Back to the Future:

The Past, Present & Future of ESD & Procurement

After 24 years of democracy and 10 years of B-BBEE Legislation, some may say that there hasn’t been significant change in the ordinary life of South Africans. But the time for real transformation and change is upon us, along with alarming consequences if not done correctly. Incidence of rapid inflation, petrol price hikes and looting will all become the ‘new norm’ for South Africa if we aren’t up for tough conversations, and more importantly, a mindset shift and real action.

Despite having won ‘political freedom’ it is apparent that economic freedom for the masses is still absent. Furthermore, we are still a developing economy that is in its democratic infancy with a disproportionate ownership of the economy still prevalent. Policies and legislation such as B-BBEE exist to help create fair participation and distribution but are yet to shift the needle.

Before continuing down this path, I fully acknowledge that the B-BBEE codes has its challenges. I am also aware that some regard the policy and other legislation to be the key constraint to economic growth especially in a time when we need it the most. However, growth without addressing an imbalance in distribution (which legislation does) is counteractive, meaning that both aspects would need to be addressed.

Preferential Procurement in an ESD Context

Let’s unpack the evolution of Enterprise, Supplier Development, Preferential Procurement, and the role of the procurement function since inception of the B-BBEE codes, with a focus on insights into the future positioning of these pillars and the catalytic role of procurement relative to impact and the share price performance of an organization.

At a high-level, the B-BBEE codes seeks to achieve three major objectives:

  1. Capacitate and upskill previously disadvantaged groups to add value to the economy
  2. Provide access and active participation in the economy
  3. Enable equitable redistribution of the economy

Both the spirit and the letter of the codes are designed to move our economy and our country forward from surviving to thriving through Access to Skills, Access to Market, Access to Funding and Ownership.

The ESD pillar is a vital cog within the B-BBEE codes that seeks to help push our economy forward. This pillar is made up of Enterprise, Supplier development & Preferential procurement. As such, the role of procurement and its practices relative to transformation are of great importance to the ultimate success of the B-BBEE codes and the South African economy.

The Past: Compliance Driven

During the first decade of the promulgation of the codes of good practice, corporates’ understanding of the subject was immature. This, coupled with a focus on revenue and market protection, resulted in ESD & Preferential Procurement solutions being implemented primarily for compliance purposes. Tick-box type generic solutions with limited degrees of financial efficiency were developed with the primary purpose of providing corporates with a means to gain compliance points. Corporates were happy to pay for these solutions as it was deemed as a ‘cost of doing business’. During this period the procurement function and its practices remained largely unchanged apart from annual B-BBEE certificate collections to achieve PP points.

The net results of the above was corporates being marketed as good corporate citizens through the achievement of an acceptable B-BBEE level and the promotion of tokenised SMEs who were taken through broad reaching generic cookie-cutter business development support. Inversely, procurements’ lack of involvement and adjustment to practices led to corporates’ supply chains remaining untransformed with many organisations having less than 10% of their supply chains transformed.

Whilst the letter of the codes was being met by corporates, the lack of sustainable impact had become apparent. This did not go unnoticed by stakeholders – including some corporates that were committed to delivering impact but in a more commercially sustainable and impactful manner. One major realisation was the importance of procurement and its role in enabling organisations to deliver both a social and financial return on investment. This gave rise to much of the thinking and solutions currently being applied and adopted by organisations today.

The Present: Impact Driven

Selected corporates today acknowledge the value in applying strategic thinking to ESD. Moreover, organisations that have adopted a social and financial return on investment perspective, start at procurement. Here, the ultimate success of ESD is measured by the percentage of procurement/ supply chain spend that is in the hands of majority black-owned and black women owned businesses. The foundational elements of this success are:

  • Embracing adapted procurement spend analytics practices that include a supplier diversification lens to identify meaningful spend opportunities that can be shift to local diverse SMEs.

  • Moving from transactional based procurement to strategic innovation and cost saving opportunities

  • Crafting Procurement & ESD strategies in tandem to ensure customised ESD initiatives (both financial and non-financial) are developed relative to the opportunity sets within a corporate’s supply chain

  • Setting 3-5 years targets against supply chain contract opportunities that are cascaded from executive level to senior operational managers and end users.

    We have had the privilege of partnering with corporates to implement solutions of this nature and the results speak for themselves. Corporates that have adopted this approach have managed to transform up to 40% of their supply chains within a matter of years with as much as 10% bottom line cost savings being achieved within the same period.

    Although this approach has been proven in the market, many corporates remain stuck in the past, applying compliance and silo driven approaches that do not yield tangible impact and end up creating a financial burden in the long run. In spite of this, there are a select few corporates that are thinking beyond impact and planning for the future, today.

  • The Future: Value Driven

    Environment, Social, Governance (ESG) was first coined in 2015 in a landmark study entitled “Who Cares Wins”. Today, ESG investing is estimated at USD20-trillion AUM. Several other studies have shown a direct correlation between good ESG practices, cost of capital reduction, improved operational performance and increased share price performance.  But what does this have to do with B-BBEE, ESD and Procurement?

    There are several linkages between the B-BBEE Codes, ESD and ESG Good practices. Furthermore, one of the most significant areas in which ESG can be managed, implemented, and monitored successfully is within corporate supply chain practices. To illustrate, the tax incentive for energy efficiency aims to encourage investment into cleaner technologies which improves energy usage. Using Enterprise and Supplier Development budgets corporates could explore the possibility of black-owned SMEs that provide green energy technologies to enable better energy usage, thus tying Environmental and Social of ESG to ESD & procurement practices in a leveraged yet value creating way.

    Simply put, doing business for good as encouraged by B-BBEE, ESD or ESG has never made more sense than it has today. Some corporates are on the cutting edge of thinking and are looking at ways in which to integrate international practices with South African legislation to simultaneously increase shareholder and stakeholder value.

    This, however, requires an eco-system mindset and approach to ultimately re-invent organisations’ ways of working. The design and implementation of customised and integrated future state target operating models has become the starting point for corporates bought into the value-driven mindset. This in turn creates a future state in which B-BBEE, ESD and procurement are pivotal tools used to drive value.

    This future and its benefits will become a reality for some corporates, enabling them to leapfrog competitors that are stuck in the past. However, from a South African perspective, a collective cohesive drive, and a significant paradigm shift within and from corporates is needed to see the needle move. The custodians and change makers of this real tangible impact and ultimate economic participation for all, are the Transformation managers, CFOs, CPOs, CEOs, and professional organisations tasked with the implementation of ESD and for whom this article is written for.

    Written by Trevor Naidoo, founding director of ProcureSense