Countries around the world are shifting their efforts towards one important concept– yet one that isn’t particularly new. “Localization” refers to the renewed focus of procurement on buying from local companies, purchasing local products, and supporting local services. This idea is especially important in Africa, where local businesses need support.
So why do companies care about localization? First, we have to understand the economy of spending at a macro level. Any given country is driven by different types of spending, split into broad categories like corporate and consumer spending (of course, there is also government spending, which in this case is included under corporate). For Western nations, consumer spending is the biggest driver of economic growth. When consumers are buying more goods, the economy booms. When consumers stop spending, the economy slows down.
In most African nations, the balance is different. Across Africa, the purchasing behaviors of businesses are driving the economy– and this distinction has significant ramifications.
Africa also has a much higher ratio of small-to-medium-sized enterprises (SMEs or SMBs) when compared to Western countries. Because of these factors, it’s clear anything that increases the contribution of the SME sector toward GDP will have a major impact on the economy.
In some African nations, and notably in South Africa, considerable effort is being made to encourage, help, and support smaller businesses. The sheer volume of SMEs in South Africa has already made them major contributors to the economy. With more opportunities to grow, SMEs can overcome historical challenges they have faced as a result of barriers to participating in economic processes. While progress is being made, it remains slow-moving.
What can we do to further support SMEs and their contribution to the South African economy? To increase participation, we can consider two broad plans of action.
Changing how businesses think and act to support localization and ESD
First, we can change the perceptions and behaviors of buyers from large businesses and of SMEs as suppliers.
Larger businesses everywhere, not just in Africa, have built-in biases cemented into their culture. These biases are usually well-intentioned and are intended to protect the company. Yet, these ideas can be damaging to the overall economy, and potentially damaging to the individual companies themselves in the long term.
A great example of this is the tendency of large buying organizations to ensure that their suppliers meet international quality standards, such as ISO 9001. These organizations often insist that suppliers be of a certain size and profitability in order to reduce the risk of business failure and subsequent supply disasters. While these principles make sense, they often create a degree of inflexibility in larger organizations that leads to a take-it-or-leave-it approach. They end up favoring larger suppliers that meet their requirements, while missing out on the opportunity to do business with excellent smaller suppliers on the local level.
On the other hand, smaller businesses need to up their game if they are serious about supplying goods and services to larger organizations. This is where Enterprise Supplier Development (ESD) programs come into play. ESD focuses on proactively helping disadvantaged businesses take part in the vast SME economy by providing them with resources, supporting them, and ensuring they are able to deliver high-quality goods and services to larger businesses.
An excellent example of quality ESD programs can be seen in the likes of what SAB or MTN offer. In 2015, MTN started its ESD program in partnership with “New Generation Mindset”, a local skills and training provider, and was an immediate success with 60 startups participating in a 3-year program. The program aimed to empower young entrepreneurs to become ICT suppliers for MTN and many of the country’s large corporations.
Finding a suitable channel for local SMEs to reach big buyers
This brings us to the second part of the plan to increase SME participation: providing a channel that enables SMEs to sell their products and services to those larger organizations.
Assume that an SME joins an ESD program, going through many meticulous steps to groom itself into becoming a “suitable” supplier for a large buying organization. The smaller company has now invested precious time, money, and resources into becoming an “ESD Qualified” supplier. While that’s all well and good, it does not mean that orders are guaranteed to start coming in. It doesn’t even guarantee that they are added to the preferred suppliers lists of large companies. Because of this, despite expending a lot of effort, these small suppliers may not experience any increase in actual sales. And this is the nub of the problem.
To resolve this apparent “catch-22,” we need a completely new sales channel that is closely linked with the various ESD programs. This new channel would reward ESD-qualified suppliers by promoting their products and services so that large companies – the buyers across the African continent – could see their offerings alongside those of all other companies. In this way, buyers would be able to select their suppliers in a transparent and unbiased manner, while also being exposed to the smaller, local suppliers.
Enter the Business to Business (B2B) Marketplace
B2B marketplaces are intrinsically different from other online consumer marketplaces (also known as B2C or business-to-consumer marketplaces) which have become commonplace. Amazon’s success has been built on the success of such consumer marketplaces globally, and Africa has its own array of similar, albeit smaller marketplaces. SMEs across Africa can, and do, join these B2C marketplaces to promote and sell their goods to consumers.
But the reality is that large enterprises simply do not buy goods from these existing marketplaces. Why? Because they don’t have access to important information like the quality of the suppliers, they can’t use credit cards that contribute to rogue or uncontrolled spend, and they are not integrated into the company’s existing ERP or accounting systems and processes. In short, B2C marketplaces go against all of the policies that large enterprises have spent years building to protect their company.
If a large enterprise is to use a marketplace, it needs a marketplace that understands corporate procurement and why it exists as a function. It needs to understand quality requirements and have the ability to vet and audit suppliers to make sure that those standards are met and maintained. It needs to be integrated with the company’s existing processes so that transactions happen seamlessly, so that the right users can purchase only the things that they are authorized to purchase. It needs to be able to set purchasing cost limits at the user and group levels. And it needs to be able to deal with the complexities of corporate purchasing at all levels, including the sending, receiving, and reconciliation of digital purchase orders, invoices, and goods received notices.
All of these things mean that B2C marketplaces are unlikely to “evolve” into something that large businesses can actually use. If a business-to-business marketplace is to succeed in a large enterprise context, it has to start with a solid procurement platform. This is exactly this realization that has given birth to the new generation of enterprise-grade marketplaces that are now emerging, which are forecast to become an intrinsic part of the purchasing strategy of businesses around the world.
Why all this focus on large businesses? Aren’t we talking about SMEs?
Circling back to the problem that we are trying to solve, why all the focus on large enterprise and bigger businesses? Well, that comes down to the question of what will make the biggest difference to the economy, and consequently will make the biggest difference to businesses large and small.
SMEs already transact with other SMEs and consumers. Growing that element of the economy is business as usual. The bit that will really move the needle is when the SME sector starts selling to the larger corporations– where the bigger transactions happen. Of course, the dream of every small business owner is to start getting those bigger orders for goods and services from the big companies in the country or region.
The important aspect of the new generation of B2B marketplace is that it is designed as a shop window where a large enterprise can search for and find the products they need. When they perform that search, they can see the same products from their existing supplier base, as well as the qualified local SME suppliers. This is a game changer in which everybody wins.
Buyers are able to view local supplier pricing from qualified SMEs, which could potentially be connected to local ESD programs qualifying them to be on the marketplace. Buyers also get to simplify the way they buy thousands of common products and services that make up their tail spend category. Sellers, on the other hand, get to showcase their products to a wider and wider range of large buyers.
Because of these benefits, B2B marketplaces are being billed as a new way of doing business that is going to transform the procurement landscape both globally as well as across the African continent where SME growth can really help the economy.
What sort of products and services will be transacted on a B2B Marketplace?
The types of products and services that will transact on a B2B marketplace will largely depend on the business sector of the buyer. Most likely, the majority of B2B marketplace transactions will be categorized as “indirect spend” as opposed to “direct spend.”
Direct spend refers to items that are essential to the day-to-day functioning of the business itself. These direct purchases are usually of a very high value, of a large volume, and are mission-critical to the company’s purpose itself. All of these requirements mean a carefully negotiated contract is required for direct spend. Pricing for these items is usually established for a period of time, so buyers understandably do not want to share their negotiated prices with their direct suppliers.
The fact that a B2B marketplace is predominantly aimed at indirect spend and tail spend emphasizes its suitability to the SME sector as suppliers. There are many categories of goods and services, price is less sensitive and with less variance, and supply is usually less mission-critical and in more manageable volumes. As long as the supplying company has been vetted through an approved ESD program, or has been through a suitable set of tests to check their eligibility to be a vetted supplier, they should have every right to showcase their goods and services alongside those of larger suppliers. In doing so, they provide more choices for large enterprise buyers.
Support for Local SMEs
The success of the SME sector in Africa is not only about growing the economy as a whole. Fundamentally, it is about supporting and nurturing smaller businesses so that they are able to contribute to their local community in a bigger way.
You can think about local SME businesses as being like Japanese Bonsai trees. Bonsai trees are a miniature version of the big tree, and they stay small because they are kept in small pots with no room for the roots to develop. However, every Bonsai tree is actually a full-sized tree waiting to be given the chance to grow and develop into its true self. It just needs to be taken out of the small pot and carefully planted where it can get the nutrients it needs.
In the same way, it is time to remove the restrictions on SME businesses across Africa by giving them the sustenance they need to realize their full potential. A B2B Marketplace for Africa that levels the playing field for suppliers of all sizes will be a game changer– a place for SMEs to be able to realize their full potential in their local economies. And once that happens, everyone wins.