Potential Target Groups
Business-to-business linkages where small enterprises located in areas where large businesses operate in sectors with promising opportunities for sub-contracting.
Business-to-business linkages where small enterprises located in areas where large businesses operate in sectors with promising opportunities for sub-contracting.
Purpose and Rationale of Service
The purpose of this activity is to create win-win deals between large and small businesses in which the large business increases its efficiency by contracting out work and the small firm benefits from selling to corporate customers.
When is This Activity Appropriate?
This activity is most appropriate when:
• Economies are undergoing structural adjustment that is opening local markets to international competition or in post-
communist countries where large firms are being exposed to international competition. With increased competition,
large firms must become more efficient;
• Large enterprises need to meet large orders quickly and do not have the time or resources to invest in full time
workers;
• Small businesses have the ability to process large orders that meet market standards in a timely fashion;
• Current suppliers are not located nearby, resulting in inefficiencies;
• There are enough large and small companies operating locally to make the endeavor worthwhile; and
• There is an association of large-scale businesses that supports the endeavor (this is not required, but can be very
helpful).
This strategy works best in sectors that are growing or provide significant sub-contracting opportunities. It should be noted that many sub-contracting relationships take place across sectors, such as a car manufacturer that uses a subcontractor to manage its cafeteria.
Methodology
There are many ways to approach subcontracting. Two methods include:
Approach 1—large-scale programs:
• Identify growth sectors that have promising opportunities for sub-contracting (the United National Industrial
Development Organization (UNIDO) suggests the metalworking, plastic, rubber, mechanical, electrical, and electronic
industries);
• Identify as many players as possible, both large and small businesses, that might be interested in sub-contracting—
publicize widely;
• Hold networking events to help business owners and managers meet one another to discuss and market their needs
and capabilities;
• Create a database of interested companies and encourage them to list their buying and selling opportunities with the
database;
• Provide open access to the database so firms can identify potential suppliers and customers; and
• Create, or link into, international business-to-business databases for firms interested in reaching international markets.
Approach 2—small-scale programs:
• Identify a manufacturer’s association willing and able to manage the program and facilitate large firm buy-ins;
• Carry out a participatory analysis of large firms to identify sectors having sub-contracting opportunities and determine
the best one to begin with;
• Research the industry to understand production and market opportunities and constraints;
• Organize a workshop to promote sub-contracting and help large firms understand how to mentor and work with small
firms and to identify the different kinds of opportunities that may be available to them;
• Work with the large firms to identify specific sub-contracting opportunities;
• Help the large firm hold an open house and promote it among small-scale suppliers. This type of activity helps potential
partners get acquainted and learn about each other’s businesses, needs, and capabilities;
• Advise the large firm on selecting small firm partners;
• Assist the selected small firm in negotiating profitable terms and help it to also negotiate specific support and mentoring
from the large firm (access to equipment, inputs provided up-front, credit, product designs, etc.); and
• Monitor the partnership by holding regular workshops and visiting the firms periodically. Move on to other sectors
when the relationship appears solid and likely to become sustainable.
Finance and Cost-Recovery Mechanism
There are different strategies depending on the approach...the BDS facilitator may serve in a finite capacity or pursue sustainability by using one or more of the following cost recovery mechanisms:
• Membership fees,
• Fees for use of the database (facilitating contacts),
• Fees for networking events,
• Fees for training in sub-contracting,
• A percentage of the negotiated contract.
If the BDS provider is the large firm that is subcontracting to the SE, its costs are covered by the commercial relationship with the SE. Such links are sustainable through the market.
How Should the Program be Evaluated?
• Number of contracts facilitated,
• Number of firms (small and large) involved in those contracts,
• Number of new clients for small firms,
• Number of months or years the relationships last,
• Increased sales of small-scale businesses,
• Increased sales / decreased costs for both large and small businesses,
• Overall growth in the sector(s) in which the subcontracting occurs,
• Improved cash flow for SE subcontractors,
• Sustainability of the BDS providers (contracting firms)—measured by profitability / reduced costs.
It should be noted that the subcontracting process could result in a net decrease in job creation, particularly if the subcontractors are former employees of the contracting firm. This should be taken into account when designing a subcontracting development program.
Note: see introductory section to Menu for general principles on evaluation.
Potential Impact
• Increased productivity and competitiveness of large firms resulting in overall growth in particular sectors; and
• A change in the business culture that increases sub-contracting among firms and links small enterprises to the
mainstream economy.
Length of Intervention
It takes 1-3 years to develop a workable strategy and the expertise to reach several hundred firms.
Illustrative Programs, Sectors and Regions
UNIDO global sub-contracting program — Since 1984, 54 Sub-contracting and Partnership Exchanges (SPXs) have been established in 30 countries with UNIDO assistance. Approximately US$7.5 million in technical cooperation funds have been spent on this effort. Of the SPXs established, 45 (85%) continue to operate and these have more than 15,500 companies registered with them. A survey of one program, conducted in 1994, indicated that around 80% of the registered companies had been consulted at least once during the year and 40% of these consultations had resulted in a signed contract. This means that an average of 37% of companies registered with an SPX concluded a contract in 1993. A similar survey conducted in 1997 indicated that registered companies had been consulted at least twice (219%) in the course of the year and that 21% of these consultations had resulted in a signed contract. Thus, 66% of the companies registered with an SPX concluded contracts in 1997. www.sedonors.org click on “BDS Materials” at the ILO web site.” www.unido.org
Manicaland Business Linkages Project in Zimbabwe is pioneering a minimalist, small-scale approach. From 1996 to 1999, results included:
• Linkages catalyzed: 110
• Cost / linkage: USD $1,360
• Employment generated: 1,000 estimated net job creation.
Lessons Learned
• Having a sector focus is important, though sub-contracting often occurs across sectors, such as cleaners and caterers
who serve a wide range of businesses.
• Large-scale programs (Approach 1) give more people access to services, but are less able to facilitate and monitor
linkages;
• With small-scale programs (Approach 2), it is important to focus on specific opportunities offered by large firms and
cast a wide net to identify small firms. It is significantly more challenging to find a match if you start with small firms and
look for opportunities with large firms;
• While there is a great deal of interest in using the internet to promote subcontracting in international markets, the
potential for this strategy to assist small enterprises may be limited in many developing countries due to slow
connection times, high costs, and other factors;
• Developing business relationships between large and small firms often involves breaking down cultural, class, and
racial barriers between small business owners and large firm managers. Breaking down these barriers may require a
specific strategy, one that is appropriate to the cultural context of the situation; and
• Large firms should not engage in sub-contracting as a charitable activity. To be sustainable, sub-contracting should
benefit both parties.