Two months on, and the IT Service Management giant EOH has officially hit a 9 year low in share price, with an onerous road to recovery. This colossal fall is another illustration that the South African economy needs variety and competition. As part of prudent reputation management and ensuring sustainability to shareholder returns multi-national corporations have to be increasingly sensitive to the increased interconnectedness of cause and effect as well as the positive and negative aspects of investing in a country like South Africa. Consider this; EOH reached a 9 year low in market share, as a result of a Department of Defence contract worth less than 1% of the companies R16 billion turnover, according to TechCentral sources.
The Financial Services Transformation Council (FSTC), the custodian of transformation in the financial sector reports in their 2016 annual report the latest available, that ICT accounted for approximately 50% of procurement of the general industry. This is understandable and justified given that ICT is the backbone on which insurance, banking, brokerage and all other regulated financial services operate on. The ICT space and by implication the financial services have been dominated by Original Equipment Manufacturers (OEMs) and bloated by local implementing partners. Implementing partners propel grand illusions of economies of scale in a sector where economies of scale have the least effect in comparison to agriculture, property or financial services. To ensure effective transformation; is it not time that the focus not be limited to transformation solely on number of players but be expanded to increase in number of service providers?
What some of us non-techophiles may not necessarily be aware of is that companies such as Microsoft and IBM have implemented what the B-BBEE commission have termed as Equity Equivalent Investment Programmes. Equity Equivalent Investment Programmes are opportunities for OEMs to invest in programmes that are aimed at promoting socio-economic advancement and development in the South African economy as opposed to diluting their equity ownership through acquiring local equity partners. This is great as an alternative for multi-nationals’ that previously did not participate in equity transformation according to the B-BBEE code; one can see how the benefit can be broadened to a wider public. This provision was made as part of the continued realignment of the B-BBEE act with the reality on the ground. The argument is that shareholders of some multi-nationals are unable due to HQ corporate governance mandates to sell equity and in comparison would rather forego their presence in the local market.
As practitioners, we have no problem with Equity Equivalents, we are in full support of EE as the Department of Trade and Industry continues to demonstrate great pragmatism and an attitude of continual learning with regards to realising sustainable economic empowerment that works. What remains of concern though is the connection or lack thereof between these OEMs equity equivalent programmes and the local value chain. As we have reiterated in previous posts, the real value in the B-BBEE act is in the tight-weaving of scorecard elements with broader company strategies, national agenda’s and global development goals. Equity Equivalence allows for this tight-weaving and broader participation when compared to Equity Ownership; especially considering global value chains and the increased requirement for sustainability sensitivity.
A golden opportunity now exists in the fantastic imbroglio left by EOH and its subsidiaries. Microsoft which until a month ago had EOH Mthombo as a gold partner in the reselling of Microsoft products in South Africa now has to reimagine its local partnerships and operating model. As a leading software provider Microsoft has to seriously rethink how to ensure the downstream chain is broken-down, empowered and transformed for broader impact across all sectors that procure IT services.
To many of us laymen the multi-billion Rand ICT industry is a minefield filed with technical jargon and acronyms of Gigs, bandwidths, ERPs, APIs and the like. However, this does not mean that transformation of the sector is a BRB or TBD issue. In comparison to transforming the agri, financial services or property sector; IT requires considerably less land, fixed assets and capital outlay of which a well designed Equity Equivalent Investment Programme would make considerable impact.
Let’s not misunderstand though; Microsoft has made great strides in not only internalizing B-BBEE but specifically in mobilising Equity Equivalents. As the latest iteration of Microsoft the Equity Equivalent Investment Programme takes a focus on innovation and digital transformation in the agricultural and manufacturing sector, we trust the door will not close on the support of Black Owned Independent Software Vendors (ISVs). How does South Africa, in particular the ICT Sector Council put pressure on Microsoft to utilise their ISV EE programme to ensure the empowerment of at least 5 Black Owned IT companies to fill the void? It’s important to note that this is advantageous also for preferential procurement, as there needs to be a mix of transformed companies of various sizes in order to maximise PP points.
Much like the dark joke about the job seeker that referenced the funeral of a company employee in his cover letter. ISVs are looking on saying, “Microsoft, there is a gaping hole in your supply chain, we know, we saw it happen.” Moreover we need IT to support sectors such as the financial services that support ISVs by bearing witness.