has seen enough. Scale it up! 

However, the literature is littered with less than wonderful results. J-PAL declares that they may “be the least impactful form of training” after completing a review of 28 randomized evaluations of business skills training programs. After a similar meta-analysis, World Bank researchers find that “the magnitudes of the improvement to practices is often modest” and can’t rule out the possibility that gains shown by participants aren’t just sales cannibalised from neighbouring firms who weren’t part of the training and not actually coming from productivity improvements. In a nice bit of semantic alliterative (a)symmetry, the FCDO sees IPA’s “Best Bet” and counters with a “Bad Buy” (at least in the realm of agricultural enterprises). 

Figure 2: Bad buys. The worst type of buy really.¹ 

So what’s going on here? From digging into the evidence behind IPA’s recommendation they seem to put a lot of weight on two studies, one in Mexico and one in India. In both cases high-quality consultants worked with established businesses (although the businesses were much smaller in Mexico). The consulting firm in the Indian study was “a large international management consultancy that is headquartered in the United States and has about 40,000 employees in India.” This does not sound like a typical ‘business skills’ consultant program.  

It’s quite likely that almost any idea in development, if well-resourced and executed by the right people, will have a positive impact. But being well-resourced and having a multinational consulting firm on hand is not a given when planning a SME coaching intervention. After looking at a wider set of studies about how business coaching is actually done, J-PAL, FCDO and the World Bank don’t share the boosters’ enthusiasm for immediately scaling out consulting services to SMEs. 

Put the knowledge in the brains 

It is of course easy to imagine an amorphous mass of budding entrepreneurs and earnest small businesspeople just waiting to have the knowledge of secrets to business success imparted to them. The GPI has previously written about how, in economist Ricado Hausmann’s phrase, “it is easier to move brains than it is to move tacit knowledge into brains”. The business coaching model is the opposite of this. Get that knowledge, put it into brains. The problem with this approach is that it is hard. 

A recent experiment in Kenya is illustrative of this point. Researchers evaluated a SME mentor program. Overall, the effect of the mentor was limited (or in the action-packed language of such papers “we are unable to reject the null hypothesis that [mentor] access has no impact”). However, the interesting part lurks in the detail. Entrepreneurs were surveyed before they joined the program, and it was the highest performing entrepreneurs who benefited the most from the mentor. Conversely the low performers may have actually gone backwards.  

Figure 3: The “rich” get richer... even with mentors 

Teaching at the right level 

In recent years, and certainly post covid, there has been a push in education circles to tailor teaching content to the level of the student; not just teach them the set curriculum according to what grade they are enrolled in. Is something similar at play in business coaching interventions? How much of the mixed results of business coaching can be explained by the coach and the student not being on the same page? Whilst it would increase the cost of the program to implement as it would limit uptake, perhaps better results would be seen if more effort is put into matching the content of what’s being taught with the level of capacity already present in the business? Different business coaching could be delivered to businesses with different levels of sophistication.  

IPA is not wrong when they say that SME consulting can have large impact. And it may even be worth betting on. But like with so much context is key. It is a mistake to remain blinkered to the evidence that business coaching may be the worse form of training and naïve to believe that a scale up won’t cause a further reduction in overall quality. Things do reliably revert to the mean. Boosting business productivity and moving people out of poverty are complex tasks. SME consulting may only work, and work well, when the right coach meets the right student at the right time. At other times we should remain sceptical. Wannabe business gurus of the developing world should take heed.