Last year saw the revised B-BBEE codes come into effect with the aim that they would not only do away with the formalistic tick-box approach to B-BBEE that has generally been adopted by corporates, but in an article for SME South Africa last year Daniel Hatfield, managing director of Edge Growth, an enterprise supplier development specialist firm, explained that the 2015 codes would also “highlight small and medium enterprise (SME) development, encourage entrepreneurship and counteract the negative effects on the economy.”
To that effect, the revised codes place a greater focus on enterprise and supplier development (ESD) – which is also the highest contributor among all elements which include ownership composition, skills development, management and control, and socio-economic development.
We speak to Hatfield to get his views regarding whether the codes’ targets are being realised, as well as his thoughts on what SMEs and corporates can expect in the enterprise and supplier development sector this year.
The impact of the revised B-BBEE codes on the ESD sector
In light of supply development becoming more prominent in the ownership composition, skills development, enterprise and supplier development, management and control and socio-economic development. Intention of corporates to integrate SMEs has stepped up a gear.
You see more corporates integrating, in their procurement strategies, the concept of supply development. There is a more positive mindset around integration of SMEs into corporates’ value chains.
How SMEs can expect to benefit
We will see more SMEs getting contracts from corporates. More of those contracts should be new work or business for SMEs as opposed to corporates taking from one supplier and giving to another.
Incremental economic growth will be driven by new areas of innovation in job creation. Big contracts should be broken down whereby the small new suppliers are brought into the supply chain.
I would like to see import replacement and innovative ways to build companies locally that can supply what would otherwise have been imported. There should also be more innovative ways in corporate spending. With these we will see, not only, more SMEs in supply chains but also economic growth. These SMEs can come up with more innovations and solutions in the economy.
“People get incentivised to buy at a lower cost. Often new suppliers don’t come at a lower cost”
Challenges to SME integration into corporate value chains
There are, however, some constraints which prevent integration from happening at the level that it should happen. Integration will be slower than anticipated or wanted. The constraints sit in the systems of corporates.
Relationships are one example of these constraints. In order to buy from someone new, you have to establish a new relationship or you have to stop buying from someone with whom you already have a relationship and trust. Building these relationships takes time. It’s not always the right thing to do to break these relationships. It is difficult for corporates to change relationships overnight.
Incentives are another constraint. People get incentivised to buy at a lower cost. Often new suppliers don’t come at a lower cost.
Availability of data to analyse where the gaps are in commodity analysis so you know where to buy from is also a constraint. The quality of data analysis is not available at every corporate. A corporate therefore cannot give enough lead time to a small supplier to build the capability to integrate.
Need for a change of mindset by SMEs
Small black businesses need to realise that being black-owned alone is not a business case. You need to show that you have other abilities in your value proposition. It’s not just the corporate scene that needs to change. SMEs also need to change their mindsets on how they approach corporates. The shift and integration of corporates will take time and the likes of Edge Growth to nurse them through the process. Edge tries to help the corporates change the way they do business so that supplier development is a sustainable process.
“A lot of SMEs feel if it’s not grant funding, they don’t want the finance”
Funding opportunities in the ESD sector
The funding landscape for enterprise and supplier development (ESD) exploded over the years. There has been massive innovation in the SME funding sector. There is, however, still a lack of appetite and space in the market for businesses that don’t yet have contracts and need to grow their capacity to get to a point where they are contract-ready. There is some work to be done in pre-contract investments.
Innovation in financing still needs to be worked on especially in two ways: pre-contract space and where an element of risk capital is required. Edge has a number of funds that SMEs can access. There are other players in the market providing contract and grant funding.
Funding – are local entrepreneurs winning the battle?
Yes and no. Yes in the sense that more SMEs are becoming aware that there is funding out there. There are more people offering finance in the SME space.
No because entrepreneurs don’t generally have a good understanding of the terms and conditions they will get funding on. A lot of SMEs feel if it’s not grant funding, they don’t want the finance. Some don’t want to give equity away yet they need funding at an early stage of their business.
There is a lack of education on the part of the entrepreneurs. They don’t understand that they are in a stage of the business where the type of money that they need is high risk capital. People putting capital will demand a return on their investments and will probably demand a stake in the business.
In the USA people give away equity as they understand it is a way to get funding and get their business off the ground. Education that equity funding is not the end of the world is required. SMEs need to be wise in how they source finance and the partners that they will work with.