Part 8 – BEE Customer research

Cost of businessYou would probably be surprised to know that most of the companies we meet at Tusker ‘want to do a BEE deal’ but haven’t figured out whether it’s actually worthwhile or not.

Without this perspective, making an investment decision is near impossible; any proposal to do such likely to get shot down by shareholders or the board.

How do we measure whether BEE is a worthwhile investment?

The simple answer is that if BEE is worthwhile, the value of your shares in your business should go up. Business valuation is about future earnings, discounted to today by the expected risk.

Doing a BEE deal should ideally increase earnings potential and reduce risk. Not doing a BEE deal may reduce earnings potential and increase risk (as is the situation many of our potential customers find themselves in). Remember than in business valuation terms, even a small change in sales growth rates or a small reduction in risk (cost of capital) can make a major change to your valuation.

So how do we analyse the future earnings side? or the risk side?

The aim here is to understand (a) the cost of doing nothing, (b) the value in achieving different BEE levels, and (c) the value of achieving different BEE ownership %. There are several components to determining value, as you’ll see below.

Start with your Internal analysis:

Here is guide as to how to do it so that you can make more confident decisions:

  • Draw up a list of all your existing clients and prospective clients. Depending on how “80:20” your business is, this could be only a few clients or many. Make sure your list includes those who are most desirable to you, and/or those with the biggest potential impact on your business (if they fired you, or if they grew your account).
  • For each of them, make a column for existing and potential future products/services that you could sell to them, and make a column for their current payment terms.
  • For each of these, estimate how much you will sell to them if you do nothing.
  • Then consider how much you could sell to them at each of the different BEE levels. Perhaps cover off from level 5, 4, 3, and 2 to make it simpler. Understand that these levels would be achieved mostly via the non-ownership elements of the scorecard.
  • Do this for year 1, year 2, and year 3. It’s probably too fuzzy to go any further than that, but this analysis for these 3 years will force your mind to interrogate what is realistic.
  • Put a confidence level against each number – how certain are you to achieve these numbers
  • Sum the (totals*confidence) for each year.
  • You now have a rough idea of how much business different BEE levels can help you achieve.
  • Now do the same analysis, but with those levels achieved via 25,1%, 51% or even 100% BEE ownership. Keep in mind that for your clients, procuring from 51% BEE owned clients (effectively a level 2 for most businesses) does a lot more for their scorecard then procuring from companies who are level 2 but less than 51% BEE owned.
  • NB – the sales you get from a BEE score achieved through ownership is likely to be very different to that achieved from the other scorecard elements (it simply has to be this way, given the way the codes are written – especially the Enterprise and Supplier development scorecards).
  • You now have a rough idea across 4 different ownership scenarios.
  • You can compare the results of the ownership scenarios to the non-ownership scenarios. The numbers are probably speaking quite clearly at this stage but that’s only the internal analysis. It’s a guess at best but forces you to think.

You now need to do the hard part: speaking to your customers.

Repeat the same exercise as above, but actually meet with your customers.

  • Have a confidential discussion with them.
  • Ask them what else (i.e. factors aside from BEE) you need to do to get more business.
  • This is really important – it may be that you actually suck on service/price/quality but you think you’re not getting the work because of BEE. Or it may be you’re really good and it’s only BEE holding you back. Either way you learn and can improve.
  • Ask what happens if you do nothing about BEE – would your business really suffer? by when?
  • Ask who else supplies them and what BEE level they have (they may not tell you exactly, but you’ll get a sense of how competitive it would make your business).
  • Explain how you want to solve their problem (BEE procurement from quality customers they trust).
  • Then repeat the internal analysis you did before, with each client.
  • Ask them what volume of business they would give you if you were BEE level 5, 4, 3, or 2.
  • For this year, next year, and the year after.
  • Ask them what volume of business they would give you if you had 25,1%, 51%, or 100% BEE ownership?
  • Maybe you can’t get much more business but they’ll offer you much more attractive payment terms? You need to push them and understand the difference here too. An extra 30 days cash can make a major difference to a business, and it’s often a concession they’re willing to make to BEE suppliers.
  • See how much you can get at different levels of BEE.
  • Repeat this with each customer. Maybe even different people from each customer, it depends how complex their business is, and how important they are to you.
  • These conversations are great for building relationships, demonstrating intent, and growing your business so it’s never time wasted.
  • Add it all up as before.

Compare results:

Now you’ve got their guesses and somewhere between theirs and yours is the answer as to how much more your business could grow sales at different levels of BEE; from doing nothing to going 100% in. You’ll also know what other levers you can pull to grow your business.

You are now in a position to strategically choose the right level of BEE and almost in a position to understand how best to achieve this level – via ownership or via the other scorecard elements. We discuss this in our next article.

Continue to  Part 9 – The BEE investment decision

 

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