BEE isn’t compulsory, but it’s hard to avoid:
While not compulsory, BEE affects every company trading in South Africa. The reason for this is that the Govt uses its massive procurement budget to force its suppliers to compete on a combination of BEE points and price (BEE counts for 10% or 20% of the tender scoring, depending on the size of the tender awarded). BEE points are measured on a scorecard basis, and a substantial part of this scorecard relates to procurement from other companies with high BEE scores. In this way, BEE trickles down and affects every company operating in South Africa.
BEE remains a choice. Companies may choose to:
- Ignore BEE.
- Become minimally BEE compliant.
- Use BEE as a strategic advantage to win business over the competition and grow faster.
It is important to realise that there will be winners and losers within each group and there will be some overall winners and losers. However, absent any other macro-economic growth, the net effect will be a zero-sum game.
When can you ignore BEE?
Some companies believe that they are unaffected by BEE because they believe that they are either not dependent on business in South Africa, or have a monopoly on the services/products they provide.
Businesses with mainly South African revenues that choose to reject BEE will limit business opportunities to the non-BEE portion of the economy, which is contracting. Ultimately, this would lead to the demise of all such businesses. Although some companies will outlast others, their trading environment will continually deteriorate.
Other businesses believe that instead of facing BEE, they can enter foreign markets and reduce their dependence on South African business. For certain businesses who export their goods or services, this may have an element of truth. However, there is a very real ‘survivor bias’ to data around this – for every public success in going offshore, there are many unseen failures where people lost everything. Entering foreign markets always carries extreme risk.
Rejecting BEE in most situations would be negligent and reckless and potentially breach a director’s fiduciary duties.
Minimal compliance BEE:
Other businesses choose a ‘do as little as possible’ approach regarding BEE: they do enough to be compliant with customer demands and will also typically split their business into two: one that is BEE compliant through which any work is done that requires BEE, and the other that is ‘business as it used to be’. In some cases, the ‘BEE compliant’ division simply ads a layer of cost/pass through as work sold there is still done by the non BEE compliant part of the business.
While this might seem prudent, the reality is that it adds a layer of cost, opens up the business to fronting claims, and achieves little for the country.
Using BEE as a strategic advantage:
The reality of the South African economy is that its’ growth rate will be flat for some time to come. In these conditions, businesses that want to grow can only do so if they take market share away from other competitors. i.e. it’s a zero-sum game.
To compete in a zero-sum world, a business needs a compelling reason for customers to buy from it rather than an alternate supplier i.e. a competitive advantage. The longer this advantage can be sustained the more likely the business is to achieve higher economic returns.
In a world where customers are under increasing pressure to have their BEE scorecards in order, they need to procure from companies who offer them the highest BEE scores too. In other words, the right BEE score can be a very real source of long-term competitive advantage.
The question then is how best to turn BEE from a compliance cost, to an investment in strategic advantage. For that, we need to understand the scorecard elements and what it costs to achieve each of them. Hint: 51% BEE ownership is the trump card.
Continue to Part 6 – Unpacking the BEE scorecard.
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