By Emma Montocchio, Head of Impact Investments at Decusatio
Enterprise and Supplier Development (ESD) has been part of South Africa’s transformation landscape for long enough that most large businesses understand what is expected of them. Budgets are allocated, programmes are implemented, beneficiaries are identified and the necessary reporting takes place.
What I think we spend far less time talking about is what happens to those businesses afterwards.
Did the entrepreneur build a stronger business? Did they secure new customers? Were they able to employ more people? Did their revenue grow? Are they in a better position to access funding? Most importantly, would the business continue to operate if the corporate support disappeared tomorrow?
These questions become particularly topical with the anticipated Gazetting of the “Transformation Fund” which is expected to put more pressure on Measured Entities who opt to continue running their own ESD programmes instead of committing directly to the Transformation Fund.
These are uncomfortable questions, particularly when a programme may be delivering perfectly well against its stated targets. However, if we are serious about the purpose of ESD, they are questions we need to ask.
South African SMEs undoubtedly face a funding problem, but funding is very rarely their only problem. In the work we do with businesses and corporate partners, it becomes clear very quickly that capital on its own cannot fix a business that does not have the systems, customers or operational capability to support its growth.
An entrepreneur might need equipment to increase production, for example, but they may also need help understanding their numbers, managing cash flow or meeting the procurement requirements of a large corporate customer. Another business might have an excellent product and the capacity to produce it, but no meaningful route to market.
Sometimes the challenge only becomes apparent once the opportunity arrives.
Winning a significant corporate contract should be a major milestone for a small business, but fulfilling that contract requires working capital, people, stock and systems. Payment terms can also mean carrying costs for weeks before receiving income. A business can therefore look successful on paper while experiencing enormous pressure behind the scenes.
This is why I think we need to be careful about equating ESD spend with ESD impact.
There is an opportunity for corporates to approach the problem from a different direction. Rather than beginning with an allocated budget and then asking where it can be spent, start with the supply chain itself.
Where are there genuine procurement needs? Which products or services are difficult to source? Where is the business overly dependent on a small number of suppliers? Are there emerging businesses that could realistically participate in those areas if the right support was provided?
That changes the conversation considerably.
Instead of searching for businesses that qualify for a programme, you begin identifying businesses that could potentially solve a commercial problem. The role of ESD then becomes helping those businesses develop the financial, operational and technical capacity to compete for that opportunity.
This is why we are particularly excited about the opportunities created through our “Sponsor a Black Industrialist” initiative and the opportunities it might create. Ultimately we want businesses which are well-capitalised and can stand on their own two feet without dependence on the Measured Entity for ongoing funding.
This is where I believe ESD can deliver some of its greatest value. Transformation and commercial objectives do not necessarily have to compete with each other – they should ultimately compliment each other.
A corporate that develops capable new suppliers can diversify its procurement base and create more competition within its supply chain. The SME, meanwhile, gains something that can be more valuable than funding alone: a genuine customer and an opportunity to prove that it can deliver.
We talk extensively in South Africa about access to finance for SMEs, and rightly so. However, access to markets is just as important. There is limited value in helping an entrepreneur purchase equipment, employ people or increase production if there is no sustainable demand for what the business produces.
It also means that our measurement of successful ESD programmes needs to extend beyond the amount of money deployed or the number of businesses supported.
I would much rather know what happened to those businesses one, two or three years later.
Did they win additional customers outside the original corporate relationship? Did they become more profitable? Did they create permanent jobs? Could they approach a lender with credible financial information and secure funding without relying on the programme? Has the founder developed the confidence and systems to manage a larger organisation?
There is also a more difficult question we need to confront. At what point does support become dependency?
There is nothing wrong with an emerging enterprise requiring significant assistance in its early stages. Building a sustainable business in South Africa is difficult, and the structural challenges facing smaller businesses are well documented. Expecting an SME to become independent immediately after receiving support would be unrealistic.
There should, however, be a direction of travel.
Each year of support should leave the business stronger and less dependent on the programme than it was before. It should have better systems, stronger financial information, more customers, greater operational capability and a clearer route towards accessing commercial opportunities on its own.
For me, one of the strongest indicators that an ESD programme has worked is when the business eventually outgrows the need for it.
South African corporates have significant resources sitting within their transformation and supplier development strategies. If those resources are connected to real procurement opportunities and paired with the right financial and operational support, they can do far more than satisfy a requirement on a scorecard.
They can help build businesses that employ people, participate in corporate supply chains and ultimately become sustainable enterprises in their own right.
Compliance will always form part of the conversation, and understandably so. The challenge is making sure it does not become the entire conversation.
When we evaluate an ESD programme, perhaps the most important question isn’t how much money was spent or even how many businesses participated. It is what those businesses are capable of doing today that they could not do before the intervention.
That is ultimately the difference between spending an ESD budget and actually developing a supplier.
