​The newly appointed Small Business Development Minister, Lindiwe Zulu, has the survival of thousands of struggling small businesses in her hands. These businesses are critical in helping to grow SA’s sluggish economy and create much-needed jobs.

Though government policies emphasise the need for a vibrant small and medium enterprise (SME) sector, the National Development Plan foresees that by 2030 about 90% of jobs will be created in small and expanding companies. However, the country is a long way from meeting this target.

Every two-and-a-half years, three quarters of new businesses fail, according to research conducted by the Human Resources Development Council. One way SA could meaningfully grow the SME sector is if big business puts its substantial muscle behind its smaller counterparts.

But big business generally doesn’t have the capacity or know-how to support smaller corporates. It isn’t their core speciality, and the time and resources needed to develop smaller enterprises shifts the focus off running their own businesses.

Big businesses and their supply chains in SA are highly concentrated, making it difficult for SMEs to get a foot in the door, says Pavlo Phitidis, CEO of Aurik Business Accelerator. In developed markets, the trend in supply chains is ‘less is more’.

‘Corporations want fewer suppliers and to deepen those relationships, and also make sure those suppliers have deep balance sheets so they can sue them if they don’t meet the terms of the contract,’ he says. The situation differs in developing markets where governments want companies to do more than just provide services or products. In SA, the state is particularly keen to see more businesses involved in the beneficiation of minerals and growing jobs.

‘Emerging market governments want companies to incorporate more people into their supply chain and to deepen the economic inclusivity of the broader population. Businesses are faced with having more smaller suppliers as part of their social licence to operate,’ says Phitidis.

In SA, this licence is positioned as BEE. The state’s desire to have businesses include social development is not exclusive to this country. But the goal to have big companies play a real role in developing emerging businesses has not been met because of loopholes in the BBBEE codes. These have now been revised and the new requirements, which come into effect in April next year, are meant to ensure large companies play a more meaningful role in developing SMEs and incorporating them into their supply chains.

Social development requirements have created a need for intermediaries who work closely with small businesses to ensure they are good enough to provide a pipeline of sustainable businesses to successfully partner with larger companies. Known as incubators or business development services, they claim to develop SMEs, but achieve varying levels of success.

For this reason JP Morgan, through the JP Morgan Chase Foundation, has tried to measure the value of business development support organisations in growing sustainable SMEs. It has invested more than R15.9 million in the SME Catalyst for Growth Programme – a two-year pilot initiative – with partners Aurik, Raizcorp and Dalberg Global Development Advisors.

Aurik and Raizcorp, both for-profit organisations that help grow SMEs, were given a wide mandate to each choose 10 early- to growth-stage enterprises to develop for two years. The companies they chose included a catering company, fashion design school, medical products courier service, manufacturer and distributor of coal products and a ladder producer.

At the end of the pilot all the companies were still operating, while 75% had grown their revenue from the baseline level in 2012 and 60% had increased their customer numbers. By contrast, only 60% of SMEs tracked in the SME Growth Index – the largest survey tracking around 500 SMEs over time in SA – grew in revenue during the same period.

‘We have to make sure our entrepreneurs are supplier ready. They have to be credible, vetted businesses’

ANNE MCWALTER, CEO, THE HOPE FACTORY

Businesses in the project added, on average, one job each while only a third of SMEs in the Growth Index grew staff numbers over the same period. ‘This may seem small but if just one job was added to 15% of existing SMEs in SA, 0.8 million jobs could be created, potentially leading to a four percentage point drop in unemployment,’ says Rafia Qureshi, manager of JP Morgan’s philanthropy programme for sub-Saharan Africa and the Middle East.

‘Combining this intervention with improving the five-year survival rate of South African SMEs from 30% to 40%, using high-quality business development support, would decrease South Africa’s unemployment rate by six percentage points and create around 1.2 million jobs,’ she says.

The SME Catalyst for Growth Programme is being transformed into an independent not-for-profit organisation, which will develop a tool to measure the quality of business development services. In conjunction with Dalberg, the tool is being created from data collected during the programme.

SMEs that require help could use the analytics platform to choose the business development support service best suited to them. Large corporates would be able to source small, reliable, black-owned suppliers with the reassurance that they have been through a quality business development process.

Anglo American, through its Zimele enterprise development initiative, is the first corporate partner to come on board, giving it access to the analytics platform to procure business development support. Zimele, established in 1989, was one of the first projects established by big business to help grow smaller companies. It works with black SMEs to create sustainable jobs combined with socio-economic development, mainly in peri-urban mining communities.

Massmart, Pick n Pay and Woolworths have since started their own programmes. Massmart’s R242 million supplier development programme has funded 193 small-to-medium-sized black-owned suppliers since its inception in 2011. The fund, a voluntary condition of its merger with giant US retailer Walmart, helps SMEs that are either black-owned, black-empowered, women-owned or are local manufacturers.

Massmart’s R242 million development programme has funded 193 small-to-medium-sized black-owned suppliers

Created in 1997, the Ackerman Pick n Pay Foundation aims to make a ‘meaningful and measurable contribution’ in the sectors where the retailer operates, according to its website. The company links emerging farmers to its stores while the ideal long-term strategy involves a model where franchise stores are established in local communities.

‘This provides the perfect point of convergence between the community, local suppliers and retailers. Communities purchase produce from the local store, which is linked to subsistence farmers close by, who receive a direct supply of fresh produce. In this way everyone benefits and the carbon footprint is reduced at the same time,’ says the company.

Woolworths also has a well-developed enterprise support programme that helps small black-owned businesses grow through financial assistance, guaranteed business, mentorship and access to experts, according to its website. Suppliers include Chic Shoes, which has produced more than 400 000 pairs of leather pumps for Woolworths, and Bagpac, which makes recyclable paper shopping bags for Trenery and Country Road stores.

The revised BBBEE codes should see more companies follow in the footsteps of existing organisations that are meaningfully incorporating SMEs into their supply chains. The amended codes were gazetted by the Department of Trade and Industry in October last year and come into effect in April 2015, with significant changes in enterprise development. Of the 105 points on the new scorecard, 40 go to enterprise and supplier development.

Anne McWalter, CEO of the Hope Factory, an enterprise development organisation governed by the South African Institute of Chartered Accountants, says it is ‘too early to tell’ what impact the revised codes will have on SMEs. ‘There is an assumption that all these black suppliers are just waiting for business. That is not true. But it might push us to get them ready and it should lead to greater access to market opportunities for small businesses,’ she says.

McWalter says there is a ‘disconnect’ between small and big businesses, particularly when it comes to processes and rules. ‘As small businesses find it difficult to comply, big business might need to relax some of the rules. They might also need to change their payment terms as small businesses cannot survive without quicker payment.’ The Hope Factory works with informal and formal businesses, and sees mentorship as key to growing sustainable SMEs.

Investors in the Hope Factory acquire BEE points and offer potential new markets to the organisation’s SMEs. McWalter says they are struggling to provide enough small suppliers to meet the demand of big investors, especially in light of the revised codes. ‘We have to make sure our entrepreneurs are supplier ready. They have to be credible, vetted businesses that we have a relationship with,’ she says.

Allon Raiz, CEO of business incubator Raizcorp, says small black suppliers tend to be of low strategic importance to big companies and require little capital to get started so the barriers to entry are low and the space competitive. ‘If supplier development is going to work, you need to move more suppliers to the high-strategic importance, high-capital requirements space,’ he says. Alternatively, black SMEs need to be more innovative.

‘Only when there is innovation, do you get a net increase in jobs and increased efficiencies,’ Raiz says, adding that his company experiences a huge demand for good black SME suppliers.

‘But supplier development cannot happen overnight, it’s a process,’ he says.

By Gene Michelson
Image: Fredrik Broden/reneerhyner.com