* This article was originally published in TFM Magazine and is republished here with the expressed permission of TFM Magazine.
Enter the Funnel
At the heart of pressure felt in Preferential Procurement is the demand for ‘Black’ owned Empowering Suppliers to provide goods and/or services, in very specific or specialised procurement categories, compared to those currently supplying such goods and/or services. This imbalance is not unique per sector, but is widespread across all business sectors in South Africa.
To-date many ‘host organisations’ investing in Enterprise & Supplier Development (ESD) initiatives have experienced high costs associated with developing Beneficiaries. In reality such investments have often resulted in relatively low survival rates of these Beneficiaries or have had little impact
within the supply chain of a ‘host organisation’.
This is mainly due to the historic one dimensional process in executing workable ESD initiatives. Currently there are many ESD relationships whereby the revenue, growth and sustainability of a beneficiary is solely reliant on the ‘host organisation’. This scenario leaves a beneficiary vulnerable, and if left stagnant would have no positive impact on a ‘host organisation’s’ supply chain or any meaningful impact on the beneficiary itself.
The Conical Mouth
There are three stages in a Structured ESD process, which facilitate building a stable Supplier Development Beneficiary. Using the analogy of a development funnel, in particular the conical mouth, relates to stage one of a Supplier Development process. This stage commences with the identification and screening of a multitude of potential Suppliers. During stage two these suppliers are developed in terms of their capability, quality, and marketing ability of their goods and services.
During stage three specific, barriers to entry are identified and addressed in
line with a Service Level Agreement of the ‘host organisation’, whereby the uptake within a ‘host organisation’s’ supply chain is managed. It is imperative that this is a structured process to ensure a specific pipeline is continually developed to safeguard the transition from an Enterprise Development Beneficiary to a Supplier Development Beneficiary. Without this structure, there is a likelihood that a ‘host organisation’ will not adequately develop a Supplier Development Beneficiary, consequently falling short of their Supplier Development mandate.
In-the-field feedback and experience reveals that only approximately 10% of ESD Beneficiary and ‘host organisation’ partnerships successfully evolve from Stage one to Stage three. Key to an Enterprise Development Beneficiary being financially feasible are establishing initiatives that service a ‘host organisation’ from a collective value chain from the onset of stage one. By basing screening and selection criteria on the initial requirements of the collective value chain, resources can be better deployed to develop beneficiaries who have the greatest potential. Doing this will ensure the successful elevation from stage one to stage three.
The Bottle Neck
In reality, a ‘host organisation’ has a multitude of suppliers within their supply chain who are essentially competitors of their ESD Beneficiaries. However, the secret is for a ‘host organisation’ to build a Supplier Development Beneficiary to have the ability to ‘compete and beat’ each of their competitors. They should have the capability to leverage their place in the market and create their own market value in an exceptionally competitive economic climate. The following areas have been identified to assist ‘host organisations’ in evaluating whether their ESD Beneficiaries can deliver ‘on time, on budget and on brief’ in either the long or short-term:
Would the beneficiary need on-the-job development, or are they adequately equipped and skilled to execute the work independently?
Would the beneficiary have the ability to meet stringent specific technical requirements?
What would be the financial and/or reputational risks associated with awarding a beneficiary work?
Would the beneficiary have the capacity to deliver on a long-term Service Level Agreement?
Would the beneficiary have the capacity to work outside of the scope of work procured by the ‘host organisation’?
Filtering through – Incubation vs. Acceleration
Business Incubation
Business incubation is a unique and highly flexible combination of business development processes, infrastructure and people, designed to nurture new and small businesses by assisting them to survive and grow through the difficult and vulnerable early stages of development.
Services may include, however are not limited to:
1. Office space: Usually at a reduced rate.
2. Office services: Receptionist, conference rooms, computers, office
equipment etc.
3. Entrepreneurial advice and mentoring.
4. Contacts and Networking: An advantage of a business ‘incubator’ is the access to experienced entrepreneurs, innovators and professionals who can answer questions, provide guidance and resources.
In most cases ‘incubation’ does not result in an exchange of equity.
Business Acceleration
Similar to a business ‘incubator’, however, differs in that they usually have a greater focus on organisations entering or growing in a national or global market. These are more likely to be financed by venture capitalists looking for an opportunity to finance growth potential through defined action plans.
They will generally offer the same services offered by a business ‘incubator’. The key difference is the level of hands-on involvement by ‘accelerator’ management, which should increase the chances of success.
An ‘accelerator’ steps in to foster growth of an established business which requires external financing to ensure growth.
Most ‘accelerators’ take a group of organisations, otherwise a cohort, through a specific process over a previously-defined period of time.
Many private accelerators participate in seed-stage investments through exchange of equity.
Expand the Development Funnel
Ideally, it is in the best interest of a ‘host organisation’ to have a stream of Supplier Development Beneficiaries within their supply chain to enable them to leverage the best deal. This competitiveness, by large, reduces costs and increases innovation. For this reason, ‘host organisations’ need to increase their development footprint in the area of Enterprise Development.
Consider, for example, other organisations within a value chain who are exploring to develop similar skills to those required by the ESD Beneficiary that the ‘host organisation’ is developing. This would benefit the collective value chain through reducing costs using economies of scale, such as shared services or shared infrastructure for development. The costs saved by using this approach could go to developing other Beneficiaries with the same needs.
This approach would permit organisations to develop a host of Beneficiaries in one time-frame, in contrast to one. In lieu of this, it is critical that organisations start focusing and improving the Enterprise Development area of the funnel. This does not necessarily mean increasing the amount of money that is spent on Enterprise Development, but rather reconsidering the ways in which Enterprise Development spend can be leveraged.
There are many issues to be taken into account when taking this approach. One such issue is the matter of allocating business development service providers with the resources necessary to ensure they are managed in an efficient and effective manner. Beneficiaries at different stages of development have different challenges and support needs. For this reason, a key step in the initial intake analysis is to understand the beneficiary needs, thereafter allocating only appropriate resources accordingly. To ensure this is cost-effective, it is crucial to employ policy mechanisms so greater resources are allocated to those beneficiaries which represent greater potential for success.
The Interactive Funnel – Adopt an Ecosystem Perspective
Introducing an ecosystem perspective entails broad thinking. It is about integrating and aligning organisms of a value chain to the benefit of all. The core aim is for organisations to realise the greater benefits in applying an ecosystem perspective than going it alone. It incorporates all role-players within the Enterprise Development system, subsequently systematically connecting them. In many cases the foundation is there, it merely needs connecting, whilst in other cases the ‘host organisation’ may need to lay the foundation to create an ESD Eco-System.
Identify the potential of a Development Ecosystem.
- Do other organisations within the same sector have a demand for similar ESD beneficiaries than that of the ‘host organisation’s’?
- Can a Beneficiary evolve and deliver goods and/or services within other areas of the sector?
- What are the real long-term prospects of an ESD Beneficiary?
- What are the critical competencies/requirements specific to a particular sector i.e. safety regulations?
- Are there any supplier synergies which could be mutually beneficial to both the beneficiaries and host organisations?
About the Authors:
Wybrand Ganzevoort, Managing Director of Collective Value Creation, specialises in the development and implementation of Enterprise and Supplier Development (ESD) strategies, with a specific focus on Lean Enterprise and Supplier Development. With a passion for entrepreneurial development and Transformation, he actively assists organisations in establishing and implementing workable ESD strategies, which deliver shared value in the South African Transformation arena.
June Lavelle is a pioneer of the business incubation movement. She is credited with being amongst the first to spearhead the concept and development of the award winning Fulton-Carroll Center in Chicago, one of the first business incubators to become financially self-sustaining. For the past 25 years, her focus has been on international development. Her illustrious career has seen her provide council and training on issues such as entrepreneurial support and enterprise development to Governments and private sector leaders in 30 countries spanning across Africa, the Balkans, the Caribbean, Central Asia, Central and Eastern Europe, the Middle East, Russia, and Southeast Asia.