B-BBEE amended codes mean higher business costs – Grant Thornton

AUGUST 18, 2016

But businesses should not overlook the cost of non-compliance

The B-BBEE Amended Codes of Good Practice have resulted in increased costs for almost two thirds (65%) of South African businesses according to second quarter research from Grant Thornton’s International Business Report for 2016.

More than three quarters (76%) of the businesses that reported increased costs have had to employ outside consultants, 44% appointed an in-house B-BBEE team and 41% enlisted specialist service providers to assist with procurement as well as enterprise development requirements.

“Our survey shows that many companies are now turning to specialist consultants to reach compliance, while a number have actually gone as far as to appoint internal specialists and transformation managers to monitor, target and track compliance internally,” says Jenni Lawrence,  managing director: Verification Services at Grant Thornton Johannesburg. 

The International Business Report (IBR) from Grant Thornton provides tracker insights from around the world on a quarterly basis. These findings are from the IBR’s second quarter tracker data for 2016 to end June, revealing findings from business executive interviews held during May and June 2016. The survey presents perceptions into the views and expectations of over 10 000 C-Suite executives in privately-held and listed businesses, across more than 36 economies (2500 interviews per quarter). 

Regional and national perceptions are also researched every quarter for South Africa, from 400 SA privately held business executives annually (100 executive interviews per quarter) regarding crime, service delivery, B-BBEE and political climate.

“The days of handing over responsibility for BEE compliance to an HR intern or procurement officer are over,” says Lawrence. “The BEE agenda has to be driven by those with authority to influence internal policy and spend.”

She notes that a key positive outcome here, though, is that businesses are clearly taking their B-BBEE compliance very seriously, and ensuring that it’s done properly.

“While the cost of compliance has increased over the years we do note that now, more than ever, proper planning is required to ensure businesses maximise the return on every cent spent on BEE,” she adds.  “The key is to understand the inputs into each element.  Many companies are already incurring costs that can be claimed on the BEE scorecard, but are unaware of this and are therefore making additional investments.”

Increased costs for business executives come from two main areas:

  • increase of spend targets under skills and procurement; and
  • increase of implementation costs in terms of specialists, service and solution providers, as well as internal capacity.

The cost of verification has also increased, mainly due to the increased complexity and additional procedures which verification agencies are required to implement under Amended Codes audits.

“The cost of non-compliance, however, should not be underestimated, particularly for companies relying on BEE scorecards to tender or apply for dti grants,” says Lawrence.

Grant Thornton’s IBR survey also shows that 61% of businesses have been motivated by the B-BBEE Amended Codes of Good Practice to work with new, additional or alternative SME businesses to improve their ratings in the category of Enterprise Development.

Contributions towards Enterprise Development, and the new sub-element, Supplier Development, make up 15 out of the 109 points on the new scorecard.

Lawrence explains that these two sub-elements fall under the old Preferential Procurement element, which has been renamed Enterprise and Supplier development.

An Enterprise Development or Supplier Development beneficiary is one that has at least 51% black ownership and a turnover of under R50million. To score points for these elements, businesses are required to make contributions to them in the forms of grants, loans, discounts or time, for example, to enable them to become financially and/or operationally sustainable.

More than half (55%) of local companies reported that the B-BBEE Amended Codes of Good Practice have affected their business in terms of tendering or proposing for new business with private or government related entities, while 38% said there was no change.  Very similar results were obtained when companies were asked if the Amended Codes had resulted in their company changing some suppliers to improve their overall BEE score, that is, to buy from 51% and over black-owned suppliers.  Fifty-five percent said yes, while 39% said no.

“The tougher scorecard will result in many companies dropping three or four levels and in some cases, becoming non-compliant under the Amended Codes,” says Lawrence. “This will reduce the points allocated for BEE status when scoring for a tender. However, smaller companies with a turnover of under R10 million, and particularly those with at least 51% black ownership, will now automatically comply with a higher BEE status.”

Lawrence goes on to say that the focus of the procurement scorecard has altered significantly towards purchasing from black-owned suppliers. Under the “old” codes, BEE spend was measured out of 20 points, with three of those coming from spend with companies that were 50% black-owned and two points from at least 30% black-owned suppliers.

“Under the amended codes, BEE spend is measured out of 25 points, with nine being allocated towards companies that are at least 51% black-owned and four points for suppliers with at least 30% black women ownership, an increase in emphasis of 27%.”

It has become crucial for businesses to get this right, particularly as procurement is now a newly-designated “priority element” which requires a 40% sub-minimum achievement to avoid a level drop.

“Changing supplier base is not an overnight process, especially for companies that are part of a larger group,” says Lawrence. “In certain industries, suppliers and components are mandated by multinational parent companies. Imported mandated items add additional complexity to procurement. The old codes allowed for the exclusion of most imports from the procurement target but this has been tightened up in the Amended Codes. To exclude items that could be manufactured locally, companies are now required to create a localisation plan to show how they will eventually produce these items locally going forward.”

Proactive companies are taking a good look at their supplier bases and changing to black-owned suppliers for non-core items to create quick wins.

“Stationery, security and cleaning companies are currently the big winners here,” notes Lawrence.

So, what is Jenni Lawrence’s advice on how businesses could reduce costs and maximise return on investment?

“First, companies must understand where they are right now. Second, they need to understand the inputs and analyse current spend in all areas to identify those that already qualify for BEE. Third, calculate the gaps towards the target and implement corrective action. Fourth, monitor constantly towards compliance.

“These steps, managed internally by a transformation manager and tracking software, or through external consultants, need to be part of the strategy at board level to make a cost-effective difference to the scorecard,” she concludes.