New Broad Based Empowerment vs Cost Savings - walking a tightrope?

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All too often BEE (Black Economic Empowerment) is dealt with in one of two extremes, that is to say all or nothing. On the 'all' side some procurement departments only consider suppliers who present a specific empowerment score, usually with substantial black ownership. This narrow based approach is clearly out of touch with B-BBEE and runs the risk of favouring suppliers who compete only on their empowerment credentials, while pricing and quality may suffer.

On the other extreme, while senior executives set grand empowerment strategies, company buyers are remunerated based largely on cost savings. As a result, there is no incentive for buyers to consider BEE when making purchases, which leaves the company's preferential procurement position wanting.

B-BBEE (Broad Based Black Economic Empowerment) indicates the shift from the initial narrow based approach, which has positioned procurement as the linchpin for government's national empowerment project. Under the narrow based system only ownership and management were considered when determining a company's BEE position (score). Now though, the determination is made across seven elements with varying weightings totalling 100%. These are:
1) Ownership 20%
2) Management 10%
3) Employment equity 10%
4) Skills development 20%
5) Preferential procurement 20%
6) Enterprise development 10%
7) Corporate social investment 10%

Considering that a company's B-BBEE score will be taken into consideration by government for the issuing of licences, the sale of property and the awarding of tenders, preferential procurement will become a critical issue for any company engaging with government. The preferential procurement element now carries just as much weight as ownership.

Through this mechanism B-BBEE will become relevant not only to those companies interacting with government, but also to their suppliers, who in turn will look to their suppliers thereby having a trickle down effect throughout most of the economy.

As such, even companies who never wish to provide services to government will have to not only look at their B-BBEE positions, but also to that of their suppliers, in effect making B-BBEE into an issue of competitiveness, with potential suppliers competing not only on price and quality but also on BEE score.

New Procurement Scorecard
In the following table nine levels of BEE contribution are shown, with a supplier's level on this table being determined by its BEE score. (Click on the image to enlarge)

The numerical values referred to in the middle column reflect the scores achieved on the scorecard. The column to the right in turn reflects the corresponding level of procurement recognition.

Only 60% of the amount procured supplier that is a Level Six Contributor will be recognised for the purposes of calculating preferential procurement score on this scorecard. 100% of procurement spend with a Level Four Contributor will be recognised.

Once a supplier has been assessed by a verification agency, (which we will deal with in a later article) the supplier will be issued a certificate stating which level it has achieved. This allows anyone buying from that company calculate what impact such a purchase will have on their own procurement score.

Consider an example: Let's say you r organisation bought R100 000 worth of goods from SUPPLIER (Pty) Ltd, which has a B-BBEE score (calculated using the seven elements listed earlier) of 53%. This means that SUPPLIER (Pty) Ltd is classed as a Level Six Contributor with 60% recognition. As such, R60 000 (60%) of your spend with that company will be recognised as preferential procurement spend. Another supplier, ABCDEF (Pty) Ltd, has only managed a BEE score of 25% and is therefore classed as Non-compliant. This means that none of the money spent with them will be counted as preferential procurement spend.

It is therefore imperative that procurement strategy should be aligned with a company's broader empowerment strategy, while insight into B-BBEE should be provided to employees at all levels and not just to senior personnel. This includes understanding how the BEE scores of your supplier's influences your preferential procurement performance, (which will be addressed next month). It also makes the case for a balanced scorecard approach to strategic sourcing. Perhaps a combination of cost savings and preferential procurement?


Robert Thorburn
Exceed Empowerment and Consultation Services
Old Oak Office Park, Acorn House, West Wing
Tyger Valley
Direct Telephone: +27 (0) 21 915 6666
Facsimile: +27 (0) 21 915 6660
E-mail: robert@exceed.co.za
Website: www.exceedempowerment.co.za

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