Practical Insight from the Sage BEE123 Advisory Team
This is the third in a series of ‘Beyond the Boardroom’ articles addressing all aspects of the Codes. In this series, the members of the Sage BEE123 Advisory Team share unique insight as to what drives successful transformation. As we come to the end of the first quarter of 2019, the team shares red-flag areas that pose a risk to an organisation’s transformation progress and investment, as well as tips for optimising their scorecard outcome.
The BEE123 Advisory Team represents a unique set of skills with its collective expertise gained first-hand from a corporate, verification and consulting perspective. The BEE123 Advisory Team, led by Managing Director Saul Symanowitz, is made up of Micah Gengan, Rene Van Der Walt, Yonela Ntsaluba, Bhavna Maharaj, Tando Dubeni and Denvor Phokaners.
Top Tip 1 | B-BBEE Buy-in
Vital to the buy-in and ultimate success of a B-BBEE Strategy is that an organisation’s workforce has a holistic understanding of B-BBEE, the rationale behind its implementation, what the intent of the ‘Spirit of the Codes’ is and the positive impact proper implementation will have on both the business and society at large. Agreed, the inner workings of B-BBEE are complex; however, a holistic overview, in short, is straightforward:
- B-BBEE is a legal framework designed to meaningfully include more people in the economy.
- It increases the number of people paying taxes, which translates into a healthy fiscus.
- Through broader economic participation, it lessens the number of recipients claiming Government’s social grants.
- Taxes collected will be available to invest in infrastructures such as roads, schools and housing projects that will benefit the broader South African Community.
- The result – economic growth is stimulated, which will ultimately benefit all South Africans.
“Ensure that a B-BBEE Strategy
makes good business sense and that it leads to a transformative outcome.”
When educating a workforce, it must be clear that B-BBEE compliance is not a legal requirement, but a choice. Following this, the purpose for choosing B-BBEE as a way forward and business imperative, as well as the benefits it can afford an organisation, must be outlined. Most importantly, however, there must be real support from top management down to encourage the entire workforce to meet their B-BBEE targets and achieve the overall objectives of an organisation.
Top Tip 2 | Take Control of your B-BBEE
The key to a successfully implemented B-BBEE Strategy is taking control of it. There are organisations that all too often view B-BBEE as a tick-box exercise to be outsourced. In other words, just writing a cheque. In saying this, outsourcing some elements of a B-BBEE Strategy to B-BBEE Professionals is necessary. However, in doing this, people within an organisation must have a good grasp of the Code they are measured on and how B-BBEE affects their business. The consequence of choosing a B-BBEE Professional not fully versed on the Code on which an organisation is measured may result in a delivery shortfall. It is critical that the advice rendered is in fact in line with the expectations of the Codes and will benefit an organisation in the long-run.
Often organisations over-simplify B-BBEE. They are not fully aware of the consequences of not completing a task accurately, through merely ticking the box, or being found guilty of Fronting. Due to the complexity of a verification, there is a general lack of knowledge surrounding the technical aspects of the Codes, which often leads to the overuse of B-BBEE Consultants. Such lack of knowledge is reflected in how an organisation chooses their B-BBEE Consultant to guide them in implementing their strategy. Without fundamental insight into the expectations of the Code on which an organisation is measured, there is a risk of aligning with a B-BEE Consultant who is either not capable or purposely skews the ethical line of compliance. All business owners, directors and those tasked with driving a B-BBEE Strategy must be involved in the implementation process, as well as understand how and why the B-BBEE Strategy will move forward, coupled with a good grasp of the legislation supporting B-BBEE.
“Track the money and ensure that any B-BBEE initiatives add value.”
There are two routes organisations can take. One is where an organisation has control over their B-BBEE Strategy and implementation, and the other is where it does not. In the first instance, an organisation would have a knowledgeable, competent team driving their B-BBEE, using consultants to optimise points on their scorecard. On the flip side is an organisation that chooses not to learn the inner workings of the expectations of B-BBEE. They then rely on consultants, in the hope that the advice they receive is in line with the expectations of the Codes. However, this outcome will only become apparent at the conclusion of their next verification measurement. Besides, more often than not, such a route will typically not result in meaningful transformation or add long-term strategic value to the business.
Top Tip 3 | Outside Intervention
When choosing a B-BBEE Consultant to drive a B-BBEE Strategy, it is imperative that due diligence is done to ensure that they are appropriately qualified and have the necessary accreditations. They must be fully versed on the Code on which an organisation is measured, with a full understanding of the sector in which they operate. Essentially a B-BBEE Consultant must drive a B-BBEE Strategy that adds value to an organisation. The goals from measurement-to-measurement must be realistic, ethical and drive real transformation. Organisations must be cognizant of the following:
- Be cautious of a B-BBEE Consultant who guarantees a specific Status Level at the following verification measurement. Unfortunately, there is no B-BBEE crystal ball. For example, moving from a Status Level 5 to a Status Level 1 in a single measurement cycle is unrealistic.
- Situations arise whereby a B-BBEE Consultant needs to engage with a third-party supplier to drive a B-BBEE Strategy, specifically in Skills Development and Enterprise Development. Usually, the first port of call for a suggested supplier is the B-BBEE Consultant. Ethically they should submit a few third-party candidates to an organisation, enabling them to compare services and costings, so they can make an independent choice.
- It is advisable not to use a B-BBEE Consultant as a middle-man for third-party procurement services. The contract with and payment to a third-party must be direct with them to remove the risk of not being able to obtain evidence at the next verification measurement or field a query as to the third’s methodology.
- To ensure that there is no conflict of interest, a B-BBEE Consultant must not form part of the selection panel for a Verification Agency. Ethically they should submit at least three verification agency candidates to an organisation, so they can independently compare services and costings.
- To determine what the real cost of an organisation’s B-BBEE Strategy is, ascertain the commission structure a B-BBEE Consultant and third-party supplier have in place, as this is standard practice in the industry. Having a full picture of how much money paid in B-BBEE services is paid on in commissions, provides an organisation with the opportunity to negotiate their rates and perhaps curb costs.
- Take the time to conduct a site visit to all B-BBEE suppliers before engaging with them, to ensure that they are adequately equipped to deliver on what they have committed to do. For example, it is acceptable that a B-BBEE Consultant has a lone office. However, a third-party who is offering Skills Development or Enterprise Development services should have an infrastructure that supports their overall offering. For instance, those offering on-site Learnerships for people with disabilities must have appropriate accessible facilities and be equipped to handle the traffic they commit to take through the learning process.
Top Tip 4 | Follow the Money
The B-BBEE verification process is evidence-based. It is, therefore imperative that money is tracked throughout the supply chain and then presented as evidence at the time of a B-BBEE verification. For example, an organisation using an institution to implement their Skills Development or Enterprise Development plan must receive proof of payment from the institution. Then the institution must provide evidence of payment to the end Beneficiaries. Without such evidence, a contribution will not be allowed. Therefore, all efforts for scorecard recognition would have been in vain.
Top Tip 5 | Haste is Waste
Probably the gravest B-BBEE mistake is when an organisation leaves vital scorecard elements until the last minute, the most common of which is Socio-Economic Development, as well as Enterprise and Supplier Development. As these contributions are based on financial outcomes, organisations tend to wait until their financial year end before committing a contribution to this element. They aim to get the contribution exactly right in exchange for the exact allocated points. Given the short timeframe this methodology allows, it often results in a scramble to distribute funds. The quickest and easiest method is to either offload the funds to a third-party supplier or frantically find a Beneficiary to bestow a grant on. However, fast-forward 12 months and an organisation will have the same conundrum, due to there being no long-term plan.
“Changing suppliers can often be a disruptive process. Therefore plan to ensure that processes are in place for a proper handover of evidence at any given time.”
In doing this year-on-year, organisations sacrifice their Return on Investment (ROI), as Beneficiaries are not selected against any criteria other than being ‘in the right place at the right time’. There have been cases, following an organisation bestowing a grant, that the Beneficiary has disappeared. One has to query how an organisation justifies distributing such vast amounts of money without doing proper due diligence on the Beneficiary, simply to tick-the-box of compliance.
Penny wise, pound foolish is a B-BBEE norm for contributions that are Net Profit After Tax (NPAT) based. In essence, ‘penny wise’ is waiting until the last minute, so no more than necessary is contributed. The flip side is ‘pound foolish’, which is waiting until the last minute, at which time vast amounts of money are offloaded without any prospect of an ROI. In reality, would any organisation embark on a marketing initiative costing millions without ensuring the long-term benefit to their business? So, why does the same mindset not apply to B-BBEE?
Top Tip 6 | Hedge your Bet
In the B-BBEE arena, ‘hedging one’s bets’ is essentially a B-BBEE betting strategy. Doing this involves creating a strategy that guarantees a different outcome to the ‘penny wise, pound foolish’ one. In short, it provides a platform for organisations to take a holistic, long-term approach to their B-BBEE Strategy, specifically those elements based on NPAT.
|When considering an organisation’s contribution for elements that are NPAT based, loosely base the contribution on the previous year’s forecast. However, a more accurate method would be tracking the cost against the current management or monthly accounts.|
|Be aware of what your leviable amounts are.|
|Have a plan in place to track and evaluate B-BBEE milestones.|
|Make contributions throughout the year or quarterly to manage cashflow and avoid the year-end rush, which can lead to waste.|
|Planning and strategising must be ongoing, for example, what is the realistic outcome vs the desired one?|
|Have a dedicated team for driving the implementation of a B-BBEE Strategy, with identified objectives that are evaluated as a KPI performance factor.|
|Put systems in place that drive a strategy with evaluation benchmarks that provide a real scenario of progress.|
|Allocate targets for each team member with a budget.|
|Ascertain whether you will be using the services of a B-BBEE Consultant or B-BBEE Management Software.|
|Create a criterion by which the progress of Beneficiaries Suppliers will be evaluated.|
|Create a criterion by which potential Beneficiaries and Suppliers will be considered.|
|Identify Beneficiaries and Suppliers that feed an organisation’s core business in the long-term.|
|Ascertain whether a Beneficiary or Supplier will add strategic business value.|
|Following an ED partnership, will a Beneficiary have the potential to become a Supplier Development Beneficiary and active Supplier to optimise an organisation’s scorecard outcome?|
EO – Equity Ownership | MC – Management Control | Skills Development | PP – Preferential Procurement | SD – Supplier Development | ED – Enterprise Development | SED – Socio-Economic Development
Top Tip 7 | To Spend or Not to Spend
Remember, anybody can spend money, but not all do so wisely. In terms of B-BBEE, a wise spend would be a calculated proactive one rather than a reactive one. A proactive investment is being aware of what you are spending money on and why. It ensures that there is sufficient time to do due diligence on Beneficiaries and Suppliers alike. The following are often risks areas encountered by organisations implementing their B-BBEE Strategy:
- Changing suppliers can often be a disruptive process. Therefore, plan to ensure that processes are in place for a proper handover of evidence at any given time.
- Do due diligence on all B-BBEE Beneficiaries and Suppliers.
- Put processes in place to ensure that B-BBEE Beneficiaries and Suppliers consistently provide adequate evidence for verification.
- Ensure those tasked with driving transformation can competently deliver on their mandate.
- Track the money and ensure that any B-BBEE initiatives add value.
- Monitor your B-BBEE performance against monthly financials.
- Steer clear of quick-fix solutions; focus on long-term strategies.
- Be proactive; do not leave any elements until the last minute. Remember there is no time like the present.
- Network with peers driving their B-BBEE Strategy. Often the same challenges are presented across all sectors.
Ensure that a B-BBEE Strategy makes good business sense and that it leads to a transformative outcome.
- Sometimes trying to support ESD Beneficiaries at arm’s length is like a surgeon trying to do life-threatening surgery telephonically. It can not be done; an organisation must get involved.
- Finally, ensure that an organisation’s entire workforce has a holistic knowledge of B-BBEE, the chosen strategy and rationale behind it.
BEE123 is a content contributor and strategic partner to TFM Magazine.