Earlier this week I attended a fascinating presentation at the Gordon Institute of Business Studies (GIBS) where they unpacked the first part of a piece of research into Enterprise and Supplier Development (ESD) initiatives in South Africa.
Comprising a working paper entitled: “Enterprise and Supplier Development Ecosystem Effectiveness in South Africa”, the research forms part of the GIBS Responsible Finance unit and looks at whether ESD is meeting its stated goals.
What is Enterprise and Supplier Development (ESD)?
As a quick reminder: “Enterprise Development (ED) and Supplier Development (SD) is one of the three priority elements of the Broad-Based Black Economic Empowerment (B-BBEE) Scorecard. The aim is to strengthen local procurement, enhance local supplier development programmes and increase financial support towards black entities.”
Depending on your sector and code, organisations are expected to contribute between 2% and 5% of Net Profit After Tax (NPAT) to supporting black-owned Exempted Micro-Enterprises (EMEs) (R10million and less annual revenue), and Qualifying
Small Enterprises (QSEs) (annual revenue of between R10 million and R50 million).
Is Enterprise and Supplier Development (ESD) actually achieving its aims?
Despite billions of Rands being invested in the ESD process, there is very limited evidence to suggest that ESD programmes are actually working or delivering the intended support for the SME sector.
The short answer is that it is very hard to provide a definitive answer to this question – this is due to a a number of factors ranging from the structure of the South African economy through to the COVID-19 pandemic and lack of economic growth.
What are the some of the key factors influencing success or failure in the ESD universe?
Short-term thinking when it comes to ESD:
The first is that we often underestimate the gap between Enterprise Development and Supplier Development. It is relatively easy to invest support in SMEs, it is very different story to integrate these SMEs into your supply chain.
Consider being a components manufacturer for an automotive OEM where you need to comply with regulated manufacturing standards, need to integrate safety and technology standards into your operations and have capacity to meet minimum order quantities. These are not things which happen overnight – it takes a combined effort between the Measured Entity and the supplier over many months and years to align.
Despite this, many of the ESD programmes which are in the market are short-term in nature with organisations being incentivised to support more – rather than better quality – SMEs.
Is it the role of business to develop SMEs?
One of the debates which continues to rage on is whether it is the purpose of businesses to artificially develop other SMEs.
Earlier this year, we attended a workshop where a mining executive and an ESD executive from a bank went head-to-head on this topic. The mining executive made the point that their core business was mining – not funding glove and safety equipment manufacturers (as an example).
The banking representative rebuttal was that it was “the right thing to do because the country needs SMEs because they create jobs”.
Unfortunately, this is one of the problems with the ESD space: Everybody wants to help SMEs flourish but the primary way for SMEs to grow is by growing the economy.
ESD thresholds should potentially be reviewed:
An interesting discussion point around the world of ESD related to the thresholds for ESD investments.
The point was made that the R10m and R50m thresholds had not been reviewed since. The ESD legislation had been introduced. This raised some interesting discussions around where in the value chain ESD was actually the most effective.
Was the purpose to support start-up and early-stage businesses in the EME universe or more mature businesses?
Specialists versus generalists:
Organisations should take a long, hard look at the types of opportunities they are making available in their ESD universe. Too often the opportunities being made available to SMEs are in the highly-commoditised, low margin areas of their supply chain (Maintenance, Cleaning, Recruitment etc.)
Higher margin, better quality opportunities remain reserved for established/entrenched suppliers with the Measured Entity complaining that they cannot identify suitable suppliers. Legal, finance / financial services and other advisory work are areas where many supply chains could be opened up.
Leakage in the ESD universe is becoming an issue:
The ESD universe often has a number of intermediaries who are all looking for their piece of the pie – ESD is becoming a “sold” product rather than a bought product.
This was one of the key findings of the GIBS research which was cause for concern. Funders were looking to meet their ESD spend targets and would then hand over their budgets to intermediaries who would then cobble together random SMEs for a 12-month programme.
There was some mention [at the GIBS presentation] of “regulation” of ESD coming in, but this would appear to be challenging as it would likely lead to existing players becoming deeper entrenched.
What is clear is that the Enterprise and Supplier Development landscape is becoming increasingly more sophisticated as businesses expect greater impact from their investments. With alternative funding mechanisms such as Responsible Finance, Sustainability-Linked funding, and Environmental, Social and Governance (ESG) funding being made available, we can expect greater scrutiny on how this funding is deployed and the impact it delivers.
