Finding that most organisations they engage with have been unable to drive meaningful compliance on the new Enterprise & Supplier Development (ESD) scorecard, Bruce Rowe and Seth Randall of Mpowered Business Solutions (MBS) give some practical suggestions in this month’s SmartProcurement.
The new ESD scorecard requires renewed thinking from Supply Chain and Procurement professionals. The way organisations have approached Preferential Procurement in the past is no longer relevant. If continued, the most that might be achieved is insignificant B-BBEE compliance improvements if applied from a VERY LOW base.
Innovative, strategic thinking is now required.
The importance of Supply Chain / Procurement involvement stems from the fact that the ESD scorecard constitutes more than 40% of the scorecard. In fact, it comprises even more if you consider that Ownership and the board-level elements of Management Control are outside the scope of most B-BBEE stakeholders.
Dissect the scorecard
A company needs to spend 80% of its procurement bill, minus a few exceptions, on BEE suppliers. Let’s call this ‘included spend’. If included spend reaches the 80%target, a company is only awarded five out of the total 27 points allocated to procurement.
Seven further points are available if 15% of the total included spend is allocated to both Qualifying Small Enterprise (QSE) and Exempt Micro Enterprise (EME) suppliers respectively.
Another nine points are available if 40% of the total included spend is allocated to 51% black-owned companies and four more points if 12% is allocated to black-women-owned suppliers.
Maximising the five points
Beginning with the five-point allocation, procurement professionals must focus their attention on aligning their expectations of suppliers with company requirements.
Communicate realistic expectations to your suppliers. It is likely they will drop three or four levels on their scorecard once they start measuring on the revised codes. Just like your own company, there is not much they can do to mitigate against this fall in compliance over the first year or two of implementation. Rather, set realistic goals for them for them to achieve over time.
Rowe and Randal recommend engaging suppliers to provide you with a “current-state assessment” of their B-BBEE compliance on both the current and revised codes, to assess the impact. This will force your suppliers to understand the details of the revised codes and the resultant impact on their business. Mandate them to offer a clear overview of their current state assessment, and to offer a four-year plan on improving their compliance with the revised codes. Standardise the format in which you require them to communicate with you, incorporating:
• a current state assessment;
• four-year targets on each element;
• sub-indicators; and
• specifics on how they will improve yearly (over four years) on each of the elements and sub-indicators.
Consider offering suppliers training on the revised codes – but please don’t offer yet another boring presentation on the detail of the revised codes scorecard (they are a dime a dozen these days). Rather offer them access to a workshop on the practical elements of how to assess the impact of the new scorecard, and how to engage in a strategic intervention to identify how to improve their B-BBEE scorecard over the next four years.
Don’t engage your suppliers like you have previously – it won’t work. There will be many empty promises and limited buy-in and commitment. We recommend contractual obligations, committing suppliers to achieve four-year targets and financial penalties for those who do not attain them.
Sourcing from SMMEs
For many companies, driving 15% of their spend towards SMMEs is a challenge, especially when global best practice dictates that 80% or more of their procurement bill is spent on a few strategic suppliers.
However, this requirement does constitute seven points, so it is important to get it right. There is no easy indicator on the ESD scorecard, so a focus on every indicator becomes paramount.
There are a few initiatives to consider:
• Establish a supplier portal where prospective suppliers can register their interest in becoming a supplier to your company. To ensure that value is added to the prospective supplier and to your procurement department analyse your spend and identify commodities that offer opportunities for a change in supply. Specify locality and standards to be met. Create a pool of prospective suppliers and, using the information they have offered, assess which supplies meet your criteria and engage with them accordingly.
• Look from within the company. There may be many employees in your company desperate to become entrepreneurs, but don’t have the means to set up a new business. However, they do have deep skill sets and they know your business intimately. Give them the wings to create a new business that will supply your company. Establish an “entrepreneurship” drive: offer people the opportunity to standup and propose a business idea, evaluate it and develop a new business. This will enhance spend on SMMEs and will give you access to a broader pool of companies or suppliers to develop.
• Call for industry-wide collaboration. Initiate an industry-wide initiative to create a pool of potential suppliers into your sector and / or supply chain. Perhaps extend your “prospective supplier portal” into an industry initiative. You can develop and set up the supplier portal as an Enterprise Development initiative.
Spend on black-owned suppliers
Now for the most challenging requirement: directing 40% and 12% of your included spend to >51% black-owned and >30% black-women-owned suppliers respectively.
Don’t think that you will achieve this via incubators and SMME development – it won’t happen with a target as high as 40% of your spend. This is where companies must think strategically in order to deliver.
• Assess the business for non-core operations that could be set up as new black-owned businesses. Your company does not have to manage this process – there are many investment and private equity houses that do this and would love a piece of your business.
• Alternatively, look at opportunities around localisation. For many businesses this is a government priority and there are incentive schemes to drive this. Examine your localisation strategy and identify opportunities to localise through setting up new partnerships with black-owned businesses.
This type of thinking is not suitable for all and may require intervention and buy-in from your CEO.
Selling a value proposition
Too often we see company executives describing to their overseas parent companies, or local shareholders, the concept of B-BBEE as a challenge, a tax and something that is completely unfair. If this is the approach you are adopting, give up now! Innovative thinkers must sell a value proposition to their stakeholders and it must be entirely convincing and exciting. If you can’t get this right, please don’t waste your time, or that of your CEO / shareholders.
Understand though, that if you don’t adopt this level of thinking within the organisation, your company in all likelihood simply won&
rsquo;t achieve the targets of the scorecard.
Don’t wait for a mandate to engage in this level of thinking, whether an internal company initiative, or one that requires buy-in from the industry or supply chain. Just get on with it and write up the best business plan and motivation you can.
A simple approach to maximising your ESD scorecard
• Engage your suppliers and look for opportunities across your supply chain. This will require executive level engagement between your company and your suppliers.
• Encourage and facilitate innovative, out-of-the-box thinking around creating new companies similar to the recommendation above.
• Create a supply chain portal through which companies can register their intent to supply into your supply chain. Engage suppliers across the supply chain, and understand where the opportunities exist to shift spend towards new or existing black-owned SMMEs.
Your company and your suppliers should conduct a detailed analysis of spend per commodity, identify specific areas of opportunity, and then clearly communicate exactly where the opportunities are, in terms of product and service, locality and minimum requirements.
Constantly assess the database and identify companies that meet your criteria, and assess developmental opportunities.
The ESD scorecard is going to require very innovative and strategic thinking – the current approach to Preferential Procurement will simply no longer suffice. Go big, or go home.
Mpowered is a software development company offering web-based compliance management solutions, with a particular focus on B-BBEE and Economic Development solutions.
An advisor on B-BBEE strategy, to ensure it is able to offer a compelling “managed solution” to clients, comprising both software and ongoing B-BBEE technical support, it has maintained deep insights into the technical aspect of B-BBEE, as well as the implementation of transformative initiatives.