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Developing SMEs in the IT sector

The local economy needs a growing SME layer, particularly in IT.
Read time 5min 30sec

In this, the second of a series of discussions over the next few months about the seven areas of effective BEE practices, I will examine the importance of small and medium enterprise (SMEs) and their development - especially in the light of BEE - to the economy and the general empowerment process.

In terms of growing a sustainable economy and providing employment, SME development is critical. SA has emerged from a quasi-monopolistic structure where a few giants dominated the economy; what the country needs is not transformed monopolies, but rather a growing SME layer. It is critical therefore that we continue to focus on and pay attention to development in this regard for several reasons.

Global experience says the largest area of employment occurs in the SME layer of the economy rather than in larger corporations or organisations, with an abundance of statistics available to support this. Innovation and the entrepreneurial sprit are fostered in SMEs, while larger organisations tend to be more rigid in terms of technology and the solutions they deliver to the market.

Clearly, in the IT sector the advent of the knowledge worker is a big issue, and as a creator of jobs and skills development, the SME is a critical layer. Yet in spite of several initiatives aimed at supporting the growth of this sector, SA has been struggling to get the promotion and advancement of SMEs at the levels required off the ground.

Limited success

Numerous initiatives from government as well as the establishment of various institutions and organisations to stimulate the growth of sustainable SMEs have not had the desired effect. There is a proliferation of informal growth rather than a studied programme, and in the IT sector itself, the growth of sustainable SMEs has not been achieved at all - and even more so if it`s a black-owned company. We`ve seen companies come and go, and because of this lack of success, the entire sector has suffered in its ability to transform itself.

In the IT sector the advent of the knowledge worker is a big issue, and as a creator of jobs and skills development, the SME is a critical layer.

Hasmukh Gajjar, deputy CEO and executive director of Faritec

Transformation in the IT sector to date has largely centred on the transformation of existing large players, with few new enterprises appearing. There have been some successes that have continued to grow and stay active in the marketplace - Cornerstone and Lechabile for example - but many others have come and gone, entering the market with much fanfare and then quietly disappearing. In the Western Cape, for example, in local government and the private sector, there`s huge frustration that black-owned SMEs haven`t evolved in the sector. This is partly because it`s a hostile environment that needs significant capital, both human and financial - and it is in these two areas that we find the biggest barriers to entry.

Critical factors

Enterprise development hinges on three main areas: firstly, joint participation for business; secondly, skills transfer to enable the business to deliver competency; and lastly, some financial support to enable the enterprise to invest and grow their business. The lack of success in structuring partnerships that promote SME development can be attributed to a failure on two levels. Firstly, the traditionally large businesses have a measure of anxiety about creating future competition; while secondly, some of the SMEs that have entered into strategic arrangements haven`t really delivered on their part in terms of the partnership.

Whether it is their actual commitment when it comes to delivery, or as an equal partner in a pitch, often the SMEs find themselves revenue-challenged and do not pass on the economic gain to the larger organisation. This creates a lot of anxiety between the partners, and therefore the ability to trust smaller organisations to meet their obligations is not always there. These unnatural experiences when partnering with SMEs have created an aversion to working with them in the same discipline, so some companies have tried to build and develop SMEs as suppliers.

Preferential procurement

Possibly one of the biggest impacts on SME development lies in preferential procurement. Many black-owned companies depend on the goodwill or patronage of BEE procurement, but the real investment in developing these organisations hasn`t happened in they way it should. While exposed to opportunities, many of these new enterprises lack an understanding of what it takes to grow a business.

The problem that we continue to face is the inability of our economy and its stakeholders to encourage the growth of SMEs, as there are many more casualties than there are players each year. The government`s current broad-based BEE approach does somehow attempt to create an instrument that will stimulate the growth of SMEs, particularly in the area of preferential procurement. In terms of enterprise development though, the details have been fairly glib and most organisations have interpreted that as dealing with suppliers around non-sector-related services.

Plan of action

So where to from here? There is a larger debate required around SMEs and enterprise development as an element of the broad-based scorecard. Because of the simplicity of the other parameters in the scorecard, enterprise development is rather vague and has been left to industry sectors. It is probably one of the least mature elements of the scorecard, and in terms of role players, tends to centre on suppliers. Procuring organisations understand this, but there is no level of sophistication as to how this is measured. An example of this would be a company that is developing a stationery supplier - enterprise development is being encouraged, but is the sector itself being invigorated? This, however, is not an issue.

As players in the ICT sector, we have to look at two things: how do we develop enterprises as general suppliers, in the area of stationery or catering, for example, but also how do we develop sustainable enterprises within our own domain - and do it where it is mutually beneficial? This then is the challenge for the future of SME development in the IT sector.

Hasmukh Gajjar

Deputy CEO and executive director of Faritec.

Dr Hasmukh Gajjar, MB ChB (UCT), is an entrepreneur with extensive IT experience and was previously CEO of IT firm Consilience Technologies, former chairman of the Black IT Forum and past president of the Black Business Council. He serves on numerous IT and telecom bodies. Gajjar is deputy CEO and executive director of Faritec, responsible for driving business transformation and black economic empowerment.

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