Making Business Development Work:

Lessons from theEnterprise Development Center

in Rafaela, Argentina

Eric Oldsman

Inter-American Development Bank

Washington, D. C.

Sustainable Development DepartmentBest Practices Series

Cataloging-in-Publication provided byInter-American Development BankFelipe Herrera Library

Eric Oldsman, Ph.D. is President of Nexus Associates, Inc., an econom-ics and management consulting firm that specializes in performancemeasurement and program evaluation. Helpful comments and sugges-tions were made by Kristine Hallberg of the World Bank; Mitsuhiro Ka-gami, Director of the Institute of Developing Economies and the mem-bers of the Rafaela Team, leaded by Juan J. Bertero. The author alsogratefully acknowledges suggestions made by Keisuke Nakamura (Sen-ior Advisor), Juan J. Llisterri (Enterprise Development Specialist) andHideki Kagohashi (Consultant) of the Advisory Group on Small and Me-dium Enterprise of the Sustainable Development Department, and toHector Castello from the IDB's Country Office in Argentina.

April 2000

This publication (Reference No. SME-101 can be obtained from:

Small and Medium Enterprise Advisory GroupPublications, Mail Stop W-0510Inter-American Development Bank1300 New York Avenue, N.W.Washington, D.C. 20577

E-mail: sds-sme@iadb.orgFax: 202-623-1708Web Site: http://www.iadb.org/sds/sme

Foreword

In order to become more productive and competitive in a market econ-omy, small and medium enterprises (SMEs) require high quality businessdevelopment services (BDS). During the past five years, the Inter-American Development Bank has expanded its support to create and de-velop business development services for SMEs through loan and Multi-lateral Investment Fund financed technical assistance programs. Themain objective of the Bank's BDS projects is to establish and developappropriate markets for business development services as instruments toimprove the efficiency and competitiveness of SMEs. The main functionof enterprise development centers (EDCs) is to assist SMEs to obtainappropriate business advisory services as well as technical and manage-rial training. The assumption behind this model is that SMEs requiresupport to identify their specific needs and to find providers that respondappropriately.

This report evaluates the performance of the Enterprise DevelopmentCenter in Rafaela, Argentina, which was established under a program ofthe Union Industrial Argentina, financed by the MIF. During the evalua-tion, special attention was given to the EDC's financial self-sufficiency,internal operating efficiency, coverage and effectiveness. The evaluationconcludes that the EDC Rafaela performs excellently in terms of effi-ciency and effectiveness. The issues discussed here were also the topic ofan EDC seminar held in April 1997 and a BDS conference held in March1999 under the auspices of the IDB.

This article includes studies of the effect of the services provided by theEDC Rafaela on two client companies, which give an indication of thetypes of improvements in SME performance that can be expected fromprograms such as this one. The lessons that derive from the experienceconveyed in this analysis are sure to become a useful guide for design-ing, implementing and monitoring BDS programs financed by the BankGroup.

Keisuke NakamuraSenior AdvisorSmall and Medium Enterprise Advisory Group

Contents

Introduction 1

The EDC Rafaela-Esperanza in Argentina 3

Implications for EDCs in the Region 17

Imperfect InformationExternalitiesEquity ConcernsBalancing Conflicting ObjectivesTarget MarketService MixOperations

Conclusion 22

Annex I: Natufarma SRL 23Annex II: DBT S.A. 26

1

Introduction

Over the past few years, the Inter-American De-velopment Bank has provided financial support tovarious private, not-for-profit business develop-ment organizations in Argentina, Colombia, CostaRica and El Salvador to help meet the diverseneeds of small- and medium-sized enterprises(SMEs).1 While differences among these organi-zations exist, all are intended to improve the per-formance of participating companies as well asdevelop a thriving market for business consultingservices.

The IDB is interested in learning more about theperformance of these programs. This concernstems from both pressure to ensure that moniesare well spent and a desire to strengthen programsto better meet the needs of SMEs in the future. Itis also fueled by current debates within the donorcommunity on the objectives of business devel-opment services and appropriate methods forevaluating their performance. The IDB recognizesthat BDS programs have multiple objectives;however, it also acknowledges that their principalpurpose is to enhance the competitiveness ofSMEs and boost economic growth. In this light,the IDB has begun to voice concerns that mem-bers of the donor community may be placing toomuch attention on financial self-sufficiency.While managers of BDS programs and otherstakeholders need to make sure that organizationsare on sound financial footing, they cannot ignoremore fundamental goals.

To help provide a solid foundation for further dis-cussions on business development programs, theIDB asked Nexus Associates Inc. to conduct anevaluation of the Enterprise Development Center(Centro de Desarrollo Empresarial) in Rafaela,

1 There are currently ten enterprise development centers inoperation with IDB support. These include one in Costa Rica,one in El Salvador, five in Colombia (Santa Fe de Bogota,Medellin, Cali, Barranquilla and Bucaramanga) and three inArgentina (Rafaela, San Rafael and Mar del Plata).

Argentina.2 The evaluation focuses on four criti-cal dimensions of performance: financial self-sufficiency, internal operating efficiency, cover-age and effectiveness as illustrated in Figure 1.

Each element of the framework is discussed be-low:

Operating Efficiency. EDCs need to ensure thatinternal processes are efficient, minimizing wasteand taking the maximum advantage of availableresources, particularly staff time. EDCs shouldexamine whether internal processes are yieldingthe highest level of output for a given level of in-put, or alternatively, using the least resources toachieve a given level of output. EDCs should usethe results of the analysis to identify the changesin policies and practices required to achieve oper-ating efficiency.

Financial Self-sufficiency. EDCs need to be con-cerned with their financial health, taking steps tomake sure that revenues are sufficient to cover

2 The evaluation was intended to build on previous studies ofenterprise development centers. See, for example, AntonioGarcia Tabuenca, “Centro de Desarrollo Empresarial enAmerica Latina, Informe Final,” prepared for the Inter-American Development Bank, November 30, 1998.

Effectiveness

OperatingEfficiency

FinancialSelf-sufficiency

Coverage

Figure 1. Dimensions of Performance

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total variable and fixed costs. EDCs should assesstheir financial performance, detailing the sourcesand uses of funds as well as the need for contin-ued subsidies. EDCs should use the results of theanalysis to identify the specific steps that areneeded to make sure that revenues are sufficient tocover total variable and fixed costs.

Coverage. EDCs should determine the extent towhich companies in target populations— thegroups of firms to which EDCs are directed— areactually receiving services. This analysis shouldexamine coverage rates within different segmentsof the population, highlighting those that are un-der-served or over-served relative to the targetpopulation. EDCs should use the results of theanalysis to identify steps to increase coveragewithin their regions.

Effectiveness. Most importantly, EDCs need todetermine whether programs work in terms ofproducing desired outcomes. EDCs should ad-dress the extent to which programs have helped

SMEs improve business processes and achievegreater profitability and growth. In addition, thepurpose of some EDCs extends beyond impactson individual businesses. In particular, EDCs aimto build a thriving market for consulting servicesin their regions. Evaluations should be designed toexamine the degree to which the centers havecontributed to growth in the demand for consult-ing services and the supply of these services in themarket.

This article summarizes the principal findingsfrom the evaluation of the EDC Rafaela-Esperanza, examining the performance of the or-ganization on each of these four dimensions.3 Itthen discusses general implications for EnterpriseDevelopment Centers in Argentina and othercountries throughout Latin America and the Car-ibbean.4 The discussion focuses on the trade-offinherent in the design of these types of programsand the steps that EDCs may need to take to rec-oncile conflicting objectives.

3 The analysis is based on extensive discussions with the staffof EDC Rafaela-Esperanza and other stakeholders, a detailedanalysis of operating and financial records, in-depth casestudies of two exemplary companies, and two mail surveys.The first survey was sent to 395 companies that participatedin one or more projects between January 1, 1998 and Sep-tember 15, 1999. Of these, 203 returned completed surveysfor an effective response rate of 51 percent. The second sur-vey was sent to 71 consultants that participated in projects inthe same time period – 47 returned completed surveys for aneffective response rate of 66 percent.4 In fact, many of the issues discussed in the article are appli-cable to a broad range of business development programsaround the world.

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The EDC Rafaela-Esperanza in Argentina

EDC Rafaela Esperanza helps SMEs obtain serv-ices from private consultants.

The EDC Rafaela-Esperanza began operations inMay 1997, covering an area consisting of the De-partments of Castellanos and Las Colonias inSanta Fe Province and the Department of SanJusto in Cordoba Province.5 Since its establish-ment, the EDC Rafaela-Esperanza has beenguided by a set of core principles:

ü Focus primarily on small businesses thatwould not be able to obtain services on theirown.

ü Foster partnerships with key organizations inthe region.

ü Charge for services as a path to greater marketdiscipline and financial self-sufficiency.

ü Rely on outside consultants for needed exper-tise.

The last two points merit further discussion. Theprinciple of financial self-sufficiency was high-lighted in the original project memorandum pre-pared by the IDB. The document states that “cen

5 In March 1995, the IDB announced approval of $8,475,000in nonreimbursable financing to support the creation of anetwork of enterprise development centers in Argentina tostrengthen the competitiveness of small enterprises. The totalcost of the four-year program was projected to be roughly$11.4 million, with local counterpart funding totaling ap-proximately $2.9 million. The proposed budget was dividedamong three regional centers based in the cities of Rafaela(Santa Fe province), Mar del Plata (Buenos Aires province)and San Rafael (Mendoza province). As noted above, thisevaluation focuses solely on the center in Rafaela.

ters will collect a fee for the services they per-form. In setting the rates, plans call for using asystem of promotion and gradual increases untilthe operation is self-sustaining, coinciding withthe end of the project as per the targets set in theproject budget.” Specifically, it was envisionedthat operating revenues would be sufficient tocover the total operating costs (fixed and variable)by the fifth year of operation. This would entailannual reductions in the subsidies extended toSMEs until they were able to cover the full cost ofservices.

The reliance on private consultants is also centralto the basic model adopted by the center. EDCRafaela-Esperanza serves as an intermediary be-tween private consultants and SMEs, brokeringservices needed by companies. Each year, thecenter designs and offers a series of programs tocompanies in the region on a group basis.6 In ad-dition, it works with individual companies, tai-loring projects to meet their particular needs. Theactual services provided to companies are deliv-ered by outside consultants selected through acompetitive bidding process and retained by EDCRafaela-Esperanza on behalf of its customers. Theuse of outside consultants is seen as a way to ex-pand the supply of business services in the region,

6 The annual plan is based on inputs from the business com-munity and Advisory Council. The programs offered in thefirst year of operation resulted from a needs assessment car-ried out by the Ministry of Production of Santa Fe Province.Some of these programs, such as those dealing with ISO9000, were based on existing services provided by partici-pating chambers of commerce. In developing the plan foryear two, the EDC Rafaela-Esperanza conducted a series ofworkshops with its customers to identify their needs andassess potential demand for new services. In addition, repre-sentatives from the chambers of commerce were asked fortheir opinions.

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avoiding both the potential for duplication of ef-fort and the need to build a large staff.7

In this way, the EDC Rafaela-Esperanza is de-signed to stimulate greater demand for businessdevelopment services through the following:

ü helping companies define their needs,

ü reducing transaction costs, and

ü lowering the effective price for consultantservices.

The EDC Rafaela-Esperanza is also designed tospur the supply of business development servicesin the regional market. Greater demand inducesmore consultants to enter into the market and/orexpand their services to companies in the targetpopulation.

Since its inception the EDC Rafaela-Esperanzahas worked with more than 600 companies, ac-counting for 20 to 25 percent of the target popu-lation.

According to data provided by the EDC Rafaela-Esperanza, 616 companies have participated inprojects between May 1997 and September 1999.In keeping with its mission, the center has workedprimarily with SMEs— more than 90 percent of itscustomers have 100 or fewer employees. Thesecompanies span a wide range of industries, withsome concentration in metalworking, food proc-

7 There are two classes of consultants employed by the cen-ter. Senior consultants with substantial expertise in requiredfields are retained to provide training and/or technical assis-tance to one or more companies. These senior consultantshave primary responsibility for specific projects. In addition,the EDC Rafaela-Esperanza hires junior consultants knownas “coordinators” to assist on projects. Working out of theEDC’s offices in Rafaela and Esperanza, coordinators areresponsible for maintaining contact with companies that areparticipating in projects, monitoring their progress and pro-viding ongoing assistance. The strategy of using coordinatorshas two objectives. First, it is seen as a means to increase thesupply of qualified consultants in the region over time byproviding on-the-job training to individuals who may chooseconsulting as a career. Second, since coordinators are hiredon a project basis, it enables the EDC Rafaela-Esperanza tominimize fixed costs by paring down the number of full-time,permanent employees on the organization’s payroll.

essing and furniture. At the other end of the spec-trum, some customers are quite large— five com-panies have 1000 or more employees.

The vast majority of customers have little or noexperience working with consultants.

Approximately 70 percent of the companies thatresponded to the customer survey reported thatthey had not employed consultants in the pastthree years outside of those retained through thecenter. As such, they have had little or no directexperience in developing terms of reference,identifying and selecting qualified consultants,negotiating agreements and managing contracts.

Those companies that had retained consultants ontheir own tended to be larger.8 This finding sup-ports the original rationale for the program. Itdemonstrates that smaller firms are less likely touse consultants in the absence of services pro-vided by the EDC Rafaela-Esperanza. As a corol-lary, it also suggests that the EDC Rafaela-Esperanza has been successful in promoting theuse of consultants among companies that had noprior experience.

Services vary considerably with respect to in-tended outcomes, subject matter, scale and modeof service delivery.

To date, the EDC's customers have participated in192 projects in a broad range of programs. Thepattern of demand reflects the interests of compa-nies in the region as well as the availability, tim-ing, pricing and promotion of certain types ofprojects. Roughly 61 percent of respondents to thecustomer survey indicated that they could nothave obtained the services provided through theEDC Rafaela-Esperanza from other organizations.

The projects are quite diverse. Table 1 shows therelationship between selected programs, the tar-geted business processes and intended outcomes. 8 The average employment within firms that retained consult-ants on their own totaled 182 workers (median = 30). Thesecompanies averaged two engagements over the three-yearperiod with an average total expenditure of approximately$12,600. In contrast, those companies that had not used con-sultants had an average of 31 people on their payroll (median= 15).

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For example, the “Five S’s” program providestraining and technical assistance related to safety,orderliness and cleanliness of the workplace.9 Theprogram consists of seven, two-hour meetingsover a five-month period. The program is intendedto increase labor productivity by focusing on theorder fulfillment process. In contrast, programssuch as international trade fairs focus on market-ing and sales, helping companies identify newmarket opportunities and develop plans to in-crease sales inside and outside Argentina. Moreo-ver, some programs are directed toward changesin attitudes or behavior within firms, rather thanspecific business outcomes such as increased salesand/or profitability. For example, the EDCRafaela-Esperanza offers a variety of human re-sources management programs such as "teamleadership." While they may eventually have animpact on sales and productivity, these programsare not aimed directly at these objectives.

Roughly three-quarters of all projects have beenconducted on a group basis, typically with five toseven participating companies paying on the orderof $720 each to participate in the project. How-ever, some projects have considerably more par-ticipants, roughly 10 percent involve more than 30companies.

The size of the typical project (as measured bytotal project expenses, including fees paid to out-side consultants and coordinators plus any directproject expenses) is approximately $6,600. How-ever, as shown in Figure 2, there is significantvariation in project size, ranging from less than$500 to more than $40,000. In a similar vein,some projects are completed within one week;others last more than nine months.

Regardless of the nature of services received mostcustomers are satisfied.

9 The name of the program is Multiplicar. It is based on aJapanese technique, the "Five-S’s" include seiri— organiza-tion; sorting and weeding out unnecessary items, and classi-fying and organizing everything else; seiton— orderliness:storing all items where they belong so they can be foundquickly; seiso— cleanliness: keeping tools and equipmentclean and in good working order; seiketsu— standardizedcleanup: maintaining a clean work environment as a standardpractice; and shitsuke— discipline: adhering to standard pro-cedures and employing good work habits.

Approximately 95 percent of the companies thatresponded to the survey reported that they were“very satisfied” or “satisfied” with the EDC serv-ices. 10 Client satisfaction is also reflected in theextent to which companies return to the EDCRafaela-Esperanza for additional services.Roughly 41 percent of customers have partici-pated in more than one project since the inceptionof the program. In fact, a significant percentage ofcustomers have called on the center for a varietyof services. With each project, companies gainmore experience working with private consultants.Six percent of customers have participated inmore than five projects and two percent have par-ticipated in more than six projects. Larger firmsare more likely to undertake additional projectsthan smaller companies.11

Not surprisingly, the number of projects under-taken by particular companies is also a function ofthe time elapsed since their first project with theEDC Rafaela-Esperanza. Put another way, it takessomewhere on the order of 200 days for compa-nies to return to the EDC Rafaela-Esperanza foradditional projects. This had implications for therate of growth of the organization, particularly inthe early stages of development. As noted above,a significant percentage of projects take three ormore months to complete. During the first six tonine months of operation, the EDC needed to relyalmost entirely on new customers. Thereafter, it 10 Caution should be exercised in extrapolating survey resultsto the total population of firms served by the EDC Rafaela-Esperanza. For example, it is conceivable that non-respondents are more likely to be dissatisfied with servicesthan companies that took the time to complete the question-naire. The opposite case may also be possible. However,there is no reliable way to discern how non-respondentswould have answered the question. While the vast majority ofcompanies that responded to the survey were satisfied withthe services that they received, some offered suggestions onhow these services might be improved in the future. Thesesuggestions tended to fall into two categories. Some calledfor lower prices, perhaps based on a sliding scale dependingon company size. Others indicated that greater emphasisneeds to be placed on implementation, geared to the particu-lar conditions within different companies.11 The finding is based on a simple ordinary least squares(OLS) regression with the number of projects undertaken bycompanies as the dependent variable. The explanatory vari-ables included the number of employees and the number ofdays since the start date of the first project undertaken bycompanies.

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was possible to secure follow-on work with ex-isting customers as they completed projects andwere ready to move on to new areas. This experi-ence has been part of the learning curve for theorganization.

The EDC Rafaela-Esperanza has used resourcesefficiently, while also taking steps to boost reve-nue.

All organizations need to be concerned about theefficiency of operations, attempting to maximizethe level of output for a given level of resources.In this regard, it is important to examine the effi-ciency of specific processes, including activitiesrelated to developing market awareness, develop-ing and executing projects and building companyrelationships.

Table 2 shows the performance of EDC Rafaela-Esperanza in the third quarter of 1999 in terms ofselected indicators,12 most of which relate processoutputs to inputs (particularly staff resources) togauge the efficiency of internal processes and arenormalized to facilitate comparison. In this regard,for comparative purposes, the table also providesthe median value for the same indicators forroughly 40 other similar centers that are part of

12 The full evaluation report for EDC Rafaela-Esperanzacontains 22 performance indicators related to outreach, effi-ciency and financial self-sufficiency.

the NIST Manufacturing Extension Partnership(MEP) in the United States.

Significantly, the EDC Rafaela-Esperanza is morefinancially self-sufficient than typical NIST MEPcenters. Customer revenues cover 66 percent and23 percent of total expenses for the EDC Rafaela-Esperanza and NIST MEP centers, respectively.

In addition, almost 65 percent of the availableEDC staff time is devoted to projects as opposedto the roughly 14 percent (median) among NISTMEP centers.13 This is due, in part, to the decisionto retain coordinators on a project basis, ensuringthat a significant percentage of their time is de-voted to project work. Furthermore, staff at theEDC Rafaela-Esperanza tends to work longerhours than staff of similar centers in the UnitedStates.

In general, the data present a picture of an organi-zation that is using resources efficiently. Thecenter has taken steps to minimize the amount oftime required for many processes. For example, ithas adopted measures to streamline the projectdevelopment process through standard formats,boilerplate contract terms and conditions, and

13 Available staff time is defined in terms of a standard 40-hour workweek less time for holidays, vacations and leavesof absence. Therefore, staff can actually devote more than100 percent of available time to projects if they commit morethan 40 hours per week to project work.

Table 2. Performance Indicators in Third Quarter 1999

IndicatorEDC Rafaela-

EsperanzaMedian value for

NIST MEPPercentage of total expenses covered by customer revenues 66.0% 23.3%Percentage of staff available hours charged to projects 64.8% 13.9%Average hours spent developing a new prospect 8.7 8.7New prospects per field staff 13.6 3.9New customers per field staff 3.1 1.2Conversion rate: prospect to customer 44.0% 28.8%Average hours spent developing a new project 38.2 10.6New projects per field staff 2.9 3.1Active projects per field staff 4.9 7.5Average hours spent per active project 113.0 13.8

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clear procedures for obtaining internal approvals.However, the analysis suggests that there may beroom for improvement. The amount of time re-quired to develop a new project (38 hours) ap-pears high. Some of this time, however, may berelated to the requirement to solicit competitivebids from more than one consultant as well as theadditional sales efforts associated with groupprojects

In keeping with its mission, the center devotesconsiderable resources to developing relationshipswith companies prior to their becoming actualcustomers. While the amount of time required todevelop each new prospect (8.7 hours) is on a parwith similar centers in the United States, the totalamount of time spent on this activity is signifi-cantly higher in EDC Rafaela-Esperanza. Moreo-ver, despite the higher conversion rate, the abso-lute number of prospects that have not yet becomecustomers is also higher. This may suggest theneed for better targeting of marketing and saleseffort, focusing attention on “qualified” compa-nies that are more likely to purchase services.

Another area that warrants attention is the amountof time that coordinators spend on individualprojects. While the average project load is rela-tively light, field staff at EDC Rafaela-Esperanzacommit a great deal of time to active projectscompared to other similar centers in the UnitedStates even though the size of the typical projectin terms of the dollar value is equivalent. Again,

this may be associated with a greater reliance ongroup projects, requiring coordinators to devotetime to each participating company. It may alsoreflect the desire of the organization to providecoordinators with significant on-the-job trainingin order to increase the supply of qualified serviceproviders in the region.

Driven by a handful of companies, client revenueshave grown significantly.

The EDC Rafaela-Esperanza relies on three pri-mary sources of revenue: the IDB, local counter-parts and customer fees. Growth in the latter is ofcentral importance to the ability of the organiza-tion to become financially self-sufficient. In fact,customer revenues have grown from a monthlyaverage of $31,620 in 1997 to $33,341 in 1999.The upward trend appears to be continuing. In thethree months between July and September 1999,the EDC Rafaela-Esperanza took in $148,062from customer fees, representing an average of$49,354 per month.

These revenues have been heavily dependent on arelatively small number of firms. As shown inFigure 3, the top one percent of all customers(roughly six firms) as measured by revenue, ac-count for 34 percent of the total customer feesgenerated to date. The top ten percent account for80 percent of all revenues. These top customerstend to be larger companies that have undertakenone-on-one projects. In particular, five large dair-

ies have provided a substantialshare of the total fees paid bycompanies to the EDC Rafaela-Esperanza since its establishment.Companies that have more than100 employees are invoiced for atleast 100 percent of the variablecosts associated with specificprojects. In practice, this has al-lowed the organization to cross-subsidize projects for smallerfirms. However, the dependenceon a relatively small number ofcustomers raises concern over theorganization.

Figure 3. Percentageof Total Fees Accounted for by Top Customers

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Customer revenues fully cover the variable costsof projects, but are not sufficient to cover the totaloperating costs of the organization.

Table 3 summarizes the financial performance ofthe EDC Rafaela-Esperanza in the third quarter of1999. As noted above, customer revenues totaled$148,062, accounting for 66 percent of the cen-ter’s total costs of $224,428 during the same pe-riod. While the center was able to cover its vari-able costs in the third quarter, customer revenueswere not sufficient to cover both variable andfixed costs.14 The operating deficit in the thirdquarter of 1999 was $76,366. This amount isequivalent to the required subsidy from the IDBand local counterparts and, as such, reflects thecost of the program from the perspective of theorganization. Therefore, the net benefits to cus-tomers of EDC Rafaela-Esperanza should be con-sidered in light of the subsidized cost of the pro-gram.

If the aim of EDC Rafaela-Esperanza is to becomefinancially self-sufficient, it will need to increasethe margins on projects.

Figure 4 presents a break-even analysis for thecenter given its performance in the third quarter of1999. The center’s fixed costs are shown as thehorizontal, solid black line. The diagonal, solidblack line shows the total costs of the program(including variable and fixed costs) based on the

14 Variable costs increase or decrease directly in proportion tothe level of sales. In the case of the EDC Rafaela-Esperanza,variable costs are those that vary according to the number ofprojects undertaken with customers. This includes the cost ofoutside consultants and coordinators as well as direct projectcosts. Fixed costs are those that remain constant regardless ofthe level of sales. These costs include staff salaries, rent,telephone, etc. However, fixed costs are only “fixed” within acertain range of activities or over a certain period of time. Forexample, the EDC Rafaela-Esperanza might need to add ad-ditional full-time personnel once a certain number of projectsis exceeded and the capacity of existing staff is exhausted. Inaddition, some costs are a combination of fixed and variablecosts: a certain minimum level is incurred regardless of thelevel of sales, but costs rise as volumes increase. For exam-ple, the telephone bill includes fixed components such asmonthly access or line charges. It also includes componentsthat may vary with the volume of business. Strictly speaking,these costs should be separated into their fixed and variablecomponents; however, for many organizations they are small.

number of active projects in the quarter. The slopeis based on the average variable cost of $2,670 forthe 54 active projects in the third quarter of 1999.Finally, the dotted gray line shows total customerrevenues. The slope is based on average customerrevenues of $2,741 per active project in the sameperiod.

The graph shows that given the current contribu-tion margin of $71 per project, the EDC Rafaela-Esperanza would be unable to cover its total costseven if the number of active projects in the quarterincreased eightfold to more than 400. (The diago-nal solid black and dotted gray lines do not inter-sect within this range.15) Therefore, the path toself-sufficiency is not an issue of expanding thenumber of projects. To become self-sufficient, theEDC Rafaela-Esperanza must reduce fixed costs,reduce variable costs and/or increase the averagecustomer revenue per project. Given the currentstructure of the organization, only the third optionoffers much potential for success.

For the EDC Rafaela-Esperanza to break-even atthe current number of projects, it would need toincrease the average number of companies thatparticipate in given projects and/or raise prices byapproximately 52 percent, while holding costsconstant. To a great extent, the cost of undertakinga particular group project is independent of thenumber of participating companies. Therefore,increasing the number of companies involved in aproject would increase the contribution margin.Raising prices is, perhaps, more straightforward.However, raising prices by this amount may se-verely limit participation among the very compa-nies that the EDC Rafaela-Esperanza is striving toserve.

Alternatively, the center could try to shift its proj-ect mix to focus on those types of projects thathave higher margins. It appears that certain typesof projects (specifically, continuous improvementprojects and projects undertaken with individualcompanies) have significantly higher margins thanothers. On average, customer-paid fees for con-

15 In fact, the number of projects would need to reach 1,134in a quarter to break-even. However, this is based on the un-realistic assumption that labor and other costs remain un-changed.

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tinuous improvement projects cover more than100 percent of the variable costs of these projects,contributing roughly $900 to fixed costs. Simi-larly, customer-paid fees for individual projectstend to exceed variable costs by almost 50 per-cent, contributing more than $1,500 to fixed costs,on average.

Finally, there may be another way to become self-sufficient if the organization is willing to alter itsbasic business model significantly, that is, to pro-vide services directly using internal staff ratherthan outside consultants. This may enable the or-ganization to retain revenues that otherwise wouldbe paid to third parties. For example, assumingthat consultants include a 10 percent profit marginin their fees, EDC Rafaela-Esperanza would havebeen able to save roughly $8,600 in the thirdquarter by performing the work themselves if theunderlying cost of service delivery were compara-ble.

This discussion points to a number of trade-offsinherent in the design of these types of programs.Raising the fees charged for services may pricesome companies in the target population out of themarket. Shifting the focus to certain types of proj-ects may limit participation and fail to addressimportant SME needs. Providing services directlyto customers may reduce the impact of the pro-gram with respect to market development. How-ever, the alternative is to continue to follow thecurrent strategy, recognizing that operating defi-cits will need to be covered by funding agencies(such as the IDB). The justification for continuedsubsidies hinges on a determination of whetherthe effective demand for services at pricesallowing for full cost recovery is below the levelconsidered optimal from a societal perspective. Asdiscussed in more detail later, companies may un-derinvest in services due to imperfect information,externalities and/or equity considerations.However, all of this presupposes that the programis actually effective in terms of boosting the per-formance of SMEs.

Customers have undertaken needed changes andimproved their performance as a result of theservices provided through EDC Rafaela-Espe-ranza.

In order to increase their profitability and rate ofgrowth, companies need to change their behaviorand/or take specific actions with respect to criticalbusiness processes. In this regard, it is importantto note that 81 percent of the respondents to thecustomer survey indicated that they changed theiroperations as a direct result of the services pro-vided through the EDC Rafaela-Esperanza.16

Further analysis demonstrates that the probabilitythat a company will report changes is a functionof the nature of the services received. Specifically,companies that participated in one-on-one projectswere more likely to report changes than compa-nies that participated in group projects, all otherthings being equal. The duration of projects andthe elapsed time since the first project also in-crease the probability that companies would reportchanges.17

The changes that companies made as a result ofthe services received through the EDC Rafaela-Esperanza were manifest in different processeswithin the firms. Given the types of programs of-fered by the EDC Rafaela-Esperanza, it is not sur-prising that most of the changes reported by com-panies relate to modifications in the productionprocess.18 For example, more than half of compa-nies that responded to the survey indicated thatthey altered processes related to the safety andhealth of workers. Similarly, 49 percent and 44percent of respondents reported that they reor-ganized production and/or changed their qualitysystems, respectively, as a result of the servicethat they received.

In general, companies that responded to the cus-tomer survey indicated that the changes made inprocesses led to improved quality, reduced costs

16 Annex I and II contain two case studies that describe theservices that the companies received through EDC Rafaela-Esperanza, the specific actions that they took as a result andsubsequent benefits.17 The magnitude of services was also found to be positivelyrelated to an increased likelihood of change; however, thisresult was not statistically significant.18 Following an assessment of needs, the EDC R-E decided tofocus on order fulfillment, including quality control and pro-duction processes. In addition, the relatively high number ofcompanies participating in projects that address issues relatedto order fulfillment is an expression of the relative demandfor services that focus specifically on this process.

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and a faster turnaround time, as shown in Table 4.More than three-quarters of the respondents re-ported that their performance improved on one ormore dimensions.

Sixty-eight percent of the 203 companies thatcompleted the survey indicated that they improvedtheir competitiveness as a direct result of servicesprovided by the EDC Rafaela-Esperanza.19 Com-panies were also asked to indicate how improvedcompetitiveness was reflected in their overallbusiness performance. As summarized in Table 5,of the 203 companies that completed the survey,roughly 46 percent indicated that their salesand/or profitability increased as a direct result ofthe services provided by Rafaela-Esperanza.Slightly more than 10 percent of respondents indi-cated that services resulted both in higher salesand profitability. Roughly 54 percent respondedthat neither their sales nor profitability increaseddue to the services received.20 These results needto be considered within the context of the eco-nomic crisis facing companies in Argentina duringthis time frame.

In an effort to estimate the magnitude of the EDCRafaela-Esperanza’s impact on overall business 19 The sentiment that the EDC Rafaela-Esperanza helps com-panies improve their competitiveness was shared by 98 per-cent of the consultants that responded to a survey.20 These figures compare favorably to similar centers in theUnited States. For example, in a survey of 12,000 companies(effective response rate of 75 percent) that received servicesfrom centers affiliated with the NIST Manufacturing Exten-sion Partnership (NIST/MEP) between July 1996 and June1998, approximately 17 percent of respondents reported thattheir sales increased as result of these services.

performance, companies were asked to providedata on sales, exports, cost of purchased inputs,payroll and employment in 1998 and 1999. Theywere then asked to indicate what these valueswould have been in 1999 in the absence of theEDC Rafaela-Esperanza services. Unfortunately,very few companies were willing to provide thisdata. Only 21 companies provided all of the re-quired sales data; fewer still provided data on theother requested items.21

Together, the 21 companies that reported salesdata indicated that the services provided by theEDC Rafaela-Esperanza increased their sales by atotal of $1.14 million with a mean of approxi-mately $54,000 and a median of $27,000. Overall,this represented an eight percent gain from thelevel expected if the companies had not receivedservices. The additional sales generated by thesecompanies translate into increased profits of$57,000, assuming a net profit margin of five per-cent. The additional profit earned in 1999 repre-sented a 28 percent return on the $42,000 thatthese companies invested in services obtainedthrough EDC Rafaela-Esperanza.

Two companies provided data needed to calculatethe change in profits in 1999 due to their in-volvement with the EDC Rafaela-Esperanza.22 Inone case, profits were roughly $61,100 or 73 per-

21 As a result, it is impossible to estimate the return on in-vestment in the overall program from the perspective of EDCRafaela-Esperanza.22 Profits are defined as sales less salaries, wages and the costof purchased inputs. This is roughly equivalent to profitsbefore taxes, interest and depreciation.

Table 4. Intermediate Outcomes – Improved Performance

Process % Observing Change

Reduction of defects, rework and customer rejects 39%Reduction in costs 32%Reduction in manufacturing lead time or delivery time 29%Increase in productivity 28%Increased compliance with standards and regulations 28%Expansion in the number of customers 27%Reduction in absenteeism or accidents 11%One or more intermediate outcomes listed above 78%

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cent higher that they otherwise would have been;in the other case, profits were $59,000 or 20 per-cent higher. These two cases illustrate an impor-tant concept in evaluating the impact of the EDCRafaela-Esperanza and other similar organiza-tions. As shown in Figure 5, one of the companiesactually experienced a significant decline in prof-its between 1998 and 1999; however, the declinewould have been worse in the absence of servicesprovided by the EDC Rafaela-Esperanza. Theother company saw a dramatic increase in profitsduring the same period, some due to EDCRafaela-Esperanza. Therefore, it is critical thatevaluations try to determine the counterfactual—what-would-have-been— rather than rely on sim-ple before-after studies.

Another two companies provided sufficient datato calculate a widely used measure of productiv-ity— value added per employee. Value added isequal to sales less the cost of purchased inputs or,equivalently, employee compensation plus profitsand other returns to capital. In one case, the EDCRafaela-Esperanza was responsible for boostinglabor productivity by $2,444 per employee, 32percent above the level expected if the companyhad not received services. In the other case, valueadded per employee was $4,646 or 51 percenthigher that it would have been in the absence ofservices provided by Rafaela-Esperanza.

The EDC Rafaela-Esperanza has helped increaseboth the demand for consulting services and thesupply of service providers in the region.

As noted above, most of the companies that haveparticipated in the program had not used consult-ants in the past. In addition to providing directfinancial assistance and negotiating more favor-able terms, EDC Rafaela-Esperanza plays a direct

role in generating demand for consulting servicesby helping customers define their needs, preparethe terms of reference for training and technicalassistance projects, find and retain qualified con-sultants and implement recommendations.23

Moreover, approximately 87 percent of the con-sultants that responded to the survey believe thatthe EDC Rafaela-Esperanza has contributed to anexpansion in the market for consulting services inthe region. From the perspective of supply, thecenter draws on a broad network of independentconsultants to deliver services to companies.Since its inception, the EDC Rafaela-Esperanzahas retained the services of 55 consultants and 41coordinators, and continues to add consultants toits roster at a steady rate consistent with its statedprocedures and objectives. More than two-thirdsof those that responded to the survey began pro-viding services to SMEs in the region subsequentto the establishment of the EDC Rafaela-Esperanza. On average, these individuals havealmost five years of consulting experience.

Consultants were asked to indicate whether theyhad experienced specific benefits from workingwith the EDC Rafaela-Esperanza. As Table 6shows, there is great deal of variation in how con-sultants see the benefits of the program. Roughly94 percent reported one or more of the benefitslisted in the table. Respondents most frequentlycited the EDC Rafaela-Esperanza as a valuablesource of leads and a contributor to the expansion 23 Consultants that responded to the survey suggested that theprincipal constraint to the development of the SME businessconsulting market was primarily economic. Approximately87 percent of respondents stated that SMEs lack of capacityto pay for services at standard market rates was a “very im-portant” or “important” barrier to working with these types ofcompanies.

Table 5. Final Benefits – Overall Business Performance

Increased Sales?Yes No

Yes 10.3% 16.3% 26.6%IncreasedProfitability? No 19.2% 54.2% 73.4%

29.5% 70.5% 100.0%

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in the market for their services. Approximately 53percent reported that the EDC Rafaela-Esperanzahas led to an increase in their total volume ofsales.

Some question the sustainability of the market inthe absence of the EDC Rafaela/Esperanza.

Approximately 73 percent of the SMEs that com-pleted the survey responded that their experiencewith the EDC Rafaela-Esperanza made them morelikely to hire consultants in the future. Moreover,more than 90 percent of the consultants that re-sponded to the survey indicated that they plan oncontinuing to offer service to SMEs in the regionin the future.

However, the vast majority of consultants thatresponded to the survey believe that the EDC

Rafaela-Esperanza needs to play a continuing rolein the development of the market for consultingservices. Two-thirds of respondents suggested thatdemand for services by SMEs would decline inthe future if the organization did not continue toexist. While the survey did not ask consultants toexplain this conjecture, it may be due to their as-sessment that certain barriers to the use of privateconsultant will persist. SMEs may continue to findit difficult to define their needs, find qualifiedconsultants and pay the full price for services inthe absence of the EDC Rafaela-Esperanza. Thisis likely to be particularly true for companies thathave yet to participate in programs offered by theorganization. Moreover, since new companies arebeing established continually in the region, therewill always be a pool of SMEs that lack directexperience in working with consultants.

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Implications for EDCs in the Region

The fundamental goal of EDCs is to improve theperformance of SMEs. Since SMEs account for asignificant percentage of value added and em-ployment in all countries, improved performancein this sector of the economy is critical to futureeconomic stability and growth. Program manag-ers, donors and other stakeholders believe thatSMEs need to change the ways in which they dobusiness to be competitive, but lack knowledge ofhow to effect needed improvements. Furthermore,SMEs are unwilling to hire outside consultants orother service providers to learn new businesspractices and techniques at prevailing marketprices due to imperfect information. Moreover,even in a world characterized by perfect informa-tion and individually maximizing behavior, thelevel of investment in consulting services bySMEs at prevailing market prices may still be de-ficient from a social perspective due to external-ities and equity considerations.24 Each of theserationales for establishing EDCs are discussedbelow.

Imperfect Information

SMEs may decide to forego services due to in-adequate information. Efficient markets dependon people making informed decisions. However,people cannot make wise choices if information islacking, incomplete, overly complex or mislead-ing. Particular problems arise if there are eithersignificant transaction costs in obtaining the nec-essary information about the quality of a good, or

24 Some people have also defined business developmentservices as public goods. Public goods have two unique prop-erties: First, consumption of a public good by one consumerdoes not affect the ability of other consumers to benefit fromit (non-rivalry). Another way of describing this characteristicis that the good can be provided to additional consumers at noadditional costs. Second, it is impossible to stop people frombenefiting from the good even if they are unwilling to pay forit (non-excludability). In this case, it is hard to see how theservice itself constitutes a public good. It would seem to failboth conditions.

if quality can only be judged after purchase and/orconsumption as in the case of “experience” goods.In this case, SMEs may be reticent to seek outsideassistance because they cannot adequately judgethe quality of services before receiving them.25

While these companies may be interested inmaximizing profit, the lack of information con-strains their purchases. The EDC Rafaela-Esperanza and other similar organizations attemptto address this type of market imperfection byproviding better information on consultants, re-ducing transaction costs and/or lowering SMEexposure to risk through direct subsidies. It is im-portant to draw attention to the fact that a signifi-cant percentage of SMEs studied for this reporthad little or no prior experience working withconsultants. However, they gain experience witheach new project undertaken through the EDC. Inthis case, the experience relates primarily to therole that the EDC plays as an intermediary. TheEDC is seen as a place to go for reliable servicewith assured quality— the equivalent of a stamp ofapproval. As a result, while imperfect informationmay be used to justify the use of subsidies in orderto reach more companies in the target population,it does not necessarily support the provision ofcontinued subsidies to the same company.

Externalities

Externalities arise when the production (or con-sumption) of the good or service affects partiesother than those directly involved in the transac-tion and these spillover effects are not fully re-flected in market prices. The issue of externalitiesis particularly important given ambiguous prop-erty rights and/or high transaction costs. In thiscase, the argument can be made that the prevailingmarket price for consulting services does not re-flect the additional value that other companies or

25 In this way, consulting services are different from financialservices. SMEs that borrow money know the value of whatthey are receiving before the loan is made.

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individuals derive as a result of the provision ofservices to a particular SME. For example, theknowledge gained by individuals that participatein programs offered by EDCs might spillover toother companies as employees leave and take jobswith other firms. More generally, intellectualproperty generated through the service that is notfully protected through enforceable laws may leakout to other firms. In addition, the actions bycompanies that receive services may have a sec-ondary impact on other firms. For example, ascustomers of EDCs grow they may need to pur-chase additional inputs from other firms, givingrise to multiplier effects in the regional economy.Finally, externalities may also arise if more SMEspurchase services, provided that there are eithereconomies of scale in the provision of these serv-ices or network effects. With regard to the latter,in some sense, the users of consulting servicesconstitute a network. Norms governing the provi-sion of services by consultants and their use bySMEs (such as professional ethics and contractterms) are likely to emerge as the network grows,providing benefits to all SMEs that purchaseservices. Similarly, consulting firms may be ableto develop and offer standard products at lowercosts as the network expands. In all of these cases,the actions taken by EDCs to stimulate demandfor services, including the provision of subsidies,may result not only in benefits that individualcustomers can appropriate, but also additionalbenefits that flow to other firms and society atlarge.

Equity Concerns

It is important to note that both imperfect infor-mation and externalities deal with allocative effi-ciency. However, EDCs may also be concernedwith equity. To a great extent, the existing distri-bution of income and wealth is determined by ini-tial endowments of land, capital and labor skills inthe country. Those who possess resources benefitmore from the operations of the market. EDCparticipation in the market can help ensure greaterfairness by committing resources to traditionallyunderserved constituencies.

The decision of donor organizations to fund or-ganizations like EDC Rafaela-Esperanza has beendriven, in part, by the recognition that these types

of market failures exist in many countries. Bylowering transaction costs and subsidizing busi-ness services, EDCs spur demand and inducegreater supply.

Balancing Conflicting Objectives

As noted above, EDCs are faced with the chal-lenge of meeting different objectives. They needto reach hundreds of SMEs in their regions, sub-stantially boost their productivity and growth andspur the development of the overall market forbusiness services. In many cases, organizationsalso need to achieve financial self-sufficiencygiven the limited duration of donor support.

However, these objectives may conflict. For ex-ample, constraining centers to a broker role maymake it more difficult to achieve financial self-sufficiency. At the same time, efforts to becomeentirely financially self-sufficient may subvert thebasic mission of the organization in light of thediscussion above. Moreover, given limited re-sources, efforts to reach numerous companies mayrun counter to the desire to generate substantialimpacts. Unfortunately, it is all too easy to fritteraway scare resources providing marginal assis-tance to many companies.

Centers need to make decisions on how best toachieve the objectives that they define for them-selves. This involves hard choices concerning thetarget market, service mix and operations. Asshown in Figure 6, EDCs can elect to pursue al-ternative strategies. Furthermore, the position thatcenters choose to occupy with respect to differentelements of their strategy has implications fortheir ability to achieve specific objectives.

Target Market

In general, EDCs tend to define their target mar-ket as all SMEs in the region, regardless of theirindustry orientation, size, propensity to purchaseservices and likelihood of future success. How-ever, centers could choose to focus their efforts onparticular segments of the market. For example,like the EDC Rafaela-Esperanza, other centerscould target specific industries, building requisitecapabilities and tailoring services to meet the spe-cific needs of companies in those industries. It is

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likely that customers would benefit more fromgreater specialization; however, by definition thiswould reduce the overall size of the market servedby the centers.

Large companies are likely to be a better source ofrevenues than smaller firms. In the case of EDCRafaela-Esperanza, the organization has been de-pendent on a relatively small number of largecompanies for the bulk of its customer revenues.In an effort to achieve financial self-sufficiency,centers could develop relationships with largecompanies that have the potential to become sta-ble and significant customers. Because of therelatively small number of large companies in anygeographic area, centers may need to expand theirservice territory to ensure an adequate pool ofpotential customers. While this may enable cen-ters to cross-subsidize the provision of services tosmaller firms, overemphasis on large companiescould draw centers away from their principal con-stituency.

All EDCs should continually consider ways toachieve greater impacts: higher income in the re-gion through rising productivity and expandedsales. This entails allocating resources to effortsthat yield the greatest returns. Not all SMEs havethe potential for significant productivity gains orgrowth, nor do all have an interest in change. To agreat extent, efforts to convince these struggling,disengaged companies to participate in programsoffered by centers are likely to fall on deaf ears.Centers could emphasize working with relativelyfewer, preferred customers (progressive compa-nies) which are more likely to succeed over time.This strategy would result in a higher return onthe centers’ investment, while also contributing tofinancial self-sufficiency.

Service Mix

All EDCs make decisions on which services toprovide to customers. The EDC Rafaela-Esperanza has based this decision on inputs fromthe business community obtained through plan-ning workshops with customers and ongoing in-teractions with firms. These mechanisms are usedto assess the needs of companies and gauge theirpotential demand for specific services. Somecenters such as the EDC Rafaela-Esperanza may

elect to offer a broad range of services, fromtraining in mechanical equipment maintenance toassistance in strategic planning. By offering abroad range of services, a center could have thepotential to address the interest of more compa-nies in the region.

Centers could also choose to emphasize smallshort-term projects or larger long-term projects.While smaller projects may be more affordablefor more companies, the evidence suggests thatlarge projects extending over a substantial periodof time are likely to lead to greater impacts as wellas contribute to financial self-sufficiency. Simi-larly, projects tailored to the needs of a specificcompany are also likely to generate greater bene-fits. Moreover, they tend to have larger marginsthan group projects, which require considerabletime to organize and implement.

The importance of being able to make productsbetter, faster and cheaper will intensify. This willgenerate an even greater need for the types ofservices that the EDC Rafaela-Esperanza is al-ready offering, particularly those related to orderfulfillment. However, based on analysis of im-portant global trends, sustained profitability willincreasingly be a function of the degree to whichcompanies are distinctive, providing the rightproducts in the right markets. To this end, theEDC Rafaela-Esperanza should expand and/ordevelop new services related to strategic planning,market research and product development.

If one of the goals is financial self-sufficiency,programs will need to establish prices at appropri-ate levels. Revenues need to be sufficient to covertotal fixed and variable costs. This involves strik-ing a balance— the program may not reach reve-nue targets if prices are set too low, but numerousSMEs may be priced out of the market if pricesare too high. Moreover, the willingness to pay forservices represents a lower bound on the extent ofneed within the target population. It is fairly safeto assume that companies that are willing to payfor services are likely to be at-need. However,many companies may be at-need, but as discussedabove, for a variety of reasons may be unwillingor unable to pay for services, giving rise to theneed for subsidies. That said, the provision of sub-sidies might be linked to individual companies,

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rather than to the stage of development of thecenter. As SMEs gain experience working withconsultants, the amount of the subsidy might bereduced. Finally, an assessment of the extent towhich companies in the target population arewilling to pay a particular price (relative to thefull cost) for services needs to be built into theplanning process. Centers should test prices asearly as possible and adjust them in light of actualexperience.

If customer-paid fees are insufficient to cover to-tal costs, centers will need to take steps to securelong-term funding to help defray their structuraloperating deficits, particularly as IDB funding isphased out. To this end, they will need to developa strategy to secure funding from business groups,philanthropic foundations, multilateral organiza-tions or government agencies as an intrinsic ele-ment of their business plan.26

Operations

The use of outside consultants has strengths andweaknesses. Intensive use of outside consultants

26 In this regard, it is useful to note that the United State Con-gress repealed a provision in the original legislation estab-lishing the Manufacturing Extension Partnership that man-dated that funding for centers be terminated after six years.The federally funded Manufacturing Extension Partnershipsenvisions that it will continue to provide needed funding tocenters around the country.

greatly expands the range of expertise available toSMEs in the region and is central to one aspect ofthe organization’s mission. However, the use ofoutside consultants comes with a price. Centersneed to pay for these services (which includeprofits), reducing their net earned revenues. Thisis a serious issue in the face of declining donorsupport. In addition, the use of outside consultantsmakes it more difficult to absorb the lessons ofprojects and build long-term customer relation-ships. Centers could offer certain services directlyto SMEs using their own internal staff. In thiscase, they would need to decide which servicesshould be offered directly and build internal capa-bilities accordingly. This decision should be in-formed by knowledge of what other, mainly pri-vate consultants, bring to the market. Whereverpossible, EDCs should not duplicate services al-ready offered by the private sector at an accept-able level of quality.

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Conclusion

Companies throughout Latin America and theCaribbean are under constant pressure to reducecosts, increase quality and deliver products morerapidly. However, many of these companies, par-ticularly smaller firms, have difficulty obtainingthe assistance needed to improve their perform-ance.

The evaluation of the EDC Rafaela-Esperanzademonstrates that EDCs can have a beneficial im-pact on individual SMEs as well as the broadermarket for business consulting services. In a rela-tively short period of time, it is possible to estab-lish programs that can deliver services to hun-dreds of companies in a region. Moreover, bycharging SMEs for services rendered, these or-ganizations can reduce their reliance on donororganizations for financial support. The pressureto generate revenues, to some extent, actually re-inforces the mission of EDCs by ensuring thatthey stay focused on meeting the demands ofmanufacturers in their regions. However, past acertain point, efforts to achieve financial self-sufficiency are likely to subvert the basic missionof these organizations. They may force centers toraise prices beyond the levels that some compa-nies are willing and able to afford, move awayfrom serving smaller firms or particular segmentsof the market, and focus on services that compa-nies may want, but do not necessarily need.

Providing services to as many companies as pos-sible also runs counter to another central elementof the mission of EDCs. A significant percentageof companies that participate in programs do notbenefit appreciably from the services provided tothem. EDCs waste considerable resources mar-keting services to companies that are not inter-ested in changing and providing minimal servicesthat are unlikely to result in significant perform-ance improvements within SMEs. Change re-quires effort. Therefore, larger projects with pre-ferred customers are likely to yield greater im-pacts.

EDCs need to strike an appropriate balance be-tween generating revenues, achieving significantmarket penetration and producing positive im-pacts on small manufacturers in their region. Thestrategy and operations of all centers need to bedesigned so as to reconcile these interests in amanner acceptable to all stakeholders. Within thiscontext, centers need to make critical decisionswith respect to target market, service mix and theuse of outside consultants. The particular strate-gies that each center chooses to adopt should de-pend on the goals and values of stakeholders, un-derlying market conditions and the particular fi-nancial situation that each center faces.

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Annex ICase Study: Natufarma SRL

Summary

Natufarma produces medical products based onnatural ingredients. The company was well man-aged with a network of distributors in differentregions of Argentina covering the national market.It seemed that Naturfarma had everything itneeded to become a leader in the Argentineanmarket for natural healthcare products. Therewere, however, indications of a problem. Whilethe overall market was expanding rapidly in Ar-gentina, Natufarma´s sales were relatively stag-nant and new imported products were gainingmarket position. The company considered mak-ing changes to his distribution network but insteadundertook a market research project with co-financing provided by the EDC Rafaela-Esperanza.

Background

Founded 12 years ago by Hernán Fermín, Natu-farma is located in Esperanza, province of SantaFe, Argentina. Natufarma is a pharmaceuticalcompany focusing on the production and com-mercialization of medicinal products of naturalorigin. The owner and founder started out pro-ducing healthcare products based on natural herbsand ingredients such as garlic, valerian, guaraná,fish oil, etc. Travelers began to recognize thequality of these products and regularly returned tostock up on supplies. In response, the companyexpanded its operations by establishing agree-ments with official distributors in different regionsof Argentina, particularly Buenos Aires. Thecompany also serves pharmacies through directsales.

Approximately 95 percent of sales are in Argen-tina; the remaining five percent in Uruguay. Themajor consumers of these products are individualswith high disposable incomes— a market that hasattracted other competitors such as NaturalLife

(United States), Garden House (Chile) and TopLife (Argentina). NaturalLife is currently theleader in the Argentinean market.

Natufarma currently employs 40 people in itsmodern factory and laboratory. The productionprocess (extraction, concentration, grinding, dry-ing, compression, filling and packaging) is con-ducted under the most rigorous standards of qual-ity, following generally accepted good manufac-turing practices (GMP) for pharmaceutical firms.

Problem

Sales reached roughly $2 million in 1997. How-ever, the rate of growth of the company’s saleslagged the rapid expansion in the overall marketfor natural healthcare products in Argentina. Ac-cording to Fermín, the phenomenon that triggedthe expansion of the market “was the acceptanceof alternative medicine as a means for treatingpatients.” However, Natufarma was not preparedto exploit this new opportunity. Fermín explained,“We were aware that the market was growing andnew competition was entering Argentina and tak-ing advantage of our weak position. We realizedthat big changes had to be made in our organiza-tion.”

Fermín continued, “At first we thought that theproblem was with our distribution channels andwe were ready to change them. But then the op-portunity to receive professional services throughthe EDC was there, so we decide to seek profes-sional advice.”

Fermín contacted Mauricio Caussi, responsible forthe EDC office in Esperanza, and explained theirproblem. Caussi suggested that they work withNatufarma to examine the market more closelyand develop an appropriate strategy. Caussi re-called, “Hernán Fermín, did not like the idea ofhiring consultants.” Nevertheless, the company

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decided to undertake a project with the EDC inMarch 1997. The success of the first project,prompted the company to return to the EDCRafaela-Esperanza for further assistance.

Services

Natufarma received the following assistance fromthe EDC Rafaela-Esperanza:

Market Research. The objective of this projectwas to quantify the market and analyze Natu-farma’s position in terms of consumer perceptionand market penetration. The EDC Rafaela-Esperanza identified three consulting firms thatcould provide the services required by Natu-farma— PERFIL, KPMG and Ordoñes. Followinga series of interviews with representatives of thethree companies, Natufarma selected PERFIL tocarry out the work.

PERFIL conducted an analysis of Natufarma’sstrengths, weaknesses, opportunities and threats(SWOT analysis). This analysis highlighted thefact that large firms were interested in the market,foreign companies were already making efforts togain market share and traditional pharmaceuticalfirms were planning new investments. Moreover,the study found that consumers did not recognizethe brand name “Natufarma” and that the com-pany had no identifiable image in the market.PERFIL offered three initial recommendations:change the focus of the company, reorient prod-ucts to satisfy the demand and invest more inmarketing. Focus groups were used in the secondtask to refine the recommendations. The focusgroups investigated consumer perception, patternsof product uses, brands and image, and packaging.This work was carried out in Buenos Aires inAugust 1997.

As discussed in more detail below, the project ledto a series of major changes within the firm.

Business Clinic— Human Resources

Natufarma contacted the EDC in the summer of1998 to seek additional assistance in human re-source management and to prepare an action planto improve operations. The consultant evaluatedthe situation and developed an action plan. Un-

fortunately, the project did not meet the com-pany’s expectations and no significant changeswere made to the original plan that Natufarma hadalready established based on its own assessment.For example, Natufarma had already decided toincorporate a new person to directly manage thehuman resource department with the responsibili-ties of managing salaries, evaluating personneland their needs, organizing new benefits schemesfor employees, etc. The recommendations offeredby the consultants did not seem to go far enough.

Despite the problems with the second project, thecompany has sought additional assistance fromthe EDC Rafaela-Esperanza and holds the organi-zation in high regard.

Outcomes

Natufarma has undertaken a series of changesbased on the recommendations made by PERFIL.This includes a change in the company's image,new packaging, reorganized distribution channels,improved coverage of the Buenos Aires marketand shrinkage in the number of products offeredfrom 35 to 17.

The outcomes of the company’s interaction withthe EDC can be summarized as follows:

Changes in Capabilities and Practices:

ü Adopted new approach to formulate companystrategy in relation to product lines, marketand distribution channels.

ü Introduced the concept of market researchbased on focus groups.

ü Developed new approaches to publicity andpromotion, including new brochures and anaggressive campaign to present its new image.

ü Reduced its product line from 35 products to17.

ü Reorganized distribution channels, focusingon expanding the company’s position in theBuenos Aires market.

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ü Introduced new after-sales customer services,including a new newsletter with informationregarding natural products and answers tospecific customer questions.

Immediate Impacts:

ü Reduced inventories (raw materials and fin-ished goods) as a result of reduction in prod-uct line with subsequent cost savings.

ü Improved communication with customers andgreater brand recognition.

Changed Business Performance:

ü It is expected that the changes the companyhas made will lead to increased sales in 2000.

Conclusions

EDC services can lead to substantial changeswithin companies. Natufarma transformed its

business in response to the services that they re-ceived through the EDC Rafaela-Esperanza. Inthis case, the principal service entailed an in-depthassessment of the company’s market position thatresulted in a set of recommendations specific tothe firm. Significantly, the project was conductedon a one-to-one basis.

An important role of the EDC is to evaluate andselect qualified consultants. Companies such asNatufarma are hesitant to hire consultants due totheir lack of experience and the generally poorreputation of many consulting firms. Said Fermín“companies such as ours are not ready to hire con-sultants. We need help to deal with them. Oncewe have the experience, we could continue ourway alone.” In fact, Natufarma subsequentlyhired PERFIL without the intervention of theEDC in order to continue their efforts to becomemore competitive. Natufarma has spent $60,000over the last three years on consultant services.

Chronology

Date EventFebruary 1997 Natufarma contacts Mauricio Caussi of the EDC-Esperanza to seek help with its com-

mercialization strategy.March 1997 Terms of Reference (TOR) for the project is developed and approved.April 1997 Evaluation and selection of consultants – company selects PERFIL S.A.July 1997 Market Research – RA017 begins with PERFIL SA.August 1997 Natufarma receives the report form PERFIL SA. Based on the recommendations Natu-

farma defines new product lines, makes changes in logo and company image, reorganizesdistribution channels, and reengineers certain processes. These changes were completedby April 1999.

September 1998 Natufarma begins Business Clinic – Human Resources (RA-80) to evaluate their humanresource management.

June 1999 An ISO 9000 quality audit is performed by Miguel Angel Segura, responsible for ISOprograms at the EDC.

July 1999 Natufarma signs a new contract with the EDC (Human Resources RA-212) to develop itshuman resource area and train personnel. This program will end in January 2000.

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Annex IICase Study: DBT S.A

Summary

DBT S.A. had been a successful manufacturer ofelectrical motors for electricity generators. How-ever, the company was interested in finding a lo-cal source of technical assistance. ExplainedDaniel Druetta, plant manager, “professionaltechnical assistance can constitute a significantcompetitive advantage.”

Through the EDC Rafaela-Esperanza, DBT re-ceived assistance in implementing a quality sys-tem in compliance with ISO 9000, improving theworkplace, reorganizing the production systemand adopting a new marketing strategy targeted tonew markets outside Argentina.

Background

DBT S.A., was founded in 1995, assuming controlof the manufacturing plant of CRAMACO S.A. inthe city of Sastre, Santa Fe, Argentina.CRAMACO S.A had been manufacturing rotatingelectric machines of increasing complexity since1947. Using the CRAMACO trademark, DBTcurrently offers a wide range of generators andelectric motors for different industrial uses. Salesare divided into the following products and serv-ices: 10 percent DC motors, 70 percent AC mo-tors for OEM of electricity generators and 20 per-cent repair services. DBT currently employs 60people. Annual sales for 1999 are projected at$4.6 million, a 14 percent drop from 1998. In1998, exports to Brazil, Uruguay, Colombia, Tai-wan and the United States accounted for 50 per-cent of sales. The Brazilian crisis was responsiblefor the significant reduction in exports.

The firm has the capacity to produce up to 2,500motors per year. However, it is currently operat-ing below capacity. It manufactured 1,552 units in1998 and expects to produce 1500 units in 1999.

All parts for the motors are produced in the com-pany, except for foundry parts that are orderedfrom a supplier. Manufacturing processes includedrilling, milling, turning, punching and painting.

Problem

DBT was looking for local consulting services inseveral areas, particularly in quality assurancesystems. In March 1997, the EDC invited repre-sentatives of the industrial community to partici-pate in the opening ceremony for the new organi-zation. Approximately 200 people attended, in-cluding representatives from DBT. At that time,the EDC announced that it would be offering dif-ferent programs, among them, Quality AssuranceISO 9000.

Services

DBT has received a variety of services from theEDC, including technical assistance and stafftraining, as well as participating in trade missionsto other countries. The following discussion fo-cuses on technical assistance.

Pre-certification ISO 9000 Group II. The ob-jective of the program is to pre-certify companiesfor ISO 9000. It is undertaken in three or fourstages. At every stage, companies have the op-portunity to decide whether or not to continuebased on their evaluation of the performance ofthe consultant and coordinator assigned to theproject. Miguel Segura— coordinator of qualityservices at the EDC Rafael-Esperanza— pointedout that “companies might decide to bring in newconsultants or coordinators if they are not happywith their performance.” He also stated, “it takescompanies several months to develop a qualitysystem. It is really important to give companiesthe chance to build their quality system at theirown pace.” Seven companies signed on to partici-

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pate in the ISO 9000 Group II. These includedGlutal, SICA, Clorindo Appo, Fimaco, RG Fre-nos, FACCA, and DBT. The following stageswere carried out by this group:

Program ISO 9000— Planning: (May to July1997). The activities undertaken during this initialphase include the selection of the consultant, di-agnostics and the development of an action plan.Following a competitive bid process, Abel Anto-nio Gramajo (Qualitech) was selected to provideconsulting services. Other consultants that bid onthe project included Ubatec, Cané y Arroyo Aso-ciados and Folgar Lusic y Asociados (KPMG).The diagnostic is used to establish the status of thecompany quality system. This is an importantstage of the program, necessary to establish theaction plan. Based on the results of the diagnostic,an action plan was prepared for the group as awhole; however, as Segura explained, “each indi-vidual company carries out the plan at its ownpace.”

Project ISO 9000— Stage I of Implementation(October 1997 to January 1998). Two trainingcourses are carried out during this stage: a 30-hourcourse to prepare the person responsible for im-plementation in the company, and an 8-hourcourse for the company’s quality committee. Fol-lowing training, the company designs and docu-ments its own quality system according to the ac-tion plan. The consultant visits the company twiceeach month for two to four hours, offering rec-ommendations on how best to proceed. Accordingto Segura, “the consultant adjusts the plan foreach company according to its progress.” Thecoordinator visited each company every week tomonitor progress and review documents.

Project ISO 9000— Group II - Stage II of Im-plementation (February to August 1998).During this stage, the company continues to de-velop quality manuals and document general pro-cedures, specific procedures and registers.

Project ISO 9000 – Group II - Stage III of im-plementation (September to December 1998).At this stage, 90 percent of the necessary docu-mentation was completed.

Project ISO 9000 – Group II - Stage IV of im-plementation (January to April 1999). This isthe final stage at which final adjustment are madeto the quality system, internal audits take place,corrective actions are taken, and registers are up-dated. DBT did not complete the program be-cause of financial problems and decided not toseek certification at this time.

Multiplicar II— The Multiplicar II program fo-cuses on helping companies implement the Japa-nese technique known as the 5S's to improveworkplace organization. It includes seven, two-hour meetings over a five-month period. Typi-cally, five people from the company participate inthe program. The program helped DBT to im-prove attitudes and people's behavior toward theworkplace.

Business Clinic— Organization and Manage-ment of Production. This project helped thecompanies to improve production processesthrough the application of the Theory of Con-straints (TOC). The project began with a 2.5-daytraining session covering the basic concepts ofTOC. Companies were asked to complete a ques-tionnaire addressing production problems, finan-cial situation and performance indicators (time todelivery, percentage of customer rejections, per-centage of internal rejections). Based on this data,the consultant used a simulation tool to identifycritical resource constraints and offered recom-mendations to improve the performance of theplant. Druetta explained “we already had startedto make changes in our production process beforestarting this program. Therefore, the programhelped us to assure that the work we did beforewas in the right direction. Also it helped to lever-age knowledge among personnel, create a positiveenvironment in our company and gave us a formalmethodology to tackle problems.” María VerónicaCardoso, the EDC coordinator, remembered “itwas very easy to work with DBT as they seemedto advance quickly in the implementation of rec-ommendations. They were committed to the pro-gram.”

Business Clinic— Marketing. The objective ofthis project was to support marketing efforts byproviding training in analyzing information, un-derstanding businesses better and designing ap-

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propriate strategies. As part of this effort, DBTlearned about concepts such as marketing man-agement (Kotler), competitive advantage (Porter)and the profit zone and value migration (Slywot-sky). In addition, technical assistance was pro-vided to help companies apply these conceptswithin their own firms. DBT applied differenttechniques to formulate a new sales strategy.

Outcomes

DBT has found the assistance of the EDC of greathelp. Druetta stated, “The center has been a realpartner for the company.” Although the Braziliancrisis has hurt the company it would have beenworse off without EDC assistance.

The outcomes of the company’s interaction withthe EDC can be summarized as follows:

Changes capabilities and practices:

ü Introduced a quality system based on ISO9000 and adopted the 5S technique.

ü Identified critical resource constraints basedon TOC and reorganized production to lever-age its capacity and avoid bottlenecks.

ü Adopted a new approach to formulate thecompany strategy.

ü Changed its product lines.

ü Changed its distribution channels and estab-lished a new strategic relationship with itsmain distributor.

ü Reorganized its marketing function to conductbetter research on user requirements. Basedon this research, DBT is currently developinga new product.

ü Developed a new human resource manage-ment process and improved administrationsystems.

Immediate Impacts:

ü Reduced inventories by 40 percent.

ü Reduction in scrap, rework and costs (albeitnot measured).

Changed Business Performance:

ü Although it was not easy to directly relate theservices provided by the EDC with an im-provement in sales or profits for DBT, ithelped to clarify the different alternativesavailable. The changes made allowed thecompany to grow even in the face of the Bra-zilian crisis and changed the way the companywas thinking about its strategy.

Conclusions

Successful projects lead companies to undertakenew projects. DBT has undertaken eight projectswith the EDC Rafaela-Esperanza over the pastfew years. Some of these projects, such as the ISO9000 series, were undertaken as a logical se-quence in the process of implementation. Othersgrew out of the experience and relationship withthe organization over time.

Success also requires a willingness and ability ofthe company to change. Representatives of thecompany and the EDC both remarked on thecommitment of the company to the process oftransformation. The company was interested inimproving its performance and was willing tomake necessary changes in its operations. At thesame time, companies have to be able to makeneeded investments. In this case, the companywas unable to go ahead with ISO 9000 certifica-tion due to financial constraints at that time.

In the absence of clear measures, companies findit difficult to assess the impact of the EDC on theiroverall performance. DBT “felt” that improve-ments had occurred, but found it difficult to quan-tify impacts. It is important that the EDC find away to measure benefits generated by differenttypes of projects.

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Chronology

Date EventApril 1997 DBT contacts the EDC to learn more about available programs. The EDC recommends

Multiplicar II, but DBT decides to begin with ISO 9000.August 1997 Program ISO 9000— Group 2— (RA-008). Initial diagnostic and preparation of action

plan.September1997

Company begins its participation in Multiplicar II— (RA-022) which ends in February1998.

October 1997 Program ISO 9000- Group 2— (RA-028). Second stage of pre-certification program.May 1998 Quality Assurance ISO 9000— Group 2— (RA-060). Third stage of pre-certification

program.June 1998 Business Clinic— Organization and Management of Production (RA-073).September1998

Business Clinic— Marketing (RA-078).

September1998

Quality Assurance ISO 9000 – Group 2 (RA-121) Fourth stage of pre-certification pro-gram.

January 1999 Quality Assurance ISO 9000— Group 2— (RA151). Final stage of pre-certificationprogram begins. Brazilian crisis does not allow DBT to continue with the program.

May 1999 DBT participates in the commercial mission to Chile organized by the EDC.September1999

DBT asks the EDC to carry out an internal audit of its quality system. ConsultantRamon Arroyo carries out the work and declares that DBT is ready for pre-certificationISO 9000.