Public Disclosure Authorized Finance & PSD Impact DECEMBER 2020 The Lessons from DECFP Impact Evaluations ISSUE 58 Our latest note reports on a new approach to improving business practices in growing firms – using the market to insource or outsource skills instead of training the entrepreneur. Using the Market to Hire Skills as an Alternative to Business Training Stephen J. Anderson and David McKenzie Improving business practices like financial help them find and hire a marketing or finance Public Disclosure Authorized record-keeping or marketing activities are worker to work full-time in their business. They important inputs into firm growth. The most received a subsidy that would cover the full cost common policy approach for aiding firms to do of this worker at first, and then declined over this is through business training programs that time so that by the end of 8 months the firm was aim to teach the entrepreneur these skills. covering most of the cost. With outsourcing, However, by the time firms reach 10 to 20 firms could contract an accounting or marketing workers, half of them have someone other than service provider, whose specialist would the entrepreneur in charge of the finance and/or marketing functions. If the goal is to help small typically work one day per week with the firm, firms grow, then it may be more effective to with a declining subsidy spread over 9 months. accelerate this process by helping entrepreneurs We tested the relative effectiveness of these Public Disclosure Authorized access a marketplace for business services different approaches through a randomized where they can hire skilled specialists. experiment in Lagos and Abuja. A sample of We test this idea through a pilot embedded 753 firms with 2 to 15 workers who had applied in the Growth and Employment (GEM) project for the GEM program were randomly assigned in Nigeria. into five groups of approximately 150 firms each: A control group, business training, 1. Experimentally Testing Different consulting, insourcing, and outsourcing. The Approaches to Improving Business Skills firms were looking to grow, were run by owners The GEM project had initially planned two who almost all had some tertiary education, and approaches to helping firms gain business skills. were earning approximately $1,000 per month The first was business training, which involved in profits at baseline. Half were in light firms receiving 25 hours of online training manufacturing, and the remainder in ICT, followed by 12 days of in-person training, based Public Disclosure Authorized hospitality, entertainment and construction. on the Business Edge curriculum, and at a cost We then measured impacts over 2 years with of approximately $2,000 per firm. The second program administrative data and two follow-up approach was to match firms with consulting surveys with 89% and 86% response rates. service providers, who would receive 88 hours of personalized consulting spaced over 6 to 9 2. Results months at a cost of $4,000 per firm. The market-based approaches were more We worked with the project to also pilot two effective at improving business practices than alternative approaches that would take the same business training, and at least as effective as amount of funding as used for training but use it consulting at half the cost. to help firms access a marketplace where they We carefully measured 41 different business could hire these skills. With insourcing, firms practices, including many that could be could contract a human resources provider to objectively verified. Business training had a media technologies. The marketing specialists small and not statistically significant impact on helped firms identify products to introduce that these practices (Figure 1). Insourcing and customers wanted. Firms also improved both the outsourcing led to 8 to 10 percentage point quantity and quality of their digital marketing, improvements in marketing and digital helping them reach more customers. marketing practices – with most firms in these Revealed preference suggests many firms interventions choosing marketing over found this beneficial, with firms keeping at least accounting specialists. one-third of their specialists after the subsidy period ended, and being more likely to go back Figure 1: 2-Year Impacts on Practices to the market to buy more services. 3. Policy Recommendations These new insourcing and outsourcing interventions appear a promising way to help firms improve their business practices. We think there are two potential roles for governments to use these results in helping firm growth. • First, when governments are looking to directly help firms through a business support program, this approach may be considered as an alternative to training. We are developing an implementation manual to Better practices lead to higher sales, profits and provide guidance for policy teams interested employment. We had planned to include more in doing this. firms from subsequent rounds of the program, • Second, governments can have a role to play but this did not eventuate. As a result, we have in reducing the frictions that prevent the less statistical power to measure impacts on firm market for business services from performance than anticipated. Nevertheless, we functioning more efficiently. This could include reducing information frictions and find that outsourcing and consulting resulted in helping provide a way for providers to signal significant improvements in sales, profits, and quality and for positive and negative employment. We can not reject that the reputations to develop. insourcing intervention had the same effect as these other two approaches, but also can not reject that it had no effect. The main mechanisms for firm growth are through product innovation and improved social For further reading see: Anderson, S, and McKenzie, D. “Improving Business Practices and the Boundary of the Entrepreneur: A Randomized Experiment Comparing Training, Consulting, Insourcing and Outsourcing”, World Bank Policy Research Working Paper 9502, December 2020. Recent impact notes are available on our website: https://www.worldbank.org/en/research/brief/finance-and- private-sector-impact-evaluation-policy-notes