Business development services (BDS) are critical in helping agricultural small and medium-sized enterprises (agri-SMEs) in emerging markets grow, improve productivity, strengthen resilience, and access necessary finance. Despite their importance, a more sophisticated model is needed to assess the cost efficiency and effectiveness of BDS programs in a comparative manner that can be applied across contexts and providers. 

Our latest work seeks to address this barrier by analyzing BDS tools and methodologies provided to agri-SMEs in East and West Africa. Through data analysis from 15 BDS providers, stakeholder interviews across the sector, and review of existing literature, this report builds on previous learnings to deepen best practices related to the needs of agri-SMEs and tools and approaches that could lead to improved BDS provision models.

BDS is effective & cost efficient in serving agri-SMEs

Overall, the study found that BDS provided to agri-SMEs is effective and cost efficient at improving outcomes related to revenue, employment, and capital raised. For enterprises in this study, the median cost of BDS provided was $2,724, which allowed those businesses to generate additional revenue, create new full-time employment (FTE) positions, and raise capital at rates multiple times the cost of the BDS.

For every $1 spent on BDS by providers, agri-SMEs generated $7 of additional revenue and raised $12 of capital. In addition, one new FTE position was created for every $617 spent on BDS.

There is a high degree of variation beneath these headline results based on the context of BDS provision (e.g., segment of recipient, objectives, market context). To further capture and explore some of these contextual nuances, the study establishes five key findings.

Finding 1: Key drivers of cost efficiency

Beneath the headline cost efficiency figures discussed above, enterprises experienced drastically different cost-efficiency outcomes based on the context of each service. While myriad factors drive the cost and efficiency of BDS provision, two primary factors were 1) the service delivery model (SDM) used and 2) the size of the enterprise being serviced — factors which were themselves intercorrelated. BDS delivered through group-based SDMs provide stronger value for money than individual SDMs in terms of outcomes of revenue and capital raised. BDS for micro and small firms is more cost efficient than BDS provided to medium-sized firms. These findings have implications for the way in which funders and providers view the efficient and effective provision of BDS. For example, group SDMs may be applicable or suitable (i.e., could drive increased cost efficiency) in more situations than currently used.

Finding 2: Enterprise fee coverage

Only 38% of the firms included in the study paid some amount for BDS received. Those that did pay for services experienced higher impact across all key metrics (e.g., revenue / FTE growth rate, revenue / FTEs created) than those not paying. Fee coverage was primarily driven by firm stage (later-stage firms more often pay fees than earlier stage firms) and SDM used (firms receiving individual SDMs tend to pay fees more often than those receiving other SDMs).

Finding 3: Segmentation approach

While BDS should be driven by enterprise-specific needs, segmenting recipients is crucial for determining the most relevant type of BDS at scale. This study finds that i) type of enterprise (e.g., cooperatives/producers vs. other agri-SMEs) and ii) maturity of enterprises are the two most commonly used segmentations. While there are numerous sophisticated segmentation approaches in existing literature, in practice providers most often use these more rudimentary approaches as a starting point (e.g., to select a broader cohort) prior to tailoring support on a more case-by-case basis.

Finding 4: Scale of provider

There is a significant gap in costs for delivering BDS and efficiency of outcomes between global (international organizations with multiple programs operating in various geographies) and local (smaller organizations operating in the region/country of its headquarters) providers. BDS via local providers ~$1k per enterprise and ~$4k via global organizations. In addition, local providers were 9X more cost efficient than global providers at boosting revenue and 10X more cost efficient in creating new jobs. These results appear to be driven by both differences in operational overhead and structure as well as varying program goals between the two types of providers.

Finding 5: Key challenges pertaining to the measurement & assessment of BDS

ISF Advisors worked closely with 15 BDS providers to collect and analyze case study data. Several recurring barriers and challenges were encountered throughout this process:

1. Data quality and sophistication: the rigor and quality of data collection varied significantly across providers, resulting in cost and performance data that is difficult to compare across different contexts or types of provider.
2. Assessment objectives and methodologies: differed significantly across the ecosystem and are often developed in an ad-hoc and isolated manner (e.g., driven by individual donors focused on specific contexts or outcomes).
3. Alignment on qualitative definitions and terminology: while BDS innately encompasses a wide-variety of services, contexts, and objectives, providers rarely align on definitions and terminology, which makes comparison difficult.

Beyond these key findings, this study revealed significant opportunities for stakeholders across the market, particularly funders, to more fully consider cost efficiency when financing or providing BDS. Currently, the sector under emphasizes these factors, leading to wide variation in cost efficiency outcomes and, as a result, a continued focus on services which are not fully optimized. Funders in particular have an opportunity to further prioritize learning about the key drivers of cost and cost efficiency in general and across different segments. With greater understanding of these drivers, funders can support providers that are delivering services that are both effective and efficient.

The BDS sector’s emphasis on rigorous learning, model validation, and information sharing has unlocked deep impact for agricultural businesses and rural communities across the world. Now, a shift is needed to bring a greater appreciation for assessing cost efficiency and effectiveness in a comparative manner. Through more standardized measurement, and greater awareness of the importance of cost and cost efficiency, funders and providers can continue to improve BDS for even greater impact.

Agricultural small- and medium-sized enterprises (agri-SMEs) are critical to the development of more inclusive and sustainable food systems. These businesses are responsible for much of the sale of inputs, food production, collection and distribution, and processing and retail of food products. However, the absence of a widely shared definition and comprehensive taxonomy of agri-SMEs stymies our view of their role in food systems. With a shared framework and language, we could more comprehensively consider the role of different types of agri-SMEs in food systems, as well as the specific types of support that would unlock their growth potential.

SAFIN commissioned ISF Advisors to develop a framework for more comprehensively considering agri-SMEs, with the goal of creating a common language that:

1. Fosters a shared understanding among actors concerned with agri-SMEs (including, but not limited to, financial service providers) about the shared features of different types of enterprises that fall under this label.
2. Proposes a new taxonomy and language to establish agri-SME segments—drawing on existing case studies and literature to illustrate how these might apply in different markets.
3. Provides a solid grounding for the assessment of different financial needs of agri-SMEs, which can inform SAFIN’s work, as well as that of other relevant actors in the agri-SME finance space.

ISF Advisors conducted a literature review of more than 80 publications, as well as consultations with key experts, including SAFIN members. This research highlights the importance of agri-SMEs in the food system, building off of current classifications of agri-SMEs to create a more comprehensive taxonomy based on key profiling dimensions. It also shows the applicability of the taxonomy across value chains and various food systems priority areas. Finally, this research presents a growth profile classification to link the agri-SME taxonomy to investability criteria and needs, allowing for a more nuanced understanding of how best to support specific segments of agri-SMEs.

A comprehensive agri-SME taxonomy

Over the last several years, significant work has been done to further understand agri-SMEs; yet this work has largely been limited to smallholder farmer, input and offtake, or service agri-SMEs. To create a more comprehensive taxonomy, this work has combined the existing, extensive segmentation within each of these agri-SME types and mapped them based on their role along the value chain. While this taxonomy will benefit from continued iteration and refinement as new business models and actors emerge, it is a useful foundation for analyzing the needs of agri-SMEs across previously siloed categories.

As can be referenced in the full learning brief, there are a number of explanatory notes that accompany this taxonomy which clarify the distinctions that have been made. Drawing from these, we highlight four key insights about the landscape that are made more transparent through this taxonomy:

1. Micro-enterprises support many of the same functions in agricultural value chains, but at a much smaller and more informal level. Considering these differences and viable pathways for micro-enterprises to “transition” to the level of an agri-SME is an important part of how many agricultural markets will continue to develop, and should be an area of continued research and support.
2. Many smallholder farmers are currently operating at a level that is comparable to many other agri-SMEs with an investability profile that largely depends on the type of operation they are running. Building on the important segmentation and pathways work that has been done over the past few years is an important way of continuing to “crack the nut” on how to support the growth of these primary producers.
3. In this taxonomy, Services agri-SMEs have been separated from Input and Offtake market agri-SMEs. The authors acknowledge that there are other ways of considering these distinctions, and that considering the market in this way is more of a reflection of how these different types have been considered in the past. While not true in all cases, for the most part Services agri-SMEs tend to operate across value chains with more of a tech focus in service delivery than Input and Output agri-SMEs. Acknowledging these distinctions can be useful in connecting funder communities that have historically been quite separate in where they have focused.
4. While agri-SMEs in this taxonomy are categorized through functional distinctions, in reality many of these agri-SMEs will run enterprises that combine different functions into a single business. Considering typical vertical and horizontal integrations of different business models is another important lens to put across this taxonomy.

Applications of a Comprehensive Taxonomy

Value-chain blueprints

There are a number of benefits to having a comprehensive taxonomy of agri-SMEs, but it is important to account for the ways in which the applicability of this taxonomy may differ across value chains and markets.

For example, in the case of rice in the Philippines: As with most staple cereal crops, the rice sector has many farmers and traders, but few processors. Given the large number of consumers, there are also many millers and retailers in the sector, though most are on the smaller end. Despite being a large producer of rice, the Philippines is also a net importer due to high demand—this is also typical of staple cereals writ large, which makes importers an important actor in these value chains. Finally, service providers in the Philippines’ rice sector are limited and focused on market linkages, again due to the large number of consumer transactions. The graphic below illustrates this case example.

The way in which this agri-SME market landscape differs from other types of value chains (such as cash tree crops, fruits and vegetables or dairy) reveals a type of market “blueprint”. This type of SME blueprint can help actors trying to transform food systems better understand the types of agri-SMEs that exist in different markets, as well as their unique needs.

Supporting different food system outcomes

Looking beyond specific value chains, the taxonomy can also be applied to specific market development objectives to understand the different roles that agri-SMEs can play in advancing those objectives. For example, the graphic below illustrates how the taxonomy can apply to the UN Food System Summit’s Action Track 4: Equitable Livelihoods. This creates a clear way to map agri-SMEs with the greatest potential to support this action track. The map can also be shared with partners who may not be familiar with the agri-SME space, enabling them to see the linkages and potential interventions that might be needed.

Conclusion

This learning brief continues the critical work of considering agri-SMEs as a distinct and definable set of enterprises, with implications for global agendas related to both SME growth and food systems transformation. We acknowledge that this is only the beginning of creating a shared definition and useful taxonomies in a sector loaded with complexity. We hope this brief forms a basis for further work and conversation related to:

• A comprehensive taxonomy of agri-SMEs, including how to continue refining the segments and sub-segments, and how to think about integrated business models.
• Defining agri-SMEs, including the global importance of an aligned language, as well as the complexities of developing thresholds and ways of considering national variation.
• The different growth profiles of agri-SMEs, including whether the six segments adequately cover the range of agri-SMEs in the market, and how such a tool could better align support—both with agri-SMEs and between collaborating organizations.
• How to better align with different food systems summit outcomes and use a shared understanding of agri-SMEs to consider the value of big intervention ideas, including around women and youth.

Market assessment: FSP perspectives of availability, quality, and affordability of BDS services

Respondents were asked to rate the various categories of BDS according to their availability, quality, and affordability. ‘Strategic planning’ and ‘digitization and data’ were the highest rated overall, but these high composite scores mask the divergence between the high perceived availability and quality, and low affordability. Meanwhile, capital structuring was among the lowest rated for all three dimensions. As the market for financial services becomes increasingly complex, particularly with the use of blended finance, the lack of high quality access to BDS that support capital structuring for FSPs may act as a constraint on the market’s ability to evolve quickly.

Build or buy: Understanding FSPs’ experiences with BDS

As part of the survey, FSPs were asked what factored into their decision to hire external BDS providers, rather than build capabilities in house via hiring or training existing staff. Of the potential factors listed, FSPs were most likely to rate ‘BDS builds in-house capabilities via skill transfer’ and ‘BDS offers access to higher quality services’ as either ‘pretty important’ or ‘very important’. The high number of respondents mentioning skill transfer suggest that FSPs are not simply choosing between ‘build or buy’, but are approaching BDS as a ‘buy and build’ opportunity. This offers insight into how BDS providers can tailor their service delivery approach to better meet FSPs’ needs—by explicitly including training and in-house integration components in their project scope.

85% of the surveyed FSPs had previously hired at least one BDS provider, and most had hired BDS providers for a range of different services. ‘Digitization and data’ was the category most frequently reported for previous BDS purchases, with ‘inclusive business design’ and ‘strategic planning’ close behind.

Balancing priorities: FSPs’ interest vs. ability and willingness to pay

When asked to indicate their interest in hiring a BDS provider in the next two years, irrespective of cost, FSPs ranked ‘strategic planning’, ‘fundraising’, and ‘digitization and data’ as their highest priorities.

However, when asked to take costs into account, the high interest in ‘strategic planning’ and ‘fundraising’ did not translate into planned purchase of services. Instead, ‘digitization and data’ was by far the most likely category for planned purchases of BDS. Coupled with the high rates of previous purchase of ‘digitization and data’ BDS, our data clearly points to the importance of this particular category of services.

Meanwhile, the lack of planned purchase for ‘strategic planning’ and ‘fundraising’ suggest that these particular BDS categories may be de-prioritized in favor of more tangible business operation services. With over half of the respondents indicating that their organization could afford to spend less than USD 25,000 on external BDS within the next year to address crucial business needs, this forced de-prioritization is natural. However, it does suggest that external financial support may be required to bridge the gap between interest and ability to purchase these types of BDS.

Further, given the limited BDS budgets, two particular questions present themselves.

1. How can donors best help FSPs in their portfolio access the skills they need for success? And,
2. How can FSPs approach and structure BDS to get the most ‘bang for the buck’?

How to lend a hand: FSP feedback on preferred donor support

Within the survey, we explicitly asked FSPs how donors could best help facilitate access to the capabilities that their organizations need to grow and succeed. In addition to the earlier data, which identified high-interest categories of BDS getting deprioritized due to cost, a key insight emerged around engaging with FSPs to jointly determine how and when BDS would be most helpful to the organization.

Consistent with our findings that FSPs are using BDS to access external skills, while also building in-house capabilities, FSPs evenly ranked ‘internal capacity building’ and ‘financial support for BDS’ when asked what type of donor support would be most helpful to their organization. Donors should actively engage with FSPs to determine which of these approaches is the best way to access new skills given the organization’s present and future needs.

Bang for the buck: FSP perspectives on key success factors for BDS engagements

Looking ahead

Given the highly diverse nature of both FSP needs and BDS markets around the world, our current data can only provide general trends and perceptions of the BDS market. To develop more specificity in these insights, there are additional steps to be taken and questions to be addressed.

In addition to deploying the survey to a larger audience to achieve a higher confidence level, ISF is planning to supplement the survey with interviews of both FSPs and BDS providers to gather deeper insight and pressure-test survey results and conclusions.

Part of the follow-up data gathering will focus on the key questions that this preliminary data raised:

• Given the dynamics identified, what role can different market participants play to ensure that quality BDS is accessible and effective in supporting the evolution of smallholder finance?
• Given the major focus on ‘digitization and data system development’ within the BDS market, how should this particular set of capabilities and tools be developed and made available in the coming years?

With access to the right tools and capabilities, FSPs will be able to better identify the needs of their smallholder customer segments and ultimately develop a stronger, more sustainable business model to meet those needs. Our data clearly show that BDS providers play a central role in this process, and ISF is committed to further understanding and positively shaping the evolution of such a critical aspect of the smallholder finance ecosystem.

Understanding the impact of inclusive financial services is crucial to closing the USD 150 billion smallholder finance gap. Since the Lab’s 2015 study on impact, new evidence and emerging data from the Mastercard Foundation RAF Learning Lab portfolio – a USD 175M portfolio including 9 partners targeting 10M smallholders across 26 countries – shows a positive impact of smallholder finance on farmer livelihoods.

Traditionally, donors have pushed for a greater understanding of farmer impact to identify which investment opportunities are most effective and also monitor performance overtime. However, private sector actors, including agribusinesses and financial institutions, are increasingly realizing that understanding the impact of their services on farmer livelihoods is fundamental to ensuring product adoption and thus enabling sustainable and scalable business models. This requires providers to understand the drivers of farmer profitability, including productivity and commodity prices, and understanding how these drivers will change overtime as farmers increase the use of capital.

Over the past few years, the sector has come a long way in understanding impact, as seen by an increase in research investments from think tanks and research institutions alike. However, the evidence gap remains significant.

Impact as we know it

As part of the Lab’s Annual Learning Review, an evaluation activity meant to capture emerging learnings from the Lab’s portfolio and identify knowledge gaps, the Lab reviewed external literature on farmer impact and found positive effects of credit and savings on farmers’ yields, income, and consumption. For example, J-PAL’s 2016 policy brief identified that the expansion of agricultural loans led to an increase in the value of agricultural output by USD 32, and an increase in the value of livestock by USD 168.  Additionally, the 2015 IPA policy brief found that agricultural loans increased output and food consumption in Zambia by USD 35 on average, ultimately improving the livelihoods of both women and youth. In regards to savings, IPA’s 2017 policy brief found that with access to formal savings accounts farmers saved more through the planting and harvesting seasons. As a result, they were able to cultivate more land, invest in more agricultural inputs, and increase their consumption

We’re also beginning to see the early stages of positive impact from Lab portfolio partners. In fact, in 2016 One Acre Fund reported an average increase of USD 137 in annual farm profits, boosting farmer income by 55% and increasing total household income by 15% on average. With higher farm profits, farmers can invest in agricultural training and financial education allowing them to reinvest into building out their company.

Acknowledging the knowledge gaps

Despite these positive findings, there remains significant knowledge gaps when it comes to farm level impact of financial services. For instance, most of the evidence today looks at the impact of the digitization of payments and to some extent short term and working capital credit. More broadly, there is little to no evidence on (1) the impact on farmer livelihoods of other financial products; (2) optimal service features for farm level impact, particularly bundled services and digital attributes; (3) the impact on gender-focused outcomes of financial services; and (4) the relationship between farmer returns and business profitability.

To address these knowledge gaps, providers, agribusinesses, and donors need to allocate resources toward improving the sector’s understanding of these four areas.

1. Impact on farmer livelihoods of other financial products: Providers need to invest in understanding how to ensure farmer returns, monitor them over time, and capture some of those returns to increase the sustainability of their business models. For example, this research could help service providers understand how much productivity and farmer income is expected to increase from asset-based loans or insurance.
2. Optimal service features for farm level impact: To date, there is little to no evidence on what service features or attributes are most effective at driving uptake, yields, and income and/or mitigating farmer and therefore business risk. This is particularly true for bundled services and digital attributes, despite the sector hype. Within the Lab’s portfolio, some players are beginning to scratch the surface. Organizations such as Opportunity International and One Acre Fund saw an increase in adoption when transitioning to digital. However, this evidence is still primarily focused on adoption and at most yields ­– with little guidance on what this means for smallholder livelihoods.
3. Gender-focused outcomes of financial services: Providers need to understand how female farmer returns from financial services may be different from that achieved by male farmer, and what service features work best to achieve gender-focused impact outcomes including financial independence and household decision making power.
4. Relationship between farmer returns and business profitability: While we are seeing increasing focus on farm level impact, there is still little evidence on the extent to which enabling higher farmer returns leads to more profitable business models for financial service providers. During the next few years the Lab’s research investment and top priority will be understanding the sustainability of different business models delivering financial services to smallholder farmers. Unpacking key drivers of financial sustainability, including the relationship between farmer and business profitability, will be a core part of this exercise.