Why measure?

Performance measurement is critical not only to see whether enterprise development projects are making a difference, but so that SMEs themselves can continuously improve. As the saying goes: "If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it." In other words, the measurement of performance is the first step towards the management of performance.

Who is the toolkit for?

Enterprise development programmes aim to foster sustainable SMEs that can promote economic growth and reduce poverty. These programmes can be public or private, and are run by a variety of actors including NGOs, multilateral organisations, domestic SME development agencies, development finance institutions, impact investors, and foundations. They have many different intervention models – from direct support such as finance, training, or advisory services; to indirect approaches such as value chain and market systems development. This toolkit is neutral about the means of intervention to instead focus on the ends: Capturing changes in SME performance.

What are SMEs?

Small and medium enterprises (SMEs) are the backbone of the global economy. They are estimated to constitute 90% of worldwide businesses, employing two-thirds of the total workforce . This toolkit focuses on developing countries SMEs who are a major engine of job creation, and a source of income and livelihoods for millions of people.

What counts as an SME? There is no standard international definition of what constitutes an SME. Definitions vary by country and are usually based on the number of employees or the annual turnover of enterprises. Typically, SMEs are defined as enterprises with less than 250 employees. Small enterprises have 10 to 100 employees, and medium-sized enterprises have 100 to 250 employees . Microenterprises with fewer than 10 employees are not covered in the scope of this toolkit as it is thought that they have distinct data needs with different ownership structures and worker-management relationships.
Why is measuring SME performance a challenge?

Enterprise development projects need to measure changes in SME performance, not only to report results to project funders, but also to help SMEs continuously improve. But measuring the performance of SMEs in the context of a developing economy brings special considerations.

  1. Face pressing capacity challenges in record keeping, data collection, and access to modern management techniques – along with the technology that drives it. Most SMEs have some kind of performance measurement system, however, these tend to be very basic.
  2. Operate in intensely competitive environments where the is little market differentiation - meaning most SMEs have to tussle just to survive, reducing the incentive to collect and use data. Some countries have 5-year survival rates as low as 10%.
  3. Have flatter management structures, less bureaucracy and – in theory at least – can be more agile and adaptive to use performance information to improve.
  4. Rely on productivity gains to maximise long-term competitiveness and profitability . In the absence of intellectual property or technology as a source of comparative advantage, labour productivity is often critical to sustaining SME performance.
Why focus on labour conditions?

Enterprise development projects are facing increasing pressure to demonstrate that their work is leading to qualitative improvements in people’s terms and conditions of employment. As researchers have noted, it is “not only the number, but also the quality of jobs matters to poverty alleviation and economic development”.

For many SMEs in the global south, workers are a critical determinant of business success. Since SMEs often undertake labour-intensive activates, they rely on a supply of labour – with varying skills requirements - to produce their goods and services. Labour and employment issues are frequently included in non-financial performance measurement systems, but they often only focus on the most easily quantifiable elements such as the number of accidents.

Labour conditions refer to the working environment and all circumstances affecting the workplace, including job hours, physical aspects, and the rights and responsibilities of SMEs towards their workers. Many aspects of this work environment are covered by national labour laws, which in turn are shaped by the eight fundamental ILO conventions.

By improving labour conditions, SMEs can also improve their business outcomes. Better health and safety practices can boost productivity and employee retention. Companies have shown growth in sales per employee workforce hour following targeted training programmes. As recent research has demonstrated, jobs with decent wages, predictable hours, sufficient training, and opportunities for advancement can be a source of competitive advantage. For many businesses, thinking about employee working conditions has shifted from a way to minimize risk to a competitive advantage.

Conversely, bad conditions can be bad for business: Poor health and safety practices can result in fines and slow task completion. Industrial action and absenteeism can lead to prolonged disruption to operations. An SME owner says, “You have to have an environment where people are happy working, where they cooperate well, interact well. If you have problems in the way people work, it could terribly affect the performance”.