Measuring ESD Performance

The debate over BBBEE and its impact has heated up again recently during President Zuma’s speech of the nation address specifically to the point relating to radical economic transformation.  The week following SONA multiple news articles started debating ‘white monopolistic capital’ with prominent business men such as Christo Wiese throwing in their weight behind the debate.  Many of the articles discussed how transformation has taken place in the country and how capital has exchanged hands from white to black individuals in the country over the past 30 years. Yet none of the articles addressed the question: “What does success look like?”

The Gini-coefficient is a measurement that provides economists with an indicator for economic inequality.  With South Africa consistently having the most unequal distribution in the world of between 0.66 to 0.7, the reality is that even though capital has transferred there is still relatively little change in the lives of the average South African citizen.

The BBBEE codes has provided us with a framework for quantifying transformation efforts and over the past two decades a whole new industry has been born around the verification of this data.  The revised 2013 Codes of Good practice has significantly increased the compliance to these codes with many multinationals now regarding transformation as a barrier to entry in establishing a South African presence.

Enterprise and Supplier Development (ESD) is one of the elements that is now the most heavily weighted in the measurement of transformation efforts, weighing a possible 36% - 38% of the total scorecard.  The emphasis of ESD is to increase entrepreneurial success and thereby black participation in the value chain of the mainstream economy.  Sadly though, based on the latest Global Entrepreneurship Monitor report between 2014 and 2015 there has been a decline in early stage entrepreneurial activity shown by black African entrepreneurs.  90% of this activity has been in the business services industry yet sadly Entrepreneurs are now four times more likely to anticipate no job create in comparison to previous years.

Job Creation and ESD Performance

Job creation has been specifically highlighted as one of the areas that the amended 2013 BBBEE codes should measure and it is the rare organisation that does not indicate that their ESD programmes have successfully created at least one job.  Little effort has however been made in looking at the debits and credits behind job creation in relation to ESD performance and more specifically so in how this relates to Supplier Development and procurement.  Transformation does not necessarily mean economic activity and when a small black company enters the supply chain of a company in many cases it could mean that a larger white company loses a contract.  This might have a positive impact on black entrepreneurial activity, but could have a negative impact on black job creation efforts. In theory, the idea would be that black entrepreneurs hire black employees, though in many industries this equation is doubtful.  In normal circumstances a job trade-off takes place with one job being replaced by another. (Read our article here regarding job accounting.)

The 2013 amended codes of good practice have further provided a much stronger focus on Supplier Development than on early stage entrepreneurial development with 2% of spend needing to go to Supplier Development efforts and 1% to Enterprise Development efforts.  Economic thinkers such as Joseph Schumpeter and management thinkers such as Clayton Christensen has argued that job creation takes place around disruptive innovation and not around efficiency innovation that is mostly found in supply chain innovation.  There is therefore a strong argument that Supplier Development could lead to a strong focus on access to the economy for new black entrants, but could seriously hamper job creation efforts.

Measuring ESD Performance - Impact vs. Intent

It would seem as if many companies are aligned around the intent behind ESD and estimates are that upwards of 26 ZARB is being spent in the South African economy around this intent.  The focus however of the BBBEE codes and more specifically so ESD is the measurement of the intent behind the codes.  What the codes do not require is the measurement of the impact.

In social development practices the focus on results has been much more significant in recent years with practices such as theory of change placing much stronger focus on the outcomes that need to be achieved rather than the scale of the input.  To this effect companies that understand and quantify the logic flow of how their social activities ultimately relates to the social outcomes they want to achieve are much more effective in achieving these outcomes if they consider the learnings in what they have measured and adapt their approach to development.

What performance do we measure – Strategy vs. Tactics

Social impact is therefore highly dependent on what an organisation wants to achieve and the way in which they want to achieve this.  ESD can be implemented through various tactics.  Just some of these tactics include the ability to provide loan financing, structure early payment terms, provide grants or to provide assistance via non-financial mechanisms such as skills development interventions.  The mistake many companies make however is to consider tactics rather than strategy.  The myopic view on tactics is mostly the result of the compliance paradigm through which BBBEE is approached in many instances.  In this paradigm there is a trade-off between BBBEE points and company expenditure.  The goal quite simply is to maximise BBBEE points while minimising BBBEE expenditure.  Tactics that follow this paradigm has very little correlation with social outcomes.

To counter this tactical approach to ESD the 2013 amended BBBEE codes have required an ESD performance plan that should be completed and should be used to measure implementation against.  Very little guidance has been provided in relation to how this planning should be done.  It has been shown that companies that have aligned their social development strategies with their overall company strategy has the highest sustainable outcomes.  To this effect there are various strategies that a company could employ to Enterprise and Supplier Development.  Compliance is one of these strategies and is based on the understanding that for a company to increase its probability of securing tenders it needs to increase its BBBEE points.

There are however some other strategies that a company can follow as well all of these based on the different stakeholders a company has.  Some of these strategies are related specifically to the supply chain, but some of the strategies are also related to marketing and sales.  Consider for instance the ADT dealer programme which allows entrepreneurs with the ability to become ADT resellers. In ADT’s marketing of the programme they specify this as a ‘being a sales channel to ADT’ (Entrepreneur Magazine, Feb 23, 2107).  The outcomes of a programme such as this not only benefits the entrepreneurs in the programme, but also directly benefits ADT correlating with the sales of ADT products.

Strategies might vary based on the industry that the company employing the strategy is operating in.  For instance a mining company might have a high risk based strategy focused on the development of local communities.  In their strategy they need to consider the impact of their mining operations on local communities surrounding their operations.  In the tragic case of the Marikana killings in 2012 and the impact of this on the mining company Lonmin’s, shareholder value there is a strong case to be made for regional localised entrepreneurial development in mining.

Some mining companies have however also focused on a local efficiency strategy by optimising local procurement.  In doing so they have sought to increase local production thereby reducing transport costs and inventory.

The results that a company wants to achieve is therefore dependant not only on the social impact, but also highly dependent on the company’s strategy in achieving these results.  The first point of departure therefore would be in asking what the strategy is that a company seeks to deploy.  Once this is understood a company can then start to measure the outcomes of this strategy both in terms of the social outcomes as well as the company’s economic returns.

Spheres of impact

Once a company understands that there is a logic of events that leads to the outcomes they want to achieve, it then follows that each event outcome can be measured.  Measuring all outcomes is however not very practical and highly costly so it makes sense to only measure some key indicators.

When measuring outcomes, it is advisable to think through both the leading indicators and the lagging indicators that can be measured.  In the case of our mining company that has a risk related strategy the leading indicator might be local procurement as measured by spend on companies in a 50km radius from operations.  A lagging indicator might be local job creation in a 50km radius from operations.  This will provide an indication of if there was a correlation between local procurement and local job creation and if there might have simply been a move to import the products internationally and sell it through a local agent.

At a high level depending on the nature of the programme and the strategy that is followed certain economic indicators could therefore be measured over the longer term.  These indicators are however dependant on shorter term outcomes in relation to both input metrics and output metrics.  In the case of rural entrepreneurial development programmes much of the outcomes are highly dependent on skills development.  In this case the basic leading indicators could be as simple as tracking attendance to skills development programmes.  As of late there has been a much stronger focus on Social Return on Investment metrics and NPO’s such a Catalysts for Growth, backed by JP Morgan and Dalberg have specifically started targeting the need for measuring the impact of ESD programmes and communicating these outcomes through an online platform.

The motivation for measurement

The Public Relations related communication in the media is a very poor indicator of how companies are performing in regards to social and more specifically entrepreneurial development outcomes.  Very few public companies or government for that matter would openly discuss their failures in regards to entrepreneurial development.  This means that our learning relating to entrepreneurial development, in many cases, is limited to the biased interpretation of successful outcomes.

In the case of the individual company it is critical for companies to understand their strategies and how these strategies will be rolled out and measured in practice.  The old dictum by Peter Drucker, “If you can’t measure it, you can’t improve it”, holds true for ESD performance and BBBEE performance as much as any other discipline.