The Market for Commercial BDS Provision to Small and ... for... · BAPPENAS GTZ RED 1 SUMMARY BDS...

Regional Economic Development (RED)

German-Indonesian Technical Cooperation Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ)

The Market for Commercial BDS Provision to Small and

Medium Enterprises -

Summary Report

Final Report May 2003

BAPPENAS GTZ RED

Table of Contents

PREFACE 1

1 SUMMARY 2

2 SITUATION AND CONSTRAINTS OF SME IN CENTRAL JAVA 6 2.1 Survey concept and design 6 2.2 General Characteristics of Enterprises 8 2.3 Markets, Performance and Constraints 10

3 DEMAND FOR COMMERCIAL BUSINESS DEVELOPMENT SERVICES 14

3.1 Which BDS are utilized when? 14 3.2 Why are BDS used? 18 3.3 Why are BDS not used ? 21 3.4 How large is the market for BDS ? 23 3.5 How will SME’s demand for BDS develop? 24

4. BDS SUPPLY AND PROVISION ON JAVA 27 4.1 Survey concept and design 27 4.2 General characteristics of Providers surveyed 28 4.3 Clients, Services and Fees 30 4.4 Performance and Business Environment 37 4.5 Marketing, Networking & Capacity Building 41

5 DOES SUPPLY MATCH DEMAND ? – SUMMARY AND CONCLUSIONS 47

6 RECOMMENDATIONS 50

ANNEX 1: TABLES FOR MARKET SURVEY ON COMMERCIAL BDS FOR

SMALL AND MEDIUM ENTERPRISES IN CENTRAL JAVA ANNEX 2: QUESTIONNAIRE FOR MARKET SURVEY ON SME

CONSTRAINTS AND DEMAND FOR BDS IN FOUR SELECTED DISTRICTS IN CENTRAL JAVA

ANNEX 3: MARKET SURVEY ON SME DEMAND FOR COMMERCIAL BDS IN SELECTED DISTRICT IN CENTRAL JAVA: DOCUMENTS OF SURVEY PRESENTATION AT BAPPENAS, JAKARTA 22 MARCH 2002

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Table of Abbreviations

ADB Asian Development Bank ASEAN Association of South East Asian Nations BDS Business Development Services GTZ Deutsche Gesellschaft für Technische Zusammenarbeit

GmbH (German Technical Cooperation) HRD Human Resource Development IDR Indonesian Rupiah ILO International Labour Organisation IT Information Technology M Manufacturing S Services SME Small and Medium Enterprises RED Small and Medium Enterprise Promotion Project TWC Transportation, Warehouse, Communication WRRA Wholesale, Retail, Restaurants, Accommodation

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P R E F A C E

BDS Market Development Approach: In recognition of international experience and best practices, business development services are regarded as private goods, normally delivered and consumed on commercial terms. The general objective of any external intervention should be to support the establishment of an effective market for BDS, which allows SME to choose from a broad range of commercial, competitively priced services that meet their re-quirements in terms of quality and scope, while at the same time ensuring that service pro-viders act demand-oriented, efficient and financially autonomously. The concept of BDS market development reflects a private sector-oriented market economy approach. It calls for focusing external interventions on substantial demand and supply constraints, while keeping market distortion as low as possible.

Figure 1: Background and overall approach

��

BDS Market

Demand

SupplyBDSP

BDSP BDSP BDSP

BDSP

SMESME

SME SME

SME SME

SMESME F

ACILITATOR

Demand Analysis

Supply Analysis

CONSTRAINTS

Intervention

Interve

ntion

BDS Market Analysis: The analysis of the demand and supply constraints is the starting point and precondition for defining interventions that may enhance the functioning of BDS markets. Therefore, within its overall approach the RED conducted a “Market Survey on SME Constraints and Demand for BDS in Selected Districts in Central Java” among some 400 SME, which was published by RED in June 2002 (first step). As a second step, in late 2002/ early 2003 the BDS supply side has been analyzed by surveying some 100 BDS pro-viders across Java, aiming at evaluating their structure, strengths and weaknesses. Scope of this report: This report combines and sums up the findings of both surveys. Based on the analysis of gaps between BDS demand for services and existing supply, ap-propriate interventions for BDS market development are outlined.

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1 S U M M A R Y

BDS Demand BDS usage and payment: With every third SME having used BDS during the last two years, BDS usage is moderate. Usage rates for specific BDS reach at maximum around 10% (Taxation, Advertisement, IT services). 83% of services were paid for by the clients. Fees paid vary greatly between less than IDR 100.000 and IDR 40 million. Usage rates, frequen-cies and fees paid increase with enterprise staffing and turnover. Main users are exporters, start-ups, and the communication & media and retail sectors. With 89% in average, willing-ness to pay is high. SME are less willing to pay for services concerning production processes and communication & correspondence (50% each). Lower willingness to pay is in most cases related to past incidence of free service provision. Users: Main reasons for BDS usage are business growth, and lack of own skills. BDS usage is strongly related to the education and age of managers: 59% of users are university-educated, and 72% younger than forty years. These groups also outperform their less edu-cated and older colleagues in terms of business performance, employment creation and in-vestment. Aside from a generally more open attitude towards professional external advice, widespread computer use among younger and well-educated managers induces higher BDS demand, in particular what concerns IT, accounting and management training services. Supply-induced demand effects: Awareness of various types of BDS among respondents is relatively high and indicates a fairly broad supply, at least what concerns main services. There is no clear-cut relation between service awareness and usage. However, there is indi-cation of location-specific availability of some services, which substantially influences re-gional BDS usage. It appears that high quality services offered by individual providers that are custom-tailored to region- and sector-specific needs can create their own demand via word of mouth within the local business community. Reasons for non-usage: The prime reason for not using BDS is the feeling to not need them. SME owners / managers are in majority confident of managing most tasks themselves, including staff training and tax matters. In addition, they draw on informal support from rela-tives, friends and business partners across a wide range of topics, consult associations on market information and for trainings, and the government on tax and information issues. Such support is particularly widely used in Jepara, the region with the lowest BDS usage. A quarter of non-users complains on high BDS prices, but concerns appear to mostly center around the perceived cost-benefit of BDS usage, against the background of free external support available from various other informal and formal sources. There is a considerable lack of market transparency and information on available BDS, in particular among less edu-cated SME owners / managers, even though this lack of information is in most cases not the prime reason for not using BDS. Market volume and trend: BDS demand can be expected to grow over the next years across nearly all service areas. Marketing services will in particular gain importance in the coming years. Strong growth, albeit from a low level, across all regions and sectors can be expected in the demand for business planning & management advice, information services, and financing-related BDS. However, for many other services, growth will primarily come from specific sectors, e.g. car repair and services what concerns technical training. A quanti-tative estimate demonstrates that, even with further demand growth, the market for BDS is still relatively small and only supporting a limited number of providers.

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BDS supply Commercial feasibility: The majority of BDS providers experienced business growth during the last year. However, even after last year’s growth, more than one-third of providers have been hardly able to obtain a turnover that is sufficient for coverage of basic operational costs. On the other hand, nearly a quarter or more of respondents have been able to mobilise sub-stantial funds for advertisement, including TV and radio spots, engage professional trainers and companies for staff training, and are obviously not doing too bad financially. This shows that it is principle possible to provide BDS to SMEs (or at least medium enterprises) on a fully commercial and financially self-sustainable base. Service oversupply: For many service segments and specific services, respectively, de-mand is still too small to support a diversified supply structure. In particular production-related services appear to be grossly over supplied in relation to demand. Equally over sup-plied seems to be ‘generalist’ training and assistance on management, marketing, business planning and finance. Consequently, the majority of providers in the aforementioned seg-ments has only been generating low turnover. Even though demand for management, mar-keting, business planning and finance-related services is projected to grow substantially, these services are likely to remain being over supplied in future. Feasible Business Models: BDS segments that can build on stable and strong demand for their main products have in general performed above average:

• Providers in the Tax / Accounting segment cover the product most demanded by SMEs. In addition, many of them have successfully ventured into related service areas, in particu-lar software installation and management advice / training, thereby capturing on the de-mand for external assistance during introduction of computer-based accounting and man-agement solutions.

• Similarly, providers of Promotion & Marketing services could build on strong demand for promotion & advertisement services, and gain complementary income from marketing, in-formation, and communication and correspondence services.

• While in general facing relatively high demand, the performance of providers of com-puter-related services has been affected by high start-up rates, which have increased competition in the segment. A number of providers have therefore started to venture into related areas, either management and accounting advice (thereby competing with provid-ers in the Tax / Accounting segment), or (internet based) marketing, promotion and infor-mation services. The survey data gives reason to question whether, outside major cities, stand-alone computer services can be provided on a commercially feasible base.

• Specialisation on ‘niche’ services, e.g. legal advice, skills training, or environmental management, or on offering an integrated support package to a specific sector, may be a feasible business model, as long as competition in that niche is not too strong. Many of the more successful providers have developed a specific sector focus, be it on commu-nication and media, retail, or hotels and restaurants.

Supply gaps / opportunities: Comparison of the results of the demand and the supply sur-veys hints at a number of more specific services that present additional business opportuni-ties for providers, namely

• Technical training and management support for car repair / service, presumably as well for (medium-scale) transport enterprises.

• Website development and web editing services, • Quality management consultancy below the ISO 9000 level, and • Skills- and attitude-oriented staff training.

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‘Marketing’ services: Several providers intend to address the increasing demand for mar-keting-related services through trade brokerage. This may be exactly what many SMEs, in particular those from the manufacturing sector, request. However, a number of SMEs may look for ‘real’ marketing advice, i.e. consultancy on prospective markets and client groups, pricing and distribution policy, their future product / service mix etc. Such services are yet widely undersupplied. Market transparency: Even though the majority of providers relies primarily on mouth propaganda to advertise their services, the number of providers advertising on billboards, in specialised publications, and even on TV and Radio should be high enough to create suffi-cient transparency on available services. The problem appears to rather lie with discontinu-ous and often changing service foci, i.e. providers moving away from their original main ser-vice area and testing other products, thereby leaving the less informed public in doubt about the kind and quality of services they actually offer. Government intervention / support: Past Government intervention and support is likely to have rather distorted than supported BDS market development. The service segments that have attracted most public financial support, namely Management & Business Planning and, to a lesser extent, Production-related services, are those where oversupply is most common and financial sustainability most endangered. Sponsorship is likely to have allowed providers to stay in the market that commercially would not have survived, with negative effects on those providers which would be commercially viable if there was not competition by subsi-dised services. Providers that have received external assistance are less focused on their main service area, thereby adding to low market transparency among less educated SME owners / managers.

Recommendations Supporting BDS Demand: Successful development of the BDS market has to address BDS demand as well as supply. A focus on BDS supply only will hardly be effective, since many supply-side constraints originate from SMEs' limited BDS usage. Particular attention should be given to policies that promote market entry, ensure and enhance public security, enhance access to commercial finance, and improve access to and reduce costs for telecommunica-tion, since the aforementioned policies have direct impact on SMEs usage of BDS. Strengthening BDS supply: The general approach to strengthen BDS supply should build on the following three pillars:

• Improving academic education in BDS-relevant areas, as difficulties to find skilled staff are among the major obstacles named by the providers surveyed. This concerns in par-ticular East Java and the areas of taxation, accounting, advertising and marketing assis-tance. Academic institutions, which are already among the main sources for training of provider staff, should as well be further encouraged to develop and offer short skills up-grading offers geared at BDS practitioners.

• Promoting provider networks (associations), which play a strong role for provider net-working, information, marketing and as source of training. Provider forums may in particu-lar focus on exchange about feasible business models, and issues related to management and controlling of a BDS provider.

• Enhancing market transparency and creating quality incentives for BDS providers, among others by associations and public institutions maintaining and publishing lists of service providers deemed to be qualified in a specific fields.

Financial support to individual providers should be awarded very selectively, if at all, and be confined to services that are clearly undersupplied in a specific region. Since small

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manufacturers are hardly reached by BDS and instead rely on informal networks for advice and support, cluster development strategies are more promising for upgrading small-scale manufacturing than creation of BDS providers with a socio-political mission.

Introduction of Voucher Programs: Voucher Programs have proved to be worthwhile in-struments for activating demand for low-cost BDS of those SME that either find BDS too ex-pensive or have problems in identifying suitable services and providers. On the supply side, voucher programs introduce basic quality standards, and feedback on voucher usage can help participating providers to identify new market opportunities and client segments yet un-covered. In East Java, where a voucher program has been implemented by SwissContact and the World Bank since 1998, the rate of BDS providers that orient on small and micro enterprises is far higher than in the other regions. Against this background, it is recom-mended to as well introduce regional Voucher Programs in Central Java. Such programs will require co-operation across district borders. Recommendations for providers: For BDS providers, it is recommended to orient on unique service offer and quality, rather than on price. The demand survey demonstrates that word of mouth within the local business strategy is a powerful promotion tool, and quality services are able to create their own demand. Judged by the results of the supply survey, investment in staff (training) appears to pay off more than investment in advertisement.

RED: For RED, it is recommended to support the establishment of a Central Java pro-vider network, with specific focus on providers of computer-related services, as a plat-form to disseminate survey findings and recommendations to the provider community, and for activities geared at upgrading the managerial capacities of network members. Further in-depth analysis is required on issues where survey data was insufficient or partly contradic-tory, in particular

• Reasons for the high number of SME in Pekalongan that have used and/or are intending to use transport-related BDS,

• Reasons for the high share of respondents from Klaten that have not used BDS in the past because they could not identify a suitable provider,

• Clarifying the understanding of marketing and of financing services, among SMEs inter-ested in such services as well as among providers of such services, in order to determine whether supply of these services really meets demand;

• Clarifying the discrepancy between SMEs low interest in production and operation assis-tance in general, and their substantial interest in quality management consultancy.

Such in-depth research should lead into identification and definition of follow-up interven-tions, e.g. in order to enhance BDS market transparency and efficiency in Klaten.

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2 S I T U A T I O N A N D C O N S T R A I N T S O F S M E I N C E N T R A L J A V A

2 . 1 S u r v e y c o n c e p t a n d d e s i g n

Demand survey: As a first step, SME demand patterns for and awareness of commercial BDS were surveyed in Central Java in early 2002. Upon design of a draft questionnaire by RED, three pilot interviews were conducted. After slight questionnaire amendment, the mar-ket survey was conducted by AC Nielsen, an international professional market research company. Permanent company staff personally interviewed the sample group of 395 SME, with each interview lasting for approximately 90 minutes. After completion, the data gathered by AC Nielsen was entered in a specialized software (SSPS) to allow for a detailed analysis by the authors of this report. First results and conclusions were presented by Mrs. Katharina Graf during a preliminary workshop and in a report published in June 2002. Survey objectives and content: Objectives of the survey were to analyze (i) the demand and potential for commercial BDS and (ii) the general business climate and internal situation of SME in Central Java. The questionnaire applied consisted of approximately 100 questions and covered the following areas: 1. General information about the enterprise in terms of business sector, years in business,

turnover, target markets, the owner’s / manager’s age, gender and education, etc.; 2. Gender specific issues, namely employment, average salary and areas of responsibility

for male and female mangers and staff; 3. The business environment such as past performance and business outlook, constraints

encountered, the respondents’ assessment of the policy environment, tax knowledge and compliance etc.;

4. More detailed analysis of current activities/capacities and development plans in the areas of (i) office / information technology and internet usage and (ii) quality control and man-agement;

5. Utilization of and demand for formal and informal Business Development Services (BDS), i.e. sources of information and support for SME for solving business problems, as well as ability and willingness of SME to pay for qualified external consultants and training, and experience with and demand for external consultancy (public and private providers of BDS);

Data and information collected should create a base line to formulate market oriented and non-distorting SME support programs and projects for the region. Target regions and sectors: For the survey, around 400 owners and managers of SMEs were interviewed. In order to complement recent studies by the ADB and ILO1, which fo-cused on provincial capitals with strong representation of the transport, trade and services sectors, the RED survey was to concentrate on medium-scale cities with strong manufactur-ing and export activity. For this purpose, the four Central Java districts of Pekalongan, Jepara, Klaten and Surakarta were selected. Special attention was given to manufacturing companies in exporting branches, namely textiles & yarns and wood & wood manufacturing (furniture), based on the assumption that dynamic and export-oriented companies are those

1 "SME Constraints and Needs with Special Focus on Gender Issues" ADB SME Development TA, Asian Development Bank,

2001 (surveying SME in Medan and Semarang); "Use and Demand for Commercial Non-Financial Services among MSE in Semarang, Indonesia", FIT Project, ILO, March 2001

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with the highest demand for external services. Hence, the sample was to comprise (i) around 50% manufacturing SME, with the remainder of respondents evenly split among (ii) services (S), (iii) wholesale, retail, restaurants & accommodation (WRRA) and (iv) transport, ware-housing & communication (TWA). Enterprise size: For classification of small and medium enterprises, a number of definitions are in use by the various Ministries, the Bureau of Statistics and foreign donor organizations involved in SME development in Indonesia. In order to simplify the duty of field workers car-rying out data collection and to allow for comparisons with the aforementioned survey by the ADB-TA, the study adopted the following definition:

• Small Enterprises (SE): 5 to 19 staff.

• Medium Enterprises (ME): 20 to 99 staff.

The sample was to include small enterprises and medium enterprises in equal shares, but to exclude micro-enterprises (less than 5 staff). Respondent structure: The actual sample structure followed the aforementioned design criteria closely (see Figure 2 below). It should be noted that in particular manufacturing and medium-scale enterprises are overrepresented. This implies that results cannot directly be compared with other surveys, namely the ADB TA SME survey, which was more focused on small enterprises from non-manufacturing sectors.

Figure 2: Respondent Structure of the RED SME Survey

Dimension Class Number Percent Jepara 96 24% Pekalongan 106 27% Surakarta 105 27%

City / Regency

Klaten 88 22% Manufacturing 201 51% Services 63 16% Wholesale, Retail, Restaurants & Accommodation 67 17%

Sector

Transport, Warehousing & Communication 64 16% Small (5-19 staff) 195 49% Size Medium (20-99 staff) 200 51%

Total All Respondents 395 100% Regional differences: The different economic structures of the four districts surveyed are reflected in specific sample compositions (Figure 3)2:

• In Jepara, wood processing and furniture manufacturing enterprises dominate the sample with 45%, followed by transportation (13%).

• The respondent structure in Pekalongan is characterised by textile and garment manufacturing (44%) and retail (12%, in particular in Batik and Garment).

• Surakarta has a very diversified respondent structure, with equipment and car ser-vices/ repair (16%), transport (12%, including courier service), the tourism industry

2 Due to multiple business activities (e.g. car or petrol trade combined with car service / repair, or furniture / textile manufac-

turing combined with retail/ export of external produce), allocation of respondents to business sectors has in some cases been arbitrarily.

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(hotels and tour & travel, 12%), communication & media (12%), and other manufac-turing (8%, in particular sports equipment) over represented in comparison to the total sample.

• Klaten has a quite balanced profile of manufacturing respondents primarily from the metal (18%), textile & garment (15%) and wood / furniture (13%) sectors. Over repre-sented in comparison to the total sample are retailers (11%), transport (10%), and restaurants & hotels (8%).

Size wise, Jepara has the largest share of medium enterprises (61%), followed by Pekalon-gan (54%). Small enterprises are over represented in Surakarta and Klaten (56% and 57%, respectively). This is primarily due wood industry enterprises surveyed in Jepara being larger than average. The same applies to retailers and, to a lesser extent, textile & garment manu-facturers in Pekalongan.

Figure 3: Sector Structure of Respondents, by City/ District:

Copyright © 2002 ACNielsen

SME Survey in Central Java

Sample of interviewed companies Base: All respondents (%)

50 54 5840

50

16 917

2017

17 1913

1818

16 18 1121 15

TOTAL JEPARA PEKALONGAN SURAKARTA KLATENTransportation/warehousing and CommunicationWholesale/Retail/Restaurant and AccommodationServiceManufacturing/ processing industries

Sample : n= 395 96 106 105 88

2 . 2 G e n e r a l C h a r a c t e r i s t i c s o f E n t e r p r i s e s

Enterprise age: 50% of surveyed SME are older than ten years, while 27% have been set up during the last five years. Young enterprises are in particular found in retail (40%), textile & garment (37%) and communication & media (TV / Radio, Wartel / warnet etc., 31%). Es-tablished enterprises dominate in transport (64%) and ‘other manufacturing’ (food, metal, sports equipment etc., 61%). Region wise, most established enterprises are found in Surkarta. Not surprisingly, more medium-scale enterprises are found among established than among young enterprises. However, some 42% of enterprises younger than 5 years are me-dium-scale, indicating strong business dynamics. Age of owner / manager: The average age of the company’s owner was 36-40 years, with age classes above 25 years represented relatively evenly. 16% of owners were above 55 years. Interviewed managers were even younger. 60% of interview partners were below 40

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years. The owner’s age is strongly related to enterprise age. However, some 15% of enter-prises older than ten years have an owner or general manager, who is below 30 years of age. This indicates that some transfer of management responsibility for established enter-prises to the next generation is under way. Education of manager: Most owners / managers are well educated. 72% visited Senior High School, 30% even graduated from university. Education is strongly correlated to age. Of those respondents that that are between 25 and 40 years old, 52% have visited University and only 17% have not visited Senior High School. 50 % of respondents above 45 years, on the other hand, have not visited Senior High School, 28% even have no or only primary edu-cation. Male respondents reported a slightly better education than female respondents (41% vs. 32% University graduates). Average education is as well higher in medium enterprises (77% vs. 67% with higher education).

Figure 4: Education of respondents, by region

Highest Level Visited Jepara Pekalongan Surakarta Klaten Total University 32 31 45 46 154 33% 29% 43% 52% 39% Senior High School 36 37 31 26 130 37% 35% 30% 30% 33% Junior High School 14 18 14 7 53 15% 17% 13% 8% 13% Elementary School / None 14 20 15 9 58 15% 19% 14% 10% 15% Total 96 106 105 88 395 100% 100% 100% 100% 1005 Education by sector: The largest shares of University graduates are found in communica-tion (72%), hotel & restaurants (63%) and retail (55%). A high number of Senior High School visitors, including a reasonable number of University graduates, are found in transport (82%) and repair & car services (77%). With 37% of respondents not having visited senior high school, the average education level in the manufacturing sector is below average. It is lowest in the food industry (56% without higher education). Respondents from Klaten tend to be better educated than average, irrespectively of their business sector (Figure 4). Gender of owners/ managers: Of the surveyed SMES, 86 % had a male owner. However, in 32% of cases, the owner’s spouse is also working in the enterprise. If furthermore consid-ering other relatives (primarily daughters and sisters) and external staff working in senior positions, only 54% of surveyed enterprises are exclusively male-managed, while 39% are run by a team of males and females. Managing couples and females are dominating tex-tile/garment and food manufacturing (70% and 75%, respectively), while non-manufacturing enterprises (in particular repair & car service and transport) are in two of three cases man-aged by males only. With 60% and 56%, respectively, male management of wood and metal processing enterprises ranges slightly above average. In regional terms, male-only man-agement is slightly higher in Jepara due to the low share of textile & garment manufacturing in the District’s sample. Gender roles: Female owners, as well as spouses and female relatives of male owners that work in the enterprise carry a variety of responsibilities, most commonly for finance and gen-eral management, but also for production in textile and food industry enterprises. Otherwise, however, the tasks assigned to male and female employees differ: Male employees are

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mostly expert technicians, supervisors, or assistants of expert technicians. Females are gen-erally employed within the administration of the company or as blue collar workers.

2 . 3 M a r k e t s , P e r f o r m a n c e a n d C o n s t r a i n t s

Turnover: The average annual turnover reported was IDR 415 million. However, the reve-nue of interviewed SMEs varies greatly. While 11% had a turnover of less than IDR 75 mil-lion, 19% had more than IDR 750 million. 11% were unable or unwilling to disclose their revenue. Annual turnover is related to the number of staff, but also dependent on the busi-ness sector. Enterprises with turnover above IDR 750 million are primarily active in the wood and metal industries, transport, retail, and hotels, while revenue below IDR 350 million is typical for SMEs in communication and media, services, and textile & garment manufactur-ing.

Figure 5: Regional Profiles

Criteria Jepara Pekalongan Surakarta Klaten Main sectors

• Wood process-ing (45%)

• Transport (13%)

• Retail (13%)

• Textile & garment (44%)

• Retail (12%) • Equipment & car re-

pair/ services (12%) • Food industry (8%)

• Equipment & car repair/ services (16%),

• Transport (12%), • Hotel & restaurants

(12%), • Communication & media

(12%) • Various manufacturing

• Metal (18%), • Garment

(15%), • Wood & furni-

ture (13%), • Retail (11%) • Transport

(10%) Exporters 31% 2% 1% 10% Selling in Prov-ince 32% 46% 58% 52%

Selling mostly locally 37% 52% 43% 38%

Past business growth 50% 58% 56% 56%

Expect busi-ness growth 66% 72% 71% 73%

In business >10 years 42% 45% 68% 46%

Attended Uni-versity 33% 29% 43% 52%

Target markets: 43% of respondents sell their products and services only or primarily locally (in their own city). This concerns in particular retail, hotels and restaurants, communication & media, and services. 46% target the Central Java market, Such regional orientation is com-mon for textile & garment, metal, food and other manufacturing, and transport. With 11%, the share of enterprises that are targeting the national and export markets is relatively low. Ex-porters are predominantly coming from the wood & furniture industry. However, it should be considered that a number of other enterprises, e.g. transporters and hotels, as well as manu-facturers and equipment service providers acting as subcontractors to exporters, are indi-rectly as well involved in and dependent on export activities. In regional terms, Jepara dis-plays the highest export orientation, followed by Klaten. Respondents from Pekalongan are in majority oriented on the local market, while those from Surakarta target primarily the pro-vincial market (Figure 5).

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Past Performance: Past performance has been good. 54% of respondents reported a growth in their business during the last two years, and only 16% a decline. Sector wise, past business development was best in other manufacturing (mainly sports equipment, 87%), ho-tels & restaurants (63%), textile & garment manufacturing (62%), communication & media (62%), and car & equipment repair/services (59%). The majority of transport enterprises (56%) reports stagnating business. The highest shares of respondents whose business de-clined during the last two years are found in metal (29%) and wood & furniture manufacturing (27%). With only 47% of respondents reporting growth, business development in Jepara was below average, among others due to increasing competition from wood & furniture manufac-turers in Surakarta and Klaten, which reported better past business development than their colleagues from Jepara. Factors: Respondents attributed their past business development primarily to increasing (43%) or stagnating / decreasing (26%) market demand. Other supporting factors were new partners (22%, in particular furniture, textile, car service, media and retail) and cooperation with similar companies (15%). 4% attributed their business success to improvements in products and customer service, and 2% to good staff, management systems and / or equip-ment. Negative factors mentioned were the economic and political instability (24%, primarily hotels, transport, media, retail, metal & furniture), increasing competition (15%, in particular metal, communication, hotels & restaurants), negative effects of exchange rate fluctuation (12%, primarily metal & transport), lack of capital (10%, mostly furniture), and problems with input supply (4%, in particular wood manufacturing in Jepara). Younger enterprises per-formed better than average, as were enterprises managed by university graduates. This indi-cates the emergence of a group of young, well educated owners/managers that aggressively identify and exploit new market opportunities and trends, thereby outperforming their older and less educated colleagues. Business outlook: The business outlook of respondents is very optimistic. 70% expect their business to grow in the next years, and only 4% expect a decline. Respondents expect pri-marily to benefit from local / domestic market growth. However, in Jepara, the district with the highest export share, 25% of all respondents expect their business to grow because of stronger sales outside Indonesia and ASEAN, while another 11% expect their market in ASEAN to grow. Proportionally, this picture also applies to companies in Klaten3. Other prominent reasons for optimism include new business partners / associates, improvements in supporting industries, and increased cooperation with similar companies. Those who expect their business to stagnate or decline are primarily concerned by insufficient or decreasing demand, lack / increasing prices of raw material, and economic and political instability, which also affects consumers. Optimism is highest among hotels & restaurants and textile & gar-ment manufacturers. It decreases with age, and increases with the manager’s education. Investment: In reaction to good business development and outlook, most SMEs have in-vested in their business. Half of respondents have (at least temporarily) recruited staff during the last twelve months, and 40% plan to employ additional staff in the next year. 35% have invested in HRD development, 28% in office and communication equipment, 29% in produc-tion equipment and 23% in facilities. Investment in HRD and office equipment has in particu-lar been common for SME in communication & media, hotels & restaurants and retail. HRD investment has also been above average in car repair and service. Wood (41%) and textile (36%) manufacturers have over proportion invested in production equipment, while 40% of hotels & restaurants and retailers have invested in their facilities. Investment has been lowest in the food industry, metal industry and transport. Overall, the likelihood to invest increases

3 cf. annex 1, Table 10 „Expected market growth“.

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with the marketing radius and the education of manager (Figure 6), and decreases with en-terprise and manager/owner age.

Figure 6: Company Investment, by Education of Manager (Highest Level Attended)



Investment in Company Performance DevelopmentBase : All Respondents (%), n = 395

28

10 9

26

16

36

21 23 21 21

51

39

20 21 21

65

44 4440

28

Recruited staff Training/ HRDInvestment

Office technology &communication

Productionmachinery

Premises & facilities

Primary School / None Junior High School

Senior High School University

in the last 12 months

Constraints: Nevertheless, 82% of respondents see their business constrained by obsta-cles. With 41%, financial problems are widespread, in particular in manufacturing and among enterprises that sell on the provincial, national or export markets. The second most frequent obstacle is high and/or increasing prices of raw materials and inputs. This concerns in par-ticular transport enterprises (fuel, spare parts), furniture manufacturers in Jepara, and metal processors. A lack of certain business skills is conceded by 19% of respondents, most com-monly among exporters (39%, relates a/o to insufficient foreign language skills) and enter-prises between 2 and 10 years in business. 17%, in particular retailers, repair / service en-terprises, and textile & garment manufacturers, complain about difficulties to find trained staff. This problem is in particular widespread in Pekalongan. Technological problems, and to a lesser extent lack of technical skills, are quite common in communication & media, for furni-ture exporters, and among young enterprises and managers, respectively, while a number of transport enterprises, hotels, restaurants and retailers, in particular in Jepara, complain about the lack of security (see Figure 7 for further details). Other obstacles include unfair competi-tion (6%, primarily felt by young enterprises and furniture exporters) and irregular / low qual-ity supply (5%, mostly food industry and retail). Most obstacles are nearly as common for SME that experienced a growth during the last years as for those whose business stagnated or declined.

12

BAPPENAS GTZ RED

Figure 7: Business obstacles of survey respondents

Sectors where obstacle is Obstacle Share Most common Not common

Other observations

Have obstacles in run-ning business 82% Food (94%), Wood (93%),

Other Manufact. (93%) Hotels& Restaurants (57%) Exporters 97%, Jepara 95%, Managers <30 years 88%. Females only 66%,

Financial problems 41% Other Manufact. (73%), Wood (59%), Textile (52%)

Communication (13%), Hotels & Restaurants (13%)

Low educated managers 53%. SME selling mostly locally only 30%, < 2 years in business only 23%.

High / increasing price of raw materials/inputs 21% Transport (46%), Wood &

Furniture (30%), Metal (30%)

Communication (6%), Other Manufact. (7%), Retail (8%)

Jepara 30%, Exporters 26%

Lack of business skills 19% Food (31%), Wood (29%) Hotels& Restaurants (3%), Transport (5%)

Exporters 39%, 2-10 years in business 22%, declining sales 23%

Lack of / difficulty to find (skilled) staff 17%

Equipmt- & Car Repair / Ser-vice (27%), Food (25%), Retail (23%), Textile (22%)

Transport (3%) Pekalongan 24%, Solo only 9%, < 2 years in business 27%, Managers > 55 years 25%

Technology and pro-duction process prob-lems

14% Communication (44%), Media & Print (23%), Wood (20%)

Retail (5%), Other Manu-fact. (7%), Transport (8%)

Exporters 23% Managers <30 years 25%. SME > 10 years in business only 10%.

Lack of security 11% Transport (33%), Hotel & Restaurants (23%), Retail (18%)

Food (0%), Textile (3%) Jepara 18%, medium enterprises 18%

Lack of technical skills 9% Media % Print (23%), Com-munication (13%), Wood (12%)

Other Manufact. (0%), Hotel & Restaurants (3%)

Jepara 15%, Exporters 16%, < 2 years in business 15%. Low educated managers only 3%

High / unfair competi-tion 6% Communication (13%), Wood

(11%) Media & Print, Services, Other Manufact. (all 0%)

< 2 years in business 12%, Managers <30 years 11%

Raw material / input access & quality 5% Retail (18%), Food (13%)

Communication. Media, Hotel & Restaurants, Transport (all 0%)

Jepara 10%, Exporters 10%

13

BAPPENAS GTZ RED

3 D E M A N D F O R C O M M E R C I A L B U S I N E S S D E V E L O P M E N T S E R V I C E S

3 . 1 W h i c h B D S a r e u t i l i z e d w h e n ?

BDS usage and payment: Overall usage of BDS, as stated by survey respondents, is mod-erate. Every third enterprise used BDS during the last two years. However, usage rates for specific BDS reach at maximum around 10% (Taxation, Advertisement, IT services), and range in most cases only around 3-6% of respondents (Figure 8). 19% of all respondents (56% of BDS users) have used more than one service, single enterprises even seven to twelve different services. In average, every SME surveyed has used 0.83 services during the last two years. 83% of services were paid for by the clients. Fees paid vary greatly: While 20% of users paid less than IDR 500.000 (USD 50) for a service, 10% paid more than IDR 10 million (USD 1.000). The maximum fee paid for one service (advertisement) was IDR 40 million (USD 4,000), the maximum total BDS payment per respondent during the last year IDR 55 million (USD 5,500). Fees also differ by type of BDS: Transport-related BDS, advertisement/promotion and legal services top the list with average fees above IDR 3 million, while the lowest fees were charged for information ser-vices, marketing advice, and business planning and management advice.

Figure 8: BDS usage and willingness to pay

Service area

Used service within last 2

years Paid for service*)

Willing to pay for

service**)

Average fee paid (mil-

lion IDR)*)

Tax advice 12% 92% 96% 1.51 Advertisement / promotion 11% 87% 96% 4.13 IT services (incl. Hardware, software) 9% 97% 95% 1.38 Management training 7% 68% 79% 2.00 Technical training 7% 53% 84% 1.56 Transport-related BDS 6% 100% 97% 5.95 Accounting 5% 89% 89% 2.86 Marketing advice 4% 62% 87% 0.25 Legal advice 4% 100% 100% 3.25 Information services 3% 50% 89% 0.67 Production & operation assistance 3% 71% 50% 3.50 Business Planning & management advice 2% 100% 82% N/a Communication & correspondence 2% 100% 50% 0.67 Financing advice 1% 66% 83% 1.00 (Average of) All services 32% 83% 89% No service / No answer 68% *) Of those respondents who used the service during the last year. **) Percent of those respondents that feel to need the service during the next year.

Usage and turnover: BDS usage rate increases with enterprise staffing and turnover. While only one out of six enterprises with less than IDR 75m turnover seeks commercial assis-tance, more than one-third of medium-scale enterprises do so. Among the largest sample respondents, those with turnover exceeding IDR 1.5 billion, usage rates even exceed 50%.

14

BAPPENAS GTZ RED

Medium-scale enterprises seek more frequently accounting and IT services, management training, transport-related BDS and advertisement / promotion. On the other hand, business planning advice, communication and correspondence services and production & operation assistance are more often used by small enterprises. It appears that medium-scale enter-prises request more complex and thus more expensive services than small enterprises, as they pay significantly higher fees, in particular what concerns tax and legal advice, IT ser-vices, transport-related BDS and advertisement / promotion. While only 3% of respondents with less than IDR 150m turnover spent more than IDR 2m on BDS, 25% of respondents with turnover exceeding 750m IDR did so (Figure 9).

Figure 9: BDS usage and payment in relation to enterprise turnover

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38 -75m Rp.

75-150 m Rp.

150-350 m Rp.

350-750 m Rp.

750-1.500 m Rp.

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Sector: Utilization of BDS varies strongly according to sector: • It is highest in communication, media and business services (60%), followed by retail

(42%). These sectors are in particular heavy users of tax advice and IT services (each service 18-20% usage in both sectors) and advertisement / promotion (24% in communi-cation & media, 18% in retail). Communication & media enterprises make also strong use of management training, technical training, accounting and information services. More-over, both sectors use marketing services above average. Half of the communication & media enterprises and retailers that used BDS spent more than IDR 2 million for the ser-vices. As retailers tend to have a high turnover, they contribute strongly to the high BDS payment in larger turnover classes.

• Average BDS usage in manufacturing is only 29%, with metal (36%) and textile/garment (34%) ranging above average. Metal processors are above average using technical train-ing (11%), while a considerable part of textile & garment manufacturers used transport-related BDS (19%, see also below) and advertisement services (16%). In the furniture industry, BDS usage is only 24%, roughly half of which relates to tax advice. Other manufacturers (mostly food and sports equipment) use BDS only occasionally (19% us-age, half of which is advertisement/promotion). While 50% of textile & garment manufac-turers that used BDS spent more than IDR 2 million on the services, in furniture it is 37%, but in metal processing only 14%.

15

BAPPENAS GTZ RED

• For hotels & restaurants and equipment / car repair & services, BDS usage is, with 30%, roughly around average. Hotels & restaurants use primarily management training, advertisement, legal and IT services. Equipment / car repair & service enterprises use in particular tax advice, promotion / advertisement, accountancy and technical training . 57% of hotels and restaurants that engaged BDS used three or more services simultaneously and paid more than IDR 2 million on the services, while it is 33% with equipment / car re-pair & services.

• The lowest BDS usage rate is found in the transport sector (15%). 50% of those few that engaged BDS, however, are heavy users, which used more than three different types of BDS, including tax advice, IT services, business planning / management advice, technical & management training, legal services and/or promotion, and paid more than IDR 2 million on those services.

Target markets: Exporting SME employ BDS to a significantly higher level then non-exporters (43% and 30% respectively). The difference concerns most prominently legal ser-vices, which are more than three times as often used by exporters than by non-exporters (10% vs. 3%) – this indicates an important function in contract formulation, negotiation and mediation taken over by lawyers in export business. Other services that are employed more often by exporters are technical training (12% vs. 6%), IT (14% vs. 8%), information services (7% vs. 2%), taxation (19% vs. 11%) and accountancy (7% vs. 5%). In the last two cases, higher usage rates are likely to primarily relate to higher than average turnover of exporters rather than to the export activity itself. Non-exporters, on the other hand, are more likely to engage management training (7% non-exporters vs. 2% exporters) and advertisement / pro-motion services (12% vs. 10%). Enterprise age: Start-ups, e.g. enterprises that have been less than 2 years in business used, with 54% average usage rate, BDS highly over proportion. 50% of BDS users less than 2 years in business have used more than one service, 21% even more than three services. They request a broad variety of services, and are in particular over represented among users of accountancy (12%), Tax (19%), IT (23%), legal (8%), and advertisement (27%) services. While young enterprises paid less than average for accounting services, their payment on IT, legal and advertisement services is far above average. A prime driving force in BDS demand appears to be the need for start-up assistance in the areas of enterprise formalization and initial operational and market development. Only 23% of start-ups mentioned to be con-strained by financial problems. Obviously, most have excellent financial background, either from previous business activities or their extended family. Business performance: Good business performance relates partly to the use of BDS. 35% of SME that reported an increase in their business employed BDS, compared to 32% with stagnating and 22% with decreasing business. The most significant differences are with ad-vertisement / promotion services, which were employed by 15% of growing enterprises, 9% of stagnating businesses, but only 5% of SME with declining business. For most other ser-vices, differences between growing and stagnating businesses are insignificant. However, declining businesses used significantly less accountancy services, management and techni-cal training, transport-related BDS and marketing advice. The data does not allow a final conclusion on the causality, i.e. whether business performance influences the use of BDS, or the business of BDS users has benefited from the services used. Most probably, both is the case. Region: Utilization patterns for commercial BDS differ strongly between the regions. Most BDS users during the last two years are found in Pekalongan (41%) and Klaten (36%), while usage rates in Surakarta (26%) and Jepara (24%) are far lower. Moreover, 13% of respon-dents in Pekalongan and Surakarta, and 11% in Klaten, have used three or more different services during the last two years, while it is only 6% in Jepara. Respondents from Pekalon-

16

BAPPENAS GTZ RED

gan spent more than double as average on BDS, and nearly eight times as much as those from Jepara (Figure 10).In Pekalongan, use of transport-related BDS (19%), advertisement and promotion (19%) and tax advice (17%) is far above average, while in Klaten it is IT ser-vices (14%), management training (10%), accounting services (9%) and marketing advice (6%). In Jepara, service usage is in particular low what concerns advertisement / promotion and IT services (each only 3%) and technical training (only 4%). To a certain extent, these regional differences result from the different sample structure in each region (e.g. more small enterprises in Surakarta, several large retailers in Pekalongan, see also figure 5 further above). However, they also point at significant differences between the regional BDS mar-kets, which will be analyzed further below.

Figure 10: BDS Usage and Payment, By Region



BDS Usage and PaymentBase : All Respondents (%), n = 395

in the last 2 years in the last 12 months

0%

5%10%

15%20%

25%30%

35%40%

45%

Jepara Pekalongan Solo Klaten

BD

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2,0

2,5

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t, ID

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1 BDS used 2 BDS used3 BDS used >3 BDS usedAverage payment (all respondents)

Willingness to pay: Willingness to pay for services is high. On average, 89% of the respon-dents planning to employ BDS in the future are willing to pay for these services. The willing-ness is particularly high with regard to tax advice, IT services, legal advice, transportation and promotion & advertising, with for each service more than 95% of companies prepared to pay. SME are less willing to pay for services concerning production processes and commu-nication & correspondence (50% each). Lower willingness to pay is in most cases related to past incidence of free service provision (see figure 8 above). In some cases, respondents obviously expect their franchisers / suppliers to take over payment, in particular what con-cerns services (car repair, photo studios) and car retailers. Medium-sized companies are more often willing to pay for BDS than small enterprises, and it would be interesting to study, whether incidence of free / subsidised service provision by the government or donors has affected willingness to pay, in particular what concerns management and technical training and advice to smaller manufacturers.

17

BAPPENAS GTZ RED

Consistence with other surveys: These findings correspond essentially with the findings of a similar ADB study on BDS usage in Semarang and Medan4. That study had yielded an average BDS usage rate of 28% during the last three years. The higher usage rate deter-mined by the RED survey (32 % during the last two years) can essentially be attributed to the higher share of medium-scale enterprises (50% compared to 20% in the ADB survey). Simi-larly, the ADB study also yielded • an 89% willingness to pay for services • advertisement / promotion, tax advice and IT services as most-used BDS, • a trend for BDS expenditure and usage to rise with turnover, • lower than average BDS usage in the manufacturing and transport sectors, • only loose relation between business performance and BDS usage, and • the existence of significant regional differences in BDS usage. Main differences concern a significantly higher rate of multiple BDS users observed in this RED survey, and a 50% higher usage rate of IT services. Both differences may partly be at-tributed to the higher share of medium-scale enterprises in the RED sample, but may as well indicate new demand trends. Clearly new is the trend for heavy BDS investment by business start-ups. The ADB survey had yielded low BDS usage rates among enterprises less than 2 years in business. Instead, that survey recorded over proportion BDS investment of enter-prises that were 2-5 years in business, albeit with low average fees paid.

3 . 2 W h y a r e B D S u s e d ?

Demand-side patterns Usage motivations: Asked for their reason to use BDS, 69% said that their good business development made them needing the service, while 59% pointed at a lack of own skills. Business growth was in particularly cited by users of accounting, IT, legal and advertisement services, management advice and training. Lack of knowledge was the most common reason for using tax and marketing advice. Some 10% each mentioned “advice of colleagues” or “our competitors use it” as reasons. A few respondents also pointed at their desires to “im-prove competitiveness”, “improve standing with clients and public offices5”, or reported to have used a lawyer to assist them in business formalization. The role of education: While ‘business growth’ is subjectively the most important motivation to use BDS, this does neither explain why only 35% of growing enterprises employed BDS, nor why usage rates are almost as high for stagnant as for growing businesses. Data analy-sis reveals, that it is in fact the manager’s education that determines BDS usage: Nearly half of those managers that attended University employed BDS in the past, but only 21% of those companies with lower educated managers. The only exemption are communication and transport-related services, which are requested to the same extent by managers of all educa-tional levels. SME managers who completed only elementary school only did not employ any BDS except for captioned communication and transportation services. University-educated managers use substantially more often several services simultaneously, and spend almost double as average on BDS. They are also better aware of BDS available (Figure 11). It should be recalled that university-educated managers outperform their less-educated col- 4 "SME Constraints and Needs with Special Focus on Gender Issues" ADB SME Development TA Policy Paper No. 6, Asian

Development Bank, 2001, “Development of BDS Markets in Indonesia – Impact Assessment of Selected Programs” ADB SME Development TA Background Report, Asian Development Bank, 2002.

5 Reference was among others made to Dinas Parawisata, i.e. the local tourism office.

18

BAPPENAS GTZ RED

leagues also with respect to business performance, employment creation and investment (see Section 2.3 and Figure 6 above).

Figure 11: Relation Between Education and BDS Awareness / Usage

Share of respondents that are / have

Highest level attended aware of

at least one BDS

aware of more than 6

BDS used BDS*)

used more than 2 BDS*)

Average BDS payment

('000 IDR, all respon-dents)**)

Elementary School / None 79% 12% 9% 0% 80Junior High School 83% 17% 21% 4% 845Senior High School 89% 38% 27% 8% 726University 98% 53% 48% 20% 2.026All respondents 90% 37% 32% 11% 1.147*) during the last two years **) during the last year

Computer use: A key driving force for BDS use is the utilization of computers in the busi-ness. Aside from IT services, which have been requested by 25% of computer users, com-puter usage also affects employment of other BDS, most prominently accounting services and management training. 13% of computer users utilized accounting services, compared to 1% of none-users. With management training, the relation is 16% to 2%. Consequently, 56% of computer owners used BDS, and 29% three or more services simultaneously. For com-parison, only 20% of non-computer owners used BDS, and only 2% three or more services. Computer usage is closely related to education: 54% of university attendants, but only 8% of managers that visited only primary or secondary school use IT in their business. Computers are as well more frequently found in medium than small enterprises (42% vs. 22%). The role of age: Similar observations as for education can be made for the relation between age of manager and BDS and IT usage. While 45% of managers younger than 30 years and 41% of those between 30 and 40 years have used BDS during the last two years, only 16% older than 55 years did so. However, differences concerning average BDS expenditure be-tween age groups are less significant than for education levels. Managers older than 55 years spent almost as much on BDS as their younger colleagues, and only BDS expenditure in the age group 40-55 is significantly lower than average. Again, IT usage is an important transmission mechanism: 54% of managers below 30 years, and 47% between 30 and 40, use computers, compared to 16% that are older than 55 years. However, education is closely correlated with age, with younger managers in tendency being better educated, and it may therefore well be possible that such age group differences primarily reflect different education levels6. Supply-induced effects BDS awareness: Awareness of various types of BDS among respondents is fairly high. In average, each respondent was able to name some six different services. More than 50% of respondents are aware of the existence of accountancy, taxation, law, promotion & advertis-ing, and marketing services in their region, which indicates the existence of a fairly broad developed local service supply. However, less than one-third of respondents are aware of business planning & management, production & operation, communication & correspon- 6 A gender-specific analysis reveals that male-managed enterprises use BDS more frequently (34%) than those managed by

a couple (29%) or by females (24%). However, it should be noted in this context that (i) managing couples tend to be older than 40 years, as most younger spouses are still occupied with raising children, and (ii) female-managed enterprises tend to be relatively small. Against this background, gender-specific differences in BDS usage are not significant.

19

BAPPENAS GTZ RED

dence and transport-related BDS. Awareness of services varies considerably among regions: In Klaten, e.g., awareness of management training, technical training, business planning & management, and production & operation BDS is more than double as high as in Pekalon-gan. On the other hand, nearly three times as much respondents in Jepara and Pekalongan as in Klaten were aware of transport-related BDS (Figure 12).

Figure 12: Awareness of BDS

Best known Least known Service area Average Awareness

Ratio Users / Aware of in by in by

Law 64% 6% Pekalongan 70% Surakarta 56% Taxation 59% 21% Pekalongan 69% Surakarta 51% Accountancy 54% 9% Klaten 65% Surakarta 48% Promotion/advertising 53% 21% Pekalongan 62% Jepara 43% Marketing 50% 8% Klaten 66% Pekalongan 38%

IT 43% 20% Klaten, Jepara 47% Pekalongan 36%

Management training 41% 16% Klaten 56% Pekalongan 28% Finance 41% 3% Klaten 56% Pekalongan 28% Technical training 40% 16% Klaten 58% Pekalongan 27% Information 36% 8% Klaten 49% Pekalongan 25% Transport-related 33% 18% Jepara 49% Klaten 18% Business planning & management 25% 7% Klaten 36% Pekalongan 18% Production and operation 25% 10% Klaten 39% Pekalongan 18%

Communication & correspondence 24% 6% Klaten 31% Pekalongan Surakarta 19%

Any service 90% 14% Klaten 95% Jepara Surakarta 87%

Awareness and usage: There is no clear-cut relation between BDS awareness and usage. While every fifth SME that is aware of taxation, advertisement or IT services use these ser-vices, with legal services it is only one out of sixteen. The same concerns regional patterns: While, e.g., awareness of IT services is second-lowest in Surakarta, usage of such services is highest there. Conversely, awareness of business planning & management services is highest in Klaten, but usage there lowest. However, in a number of cases, higher regional awareness coincides with higher service usage. Klaten has not only the highest awareness, but also the highest usage of technical and management training, production & operation, and information services. In Pekalongan, high awareness of taxation, legal and promotion services and transport-related BDS coincides with the highest usage of such services. Informal referral mechanisms: In general, informal referral, i.e. usage of a specific service on advice of a (business) friend or because a competitor uses it, plays only a minor role as reason for BDS usage. However, certain services, namely management training, technical training, production & operation assistance, transport-related BDS, marketing advice and information services, have in 15-25% of cases been used because of informal referral. A point in case is transport-related BDS: Nine out of ten transport-related BDS have been used in Pekalongan, yielding a 19% usage rate in this city, compared to 1% in all other regions surveyed. 20% of users in Pekalongan have used the service on a (business) friend’s advice. Moreover, the average fee paid for this service in Pekalongan was, with IDR 5.5 million, (USD 500), relatively high. It appears that specific, high quality services offered by individual providers can create their own demand via word of mouth within the local business commu-nity. Such supply-induced effects of quality services that are adapted to the (sector-specific)

20

BAPPENAS GTZ RED

needs of the local business community would be a plausible explanation for the regional variation in BDS usage observed. However, further analysis, e.g. by means of focal group discussions, is required to verify this assumption.

3 . 3 W h y a r e B D S n o t u s e d ?

No need: The prime reason given by survey respondents for not using BDS is the feeling to not need these services (86% of non-users). However, more than half of non-users have either experienced business stagnation or decline during the last year, or state to be con-strained by financial problems, lack of business or technical skills, or difficulties in obtaining raw material / inputs or qualified staff. Not all of these problems may be solved with external assistance – the current situation of the Indonesian banking sector, e.g., precludes many SMEs from access to loan finance. Nevertheless, for many non-users, there appears to be an objective need to look for qualified external assistance. The subjective feeling to ‘not need BDS’ may therefore in many cases well root in limited information and the absence of any own direct experience on the potential benefits of BDS. Internal capacities: SME interviewed stated that most business challenges and problems are currently solved in-house. More than 63% of the companies interviewed are convinced to manage a broad variety of tasks themselves, e.g. business planning, production processes, technical issues, communication, transportation, marketing, finance and management. In-house training of staff is very common: 43% of respondents that reported past quality prob-lems have conducted internal staff training to solve the problem, compared to 8% that sent their staff to external training on quality matters7. Only when it comes to accounting, taxation or legal problems, more SME seek for external assistance. Still, more then 40 % of SME in-terviewed solve problems in captioned fields in-house, More than half of respondents rate themselves as ‘knowledgeable’ or ‘very knowledgeable’ on tax matters. Informal support: Only 1% of non-users pointed at other available sources of support as reason for not using BDS. However, when asked separately to whom they turn in case of business problems, on average 14% of respondents stated to ask family members, 12% friends, and 10% business colleagues. Only 5% referred to external consultants. The family is in particular consulted on financial, accounting, legal, tax and management matters, while friends and business colleagues assist in problems relating to communication & correspon-dence, information, promotion, marketing, accounting, law and production & operation. Inter-estingly, support by family members is more frequently claimed in the manufacturing sector, and with 19% highest for manufacturing companies in Jepara, hinting at clusterXXXXXs of businesses in the same sector run by family members. Moreover, respondents in Jepara consult, with 17%, over proportion business friends and colleagues, which hints at a strong role of foreign buyers as source of information and advice. Clients (89%), traders (29%), suppliers (25%) and trade fairs (17%) are important sources of market information. Also common appears to be outsourcing of more sophisticated orders to specialised local compa-nies in order to avoid quality problems. Such "external" support available from family mem-bers and (business) friends may lead many SMEs to feel no need for BDS, even though the informal assistance received may not always be of professional quality. Support from membership organisations: Besides receiving advice from family and friends, SME are supported by business organisations (cooperatives, chambers, industry associations etc.). Cooperatives are in general considered to be most instrumental by the

7 This may explain most of the difference between the 35% of SMEs that have invested in HRD training, and the 7% each that

have used external management training and technical training, respectively. However, further analysis of staff training pat-terns and mechanisms, e.g. by means of focal group discussions, might be worthwhile.

21

BAPPENAS GTZ RED

respondents. Almost one quarter are members of a cooperative, with a higher level of me-dium size enterprises (29%) than small enterprises (21%). Nevertheless, in average only 2% of respondents consult business organisations, primarily on problems related to marketing, information and management. However, some smaller industry associations seem to be quite instrumental in supporting their specific sector. Radio stations, e.g., reported to have sent a number of staff to technical or broadcasting training organised by their national asso-ciation. Furthermore, 13% of SME use business associations to gather market information. Government support: What concerns the government, support is primarily sought on taxa-tion matters (18% of all respondents, compared to 12% consulting commercial providers). This concerns most prominently Jepara and Klaten, where 29% and 21%, respectively, con-sult government agencies (presumably the tax office) on tax issues. Some 3-5% of respon-dents consult government agencies on problems related to marketing, information, promotion and finance. This concerns mostly companies from Jepara, some 10% of which consult gov-ernment agencies in case of problems in the a/m areas. Across all regions, 24% of respon-dents rated the Department for Industry and Trade, 8% the Department of Cooperatives, and some 6% various other government offices and agencies as helpful and supportive. Service price: 22% of BDS non-users (16% of all respondents) named high service costs as reason for not utilising commercial BDS. Companies with less than IDR 40 million turnover may have objective problems to finance more expensive services. However, such companies only account for 2% of the sample, and do not account for the majority of respondents con-cerned about service prices. In fact, more than half of SME that have not used BDS for its price are medium-scale companies, which should be able to finance commercial services. Therefore, concerns appear to mostly centre around the perceived cost-benefit of BDS us-age, against the background that free external support may be available from various other informal and formal sources. This conclusion is also in line with the observation that in Jepara, where use of other external sources of assistance is most common, a much larger portion of non-users complained (37%) about service prices than in other regions. Service price is as well important for companies with a pessimistic market and business outlook, which obviously don’t expect to gain much from operational or management improvement. Service access and availability: 6% of non-users stated to not have used BDS because they did not know where to find a consultant, while 2% said there was no qualified consultant available. It should also be noted, that 10% of respondents are not aware of any BDS in their region, and 25% only of 1-3 services (mostly law, tax, accounting and/or advertisement). This concerns in particular managers with only elementary or junior high school education, 60% of which are at maximum aware of three BDS provided in their region. It can be concluded that there is a considerable lack of market transparency and information on available BDS, in particular among less educated SME owners / managers, even though this lack of informa-tion is in most cases not the prime reason for not using BDS. There may as well be certain gaps in local service supply, in particular in Klaten, where 10% of respondents (most promi-nently from the services sector) did not use BDS because they could not find an appropriate consultant.

3 . 4 H o w l a r g e i s t h e m a r k e t f o r B D S ?

Methodology: Based on information on BDS expenditure collected by the survey, and data from the BPS enterprise census 1996, is it possible to estimate the total market volume for BDS provision to SMEs (Figure 13). In this context, the following is worth noting:

• To account for inflation, which was in particular high in 1998, the turnover classes of the 1996 BPS enterprise census have been upwardly adjusted by 50% before applying aver-age BDS expenditure per SME and turnover class as determined from the RED survey.

22

BAPPENAS GTZ RED

• The BPS enterprise census excluded agricultural enterprises, the number of which may be estimated around 40 million. BDS demand from agricultural enterprises is not consid-ered in the market volume estimate presented.

• The survey does not yield information on BDS expenditure of micro-enterprises with less than five staff. Therefore, BDS expenditure of enterprises in the lowest turnover class has not been considered in the market volume estimate presented.

• Since the survey focused on medium-scale enterprises, the lower turnover classes (38-74 and 75-149 million IDR) are underrepresented. Respondent numbers in these classes may be too small to derive an average BDS expenditure that is representative for these turnover classes as a whole.

• The BPS census data includes some 10,000 large enterprises with more than 100 staff. Since such large enterprises are likely to spend more on BDS than medium-scale enter-prises, the market volume in the largest turnover class (>= 1 bn IDR acc. to BPS, >= 1.5 bn IDR inflation adjusted, marked in orange in Figure 51) may be considerably underes-timated.

Figure 13: Estimation of BDS market volume (excluding services to agriculture and micro-enterprises), by enterprise turnover class

Turnover class (million IDR)

according to BPS enter-prise census 1996 Inflation adjusted

No. of enterprises

according to BPS enter-

prise census 1996

Avg. BDS expenditure

per enterprise, in ‘000 IDR

(acc. to RED survey)

Market volume

(billion IDR)

Supported providers

@ 0.25 bn IDR turnover/ provider

< 25 < 38 13,865,940 excluded 25 - 49 38 - 74 1,259,506 226 285 25% 1.140 50 - 99 75 - 149 641,492 315 202 18% 807

100-499 150 - 749 509,988 601 307 27% 1.226 500-999 750 - 1449 91,490 1,388 127 11% 508 > = 1000 >= 1500 58,517 3,450 202 18% 807

Total / Average 16,426,933 438 1,121 100% 4,488 Remarks: The aforementioned comments imply that a certain caution is required with re-spect to absolute figures. This holds even more through in view of the supply-induced de-mand effects, i.e. specific local supply ‘creating its own demand’, described in the previous chapter. If expenditure on transport-related BDS in Pekalongan were excluded, the estimated market volume would be 30% lower. To come to a reliable estimate, more than 4 regions would have to be surveyed8, and the share of small enterprises would have to be higher. Conclusions: Nevertheless, the estimate allows for the following conclusions:

• The overall volume of the Indonesian BDS market is, with some 1,100 billion IDR (110 million USD) plus/ minus 40%, still relatively small. Under the assumption that 250 million IDR turnover is required for cost-recovery of a small-scale BDS provider with more than one professional staff, only some 4,500 professional small-scale BDS providers are sup-ported.

8 Applying the same methodology based on average BDS expenditure yielded by an SME survey in the cities of Medan and

Semarang, the ADB SME Development TA estimated the Indonesian BDS market at only IDR 400 billion. This demon-strates how sensitive such estimates are to specific regional usage patterns and supply-induced effects.

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BAPPENAS GTZ RED

• Aside from large enterprises, the most attractive client group is not medium-scale enter-prises, but small enterprises with 38-750 million IDR annual turnover. These enterprises account for 60% of BDS purchase from SMEs (excluding micro). Although medium scale enterprises above 750 million IDR annual turnover pay in average more for BDS, their absolute number is relatively small.

3 . 5 H o w w i l l S M E ’ s d e m a n d f o r B D S d e v e l o p ?

General trend: In general, SMEs' usage of BDS can be expected to rise in future, as it is promoted by demographic change. In some 25% of SME surveyed, the owner was older than 50 years. Most of these enterprises will over the next ten years transfer management into younger hands, either inside the family or externally. As these new managers are likely to be better educated but less experienced, they should use more BDS than the current owners / managers. Moreover, as more than 50% of the Indonesian population is younger than 25 years, the current trend towards enterprise start-up (nearly 30% of the SME surveyed were younger than five years) is likely to continue and even intensify. This implies further strong demand for (post -) start-up assistance. Since such new entrants will in average be better educated, they are also likely to display a more open attitude towards BDS. BDS needed in future: Even without these upcoming changes in the SME population, BDS demand can be expected to rise. When asked for most needed services during the next twelve month, 51% named at least one service. In other words: Every fourth SME that has so far not used BDS sees a need to use services during the coming year. This stated need will not in all cases translate into usage. Some skepticism is in particular appropriate what con-cerns marketing and financing BDS, since ‘need’ is substantially higher than current service usage. Nevertheless, the result gives good reason to believe that the share of overall BDS users among SME will increase in future. The difference between BDS usage and future need is most pronounced in Klaten and in the services sector, and lowest in Surakarta and in the transport sector. Services needed: For almost all types of BDS, the stated ‘need’ is higher than current us-age. The only exception is communication & correspondence and legal services. However, since the need for legal support tends to come unplanned, and start-ups (whose demand is not included here) are key users of legal advice, this should be no reason of concern for the legal profession. The most needed services in the future are marketing, promotion & adver-tising, taxation, management training and IT (incl. hardware and software). Marketing ser-vices will in particular gain importance in the coming years. Strong growth, albeit from a low level, across all regions and sectors can be expected in the demand for business planning & management advice, information services, and financing-related BDS. (Figure 13). Judged by the expressed need for ‘most needed services’, demand for production & operation assis-tance will stagnate on the current low level. However, in a separate question, 8% of SME, in particular from services and manufacturing, indicated their intention to use consultancy on quality management during the next twelve months. This discrepancy will require further re-search, e.g. by means of focal group discussions.

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BAPPENAS GTZ RED

Figure 14: Respondent’s BDS Demand in the Coming Twelve Months

Service area Used service within last 2

years

Will need ser-vice in next 12

months Projected

growth

Tax advice 12% 13% 8% Advertisement / promotion 11% 13% 11% IT services 9% 9% 9% Technical training 7% 8% 19% Management training 7% 7% 11% Transport-related BDS 6% 7% 27% Accounting 5% 7% 34% Marketing 4% 13% 246% Legal advice 4% 3% -20% Information services 3% 5% 72% Production & operation assistance 3% 3% 1% Business Planning & Management 2% 4% 139% Communication & correspondence 2% 1% -32% Financing 1% 6% 482% No service 68% 51% -26% Regional patterns: Among the ‘established’ services, demand growth is highest for account-ing services (34%) and transport-related BDS (27%). In both cases, this concerns primarily Pekalongan, supporting the thesis of qualified local supply creating its own demand by word of mouth in the local business community. It is also worth noting in this context that only SME from Pekalongan and Jepara express a need for transport-related BDS (awareness of such BDS is much higher in both cities than in Surakarta and Klaten, respectively). Moreover, in contrast to all other regions, where the expressed need for tax advice is lower than past us-age, the number of respondents from Pekalongan that state to need taxation services in fu-ture is, with 25%, almost two-thirds higher than current usage there, which is already the highest among all regions surveyed. Conversely, in Jepara and Klaten it is marketing ser-vices that are most needed, and both regions have the highest awareness (and Klaten also the highest past usage) of marketing BDS. SME in Klaten, in particular hotels and retailers, also intend to employ more advertisement & promotion services, while current high usage of such services in Pekalongan may drop slightly. Training: The need for technical training is some 20% higher than current usage, indicating considerable growth potential. Additional demand will almost exclusively come from the ser-vice sector, most notably car repair and services, while demand from other sectors will re-main constant. In management training, demand from manufacturing and services can be expected to increase, while demand from trade, hotel & restaurants, and communication & media, the past major users, is likely to decrease. Overall, the demand for management training should grow slightly. IT services: Overall, expressed need for IT services is only slightly higher than past usage. Additional demand growth can be primarily expected from manufacturing enterprises in Jepara and Surakarta, while demand should at best remain stable across all other sectors and cities. However, when asked more specifically for internet usage and presence, 16% of respondents revealed their intention to install a website in the coming year. Currently, only 5% have their own website, four fifth of which installed it during the last two years. Since 57% of these websites were developed by specialised companies, the demand for website devel-

25

BAPPENAS GTZ RED

opment and web editing services among SME can therefore be expected to grow strongly in future, with the highest growth expected to come from exporting companies. In Jepara, for example, every fourth company plans to install a web page. Main benefits of internet access and presence are seen in improved access to market information and closer customer rela-tionship. Cautionary remarks: Since BDS are mainly used in reaction and support to business growth, SMEs' future demand for BDS will primarily be shaped by their business environ-ment. The stated need for BDS has to be related to the facts that 70% of survey respondents expect their business to grow in future, and 78% are willing to invest into expanding their enterprise. Should the overall business climate deteriorate, many respondents will review their business outlook and adjust BDS usage accordingly.

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BAPPENAS GTZ RED

4 . B D S S U P P L Y A N D P R O V I S I O N O N J A V A

4 . 1 S u r v e y c o n c e p t a n d d e s i g n

Provider survey: To complement the demand survey, in a second step BDS providers were surveyed for their structure, activities and performance. In July and August 2002, AC Nielsen interviewed 110 providers alongside a standardized questionnaire for ca. 60 minutes each. While the questionnaire was prepared by RED, the sample identification and selection was the responsibility of AC Nielsen. After completion, the data gathered was entered in a spe-cialized software (SSPS) to allow for additional analysis. First findings and conclusions have been presented by Mrs. Katharina Graf in a Draft Final Report in December 2002. Survey objectives and content: Objectives of the survey were (i) to gain deeper insight into the structure and capacities of BDS providers, and (ii) to analyse their strengths and weak-nesses, as well as their business environment, for eventual need for external intervention. The questionnaire applied consisted of approximately 70 questions and covered the following areas: 1. General information about the provider, including age, gender and education of owner /

manager, years in business, kind of business, number of staff etc. 2. Detailed inventory of services offered and fees charged, as well as an overview of the

providers’ target market in terms of client size and business sector. 3. Structure, education and professional background of staff, including analysis by gender,

as well as capacity building carried out for the staff. 4. Operational capacities and activities in marketing, networking, quality management and

product development . 5. Past performance and business outlook, as well as the respondent’s assessment of its

strength and weaknesses and the general business climate for BDS provision. Target regions and service sectors: Since BDS providers do not necessarily limit their ser-vices to one specific region, and in order to obtain a representative sample size, the survey did not exclusively focus on the four regions in Central Java that had been covered by the demand survey. Instead, providers across all Java, but excluding Jakarta, were interviewed, thereby slightly over representing respondents from Central Java. In order to allow for com-parison with the demand survey, the sample was to cover a minimum number of respondents from each major BDS segment, namely Tax & Accountancy (TA), Promotion / Advertising & Marketing (PAM), Computer training & installation (C), Management & Business planning (MTBP), and Production / Research and Development (PRD). Sampling methodology: As no central register of BDS providers exists, the survey firm faced a difficult task to identify suitable respondents according to the determined sample structure. Most interview partners had to be chosen randomly, and could only be classified ex-post into one of the service segments pre-defined. In spite of these problems, the deter-mined sample structure could almost be matched (Figure 15). The actual sample contains slightly more providers active in Promotion & Marketing and in production-related services, and less providers in ‘other services’, than anticipated. Furthermore, providers of tax / ac-countancy are under represented in East Java, while marketing services / training is overrep-resented there. However, since several respondents offer services from more than one seg-ment, classification had to be to a certain extent arbitrarily, and such variation should not be over interpreted.

27

BAPPENAS GTZ RED

Figure 15: Envisaged and Actual Interview Panel for Provider Survey

Region West Java Centr. Java East Java Total Code Services covered Plan Actual Plan Actual Plan Actual Plan Actual TA Tax and accountancy training & advice 4 4 6 7 5 3 15 14 PAM Promotion, Advertising, Market infor-

mation, Marketing, Communication & Correspondence

4 6 6 7 4 10 14 23

C Computer training, installation and applications 4 4 7 7 4 4 15 15

MTBP Management training and advice, Business Planning, entrepreneurship development

4 4 7 7 4 4 15 15

PRD Production technology, technical train-ing, Research and Development 5 7 7 8 4 5 16 20

Other Legal services, HRD / people empow-erment, transport-related BDS, finan-cial brokerage, environmental consul-tancy, appraisal, design & graphics

10 6 12 9 13 8 35 23

Total 31 31 45 45 34 34 110 110 Cautionary remark: As the total population of BDS providers on Java is unknown, there can be no guarantee that survey results are fully representative of the sector as a whole. While trends can be observed and highlighted from the survey, caution is therefore required what concerns any absolute figures and ratios.

4 . 2 G e n e r a l c h a r a c t e r i s t i c s o f P r o v i d e r s s u r v e y e d

Company age: Slightly more than half of providers interviewed have only been founded dur-ing the last five years, and less than one-third is older than ten years. Almost one quarter of respondents have been in business for less than three years; in West Java even one-third. The most dynamic segment is IT services, where two out of three companies have been in business for not more than five years, and every third enterprise has only been founded dur-ing the last two years. The rate of start-ups is also above average in tax & accounting and promotion / marketing services (28% and 26%, respectively), while management training and business planning services are dominated by providers 3-5 years in business, but have rela-tively few start-ups. Conversely, in production-related services half of providers have been in business for more than ten years, and only one quarter is younger than five years. Owner background: The typical owner of a BDS provider is male (89%), has graduated from University (92%) and accumulated previous work experience before founding his enter-prise (86%), primarily in the private sector (66%). Female owners are relatively common among BDS providers offering production-related services (25%). This segment also ac-counts for most owners that have not visited University (30% of owners only completed sen-ior high school). The professional background of owners/managers is strongest for tax & ac-countancy services, where all respondents have previously worked elsewhere, 71% of them in senior positions. Conversely, in promotion / marketing, computer, and production-related services, some 40-45% of respondents had no or only operational work experience when starting their business. In business planning & management and production-related services, owners/managers with background as teachers or lecturers are relatively common (Figure 16). Regionally, the highest share of respondents with previous senior management experi-ence is found in East Java (47%), while those entering from a professional position are most

28

BAPPENAS GTZ RED

common in West Java (29%) compared to other regions. Respondents from Central Java have over proportion no previous work experience (20%), or a background as lecturer / teacher (16%).

Figure 16: Previous Work Experience of BDS Owners / Managers, by Service Segment

Last Position Covered All TA PAM C MTBP PRD Other

Senior (Director, Manager, Supervisor, Own Business) 38% 71% 30% 27% 33% 20% 52% Professional (Consultant, Trainer, Engineer, Analyst) 21% 29% 26% 20% 13% 20% 17% Lecturer / Teacher (Institute) 12% 4% 7% 27% 20% 13% Operational (Regular Staff, Assistant, Secretary) 15% 17% 33% 13% 25% 4% No Previous Work Experience 14% 22% 13% 13% 15% 13% Total 100% 100% 100% 100% 100% 100% 100% Age of owner: The age structure of BDSP owner equals essentially the age structure of SME owners observed in the demand survey. 47% of BDSP owners are below 40 years, while only 6% are above sixty. Owners and managers of providers offering computer-related BDS are relatively younger (72% below 40 years), whereas those offering Tax/Accounting services (64% above 50 years) and production-related services (75% above 40 years) are older than average. Naturally, owner and enterprise age are related closely to each other, which explains in particular the higher average owner age in provision of production-related services. However, more than a quarter of respondents between 50 and 60 years old, and even almost half of those that are between forty and fifty or older than 60, have only set up their enterprise during the last five years, after having accumulated extensive professional experience in other positions. Owner involvement: The involvement of the owner in management decisions is high. In four of five providers surveyed, the owner takes decisions on all business aspects, irrespectively of enterprise age and size. The share is slightly lower for provision of computer services, management training & business planning, and other services. Here, every third owner has delegated decisions on product development and marketing to other company staff, but still retains responsibility for finance and general management. Size and staffing: The typical BDS provider is an SME itself, and employs in average some 12 staff. Only 3% of respondents had less than three staff. The largest part of responding BDS providers has more than seven employees (80% of companies). One-third employs between 15 and 100 persons, while some 5-7 % have more than 100 staff.9 Typically, more than half of staff are professional staff, i.e. advisors and/or trainers. One-third of providers have 3 or less professional staff, while every fifth respondent employs more than ten. More than three quarters of providers employ less than three staff to handle their administration. However, several companies, in particular in accounting, promotion and IT services, appear to employ a number of technical / operational staff for tasks such as client data processing, IT installation / maintenance and promotion services, respectively10. Consequently, company size in the three aforementioned sectors tends to be slightly larger than average. Average company size increases with enterprise age. The share of providers with more than 15 em- 9 Cf. annex 1, Table 1 “No. of employees”. Unfortunately, the survey did not group staffing data according to BPS standards,

i.e. ‘less than 5 staff’ (micro) and ‘more than 20 staff’ (medium), so no information on the share of small and of medium en-terprises can be derived. The share of large enterprises (more than 100 staff) among respondents has been estimated from information provided on the education and background of staff. Since this data is partly also covering freelancers, the esti-mate is somehow rough.

10 Since this staff has not been surveyed separately, unfortunately no detailed data on the extent of such employment is avail-able.

29

BAPPENAS GTZ RED

ployees is slightly below average in Central Java, however, in general, there are no statisti-cally significant size differences between the regions. Freelancers: In addition to permanent staff, three quarters of respondents also contract free-lancers on a case-to-case basis.11 For 15% of providers surveyed, freelancers contribute to more than 50% of total work, another 22% have a quarter to half of their workload covered by freelancers. Freelancers are most commonly used in Central Java, where 82% of respon-dents rely on them, 24% for more than half of their workload. Sector-wise, use of freelancers is least common in production-related services (65%). Conversely, one-third of providers of computer services have more than 50% of their workload covered by freelancers. Staff background: More than 90% of providers work primarily with university-educated pro-fessional staff and free-lancers. Every fifth enterprise employs also professional staff that has only completed senior high school. This concerns in particular computer, and production-related services. In production-related services, 30% rely primarily on senior high school graduates as professional staff, half of which employ no university graduate at all. The pro-fessional background of advisors / trainers varies widely; it includes management, work as advisor / trainer in other companies, lecturing and operational / assistance work. 45% of pro-viders have recruited (part of) their professional staff directly from university / high school. This is most common in computer-related services (60%) and management services / busi-ness planning (53%). In regional comparison, direct recruitment from University is least common in Central Java (31%), whereas providers there use over proportion trainers / advi-sors with previous experience as lecturers (38% vs. 26% in average) or managers (29% vs. 20% in average)12.

4 . 3 C l i e n t s , S e r v i c e s a n d F e e s

Clients Main clients: Four out of five respondents provide their services primarily to SME, while one-tenth focuses on micro- enterprises, and another tenth on large organisations. In the promotion / marketing segment, medium-scale enterprises tend to be most important, while providers of production-related services focus more on small and micro enterprises. In terms of business sector, 45% of respondents work primarily for manufacturing enterprises, 40% for wholesale / retail, 15% for the government, and 22% for clients active in communication, transport, tourism or accommodation / restaurants13. The latter sectors are in particular im-portant for providers of promotion and marketing services. Among providers focusing on computer-related services, even 40% each reported to work primarily for the government, and for the communication / IT sector, while only 27% named manufacturing enterprises as their main clients. Providers of production-related services display the strongest focus on manufacturing (60%), while wholesale / retail is the main client sector for 50% of providers in the tax / accounting service segment. Marketing radius: 55% of respondents travel less than one hour in average to their client’s office, i.e. market their services mostly locally. However, 15% travel more than three hours in average to their clients, which indicates service provision across the whole province or even in other provinces. Providers from the Tax / Accounting and Production-related service seg-ments tend to primarily cater for local clients (70% travelling in average less than one hour to

11 Cf. annex 1, Table 3 “Freelancer” and Table 4 “Freelancer contribution”. 12 Multiple answers were possible what concerns the previous work experience of trainers / advisors. The figures therefore

only signify that some recruitment took place from the sources named, but do not allow any conclusion on the share of pro-fessional staff that has such background.

13 Multiple answers possible, therefore percentages add up to more than 100%.

30

BAPPENAS GTZ RED

the client), while travelling times above three hours are most common for the Promotion & Marketing and Management & Business Planning segments (27% each). Nearly half of pro-viders of computer-related services travel between one and three hours to their client’s office. Regional patterns: There is substantial variation among the regions what concerns client size and sector, and marketing radius:

• In West Java, providers focus primarily on medium enterprises (61%), while large enter-prises (0%) and micro-enterprises 3%) play hardly a role. Government institutions (19%), communication / IT (16%) and tourism (13%) are more often named as main clients in comparison to the other regions, while a focus on wholesale / retail is relatively rare (16%). The time to clients’ office is slightly higher than average, presumable because of high traffic density in the region’s main economic centres.

• In East Java, only 29% of respondents focus on medium enterprises, while large enter-prises (18%) and in particular micro-enterprises (24%) are more often targeted than in the other regions surveyed. Clients come mostly from wholesale / retail (53%), manufac-turing (50%), hotel/ restaurants (12%) and the public sector (12%). The number of pro-viders focusing on the transport sector is, with 6%, above average14. More than half of respondents travel longer than hour in average to their client’s office, one quarter even more than three hours. This might partly relate to the stronger focus of local providers on large enterprises, but also indicates that many medium-scale cities are served by provid-ers from the province’s main economic centres, i.e. Surabaya and Malang.

• Providers from Central Java focus strongly on small enterprise clients (47%), with me-dium enterprises coming second (33%). Micro-enterprises play hardly a role (4%), but large enterprises are relatively important (15%). The main target sectors are manufactur-ing and wholesale / retail (44% each), and, to a much lesser extent, the public sector (11%). Other sectors play hardly a role. In particular the share of providers focusing on communication / IT is substantially lower than in other regions (4%). Travel times to cli-ent’s offices are lower than average. Two-thirds of providers serve primarily local clients (less than one hour average travel), while only 10% travel in average more than three hours to clients.

Relation to demand: The client focus does only partly correspond to the demand as yielded by the demand survey. While the relevance of wholesale / retail clients seems to have been realized by providers, in particular what concerns taxation and advertisement / promotion services, some other prospective client sectors seem to be widely overlooked. Most striking is that no provider of technology-related services named car repair / service and transport as main clients, even though current usage and future demand for technical training and opera-tional assistance in these sectors is far appears above average. In this context, it should be recalled that in Klaten, 10% of respondents to the demand survey, most prominently from the services sector, did not use BDS because they could not find an appropriate consultant.

14 Multiple answers concerning the clients’ business sector have been much more common in East Java than in other regions,

therefore percentage variations may slightly overstate actual differences in client structure. The much stronger focus on mi-cro-enterprises in comparison to other regions may result from the Swisscontact / World Bank Voucher Program imple-mented in East Java since 1998. Further fact-finding, e.g. by means of focal group discussions, will be required to verify this assumption.

31

BAPPENAS GTZ RED

Figure 17: Service Mapping According to Provider Type

Techn. Problems 20%Operation &Production 20%

Operation &Production 13%

Marketing 40%Information 20%Communication 13%

Marketing 43%Information 21%Promotion 14%Communication 14%

Business Plans 43%Management 35%

Management 27%Business Plans 13%

Software 13%

Software 9%Software 9%

Management 87%Busines Plans 73%Entrepreneurship 20%ISO 9xxx/14xxx 13%

Accounting 20%

Software 36%

Software 5%Multimedia 5%

Management 79%Business Plans 50%

Management 49%Bus. Plans 17%

Legal 9%HRD 9%

Marketing 26%

Legal 15%

Techn. Problems 9%Operation & Production 9%

Accounting 26%Finance 26%Taxation 5%

MTBP PRDTechnicalProblems 85%Operation &Production 20%QualityManagement 10%

Legal 17%HRD 17%

Design 13%Fin. Brokerage 13%

Others

Environmental / Sectoral Consultancy 13%

Management 30%Business Plans 25%Quality Mgmt 10%

Marketing 27%Promotion 23%Information 7%

Marketing 40%Information 15%Promotion 10%Communication 5%

Accounting 10%Finance 10%Taxation 5%Accounting 17%

Finance 17%Taxation 9%

Accounting 33%Finance 20%Taxation 7%

CSoftware Installation& Training 100%Data Processing 33%Multimedia 13%IT Networks 7%

Accounting 100%Taxation 86%Finance 43%Fin. Audit 14%

TA

PAMMarketing 65%Promotion 52%Information 43%Communication 22%Public Relations 9%

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BAPPENAS GTZ RED

Services Service portfolio: The service portfolio of providers is quite diversified. In average, each respondent named 3,8 service areas that are charged for. Providers in West Java are, with in average covering 2,4 service areas, much more focused than their colleagues in Central and East Java, which in average offer 4,2 and 4,4 different services, respectively. The difference concerns primarily management and marketing services, which are offered by more than half of respondents in Central and East Java, irrespective of their main service focus, while in West Java it is only 29% (management) and 13% (marketing), respectively. Service mapping: A detailed mapping of the services provided by each provider type (Fig-ure 17 on previous page) reveals a strong tendency of providers to diversify from their main service focus into related areas:

• Aside from their main focus, namely tax, accountancy and finance-related services, pro-viders in the TA service segment are strongly active in management training & advice (79%), business planning (50%), and marketing (43%). On third has also ventured into (financial and accountancy) software installation and training.

• Providers of Promotion, Advertisement and Marketing (PAM) services are in particular venturing into management training & advice (43%) and business planning (35%). Some 10-20% each are also active in accounting, finance & taxation, operation & production assistance, software installation & training and legal training / advice, respectively.

• For providers of Computer Installation / Training (C) services, supplementary provision of marketing (27%), promotion (23%), management (27%) and accounting (20%) ser-vices is quite common. Notably, such services are more common for computer service providers than IT networking or multimedia / internet training and applications.

• Providers of Management Training and Business Planning (MTBP) services are to a good extent as well providing services related to marketing (40%), accounting (33%), fi-nance (20%), technical problems (20%) and production & operation (20%), respectively. Only 13%, however, are offering training and advice related to ISO 9xxx / ISO 14xxx cer-tification.

• Providers of Production, Research & Development (PRD) services are mostly focused on training / advice related to specific technical problems (85%). Only 20% offer inte-grated assistance on production & operation processes, and only 10% on quality man-agement. Instead, marketing (40%), management (30%) and business planning (25%) services play an important role. Some 10-15% have also ventured into provision of train-ing / advice related to legal matters, accounting, finance and taxation, and 5% are as well active in software and multimedia training / installation.

• Even for providers of other services, management (43%), marketing (26%), and ac-counting & finance (26%) services play an important role in complementing their core services.

As already mentioned, this structure concerns primarily providers from Central and East Java, while those from West Java are much more focused on their core services. Diversification patterns: In many cases, diversification into related service areas appears to be driven by the intention to deliver a complete support package to clients in complemen-tation of core services. For providers of tax & accountancy (TA) services, e.g., supplemen-tary software installation & training, business planning, and marketing services are in most cases not among the main three products in terms of turnover. However, a sizeable number of providers appears to have permanently ventured away from their traditional service range. Among the providers of production-related services, 25% each rate management and mar-

33

BAPPENAS GTZ RED

keting services as one of their three main products, and 10% even legal training / advice. Within the promotion / advertisement / marketing (PAM) provider group, 17% each have management and business planning, and 10% each accounting and finance among their main services. Furthermore, 43% of PAM providers are not using BDS as there main source of income, but rely on other activities (presumably in particular trading). BDS as secondary activity concerns exclusively Central and East Java, and is in particular common for provid-ers that name ‘marketing’ or ‘market information’ as their main service. Main services offered: Understanding of these patterns is required to correctly interpret the supply structure as reported by the providers interviewed (Figure 18):

• The services most commonly offered are advice and training related to management, marketing, business planning and accountancy. These services are provided by between one third and half of the providers interviewed, even if they are not part of their main ser-vice segment. Except for business planning, these services are among the three main generators of revenue for the majority of their providers.

• Typical ‘sell alongside’ services, i.e. services that are widely offered even if they are not part of the main service segment, but are for the majority of their providers not among the three main generators of revenue, are communication & correspondence, training / assis-tance on operational and production processes, information services, and business plan-ning.

• Services that are mainly provided by service professionals, and only complementarily offered by providers from other BDS segments, are software installation and training, as-sistance on technical problems, promotion, taxation and legal services. Consequently, these services figure less prominently among the services provided, but play an impor-tant role as product for the specific service segment.

Figure 18:

Area of BDS provided Service Of-

fered / Charged

Main Product

In Service Segment &

Main Product

Cc: Share in SMEs’ BDS ex-

penditure

Management 48% 34% 12% 4,5% Marketing 41% 25% 14% 0,3% Business Plan 32% 15% 10% 0,1% Accountancy 29% 20% 13% 9,1% Software installation & training 24% 16% 14% 8,4% Technical problems 22% 17% 15% 3,1% Information 19% 9% 9% 0,4% Finance 19% 10% 3% 0,1%- Promotion 18% 11% 11% 27,5% Taxation 15% 12% 11% 12,3% Operational & Production processes 11% 4% 4% 3,0% Communication & Correspondence 9% 2% 5% 0,5% Legal 8% 5% 4% 5,5%

Legend ‘Me too’ ‘Sell alongside’ ‘Mostly by professionals

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Relation to demand: In relation to SME’s service usage and demand as yielded by the de-mand survey, a number of services appear to be strongly over supplied. This concerns in particular the ‘me too’ services, i.e. training and assistance on management, marketing, business planning and finance. Only some 5% of the total BDS expenditure during the last year as reported in the demand survey relates to these services. With some 6% of total BDS expenditure falling on technical training and production & operation assistance, such services appear as well, albeit to a lesser extent, over supplied, in particular in relation to taxation, promotion / advertisement and IT services as the ‘Top 3’ BDS demanded by SMEs. Such over supply in relation to demand for their core business may explain the strong tendency among providers in the MTBP and PRD segments to diversify into other services. Fees charged: Fees vary strongly, ranging anywhere between IDR 1,000 and IDR 500,000 per hour. It must be assumed that some respondents named their fee per training hour, i.e. the price to be paid by every participant, while others referred to the total fee earned per hour of training / consultancy. While this data base does not allow for detailed comparisons by service and/or region. assessment of the raw data suggests, that the fee per hour of training typically ranges between IDR 10,000-50,000, while between IDR 100,000 – 500,000 is charged per hour of consultancy. Providers in West Java appear to charge higher fees than average, while the fees charged in Central Java appear to be lower than average, in particu-lar what concerns management and marketing training. In two out of three cases, the fees charged are depending on the type of client. The highest shares of providers that charge fixed fees, irrespectively of the type of client, are found for production & operation assistance (50%) and legal advice (45%). Product Development: Almost two third of respondents (62%) stated they plan to introduce new products or services within the next year. Rates are highest in West Java (68%) and the MTBP segment (80%), and lowest in East Java (53%) and for the Tax / Accounting service segment (50%). The range of new services comprises a broad variety of different products, with the most important being:

• Brokerage services related to trade and export (13%), in particular export brokerage, but also forwarding services (2%), real estate brokerage (1%) and services like “invite SMEs to go overseas for comparative study”. The trend to move from training and con-sultancy into brokerage is in particular common among providers of Management & Busi-ness Planning services located in Central and East Java.

• Various IT services (12%), with particular focus on internet training and website devel-opment. It is mostly providers of computer-related services intending to develop respec-tive new products, but there are also a few providers of Tax / Accounting and Promotion / Marketing services intending to offer more IT- and Internet-related services.

• Skills training (11%), in particular entrepreneurship development, but also ‘customer care’, motivation training, and specific issues like ‘Human Resource Development for Journalists’ or ‘Attitude training for security staff’. It is primarily providers from Central Java, in particular those active in Promotion & Marketing, that intend to introduce new skills training products.

• Tax and accounting services (10%), which mostly concerns providers that want to complement their existing accounting services with tax advice so far not offered by them, and to a lesser extent relates to specific new products such as ‘Advanced accounting’, ‘Budgeting’ or tax software (to be introduced by a provider of computer-related services).

• Technical / product related / operational training (9%) in a variety of fields including car repair, housekeeping, embroidery, cow fattening, red dragon fruit cultivation, and product packing for export. In most cases, it is providers from the Management & Busi-ness Planning segment intending to introduce these new products.

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• Training and consultancy for retail and services (6%), such as retail business devel-opment strategy, category management, ‘Developing a boutique’, ‘Business property – from design to marketing’, ‘clinic design’, and (IT) training for travel bureaus. Interestingly, no provider form Central Java mentioned any new products geared specifically at retail and services.

• Support services for advertisement / promotion (5%), such as video production, pub-lishing services, event organisation, improved printing services, and a rental service for queuing facilities.

In general, the product ideas indicate a trend among providers to move away from ‘general-ist’ advice / training (management, business planning etc.) towards more focused, sector-specific services. Topical focuses correspond with the main services demanded by SME’s, i.e. tax, advertisement / promotion, IT, and technical & management/skills training. However, it remains to be seen whether the various brokerage services to be newly introduced will adequately address SMEs’ increasing demand for marketing assistance.

4 . 4 P e r f o r m a n c e a n d B u s i n e s s E n v i r o n m e n t

Turnover: The respondent’s average turnover during the last year was some IDR 250 million (approx. USD 25,000). Turnover is strongly related to enterprise age: The mean turnover of providers that have been in business for not more than three years is only half as high as the average turnover reported by all respondents. Average turnover is highest in West Java and lowest in Central Java, which mainly reflects the different shares of medium-scale providers in each region, as turnover and staffing are closely related. In terms of main service seg-ment, average turnover is highest for Promotion / Marketing, followed by production-related services. The lowest average turnover is generated by computer-related services, which is partly due to the high number of young enterprises in the segment. Also below average tends to be the turnover generated by Management & Business Planning services (Figure 19).

Figure 19: Turnover by Region and Service Segment

Share with turnover Class Average turnover (Million IDR) > 50 mill. 50-100 mill.

West Java 288 29% 16% Central Java 224 20% 29% East Java 261 15% 21% Tax / Accounting 236 14% 21% Promotion / Marketing 384 17% 9% Computer Services 167 33% 27% Management & Business Planning 208 21% 27% Production, R&D 302 45% 15% 1-3 Years in Business 128 27% 42% >3 Years in Business 307 18% 14% All respondents 253 21% 23% Financial Sustainability: Even when operating under very modest conditions, a BDS pro-vider should at least generate some IDR 100 million (USD 10,000) annual turnover in order to be financially self-sustainable15. However, every fifth respondent reports a turnover of less 15 97% of all respondents employed at minimum four staff. It can be assumed that at least 30% of turnover are required for

covering operating expenses (electricity, telecommunication, transport, office consumables, depreciation etc.), which would, from IDR 100 million turnover, leave some IDR 70 million to cover staff costs. With four staff, this relates to an average an-

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than IDR 50 million (USD 5,000), and another quarter ranges between IDR 50 and 100 mil-lion. Even when excluding companies that have only been up to three years in business, which typically incur start-up losses until they have established a sufficient client base, still every third provider older than three years generates less than IDR 100 million turnover. The situation is worst for providers of production-related services, only 40% of which generate a turnover which might in general be cost-covering, and 45% of which even report less than IDR 50 million annual turnover16. Similarly problematic is the situation in computer-related services; however, in this case the high share of start-ups has to be considered. With almost half of providers in the segment reporting less than IDR 100 million turnover, achieving finan-cial self-sustainability from Management & Business Planning services appears as well to be quite difficult (see Figure 19 above), which might explain the strong tendency of providers in that segment to diversify into other service segments and into brokerage services. Financial support: How can providers with insufficient turnover survive? One way is through external financial support. In fact, more than one-third of respondents reported to have re-ceived or still being receiving financial support for developing their business. The main sources of support are the central government (15%), international donors (11%), the provin-cial government (8%) and clients (8%). Other sources include family & friends, the Kabu-paten government, banks and state-owned enterprises. Public financial support has in par-ticular been geared towards the Management & Business Planning segment, where 67% of providers received financial support, in many cases from several public sources. Providers of Tax / Accounting and Computer-related services, on the other hand, have only rarely re-ceived public financial support (Figure 20). In regional terms, public financial support has been most common in East Java. This relates primarily to strong donor involvement in that province, among others through the SwissContact Business Development Center Project that only recently has been expanded to other provinces.

Figure 20: Public Financial Support Received, by Main Service Segment (Multiple Answers)

15%13%

7%

53%

20%

4%8% 9%

13% 15%

9%5% 9%

13%10%11%

7%

17%20%

5%

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Total TA PAM C MTBP PRD OtherCentral Government Provincial government Kabupaten government Donors

Obstacles: 87% of respondents stated to have obstacles in running their business. Obsta-cles were most common for Central Java (96%) and the Management & Business Planning Segment (100%). The main obstacles named by respondents related to the following issues:

nual salary of IDR 18 million, or IDR 1.5 million (USD 150) per month. Such income is earned by many taxi or minibus driv-ers, and the absolute lowest limit of what is required to attract and keep university-trained professional staff.

16 The relatively high average turnover of providers of production-related services is misleading in this respect and stems mostly from a handful of large providers with 20 or more professional staff.

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• Low willingness to pay: 40% of respondents complained, that companies are not ha-bituated to pay for consultancy services. This statement was most frequent in East Java (50%), where providers are strongly targeting micro and small enterprises, while provid-ers in West Java, which in majority focus on medium enterprises, had significantly less respective complaints (23%). Segment wise, providers focusing on Tax & Accounting (57%) and on Management & Business Planning (53%) complained most frequently.

• Competition: With 27%, high competition ranks second. It is in particular felt to be a problem in West Java (39%), and by providers of Computer-related (53%) and Promo-tion & Marketing (39%) services, i.e. the region and service segments, respectively, where start-up rates have been highest. High competition affects young and established enterprises alike.

• Regulatory / Policy Environment: A number of obstacles listed relate to the regulatory and policy environment for BDS provision, including KKN17 (21%), tax regulations (6%), subsidized government services (6%), business licensing (5%), and individual complaints on bureaucracy and overall regulation. Interestingly, KKN is least felt to be a problem by providers of Management & Business Planning and Production-related services (7% and 10%), i.e. service segments that have over proportion benefited from government finan-cial support. Complaints on tax regulation come primarily from the Tax / Accountancy and Promotion & Marketing service segments, which tend to serve larger clients than aver-age.

• Human Resources: 19% of respondents have difficulties to find qualified experts for their services, while 6% complain about a lack of training for skills improvement. Both ob-stacles are slightly more common in East Java (26% and 9%) than in the other regions. Patterns vary strongly by service segment: Providers of Tax / Accountancy and Promo-tion & Marketing services complain over proportion on difficulties to find qualified staff (30% each), but mention in no case a lack of skills training opportunities. In the Manage-ment & Business Planning segment, on the other hand, low availability of skills training constrains 20% of respondents, but only 7% report recruitment problems. While recruit-ment problems concern all size classes alike, a lack of skills training opportunities is pri-marily felt by providers with 4-6 professional staff.

• Client / Market information: Finally, 15% of respondents are constrained by a lack of information on potential customers, while 10% admit straight-forward to not know which services the clients need. Both obstacles are most common in East Java (21% and 18%), and least common in West Java (10% and 0%). A lack of client information is most strongly felt by providers of Tax / Accounting, Management & Business Planning, and Production-related services (20% each). The largest share of providers that do not know which services their clients need is found in Management & Business Planning (20%), followed by Computer-related services (13%). This obstacle is almost exclusively con-fined to smaller providers with less than six professional staff.

Past business development: In spite of the various obstacles listed, the business of more than two thirds of respondents grew during the past 12 months, while only one out of ten re-spondents reported a decline. Especially BDS providers in East Java experienced a positive development, while one out of five providers in West Java reported a decline, primarily due to economic and political instability (54%), increasing competition (46%) and decreasing de-mand (32%). Medium-scale providers with more than 10 professional staff, which tend to have a stronger focus on medium and large enterprises, performed significantly below aver-age. Segment wise, Tax/Accounting (TA), Promotion & Marketing (PAM) and Production-

17 Corruption, Collusion and Nepotism

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related services (PRD) fared best, with three quarters of respondents in each segment re-cording a growth. The weakest performing segment was Management & Business Planning (MTBP). Nevertheless, even in this segment, slightly more than half of respondents reported growth during the last year (Figure 21).

Figure 21: Past Business Development

69 5871 76 79 74

60 5375

2223

2024 14 22

3333

10

9 19 9 7 4 7 13 15

0%

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Total West Java CentralJava

East Java TA PAM C MTBP PRD

Increase Stagnant Decline

Business outlook: Respondent’s outlook for the coming 12 months is very optimistic: 81% expect their business to increase, while only 2% anticipate a decrease. Optimism is highest in the Promotion & Marketing segment (87%), followed by Computer-related services and Management & Business Planning (80%). Pessimism is highest in West Java, where only 68% expect their business to grow, while the remainder expects stagnation due to continuing economic and political instability and strong competition in the region. Business Development and Government Support: Most respondents attribute past and/or expected future growth to internal strengths and the general economic trend, while stagna-tion and decline is primarily being related to unfavourable market conditions in terms of de-mand and competition. However, some 20% of respondents name government support / subsidies as one of the factors influencing their past and / or expected future business de-velopment. In this context, three observations appear to be worth mentioning (Figure 22):

• Overall, the number of respondents whose business development has been directly af-fected by government support, i.e. who benefited from increasing support or suffered from decreasing / cancelled support, is equal to the number that reported to have been indirectly affected by increasing / decreasing competition from subsidised services.

• Likewise, the total number of respondents that has either directly or indirectly benefited from changing government support equals the number of those who have been nega-tively affected by such changes.

• There are, however, clear differences by service segment. The Management & Business Planning segment appears to be the government’s “dear child”, as 27% of respondents from that segment have reported a direct influence of government support / subsidies on their past business performance. With 20%, production-related services are also above average directly affected by government support and subsidies. However, in this seg-ment, indirect effects, i.e. negative business development due to increasing competition from subsidized services, are as well common (15%). The other service segments have primarily been indirectly affected by government support extended to other providers. What concerns the business outlook, patterns are similar, except for Computer-related services, where both the share of respondents expecting to benefit from upcoming subsi-

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dies (13%), and the share expecting increased competition from subsidised services (20%), is higher18.

Figure 22: Impact of Government Support on Past Business Development

8% 7%

20%

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9%

-3% -4% -7% -5%

3%7% 9%

-7%-4% -7%

-15%-13%

-15%

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Total TA PAM C MTBP PRD OtherIncrease of government support Decrease of government supportLess competition from subsidized services Increasing competition from subsidized services

4 . 5 M a r k e t i n g , N e t w o r k i n g & C a p a c i t y B u i l d i n g

Marketing Marketing mix: Providers mainly rely on service quality (76%) and own reputation / image (61%) as sales arguments. Pricing comes only in third place (48%), closely followed by the availability of a unique / specific services package in-house (45%)19. Proximity to the client (for trouble shooting etc.) is hardly important (16%), which corresponds to the extended mar-keting radius of most providers. The segments that are facing increasing competition, i.e. Computer-related and Promotion & Marketing services, give more relevance to pricing (67% and 61%, respectively). Providers of Tax / Accountancy services strongly trust in their unique service package (57%), while those of Management & Business Planning and Production-related services build over proportion on their proximity to clients (27% and 20%). Promotion / Advertisement: Providers primarily rely on mouth propaganda (57%), seminars and discussion rounds of associations and other intermediaries (55%), and leaflets and bill-boards (47%) as promotion tools. However, roughly half of respondents launch complemen-tary advertisement in the media, in particular in specialised publications / magazines (46%), and on the Internet (35%), but also on TV and Radio (17%). Less common, and only used by single respondents, are direct (door to door) marketing, institutional cooperation for client referral with banks or government services, and newspaper advertisement. Media usage is highest in Central Java, where 56% of all respondents advertise in specialised publications, and 22% on TV / Radio, while providers from East Java rely over proportion on mouth propaganda (91%), seminars (71%) and leaflets / billboards (62%). Promotion means by segment: In terms of business segment, providers of computer-related services make the highest use of internet (47%) and TV/ Radio advertisement (33%), while Tax / Accountancy and ‘other’ providers are over proportion advertising in specialised

18 This relates presumably mostly to the ongoing MoIT / World Bank TATP program, which provides matching grants for

computer training and software development. 19 Answers to the survey question: “Which factors, according to your opinion, influence SMEs to use your services ?”. Multiple

answers were possibly.

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publications and magazines (64%). The Management & Business Planning and Production-related service segments promote themselves mostly on seminars and discussion rounds (73% and 60%). Opposite to what might have been expected, providers of Promotion & Mar-keting services rely primarily on mouth propaganda when it comes to promoting themselves (83%), and make the lowest use of media, billboard and leaflet advertisement among all ser-vice segments surveyed. Promotion budget: The average promotion budget is, with IDR 22 million (ca. 2.200 US$, approximately 9% of average turnover) in 2001, quite high. However, this is mainly due to those 7% of respondents, most of them medium-scale providers with more than seven pro-fessional staff, which spent more than IDR 50 million on advertisement and promotion. Roughly half of respondents spent less than IDR 5 million on promotion, 25% even less than IDR 1 million (USD 100), and relied primarily on mouth propaganda that only occasionally is complemented by media advertisement. The share of respondents that spent not more than IDR 5 million on promotion is highest for Tax / Accountancy and Production-related services (64% and 60%), and in East Java (53%). Conversely, the highest rate of ‘heavy advertisers’ with more than IDR 50 million promotion expenditure is found in Computer-related services (20%), and in West Java (16%). Marketing staff: Slightly more than half of providers do not have specialised marketing staff, in East Java it is even two-thirds. Untypical in this respect are providers of computer-related services, 80% of which employ marketing specialists, 27% even more than two of them. Me-dium-scale providers with more than seven professional staff are slightly more likely to em-ploy marketing specialists than smaller providers, where the marketing function tends to be handled by the owner.

Cooperation & Networking Co-operation: Three-quarters of respondents co-operate with other providers, most of them on a case-by-case base. Nevertheless, 10% have entered into permanent cooperation with other providers. Permanent co-operation is in particular common for providers from the Man-agement & Business Planning (MTBP) segment (27%), whereas providers offering Com-puter- and Production-related services are more likely not to co-operate at all (33% and 35% respectively, compared to the average of 25%). Permanent co-operation, but as well no co-operation at all, are both most frequently found in Central Java (16% and 31%, respectively). Information about potential cooperation partners and/or competitors is collected from various sources, in particular publications (58%), professional associations (55%), family and rela-tives (45%), the government (42%) and via the internet (37%). Publications are most impor-tant for providers situated in East Java (74%), as well as for companies offering computer-related services (80%). Providers of computer-related services also make most use of the Internet (60%), while hardly relying on associations (only 27%). The government as source of information about other BDS providers is most important for providers in the segments MTBP and PRD (60% and 65%), which corresponds with the higher level of government support / subsidies received by these segments. Professional membership: Professional organisations assume important functions for in-formation generation, networking, and promotion (through their seminars and round-tables) of BDS providers. Consequently, 72% of respondents are members of at least one profes-sional organisation. Membership is most common in the MTBP segment (87%), and lowest for providers offering computer-related services (47%). It is also below average for providers situated in West Java (55%) and young enterprises that have only been in business less than three years (61%). However, there is not a dominating association of providers. Instead, membership is spread over a variety of in total seventy associations, the most important of which are:

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• CNS (Consultants Network for SME) organises 11% of respondents, most of which come from East Java. In East Java, 34% of respondents are members of CNS.

• KADIN (Indonesian Chamber of Commerce and Industry) organises 10% of respondents. Membership rates are highest for Central Java (16%) and providers of computer-related services (20%), respectively. Since KADIN is not specifically focusing on BDS providers, this might indicate a lack of specialised professional associations of providers in Central Java and for providers of computer services. The overall low organisation degree of pro-viders of computer-related services additionally supports this thesis.

• 8% of respondents are members of Assosiasi BDS Indonesia. Membership is spread among all regions and service segments, but slightly above average for the Management & Business Planning service segment (20%).

• IAI (Ikatan Akuntasi Indonesia, Indonesian Accounting Association), as professional body of the accounting profession, organises 33% of providers of Tax / Accountancy services. Outside this segment, membership is negligible, resulting in an average membership rate across all segments of 5%.

• INKINDO (Ikatan Konsultan Indonesia) organises 5% of respondents, primarily from West Java.

Other associations named more than only once include AMA (Assosiasi Manager, 5%), HIPMI (Association of Young Entrepreneurs, 4%), ISEI (Ikatan Sarjana Ekonomi Indonesia, 3%), AAI (Associasi Advocate Indonesia, 2%) and IMA (Indonesian Marketing Association, 2%). Management support: 29% of respondents have received external management assis-tance. The rate is highest for providers in of Management & Business Planning and Produc-tion-related services (40% each), followed by the Promotion & Marketing segment (30%). Assistance to the captioned segments has mainly come from public sources (central, provin-cial and Kabubaten governments), and international donors. Assistance from friends and family plays quite some role across all service segments. A few providers have also con-sulted universities or business colleagues. Three providers, one of them a provider of Man-agement & Business Planning services, even received management assistance from their clients!

Staff training Attitude: Providers attach high relevance to staff training as means for securing / improving their service quality. Quality improvement through past internal staff training is the third most frequently stated reason for providers to have a positive business outlook20; 33% of all re-spondents made this statement. Quality improvement through external staff training follows closely (21%). The appreciation for staff training is particularly high in the segments Man-agement & Business Planning (MTBP) and Production-related services (PRD), which above average tend to recruit staff without previous work experience. In contrast to all other seg-ments, more providers from the MTBP segment expect to benefit from external than from internal staff training. Use of external training: More than three out of four interviewed companies had staff par-ticipating in external training during the last 12 months. External training was most frequently used by providers situated in East Java (82%), those working in the segments Tax/Accountancy (100%), ‘other services’ (83%) and Management /Business Planning (80%), providers longer than five years in business (81%), and those with more than seven 20 The top two reasons are high customer satisfaction / service quality (64%) and investment into marketing / promotion (38%).

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professional staff (88%). The lowest participation rate had providers of computer-related ser-vices (47%). Topics: Training topics were spread widely. In average, every training user had his staff at-tending nearly four different trainings. The highest usage was made of training in the spheres of management (40%), marketing (22%), accountancy (19%), IT (16%), business and in-vestment planning (15%), taxation (14%) and market information (13%)21. In most cases, training topics corresponded to a segment’s focus, e.g. 66% of all attendants of taxation training coming from the Tax/Accountancy service segment. Exceptions are management training, which was used in similar rates across all segments, and IT training, which was pri-marily used by providers of tax / accounting and ‘other’ services. Also worth noting is that providers from the PRD segment had the same participation rates in training on marketing and on business and investment planning, as they had on training on production technology (33% in each case). Surprisingly low usage rates of only 1-2% were reported for skills-related trainings such as Training of Trainers, Human Resource Development, Business Leadership or BDS Development. Providers: Among the various kinds of institutions offering training for BDS providers, most frequently used were:

• Private professional trainers / training enterprises (46%), which were most commonly used by providers from the Tax/Accounting (86%) and Management & Business Planning (53%) segments, and in East Java (59%);

• Associations (33%) - this concerns in particular the Tax / Accounting segment (64%), and is presumably to a good extent related to taxation and accounting training offered by IAI (Indonesian Accounting Institute);

• Institutes/ Universities (30%), usage of which is also highest for the Tax / Accounting segment (57%);

• Government extension workers (26%), which have been over proportion used in East Java (38%), and by the Management & Business Planning (40%), Promotion / Marketing (35%) and Production-related services (30%) segments;

• NGOs (20%), most frequently in Central Java (28%), and by providers of ‘other services’ (HRD/ people empowerment, legal services, environmental consultancy etc., 35% us-age).;

• International donors (12%), mostly in East Java (26%) and not at all in West Java, across all BDS segments except for computer-related services.

Fees paid: Only 14% of respondents (18% of training users) received all of their training free of charge22. 14% of users paid a (rather symbolic) fee of less than IDR 200,000 (USD 20) per training session, 41% paid between IDR 200,000 and IDR 1 million, and 15% even more than IDR 1 million. The highest shares of users of training that was free or cost less then IDR 200,000 are found in Central Java, and among providers of production-related and ‘other’ services. Conversely, providers of Tax / Accountancy services paid the highest aver-age training fees and were very rarely using free training. While overall usage of external training by providers of computer-related services was lowest, those who used training paid as well higher fees than average, and received no free training at all.

21 Cf. annex 1, Table 11 “Participation in trainings in the past”, and Table 12 “Type of training participated in”. 22 Since BDS providers that had staff participating in external training have in average used nearly four different kinds of train-

ing, and 2,2 different types of training providers, this does not necessarily imply that only 18% of the trainings were deliv-ered free of charge.

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Information about training: Information about training courses is collected from various sources. Business associations and publications play the main role in this respect, and are used by 54% and 36% of respondents, respectively. Next come the government (27%), the Internet (24%), family and relatives (14%), International Donors and NGOs (13%) and TV/Radio (10%). BDS providers in East Java, as well as companies offering Tax / Account-ing services and those older than five years, use this variety of information channels most intensively. Providers from the Management & Business Planning segment are above aver-age consulting the government (47%) and donors and NGOs (27%) on training opportunities. Opposite to what might have been expected, providers of computer-related services do not gather more information from the Internet than their colleagues. Information about training: Information about training courses is collected from various sources. Business associations and publications play the main role in this respect, and are used by 54% and 36% of respondents, respectively. Next come the government (27%), the Internet (24%), family and relatives (14%), International Donors and NGOs (13%) and TV/Radio (10%). BDS providers in East Java, as well as companies offering Tax / Account-ing services and those older than five years, use this variety of information channels most intensively. Providers from the Management & Business Planning segment are above aver-age consulting the government (47%) and donors and NGOs (27%) on training opportunities. Opposite to what might have been expected, providers of computer-related services do not gather more information from the Internet than their colleagues. Outlook: For the coming twelve months, providers intend to intensify use of external training further. The increase will be most pronounced for providers of computer-related services, 80% of which have plans for future staff training up from a past utilization rate of 47%. Inter-est in specific topics will change significantly: While management and marketing will remain the most popular topics, accounting, Business Planning, and market information are less requested than in the past. Instead, training on IT, promotion & advertisement, but as well ISO 9000 preparation / audit gets more attention (Figure 23). What concerns promotion & advertisement training, interest is not so much coming from advertisement professionals, but more from providers of computer-related and ‘other’ services, obviously in reaction to in-creasing competition. In general, training plans for the future appear to be less ‘product-related’ than in the past and more geared towards developing internal management capaci-ties.

Figure 23: Main Training Topics Demanded by BDS Providers

Past usage Planned usage Change Any training 77% 82% 6% Management 40% 42% 5% Marketing 22% 27% 25% IT 16% 19% 17% Promotion & Advertisement 5% 16% 200% Accounting 19% 15% -24% Taxation 14% 15% 7% Business & Investment Planning 15% 11% -29% Production technology 9% 10% 10% Market information 13% 9% -29% ISO 9000 preparation / audit 6% 9% 43% Access to Finance 12% 8% -31% Training budget: In spite of high training interest, the budget most providers have allocated for this purpose is relatively small. Aside from the 18% which do not plan any training, an-other 5% will only go for free training, and 33% have allocated less than IDR 1 million (USD

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100) to all staff training planned for the coming year. Only 20% will provide more than IDR 5 million (USD 500) for external training. Typically, the training budget is some 10-20% of the average marketing budget of a BDS provider. Average training budgets are highest for pro-viders from East Java and in the Tax / Accountancy segment, which also happen to have the lowest marketing budgets, and obviously prefer to invest in service quality instead of image. The highest share of providers that have not allocated more than IDR 0.5 million (USD 50) to training is found in production-related services (75%, compared to an average of 49%), which might relate to the difficult financial situation of most providers in this segment (see Section 4.4 / Figure 19 above).

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5 D O E S S U P P L Y M A T C H D E M A N D ? – S U M M A R Y A N D C O N C L U S I O N S

Commercial feasibility: Even though the majority of SMEs still feels they do not need BDS, a sizeable number of them has started to regularly obtain external support at fee rates that are commercially viable. Therefore, the majority of BDS providers experienced business growth during the last year. However, the supply structure still gives a very mixed picture: Even after last year’s growth, more than one-third of providers have been hardly able to ob-tain a turnover that is sufficient for coverage of basic operational costs. On the other hand, nearly a quarter or more of respondents have been able to mobilise substantial funds for ad-vertisement, including TV and radio spots, engage professional trainers and companies for staff training, and are obviously not doing too bad financially. This shows that it is principle possible to provide BDS to SMEs (or at least medium enterprises) on a fully commercial and financially self-sustainable base. Service oversupply: For many service segments and specific services, respectively, de-mand is still too small to support a diversified supply structure. In particular production-related services appear to be grossly over supplied in relation to demand, resulting in 60% of all providers in that segment having a turnover that is hardly cost-covering and leaves them with few resources for product development, promotion and staff training. Equally over sup-plied seems to be ‘generalist’ training and assistance on management, marketing, business planning and finance. As a consequence, providers in the Management & Business Planning segment reported worse than average business development, and almost half of them have a turnover which is hardly cost-covering. Feasible Business Models: Those BDS segments that can build on stable and strong de-mand for their main products have in general performed above average:

• Providers in the Tax / Accounting segment cover the product most demanded by SMEs23. In addition, many of them have successfully ventured into related service areas, in particular software installation and management advice / training, thereby capturing on the demand for external assistance during introduction of computer-based accounting and management solutions (see section 3.2 above).

• Similarly, providers of Promotion & Marketing services could build on strong demand for promotion & advertisement services, and gain complementary income from marketing, in-formation and communication and correspondence services.

• While in general facing relatively high demand, the performance of providers of com-puter-related services has been affected by high start-up rates, which have increased competition in the segment. A number of providers have therefore started to venture into related areas, either management and accounting advice (thereby competing with provid-ers in the Tax / Accounting segment), or (internet based) marketing, promotion and infor-mation services. The survey data gives reason to question whether, outside major cities, stand-alone computer services can be provided on a commercially feasible base. Many providers of computer-related services will either have to develop complementary and / or more sophisticated services (e.g. webpage design or development and implementation of integrated, computer based solutions for accounting and operation), or may quickly disap-pear from the market again.

• Finally, providers of ‘other services’ have fared above average. Specialisation on ‘niche’ services, e.g. legal advice, skills training, or environmental management, or on offering

23 The demand survey yielded 12% usage rate for tax advice, making this the top 1 service used by SMEs.

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an integrated support package to a specific sector24, obviously may be a feasible business model, as long as competition in that niche is not too strong. In this context, it also should be noted that many of the more successful providers obviously have devel-oped a specific sector focus, be it on communication and media, retail, or hotels and res-taurants.

‘Operational’ vs. ‘strategic’ BDS: One main lesson to be learnt from the supply analysis is, that the common distinction between ‘operational’ services (e.g. tax, accounting and legal services), and ‘strategic’ services such as business planning, management and marketing advice, is not very helpful in practice. A provider of ‘strategic’ marketing services may, and is in fact very often, turn into an ‘operational’ trade broker and forwarding agent, while many providers of ‘operational’ accounting services have started to give management advice on the introduction of computerised accounting systems. It should also be recalled that ‘opera-tional’ lawyers are primarily used by exporters, hinting at their important function in contract negotiation and mediation with foreign partners. How ‘operational’ or ‘strategic’ a service is and can be, is ultimately defined by the clients and the market, and the demand-responsiveness of providers appears to be high in this respect. Supply gaps / opportunities: What concerns future service demand as indicated by the demand survey, current supply in the main growth areas, i.e. Marketing, Management, Busi-ness Planning and Financing, is broad enough to cover additional demand. In fact, even if demand should increase substantially, the aforementioned services are likely to remain being over supplied. However, comparison of the results of the demand and the supply surveys hints at a number of more specific services that are under supplied, at least what concerns certain regions, or, to be put more positively, which present additional business opportunities for providers. Such services and prospective markets, respectively include:

• Technical training and management support for car repair / service, presumably as well for (medium-scale) transport enterprises: The car repair & service sector accounts for almost all of the demand growth that is expected in the area of technical training, and has also indicated an interest in management training and support that is substantially higher than current service usage. However, only 3% of all providers surveyed currently mainly target this sector, and only two providers revealed their intention to introduce respective new products during the next year. In Klaten, 10% of SMEs surveyed, most prominently from the (car) services sector, stated they did not use BDS because they could not find an appropriate consultant.

• Website development and web editing services: 16% of respondents to the SME sur-vey revealed their intention to install a website in the coming year. Currently, only 5% have their own website, four fifth of which installed it during the last two years. Since 57% of these websites were developed by specialised companies, the demand for website de-velopment and web editing services among SME can therefore be expected to grow strongly in future, with the highest growth expected to come from exporting companies. In relation to this demand, current supply, and upcoming introduction or respective services, appears to be rather at the lower end of what would be required to satisfy demand.

• Quality management consultancy below the ISO 9000 level: 8% of SME, in particular from services and manufacturing, indicated their intention to use consultancy on quality management during the next twelve months. In most cases, these enterprises will not re-quire ISO 9000 certification, and many of them may actually have been intimidated by the complexity and cost of ISO 9000 certification. However, current supply of consultancy on quality management, which is anyway relatively weakly developed (only 10% of providers

24 One provider in the sample, e.g., was specialized on advice to the mining sector.

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of production-related services, and 13% of those in the Management & Business Planning segment offer services related to Quality Management), is primarily focused on ISO 9000 preparation / certification, and may in addition ignore certain sectors, in particular ser-vices.

• Skills- and attitude-oriented staff training: Analysis of SMEs’ training investment has revealed a number of cases of attitude-oriented staff training, in particular in the area of customer care, by retailers, hotels and restaurants, but also by transport companies aim-ing at improving their drivers’ attitude towards passengers. A good part of these trainings has been carried out in-house, presumably partly for lack of adequate external training opportunities. Good performance of providers of respective training, and a number of new respective training products to be launched in the coming 12 months, indicate good busi-ness prospects for such training.

‘Marketing’ services: From a screening of services to be introduced during the coming twelve months, it appears that many providers intend to address the increasing demand for marketing-related services through trade brokerage. In fact, this may be exactly what many SMEs, in particular those from the manufacturing sector, request. Trade brokerage is typi-cally only paid in case of success, which reduces the risk on behalf of the user. However, some forty percent of the enterprises interested in marketing services are not active in manu-facturing, and university-educated managers/owners may well be able to understand what marketing is really about. A number of SMEs may therefore look for ‘real’ marketing advice, i.e. consultancy on prospective markets and client groups, pricing and distribution policy, their future product / service mix etc. Such services, however, are yet widely undersupplied, and several providers of ‘marketing’ (i.e. brokerage) services, as well as SMEs looking for ‘real’ marketing advice, might await unpleasant surprises and disappointments. Market transparency: The demand survey yielded a considerable lack of market transpar-ency and information on available BDS, in particular among less educated SME owners / managers. Even though the majority of providers relies primarily on mouth propaganda to advertise their services, the number of providers advertising on billboards, in specialised publications, and even on TV and Radio should be high enough to create sufficient transpar-ency on available services. The problem therefore appears to rather lie with discontinuous and often changing service foci, i.e. providers moving away from their original main service area and testing other products, thereby leaving the less informed public in doubt about the kind and quality of services they actually offer. Government intervention / support: Past Government intervention and support is likely to have rather distorted than supported BDS market development. It is probably no coincidence that the service segments that have attracted most public financial support, namely Man-agement & Business Planning and, to a lesser extent, Production-related services, are those where oversupply is most common and financial sustainability most endangered. Public fi-nancial support did not impact on capital investment, i.e. the providers supported have not invested above average in (office) equipment and facilities. Instead, sponsorship is likely to have allowed providers to stay in the market that commercially would not have survived, with negative effects on those providers which would be commercially viable if there was not competition by subsidised services. The demand survey has furthermore shown that low will-ingness to pay is related to past incidence of free-of-charge or low-cost service provision. Finally, cross-analysis of data shows that providers in the Management & Business Planning and Promotion & Marketing segments that have received external financial and management support are offering more different services than average. In other words: Providers that have received external assistance are less focused on their main service area, thereby add-ing to low market transparency among less educated SME owners / managers.

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6 R E C O M M E N D A T I O N S

Policy Environment Supporting BDS Demand: Successful development of the BDS market has to address BDS demand as well as supply. A focus on BDS supply only will hardly be effective, since many supply-side constraints originate from the fact, that SMEs' current usage of paid BDS is only moderate. In general, any policy action geared at removing market barriers and enhancing competitiveness, i.e. to improve the business environment, strengthens demand for BDS. Particular attention should be given to the following issues:

• Promoting market entry, among others by streamlining registration and licensing proce-dures, as start-ups are among the main users of BDS;

• Ensuring and enhancing public security, in particular for retailers, restaurants and ho-tels, as security problems affect significantly on these sector’s business outlook, willing-ness to invest and, consequently, usage of BDS;

• Enhancing access to commercial finance, since low willingness to pay and low usage of BDS is strongly related to insufficient access to finance, and low capital investment in the manufacturing sector;

• Improving access to and reducing costs for telecommunication, among others by market deregulation, to support SMEs’ use of the internet and related BDS (IT services, web design etc.);

• Promoting tax compliance through fair and transparent tax regulations and procedures, in order to promote use of tax services and SMEs’ installation of transparent accounting systems.

Strengthening BDS supply: The general approach to strengthen BDS supply should build on the following three pillars:

• Improving academic education in BDS-relevant areas, as difficulties to find skilled staff are among the major obstacles named by the providers surveyed. This concerns in par-ticular East Java and the areas of taxation, accounting, advertising and marketing assis-tance. Academic institutions, which are already among the main sources for training of provider staff, should as well be further encouraged to develop and offer short skills up-grading offers geared at BDS practitioners, thereby ensuring fair competition between these institutions and private sector training providers to the BDS sector. Synergetic ef-fects with the GTZ project “Indonesian German Institute” should be identified and, if vi-able, pursued.

• Promoting provider networks (associations) by strengthening professional organiza-tions, organizing provider forums, and promoting the use of electronic media in informa-tion exchange. The survey clearly points at the strong role of professional associations for provider networking, information, marketing and as source of training. In order to strengthen and complement these functions, provider forums may in particular focus on exchange about feasible business models, and issues related to management and con-trolling of a BDS provider.

• Enhancing market transparency and creating quality incentives for BDS providers, among others by associations and public institutions maintaining and publishing lists of service providers deemed to be qualified in a specific fields.

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Stand-alone technical assistance and provider training is not recommended. Outreach, efficiency and chances for sustainability are higher if such activities are connected to promot-ing provider networking and improving academic and postgraduate education. Moreover, such activities might crowd out commercial training supply to providers, which currently is already used by every second provider surveyed. Financial support to individual providers: Past financial support by the government and (to a lesser extent) donors has in most cases rather distorted than supported BDS market development. In the current market situation that, at least on Java, is characterised by BDS over supply in main service segments, any financial support to providers should be awarded very selectively. If financial support is provided at all, it should be restricted to the start-up phase, where turnover tends to be insufficient to cover costs, and confined to services that are clearly undersupplied in a specific region. Strong management capabilities of the appli-cant are indispensable for ensuring long-term financial self-sustainability. The SwissContact BDC project may serve as orientation how a financial support scheme that limits market dis-tortion should be structured. Cluster development: Past financial support to BDS providers may in many cases have been intended to encourage and support modernisation of Clusters of small-scale manufac-turers. While such intentions are in general understandable and justified, the demand survey indicates that small manufacturers are hardly reached by BDS, irrespectively of their price, and instead rely on informal networks for advice and support. This calls for Cluster develop-ment strategies, by means of strengthening local business associations and public-private cooperation, rather than creation of BDS providers with a socio-political mission, to upgrade small-scale manufacturing. Voucher programs can play a complementary role and gradually promote usage of commercial BDS by such target groups.

Introduction of Voucher Programs Rationale: Voucher Programs have proved to be worthwhile instruments for activating de-mand for low-cost BDS of those SME that either find BDS too expensive or have problems in identifying suitable services and providers. On the supply side, voucher programs introduce basic quality standards, and feedback on voucher usage can help participating providers to identify new market opportunities and client segments yet uncovered. In East Java, where a voucher program has been implemented by SwissContact and the World Bank since 1998, the rate of BDS providers that orient on small and micro enterprises is far higher than in the other regions. Against this background, it is recommended to as well introduce regional Voucher Programs in Central Java. Regional coverage: In defining the adequate regional coverage of a Voucher Program, con-sideration should be given to the following:

• The region should cover a sufficient number of BDS providers in order to enable SMEs to choose among services and providers. For each of the SC Voucher Programs in East Java and Jabotabek, some 70 providers submitted proposals, and slightly below 40 pro-viders were selected for inclusion in the Programs.

• The region should be likely to constitute one integrated BDS market. This means in par-ticular, that SME from within the target region should be able to use most services offered without having to spend too much time and money on transport to the provider's location.

As a rule of thumb, a sensible region for a Voucher Program may either be a larger city to-gether with its adjacent districts, or the belt between two larger cities (e.g. Yogyakarta-Solo, Semarang-Kudus, or Cirebon-Tegal). This implies that most Voucher Programs have to be established by several districts in co-operation.

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Eligible services: Voucher schemes should be primarily targeted at standardized BDS with a broad potential demand for SME and micro enterprises. A standardized service package could focus on SMEs that are interested in (post-) start-up assistance and support for busi-ness formalization. This focus would be primarily reflected in the selection of services eligible under the program. Such services could include start-up, technical, IT, management and marketing training, as well as training and advice on legal, tax and accounting matters re-lated to business registration. However, it is advisable to not define the range of eligible ser-vices too strictly from the outset, but orient on the service supply that is available in the target region.

Recommendations for providers Strategy: For BDS providers, it is recommended to orient on unique service offer and qual-ity, rather than on price. Low willingness to pay relates strongly to free advice that is avail-able from other informal and formal sources. Even when reducing fees as low as possible, services will still be more costly than such free advice. The only way to gain additional clients is by demonstrating the benefit to be gained from professional support. The demand survey demonstrates that word of mouth within the local business strategy is indeed a powerful promotion tool, and quality services are able to create their own demand. This requires, how-ever, a clear and constant service focus and quality Investment: Judged by the results of the supply survey, investment in staff (training) ap-pears to pay off more than investment in advertisement. The segments with the highest train-ing intensities and budgets, i.e. Tax/Accounting, Promotion & Marketing, and ‘other services’, were also those which tended to perform better than average. In addition, the aforemen-tioned segments also tended to rather recruit experienced staff instead of fresh graduates.

Possible specific interventions of RED Provider networking: The provider survey clearly points at the strong role of professional associations for provider networking, information, marketing, and as source of training. In Central Java, membership in associations of the BDS profession is lower than in other re-gions - providers are mainly organised within KADIN. Moreover, providers of computer-related services have the lowest membership rates of all BDS segments, and appear to lack a specific professional organisation. Against this background, it is recommended for RED to support the establishment of a Central Java provider network, with specific focus on providers of computer-related services. Such network would be an appropriate platform for RED to disseminate survey findings and recommendations to the provider community, initiate inter-regional exchange on feasible business models and service ideas, and conduct activities geared at upgrading the managerial capacities of network members. Further in-depth analysis: RED should follow-up the surveys by further in-depth research and analysis on issues where survey data was insufficient or partly contradictory, in order to derive additional indication on specific interventions that might support BDS market devel-opment in its target region. Such research, which might be carried out by means of focal group discussions and field studies, should in particular centre around the following ques-tions:

• Understanding the reasons for the high number of SME in Pekalongan that have used and/or are intending to use transport-related BDS, in order to determine whether this specific local service may serve as a business model to be implemented in other regions;

• Understanding the reasons for the high share of respondents from Klaten that have not used BDS in the past because they could not identify a suitable provider, in order to

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derive specific approaches for enhancing market transparency and efficiency in that re-gion;

• Clarifying the understanding of marketing and of financing services, among SMEs interested in such services as well as among providers of such services, in order to de-termine whether supply of these services really meets demand in terms of service scope and quality.

• Clarifying the discrepancy between SMEs low interest in production and operation assistance in general, and their substantial interest in quality management consul-tancy, in order to establish a clearer picture of actual demand.

Follow-up interventions: In many cases, interventions can only be sensibly identified and defined after the aforementioned in-depth research has been carried out. This concerns, e.g., measures for enhancing BDS market transparency and efficiency in Klaten, or eventual ac-tivities to promote supply of strategic marketing services, as opposed to the current trend towards trade brokerage, in case the research reveals a significant mismatch between sup-ply and demand. In the latter case, it might, e.g., be justified to develop a matching grant scheme for short company diagnosis and strategy25.

25 See respective recommendations in the Final Report of the ADB SME Development TA.

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