Value Chain Glossary: Embedded Services
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Embedded Services
Embedded services occur when a buyer of a firm's products or a seller of inputs to a firm also provides "free" services or products as part of the transactional relationship. In these scenarios, the enterprise does not pay direct fees for the services or products; service providers (e.g., the input suppliers or buyers) cover the costs--although the enterprise may pay for the product or service indirectly through higher input costs or lower prices received from buyers. For example, export companies, in addition to export services, often provide technical assistance, training, finance and/or inputs to their small enterprise suppliers. The exporter provides these services because it makes good business sense to do so and it ensures the exporter receives high-quality goods from the small enterprises. The services are embedded in the transaction the two parties have with one another.
The frequent provision of high-quality embedded services typifies effective vertical linkages. Lead firms can provide a wide range of embedded services to affiliated suppliers and buyers to ensure consistent quality of end products and services. These embedded services are often seen as an integral part of business transactions and considered a necessary cost of doing business.
Embedded Services can be:
Sector-Specific – Usually target primary producers, such as: input and equipment supply, agricultural extension, veterinary services, etc.
Cross-Cutting – Business services useful to a broad array of businesses not necessarily in the same sector, such as: management consulting, auditing, legal, information technology, etc.
Financial – Financial service providers include commercial banks, microfinance institutions, and microcredit schemes. Financing arrangements between actors in the value chain are also considered embedded services.
