B-BBEE and Enterprise Development

In this article we will unpack Broad-based black economic empowerment (B-BBEE) and its impact on the Enterprise Development compact.

Why B-BBEE?

In a free market economy the rich get richer and the poor get poorer, so some form of market intervention is needed to stabilise our economy.

Due to our apartheid legacy the economic gap described above has a significant racial loading to it and in response to this problem the nation has collaboratively developed B-BBEE as a market intervention, and it is our bet for the future stability of our country.

B-BBEE is a mitigation strategy against any future of Africa’s social, political and economic stability. It addresses the legitimacy of a mixed market economy and dramatically increases the size of any potential market.

B-BBEE implemented correctly, seeks to positively support the business strategy and contribute to the countries grow as this is what stimulates the creation of more jobs in the country.

It achieves these objectives through introducing a systematic measurement and monitoring system that tasks companies to review the barriers to entry into the economy(detailed below), in light of the company strategy, with a view to understand the impacts the company can have, that also align with the businesses strategic objectives.

The opportunity barrier

A discussion paper developed by Steven Kelman of Harvard University (2007) highlighted the need for B-BBEE to address the opportunity barrier existing in the economy due to South African companies being significantly invested in their value chains, as sanctions did not allow for off-shore investment.

There are productivity implications to this situation, for example if your supplier has a common shareholder with you, you might use them even if they are the best option. The tenant of the paper was that a shaking out of deep comfortable relationships in a value chain could create higher competitiveness and growth.

Enterprise development was chosen as a mechanism to drive some of this change. It focuses on the development of the capacity of black companies, and contributions to these companies are measured based on a target of 3 percent of net profit after-tax, invested annually.

Enterprise development on a B-BBEE scorecard then releases large funding from corporates, with significant market pressure toward qualitative contributions in enterprise development, and no accountability toward qualitative impacts, with significant effects in the compact between enterprise development contributor and the beneficiary.

The impact on the psychological compact

I would argue that too often what the ED contributor “wants” is to score points on their B-BBEE scorecard, and is prepared to offer donations or other contributions in order to secure these points.

The qualitative impacts on the country and the beneficiary are not considered. So we give some cash, it artificially supports the ED beneficiary while we contribute and when we stop contributing the company falls over.

For the ED beneficiary, if they are offered easy cash, they “want” it, which builds a culture of dependency instead of entrepreneurship.

I would argue that this compact is superficial, unsustainable and does not automatically generate growth.

I place quotes over “wants” because if we look at what the country, our corporates and the entrepreneurs “need” and we reflect on the Malaysian model, we see a very different compact that I believe we can learn from

The Malaysia model has an enterprise development objective of using the energy of smaller entrepreneurs to plug into and support / supply the corporates. These “two economies” (formal and informal), are learning to speak each other’s language toward an objective of mutual growth and benefit.

I would argue that the current structure of B-BBEE is creating perverse effects in the psychological compact between contributor and beneficiary, which seriously erode the potential contributions to the growth of the country.

How should enterprise development be implemented in a sustainable manner?

We need to more strongly establish the old “win-win principle” in how we approach our value chains.

Here are the best practice principles toward enterprise development:

Supplier development

Enterprise development aims to encourage companies to invest in strategic supplier development initiatives. These will ultimately enable your supply chain and, if tackled correctly, can ensure the supply chain communicates correctly to deliver efficiently and cost effectively to you.

“Win-win”

And the more you spend with strongly empowered suppliers, the better your preferential procurement score.

Outsourcing non-core activities

Establish what is core and non-core to your business, and explore what can be outsourced as an enterprise development initiative. One company spun off its consumables division, setting up former employees in a separate business. This led to an overall cost reduction as this aspect of the business was a distraction, but something the business and its clients did want.

Owner-driver schemes, security, cleaning and so on are key candidates for enterprise development initiatives.

Building related value offerings (joint ventures)

Often clients require a portfolio of offerings that your business is unable to offer in its entirety. Through stronger relationships with companies that have related value offerings, you can bolster your overall value proposition to the client…. again “Win-win”

Courting future owners

The interesting aspect to enterprise development is that it can be very useful as a courtship mechanism for future owners. Rather than diving quickly into a change in your ownership, perhaps consider the partners as an enterprise development initiative, see how the relationship develops and, if all is progressing well, move into a merger or acquisition.

Enterprise development is a strategic tool, with South Africa poised at a moment of truth, we need to have every South African engaged and using these tools, clear on how they are contributing to a transformed stable company and country which can be a great heritage for our children.

Enterprise development can play a key role in this journey; it just depends on how you use this tool.