The SA Information Technology (IT) market is estimated at more than R20 Billion a year but what is the role played by the black IT sector? Black IT Forum chairman Dr Hasmukh Gajjar, one of the sector`s pioneers, retraces his steps and shares some thoughts.
The Black IT Forum was constituted in the Western Cape in April 1995 with fewer than 10 members, and two years later in Gauteng with between 20 and 25 participating companies.
Today national membership numbers are somewhat vague but various estimates put them at between 150 and 200 companies. "Most of these," says Forum chairman Dr Hasmukh Gajjar, "are very small operations that are insignificant on the overall South African IT landscape. There are only between eight and 12 companies that can be regarded as medium-sized in the black IT sense.
"Among those to have developed a degree of market presence and branding are Kwetliso, TSS, Lechabile, SourceCom Solutions Systems, Ndizani, ATH and Motswedi. However, one of the trends of the past two years has been for these companies, which were 100 percent black-owned, forming equity partnerships with other IT companies."
Motswedi sold 40 percent of its shares to MGX, Latshabela has Germany`s Debis as equity partner and Kwetliso did a deal with PQ Africa. "These companies were forced to sell equity in order to obtain working capital for their organisations," says Gajjar.
"The second of three trends to develop since 1998 is black IT companies forming partnerships with established companies but without adding any value to themselves or their partners.
"I call them the rent-a-black brigade and, unfortunately, there`s a very big element of that."
The final trend, he says, is the formation of a large number of companies that are "probably majority black-owned but operating in very small niches where there is little potential for growth".
"To achieve growth, one needs access to both sustainable revenue and working capital. The challenge for entrepreneurs in the black IT sector is evading the twin pincers of these two needs."
Removing the barrier of access to sustainable revenue is probably the easier challenge to overcome. "Clearly the public sector has a major role to play in this. The problem we face is that thus far black IT companies have gone to the public sector on the basis of entitlement rather than developing a sustainable value-added relationship.
"The public sector has contained black IT companies to be `box-droppers` as part of its procurement policies rather than empowering them by giving them access to value-added services."
("Box-dropping" is a derogatory description of companies that merely supply end-users with software or hardware "boxes" but lack development or service skills.)
While black economic empowerment (BEE) in IT came to prominence in the mid-Nineties when a number of people saw technology as an entrepreneurial opportunity after the first democratic elections, it effectively had its roots 10 years earlier with Gajjar as one of its pioneers.
A general practitioner on the Cape Flats, he bought his first PC - loaded with the WordStar "suite" - in 1981. "Rasheed Hargey was one of my patients and he was very interested to see a doctor using a computer." He and Hargey began exchanging software like Lotus 1-2-3 and dBase when they were launched.
"It was all pirated software," he admits, "but with sanctions imposed on South Africa, it was very hard to get hold of products.
"There was a company called Computer Direct that started off in Woodstock and we ran into them in around 1986. They were importing from the US, so Rasheed and I decided to buy software and split the costs. We moved from complete piracy to semi-legitimacy.
"When Computer Direct went the franchise route in 1987, we formed a company called HNR (Hasmukh `N Rasheed) Computers so we could buy software for the two of us at dealer prices. We had no notion of reselling software but before we realised it, we were selling it to friends who were selling it to their friends.
"In February 1988, we opened our first HNR Computers retail store in Rylands. This was probably the first technology outlet that was not in Long Street, which was known as the computer street in Cape Town. We decided to put our store where the people lived but weren`t very successful because people preferred going to Long Street. We didn`t have the credibility.
"That was one of the first hard lessons of black economic empowerment ... being able to develop a level of credibility within the market. If you can`t develop credibility among your own community, you don`t stand a chance of developing it outside."
In June, the pair opened a second outlet (in Observatory). "There were no black consumers of technology, so for us to survive, we had to rely on white business.
"We were doing what everybody else was doing and felt we had to do something different. We went to Comdex in November 1988 with the notion of establishing a relationship with a major company."
(Comdex, held annually in Las Vegas, is the world`s largest communication and information technology expo.)
"We were thrown off every floor of Comdex because South Africa was a pariah state." Nonetheless, six months later, Gajjar returned to the US to secure the WordPerfect agency. The Utah-based company was probably the perfect partner in that it presented its fledgling affiliate with highly marketable products, in the form of the world`s leading word-processing and presentations software.
"In those days, you didn`t think within the framework of black economic empowerment, you thought of economic `struggle` and challenging the business establishment. At the same time, commercial success depended on white consumers and one could not provoke that base by waving political or economic flags." Gajjar served as general manager of WordPerfect South Africa yet retained his interest in HNR Computers, which was initially sole agency for WordPerfect at a time when the product far outsold its competitors.
HNR Computers was one of the very first BEE information technology initiatives. Another secured a major American computer hardware agency for South Africa but a year later entered into a joint venture with an existing company and was quickly swallowed up.
"We remained independent and the business became very successful. In 1991, we received offers from two major distribution companies to acquire minority stakes of up to 30 percent. The offers were rejected because Rasheed and I were of the opinion that, politically, it was be important to retain 100 percent ownership. We thought that by selling equity we would be perceived as `sellouts`."
Gajjar feels that, as far as joint ventures and partnerships are concerned, today`s black IT companies are re-inventing the wheel. "The fact that one of our fellow black IT pioneers` company was absorbed and died proved that a joint venture with a large existing business could be a total failure.
"The fact that we wanted to retain total ownership was also a failure. We failed because we refused a multi-million Rand offer for a 30 percent stake. What we didn`t realise was it would be politically acceptable to have a 30 percent let alone 100 percent black ownership ... that it would be marvellous to have a company that was 51 percent black-owned.
"HNR Computers lost out in that it grew organically and never had the working capital it needed to sustain the level of growth it was going through. We did not foresee that and were forced into doing a deal with Infiniti in February 1997. This was not successful and HNR Computers demised with the demise of Infiniti. I think history would have been very different if we had sold 30 percent."
The BEE lessons, he says, are two-fold and as relevant now as they were a few years ago. Black economic empowerment cannot be achieved in isolation by black people but through partnerships and alliances with established big business. "On the other hand, one cannot have partnerships and alliances that kill black entrepreneurial initiatives as Alan Roper experienced through the Unidata deal."
HNR Computers was the first step in a journey that was to take Gajjar to many ground-breaking undertakings. His most recent is Radian (his contract as chairman of Vodacom expired at the end of June), an investment company taking minority stakes in black technology enterprises. Again, Hargey is one of the leading lights.
"Radian is an effort to address the black IT sector challenges by taking strategic and equity control of its underlying assets but leaving management control in place."
The financial contribution of black IT companies to the sector`s overall performance is negligible. BMI-TechKnowledge estimates the size of the sector to be in the region of R21 Billion a year. Gajjar maintains that the black impact is "very, very marginal. In the real economic sense, black companies probably account for only two or three percent of all IT activity."
"If one then excludes the joint ventures and BEE partnerships, real economic value-added activities amount to between one and two percent of the whole."
Does this disturb him?
"I think we are going through a process of evolution, experiencing in black IT what is being experienced across the entire economy. There is a lack of clear framework, which is why the work of the Black Economic Empowerment Commission (BEEC) is so eagerly awaited by all stakeholders." (Gajjar is also chairman of the Black Business Council.)
The kind of structures and relationships that are going to be attractive to the public and private sectors from the point of view of fledgling businesses will largely be determined by the BEEC.
"Many existing, established businesses expected real value from their black partners and have become disillusioned with the rent-a-black brigade. But I see an increasing level of maturity, both from black enterprises and their established counterparts, so future relationships and partnerships will be much more meaningful and distributive.
"I think a large part of BEE can be summed up by the fact that we are enriching quality people but are not distributing the wealth that is being created.
"While highly profitable when it comes to individual enrichment, we have pretty much been declared bankrupt when it comes to human resource development side of the balance sheet."
He adds that another major drawback of black IT companies is an almost total lack of marketing capability. "There are lots of black IT companies with very good content and capabilities but that are not able to market themselves.
"Technology is such a high-growth sector and, as such, is all about marketing.
"The most classic examples are Microsoft and Cisco. Microsoft attained its leadership position not by being an innovative company or by providing leading-edge products. It is the epitome of how a company can become successful purely through marketing.
"On the other hand, Cisco Systems has provided real technology but, in order to unlock its true potential, it has had to go the marketing route over the past two years.
"It`s not only with technology; you have to figure out how to market and brand yourself if you want to be successful as an entrepreneur with any product or service.
"And the whole Internet age has made this need much more acute." - JIM FREEMAN
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