New BBBEE Codes crunch presents mid-sized businesses with a golden opportunity

9 April 2015

Mid-sized businesses face a significant challenge in transforming their businesses to comply with the stricter Revised Broad-Based Black Economic Empowerment (BBBEE) Codes that will come into effect on 1 May this year.

However, they should regard it as an opportunity to help grow both their businesses and the South African economy. That’s the word from Saul Symanowitz, Divisional Manager at Sage Pastel BEE123, who says that mid-range businesses regarded as Qualifying Small Enterprises (QSE) under the Revised BBBEE Codes will need to think of creative solutions to address the new requirements of the Codes. QSEs are businesses that have an annual total revenue of between R10 million and R50 million.

For QSEs with black ownership in place the opportunities are evident. QSEs with 100% black ownership will be automatically compliant as Level 1 Contributors, while QSEs with 51%-99% black ownership will be automatically compliant as Level 2 Contributors. This presents numerous opportunities for them in relation to the new Enterprise and Supplier Development (ESD) element of the Revised Codes. Under the Preferential Procurement sub-element of ESD, black-owned QSEs are particularly attractive as suppliers because their customers will score well when procuring from them, due to both their good ratings and the multiple places on the Scorecard they qualify within.

Additionally due to their size and black ownership credentials they qualify as ESD Beneficiaries, which means they have the ability to attract a variety of support (eg. funding, loans, discounts, favourable terms etc) from other businesses who need to spend up to 3% of their NPAT developing such ESD Beneficiaries.

For QSE businesses without black ownership in place the position is somewhat tougher. They neither qualify from the exemption from the codes granted to black owned QSEs, nor do they have the dedicated resources focused on transformation that larger businesses have at their disposal. And with the new Codes, they must completely rethink their approach to BEE if they are not to drop up to a few levels as the regulations come into effect, says Symanowitz.

“In the past, QSEs could choose to comply with any four of the seven elements in the older BBBEE Codes, which gave them a great deal of flexibility,” he says. “For example, a family-owned business could choose to focus on socio economic development, skills development, and enterprise development rather than on black ownership.

“Now, however, they are penalised if they don’t comply with all five pillars of the revamped Codes: ownership, management control, skills development, enterprise and supplier development, and socio-economic development. And now ownership, skills development, and enterprise and supplier development are priority elements. That means if they fail to meet the minimum requirement in ownership and any one of the other two, their BEE status will drop a level.”

Creative thinking required

Symanowitz says that mid-sized companies should think creatively about how they will comply with the new, stricter Codes. For example, an employee share incentive or a community share scheme can benefit the business strategically while helping it comply with the new Codes. By bringing the right shareholders on board, companies can also open up new markets and perspectives for themselves.

“As difficult as it may seem at first to comply, it’s helpful for organisations to think of BBBEE as a way to help the economy and the wider society,” says Symanowitz. “We need to grow our middle class as much as possible and unlock the potential of 45 million people who live in poverty. That’s good for business and everyone who lives in South Africa.”

According to a survey by University of Cape Town’s (UCT) Unilever Institute of Strategic Marketing, the black middle class population grew to 4.2 million by 2013, up from 1.7 million in 2004. The black middle class spends around R400 billion a year. That means a rising black middle class is an engine for growth and profitability for businesses.

Yet numbers from Stats SA show that some 21% of South Africans still live in extreme poverty, meaning that transformation of the economy is far from complete. Symanowitz says that many QSEs are struggling with transformation, even if they recognise its importance, because of a lack of resources.

Automation and the right strategic advice can help companies to master the BBBEE challenge. Typically, they’ll have one person focusing on BEE, usually a finance or HR director, rather than the team of dedicated specialists larger companies can afford. There is a massive learning curve when the Codes are changed or the BBBEE Act is amended, says Symanowitz. That is why they should look to tools such as BEE123’s B-BBEE Management Solution to automate some of the process.

This solution helps organisations calculate and understand their BEE scores ahead of an audit for certification. They can simply input the relevant numbers and the application will tell them how the new Codes will impact on their scorecards. The BEE123 scenario planning tool determines exactly how certain changes could potentially impact their BEE rating.

Symanowitz says: "BEE can be complex to implement under the new Codes, but it can also provide a competitive edge for QSEs that do get it right. This starts with having the correct data and information at your fingertips, which is where our tools have a valuable role to play. Coupled with our strategic advisory and ongoing support, a simple and cost effective solution to BBEE compliancy is provided. "