The true cost of being unethical

By: Stuart Townshend

- chasing compliance above all in procurement and supplier development

As the most significant contributor to a business's B-BBEE scorecard, it's no wonder that enterprise and supplier development (ESD) is high on the South African business agenda. Supplier compliance is no longer a nice-to-have, but an essential box to tick if a business is to reap the benefits of ESD, in terms of both compliance and competitive advantage.

However, many South African organisations have probably already learnt through experience that wholeheartedly pursuing ESD is easier said than done. Some may view ESD as a necessary sacrifice in the name of B-BBEE compliance and an attractive transformation scorecard. Others may be wary, from unpleasant past experiences - channelling significant sums into ESD providers who fail to effect meaningful transformation and deliver nothing but lacklustre performance.

However, experience has also shown that ESD is at its most effective when the enterprise, the ESD supplier and the SME beneficiary are driven by not only business and compliance considerations, but the spirit of national transformation that ESD embodies as a tool for economic and social progress.

These three partners need to pursue a symbiotic relationship that goes far beyond ticking the right boxes, extolling the essence of Ubuntu in every partnership and ensuring alignment of values and a dedication to transformation. Far from being a grudge purchase, ESD is an opportunity to nurture not only their own businesses and their SME partners, but in the process also uplift South African society.

Mere compliance-driven and sometimes downright unethical behaviour in this space may appear to achieve the letter of the law, but not the spirit in which the B-BBEE codes were intended.

Who pays the price for unethical quick fixes?

The true cost of unethical procurement is felt the most when we are not using every opportunity and available resource optimally to build our nation through small-business job creation, but instead get stuck on compliance alone.

This simple table points out some pitfalls of choosing the quick fix and trying to hack your way through.

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A clear roadmap for doing this the right way

The most important benefit of ethical procurement and ESD extend to enhancing the ability of small businesses to compete. This in turn contributes to the reduction of South Africa's high unemployment rate - creating a stable, thriving economy for all.

Compliance. Achieving the minimum number of ESD points (a level 4 rating) must be a top priority for the business to maintain its licence to trade. This means that it must achieve at least 65% compliance across each ESD element (enterprise development, supplier development and preferential procurement).

Mutual value creation. ESD is not a question of driving either commercial value or societal change. They are intricately linked at all levels of business. A successful ESD implementation assists a business to improve affordability and efficiency in their own value chains, while at the same time uplifting the suppliers they depend on: a win-win situation.

Reputational benefits. In South Africa's current economic climate, it is more important than ever for enterprises to do their part to uplift South African communities, through nurturing small businesses into stable and efficient employment creators. ESD is the perfect way to fulfil this moral imperative and to show stakeholders, and the business community at large, that your enterprise is committed to making a difference on a socio-economic level, which can only be of benefit to your brand.

Value-chain sustainability. ESD contributes to de-risking the value chain by breaking existing supplier monopolies, promoting localisation to reduce dependency on imports and assisting distributors to improve service delivery and adopt a more client-centric way of operating.

Once ESD is done well, the results will bring about visible positive change: an improvement in supply chain performance, genuine cost reduction by allowing new suppliers with superior quality and lower prices to enter the supply chain, brand loyalty, customer centricity, community goodwill, government buy-in and many more.

Common misconceptions around supplier development

"It's too risky to work with smaller, less well-established suppliers."

It is a common assumption that working with smaller, emerging suppliers introduces risk into the reliability of the value chain. Most decision makers in large enterprises prefer to work with suppliers that have a decent track record and experience.

It should be the corporate mandate to challenge this belief and understand the myriad of advantages that these small suppliers can bring. With the right support and strategic investment, SMEs can add great value to an enterprise. It is vital to remember that SMEs are the disruptive competitors of tomorrow, stimulating the economy and preventing complacency in well-established suppliers.

"Who really benefits - the ESD service provider or the SME beneficiary?"

A common misconception among corporate stakeholders is that ESD providers absorb so much of an enterprise's ESD budget that the intended beneficiary - the growing, black-owned business - rarely experiences significant benefits. While some ESD providers simply pass on the funds (after taking their sizeable cut) to their beneficiaries, others include value-added business development support to remove stumbling blocks to meaningful growth.

These are some indicators that the SME beneficiary is actually reaping the rewards of an open, honest and well-run ESD programme:

  • The SME is awarded contracts from the corporate entity, which grants them access to the market

  • There is notable revenue growth within the business

  • The business has access to growth finance at opportune times

  • The SME is able to predictably add employment opportunities to their operations

Dedication to accountability and transparency, and making the extra effort to provide accurate measurement and reporting throughout is non-negotiable.

"Where is the ROI?"

Old models of ESD have given many companies second thoughts about what value ESD provides. They may see ESD as more of a charitable contribution, or worse - an unnecessary tax on the business's cash flow. While they may not be far from the truth when it comes to unethical and poorly implemented ESD strategies, those that are done correctly lead to self-sustaining value-generation.

New suppliers often offer lower prices to break into existing markets, as well as offering more value-added services and a better customer experience. Their ESD partners also have a distinct competitive advantage in the form of exclusive access to new innovations and market-disrupting products being developed.

In closing - it is a delicate balancing act

Driving value in ESD investments requires a delicate balancing act of a business's social and financial objectives. It is a long-term investment in the development of new markets and new suppliers simultaneously, explaining at each step of the way how new SMEs in the supply chain can enhance or even completely revolutionise their business.

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