The next big trend in the IT sector: too little too late for the big players?

Johannesburg, 9 July 2003 - The eventual recovery of South Africa 's IT sector is unlikely to be led by the industry's current big players, who have neglected the Black economic empowerment (“BEE”) that will drive it.

This is the view of Christoff Botha, a partner in the specialist venture capital and private equity business Treacle, which focuses on the technology sector. Treacle has significant holdings in Datacentrix and ERP.com among others.

Botha notes that fundamental changes in the global IT industry have in the past been driven largely by technological trends, such as the creation of the internet and the movement from the mainframe environment to the distributed network. No new trend is currently apparent and some industry commentators and analysts believe, in fact, that there is no “next big thing.”

“Maybe South Africans don't have to wait for the next big global trend to arrive as a big local trend - which is going to change the landscape of the South African IT industry drastically and which will create wealth for its participants - is already taking shape. This new trend, which will be socially rather than technologically driven, is BEE,” says Botha.

“BEE legislation is currently being put into place for several large industries and a BEE charter for the IT sector is being finalised. Its requirements are undoubtedly going to be strictly enforced. IT companies are therefore scrambling to get some form of empowerment in place by bringing in Black shareholders. Selling shares in a company does not, however, constitute BEE - it merely enriches a handful of people. True BEE can only be achieved through true transformation within, which includes a combination of shareholding, employment, procurement, skills transfer, training and education.

“It's a situation of too little too late for the large IT companies, and it's unlikely that these businesses, which until now have largely paid lip service to BEE and have given little attention to the employment and development of Black skills, will be able to address their predicament in time.”

Botha says Black people will go where they are comfortable with the culture of the company, where they sense a real commitment to the transformation and development of Black IT professionals, and where they have a chance of creating wealth for themselves. Such a culture is not created overnight, but grows over many years.

“Over the next five years, a new generation of Black entrepreneurs will come to the fore in the IT industry. It is unlikely that the large IT companies will be able to offer attractive career opportunities to these people as they would, albeit at higher risk, be able to create more wealth for themselves in smaller, more entrepreneurial businesses. Nor will they be content to serve as a Black facade for companies which are predominantly owned and managed by whites. In any event, skills will move to where the contracts are going,” says Botha.

The accelerating BEE trend may well coincide with an investment re-rating of the IT sector over time, Botha believes.

“Current investor sentiment towards the IT sector is justifiably negative, with the result that listed IT companies represent only 0.7% of the JSE's total market capitalisation. This stands in stark contrast to spending on IT products and services, which accounts for 4% of GDP. We believe the JSE ratings of IT shares will recover to a more representative level as the IT industry returns to health over the medium to longer term,” he says.