A great deal has been written on the benefits, both economically as well as socially, of transformation. The truth of the matter is transformation and compliance imposes a financial implication for businesses, yet non-compliance and stagnation may have a far more reaching and negative effect on the bottom line.
According to ‘The Institute of Risk Management South Africa’ (IRMSA) and as recently published in the ‘IRMSA Risk Report: South Africa Risks 2015’1 , the top risks include the skills shortage in South Africa and the economic slowdown, with specific reference to unemployment and income disparity. When asked about the severe income disparity situation facing South Africa, Michael Lalor, Director: Ernst & Young Africa Business Centre, said: “The consequence is likely to be a downward spiral of social unrest, political instability and economic stagnation”. When asked about the most effective response to managing this risk, Lalor elaborated: “From a government perspective, there are clearly no quick fixes. It is most critical to find the correct balance between keeping the economy stable and enhancing our competitiveness in a global context, while driving steady progress on structural economic transformation – for example, it is critical that BEE (Black Economic Empowerment) legislation is effectively implemented”
Jason Goldberg, Director of Edge Growth, particularly advocates for those forms of transformation which directly benefit the most poor. “Education and job creation are the only ways to create social equality in the New South Africa. Even if you don’t care about those matters, how long is it likely that South Africa’s 20 million youth, without a future will remain peaceful and quiet, when nothing is visibly changing for them? As a generation whose heroes are revolutionaries with an ideology of radical economic transformation and emancipation, how long will they be patient? The role of big business is crucial in mitigating the risk South Africa passing a tipping point. Government implemented the new Broad-Based Black Economic Empowerment (B-BBEE) codes in May 2015. If executed correctly, particularly the Enterprise and Supplier Development pillars can have a positive impact on business and stability in this country.”
Goldberg explains the business case for effective enterprise and supplier development. “Compliance to the B-BBEE codes costs money, yet there are two pillars where the cost can be converted into true value for the business, namely; Skills Development and Enterprise & Supplier Development (E&SD). E&SD allows for the possibility of recouping costs invested in the supply chain, should these businesses be sustainable and scalable – which is of course the goal. The best and cheapest form of transformation is to pick good but young black suppliers, lend growth capital, give them growth contracts, provide Acceleration to help them build a sustainable, larger business, and then recoup loan repayments over time. Done this way, transformation can create jobs, empowered black suppliers, and cost very little in the end.
Aside from the obvious financial return, the benefits of E&SD compliance are:
– Delivery of core business benefits – if you invest in strategic suppliers / distributors, more robust suppliers are created, turnaround times improved and a higher rate of localized content is achieved. If investment is on the distribution side – better trained distributors building customer loyalty is attained
– Import replacement creates local jobs and boosts the manufacturing and services sectors of the economy.”
Effective and efficient transformation cannot occur in a short time frame, it requires a long-term commitment from management of the large business. The starting point is to create a special purpose vehicle, a trust that will be used solely for the support and growth of SMEs in the supply chain. There are a number of options within this step: the business can run and administer the trust themselves, although unless trust management is their core business it is advisable to hire a reputable company to effectually run and manage the fund. The next consideration is to have a 5 – 10 years plan, which is how long it takes to grow a small business to sustainability at scale.
In conclusion, Goldberg provides an example of effective and efficient transformation: “Through the Vumela, a fund run in alliance between Edge Growth and FNB, Coega Autospray is an outstanding example of the effectiveness and efficiency of transformation when planned and executed by professionals. Coega Autospray is a company who, has grown substantially in the past three years increasing their annual turnover by over 300%, whilst increasing the number of staff, who are gainfully and sustainably employed, by 171%. As part of the supply chain for General Motors and Volkswagen, the cost of production has been reduced for the automotive giants and local business has been supported by reducing imports.”
