When used correctly, enterprise development (ED) can be a very powerful tool for facilitating transformation in a sector or supply chain, but the way telecommunications group Telkom is using it to mask retrenchments is simply wrong.

For those who have not followed the story, Telkom is aggressively cutting headcount with the aim to reduce the size of its workforce by 24%.

The plan is to retrench 4 400 people, while another 3 400 will be outsourced or deployed into outsourced service providers. The guise is that these employees will start little businesses of their own and they will then service Telkom.

Simplistically Telkom wins because it doesn’t have to have permanent employees and the associated fixed costs. The “spin” side of Telkom positions it as facilitating entrepreneurship but that’s not exactly what it is.

If you go back to the beginning, you will remember that the thinking behind ED initiatives was to try to break down vertical and horizontal integration of supply chains that had become a systemic result of a relatively closed economy in South Africa.

ED was seen as a way to introduce entrepreneurs — primarily young black businesses — into supply chains and give them the opportunity to get experience working with friendly clients who would help facilitate their growth and give them much-needed experience to grow.

Cash flow, infrastructure and capital were to be provided for people who were serious about starting their own businesses and they would be able to work with established industry players to grow.

Organisations that have done it really well include Woolworths, Massmart and Anglo American, but for context Zimele, the ED arm of Anglo American, was established in 1989 and it certainly wasn’t built overnight.

Failure rates in small businesses are already high — go to 10% of your workforce and tell them they are suddenly “entrepreneurs” is setting them up to fail.

I was chatting to small business expert Pavlo Phitidis from Aurik — a big player in the local ED space — and he made the point that entrepreneurship requires a very specific aptitude. While the idea of supporting “young” entrepreneurs is great, globally the most successful [traditional] entrepreneurs are in their mid 30s to late 40s. The reason they succeed is that they have earned their stripes in terms of industry experience.

Taking “non-core” middle managers and getting them to contract back in a close corporation or Pty Ltd is not going to work.

The second aspect to consider is that businesses receive tax credits for investing in ED programmes. While I can’t say for certain that this is what is happening at Telkom, I hope that management at the company are not using ED credits to facilitate retrenchment. Apart from it being a really poor display of creative accounting rules, one should remember the purpose of the ED credits.

The “Davis Tax Committee: Small and Medium Enterprises: Taxation Considerations, Interim Report” from July 2014 points out that the purpose of the incentive is actually to stimulate youth employment, and specifically people between the ages of 19 and 29.

The report notes: “There is a strong argument for the case that tax incentives for the SME sector should be focused on rewarding or encouraging employment-creation rather than rewarding the business owner.”

It doesn’t help if you’re removing people from the workforce and then setting them up to fail under the guise of “enterprise development”. Then you are simply abusing a system.

Having said that, Telkom CEO Sipho Maseko told Moneyweb editor Ryk Van Niekerk in this interview: “I’m sensing quite a lot of optimism about the future. I think that the staff are beginning to see that if we do the right things, the financial delivery will flow through.”

So maybe I’m wrong.