Current procurement systems and practices will fail BEE verification requirements.
The South African economy in all its diversity, presents BEE Verification Agencies with a reality that differs substantially from the corporate standard envisioned by the authors of the BBBEE Codes of Good Practice. “This is not to say that Verification is critically affected, or that adherence to the codes becomes impossible, but rather that both Verification Agencies and clients should be aware of the challenges faced, responding to these as quickly and as accurately as possible,” says Robert Thorburn of Exceed Verification.
It is also important to note that each successive draft of the Codes has shown an increase in flexibility, allowing for divergent business practices to be brought into the fold.
Wait and See approach will cause a loss of points until systems are updated.
At present though, with the codes not yet gazetted, many companies are taking a wait and see attitude, both as far as their own scores and their internal systems are concerned. This is understandable when one is dealing with uncertainty on the possible introduction of a new system, but in this case though, the uncertainty only relates to the technicalities of the final measurement system and the effective data thereof.
That the codes will be gazetted is certain, as are the specific issues to be measured. Amongst other things, this implies that businesses which have already undergone a Verification are in a better position to improve systems with a view to BEE Verification criteria. This in turn will impact positively on scoring and will place such businesses ahead of the curve once the codes are gazetted.
Recording of BEE purchase transactions crucial
When considering the competitive advantage to be gained from a good BEE score, companies already aligning their systems with measurement under the codes are definitely on the right path. What this alignment means is not always clear though, with new BEE initiatives often being negatively impacted by insufficient record keeping. Recording the exact details of all expenditures, the recipients or participants including race and gender, dates and any other relevant details, is critical since this will enable Verification Agencies to confirm the expenditure and award the associated points. So for instance, spending R10 000 on a Corporate Social Investment project will only score points if the Verification Agency can confirm the amount spent (invoices, bank statements, etc.), that the date for the expenditure is within the measurement period and that at least 75% of the recipients are black. This need for record keeping holds equally for the procurement function.
Procurement in general
When considering the importance of Preferential Procurement for a business’ BEE score two key points come to the fore. Firstly, Preferential Procurement accounts for 20 out of the total 100 points available, the same as Ownership. Secondly, your Preferential Procurement score is dependant on the BEE scores of those businesses you procure from, emphasising the importance of supplier management.
Records not enough
Recordkeeping alone is therefore not sufficient, with procurement departments needing to take and integrated approach focusing on recordkeeping, staff training and continual oversight. Two key issues in this regard are:
1. BEE training for procurement personnel.
2. A centralised and flexible procurement record keeping system.
BEE training for procurement personnel
Although individuals at the head of procurement departments should obviously be aware of BEE and the system of measurement contained in the Codes, this is all too often the only level at which up to date BEE information resides. As such, buyers and other procurement employees are not in the loop and may end up making decisions that impact negatively on a business’ Preferential Procurement score.
This lack of knowledge often leads to BEE considerations being left by the wayside during procurement decisions, or the making of procurement decisions on the basis of the wrong criteria. Once any item or service has been procured, the impact of that purchase on a business’ Preferential Procurement score will stand. The dissemination of information, as well as proper control within the procurement function are therefore key.
A centralised and flexible procurement record keeping system
Unfortunately, procurement is often not a centralised function. Though the reasons for not employing a centralised procurement department differ from one business to the next, the impact thereof on the Verification of Preferential Procurement is largely predictable.
If different departments perform their own procurement, oversight is reduced and the ability to drive Preferential Procurement initiatives becomes limited. Since individuals operating in departments other than procurement may be less motivated to participate in procurement initiatives, while strategy integration across departments also provides challenges, it is typically the case that these factors inhibit Preferential Procurement scoring.
In such instances, full procurement records for the period under review is usually only obtainable from the internal audit or finance departments. It is also not uncommon to find that these departments have difficulty in drawing supplier specific reports, thereby further undermining supplier management as well as BEE Verification.
The ideal would therefore be centralised procurement record keeping, even if procurement is not centrally conducted. Such a centralised system may of course also present problems of its own. It is for instance, not uncommon to find that large corporates have already embarked on a programme to record BEE spends. This typically takes the form of a simple addition to the information recorded for each supplier and transaction, with line items not only recording the date, amount, classification, supplier name and the like for each expenditure, but also the BEE contributor level for each supplier. This is exactly the type of data needed by Verification Agencies as well as procurement officials, the manner in which the data is recorded may be a problem though.
The data relating to items purchased and pricing is entered as the expense is incurred, while information relating to the supplier is often drawn from a separate central database. Normally this does not present a problem, unless a supplier spend report is drawn on a significantly later date, implying that information on the central database, relating to the supplier’s BEE status, may have changed from the period of measurement.
A practical example would be the Verification of a company conducted in June 2006, with financials for the period February 2005 to March 2006 (financial year) used. The Verification Agency will request spend per supplier for the period as well insight into the procurement system and hard copies of all relevant documents for a supplier sample. The sample will list specific spends as well as the supplier’s BEE status. The client will then provide the Verification Agency with a copy of its total procurement expenditure, going from year total, to spend per supplier, to individual items of expenditure. The agency will trace all calculations and retrieve invoices and bank statements, with all calculations checking out, that is until supplier BEE status is Verified. At this point the Verification Agency may well find that some of the supplier BEE scores fall in a period outside the relevant financial year. Since certificates are valid for 12 months, they may have expired before February 2005 or may only have been issued after March 2006.
The simple reason for this is that the central supplier database may have outdated information, or the information for a specific supplier may have been updated after the previous financial year. This exposes a key risk inherent in a centralised supplier database, in that these databases aren’t geared towards identifying out of date information and only record the most recent version of any information.
Two actions are therefore needed, if you make use of such a system. Firstly, somebody needs to take responsibility for keeping supplier BEE details up to date, since other supplier details do not usually change on an annual basis. Secondly, supplier reports should be prepared for each financial year, at year end. Thereby ensuring that all the information needed for BEE calculations is pulled together while the database still contains the required data.
Not only will such an approach speed up the Verification process, but it will also provide the procurement department with an excellent tool for managing and measuring Preferential Procurement spend on a yearly, as well as a monthly, basis. The value of which is easily demonstrated if you consider that no amount of spend on Preferential Procurement will translate into any points on your scorecard, if that spend has not been managed and recorded in full, including the supplier’s BEE status during the period of measurement.
About the author:
086 111 5280
“Working as a verification analyst one deals with businesses of all sizes and natures, running almost the entire spectrum of the South African economy. Although this most definitely keeps things interesting, it also means that information Verified (audited), as well as the client systems and job functions involved, may well change from one client to the next.”