There has never been a more urgent time for procurement organizations to invest in supplier diversity. The increased focus on diversity, equity, and inclusion (DEI) resulting from the social unrest in the United States has put pressure on procurement leaders to respond. And they are: In a 2020 Gartner survey, 74% of procurement organizations said they intend to expand their use of diverse suppliers over the next 12 to 18 months. For those companies, the question then becomes: How do we build a supplier diversity program that will drive sustainable, long-term value?
Supplier diversity is a proactive program that encourages partnerships and contracts with businesses that are at least 51% owned and operated by a historically underrepresented or underserved group. These groups can be defined in a variety of ways depending on the organization and country, but they typically include small, women-owned, veteran-owned, disabled-owned, LGBTQ+-owned, and minority-owned businesses.
Procurement leaders who react quickly to stakeholder pressure without properly laying the foundation for a strong supplier diversity program will struggle to keep momentum and demonstrate long-term value. Common challenges our clients face when developing a program include building awareness and breaking down bias among internal stakeholders, identifying appropriate suppliers, preparing diverse suppliers for competitive bidding, and setting achievable targets.
While some companies have already established robust supplier diversity programs, the vast majority of them only started to build programs in the last one to two years. We’ve seen a significant increase in interest from companies that want to build their knowledge in this area: requests for calls on supplier diversity with our analysts have increased by over 500% since the beginning of 2020. Based on those conversations, we have identified five main components that set up supplier diversity programs for success. These are shown in Figure 1 and are discussed in the sections that follow, which include some practical recommendations for steps you can take in your own organization.
[Figure 1] Components of a best-in-class supplier diversity program
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COMPONENT NO. 1: METRICS
How you define the success of a program is based on your organization’s level of ambition for supplier diversity, which should be reflected in the metrics that are tracked and reported. More than 80% of organizations track their percentage of spend with diverse suppliers, with an average goal of achieving 10%, according to a 2020 Gartner Supplier Diversity benchmark. However, tracking percent of spend alone will fall short of demonstrating the true value a supplier diversity program can have on organizations and communities. To provide a clearer picture of a program’s impact, consider reporting absolute numbers instead of percentages.
Another way to move beyond measuring spend alone is to define success based on outcome-oriented metrics and track them for both the company and local communities. Company outcome metrics include measuring the percentage of diverse suppliers exceeding scorecard performance targets, the number of innovative solutions provided by those suppliers, and cost savings. At the highest level of ambition, organizations are tracking community impact, including the number of jobs created, tax and wage contributions, and the output multiplier of spend with diverse suppliers—the ripple effect on gross domestic product (GDP) from spending with diverse suppliers.
That effect can be considerable: When one consumer goods company produced an economic impact report on its supplier diversity program, it found that every $1 million spent with diverse suppliers creates 17 new jobs, and every dollar spent creates $1.97 in total economic impact (based on U.S. GDP contribution). Reporting on these figures in addition to percent of spend makes the program’s impact tangible for stakeholders.
Once you have established what success looks like for your program, the next step is to cascade the metrics throughout the organization by using shared diversity metrics in employee performance evaluations. Role-oriented goals help establish different levels of accountability across the board, compelling employees and functional groups to focus on supplier diversity alongside traditional priorities like cost and quality. The metrics introduced should be consistent across the organization, but the degree of accountability changes with the level of seniority. For example, the C-suite may be measured against an overall diversity spend target, but the professionals empowered to impact these goals, such as buyers and category managers in procurement, should have more granular metrics. These metrics can include percentage of contracts won by a diverse supplier and percentage of spend allocated to a specific diversity category.
One South African financial services organization felt supplier diversity was being deprioritized by the business because of a focus on traditional cost measures. Before introducing the shared goals, the organization created a comprehensive education program to introduce the language of diversity to the business. This program helped build a common understanding of diversity and provided easy access to learning tools for ongoing education. Once introduced, the shared diversity goals helped increase business participation and commitment for the company’s diversity initiatives. As a result, from 2015 to 2020 the spend across various types of diverse suppliers, such as women-owned businesses, increased by as much as 94%.
COMPONENT NO. 2: RESOURCES
In a 2020 Gartner survey, only 14% of procurement leaders agreed that their supplier diversity program is sufficiently resourced for long-term success. In the same survey, almost half (45%) of companies said they did not have a dedicated, full-time equivalent (FTE) assigned to supplier diversity initiatives. Many program leaders are supporting these initiatives “off the side of their desk” for 15% to 25% of their time; as a result, traditional strategic sourcing activities take priority and diversity initiatives can fall behind. Meanwhile, 44% of organizations reported having one or two dedicated FTEs who are responsible for program elements that can include tracking spend metrics, identifying diverse suppliers, building program awareness, and attending educational conferences and seminars about supplier diversity. Hiring a dedicated FTE, as those companies have done, will allow these individuals to focus on growing the program. Without such formalization of responsibilities, supplier diversity tends to fall by the wayside as sourcing disruptions and other priorities take up procurement’s time and attention.
It’s also a recommended practice to have a C-suite sponsor promote supplier diversity programs and initiatives. Desired behavior is shaped and nurtured by leadership first. If procurement professionals see leaders prioritizing diversity, then they will feel empowered to do the same in strategic sourcing activities. However, sponsors do not have to be limited to procurement leaders. Across the organization, there are employees who are passionate about diversity and want to make an impact alongside their core responsibilities. This passion can be channeled via an “ambassador” program. Volunteer ambassadors across the organization and in different regions can gain knowledge of suppliers in local markets, current and future legislation, and local nongovernmental organizations (NGOs) to support diverse suppliers. Individuals in different business units can also become ambassadors, as they are able to gain a better understanding of the business needs where they have expertise. Ambassador programs go a long way toward building awareness of supplier diversity and can be tailored to an organization’s specific goals.
At one global technology company, for example, it was nearly impossible for the supplier diversity team to understand all the opportunities within every spend category or region due to the size of the organization. To gain this insight, the team recruited individuals with a passion for diversity and inclusion, experience in sourcing, strong influence skills, and an understanding of the broader business operations. These individuals were then embedded as diversity ambassadors into every category of spend and geographic region. These champions spent about 10% to 20% of their time influencing their teams and regions to use diverse suppliers and communicating contract needs back to the central supplier diversity team. This bottoms-up approach helped the organization increase diversity spend by 22% between 2018 and 2019.
COMPONENT NO. 3: AWARENESS
Building momentum for the program and marketing the capabilities of diverse suppliers is an ongoing effort. To do this, there needs to be a consistent strategy for building awareness with key stakeholders via internal and external channels. The specifics of such an effort will vary greatly by organization and how procurement is structured. Key stakeholders for a decentralized procurement function, for example, commonly include marketing or IT departments, which are responsible for supplier identification and selection and may also be involved in the ongoing management of the relationship with the supplier.
Many actions you can take to build awareness with these teams require minimal time commitment and budget. For example, you can use your company’s internal website to feature a new diverse supplier every month or to display testimonials collected from business partners who have worked with diverse suppliers in the past. Invite diverse suppliers to speak at your next all-company meeting and collaborate with Employee Resource Groups (ERGs)—voluntary, associate-driven groups that foster inclusion in the workplace—to ensure you reach a broad audience.
Externally, take advantage of your company’s corporate social responsibility (CSR) report to outline your program initiatives and report metrics. “Supplier diversity intake portals” can help with outreach, as they allow diverse suppliers to register organizations to be considered for future opportunities. Target, for example, uses an online supplier diversity portal to quickly identify potential suppliers for specific procurement needs as they come up.1 Finally, organizing a Supplier Diversity Day and inviting business partners to meet with promising diverse suppliers will further drive awareness.
COMPONENT NO. 4: EQUITY
One of the most important elements of a supplier diversity program that is often overlooked is making adjustments to the sourcing process itself to enable diverse suppliers to compete and win business. Requiring inclusion of diverse suppliers in a competitive bidding event is simply not enough. Some suppliers might not have the historical data or the level of insurance coverage, for example, to fulfill existing Request for Proposal (RFP) requirements. A review of lengthy RFP requirements may show that they can be simplified and diverse definitions included in the award criteria. Even then, some suppliers will need support if they don’t have the resources available to complete lengthy RFPs.
One organization launched an innovative program to create more equity in their sourcing process and encourage more innovation by diverse suppliers. The company brought small and diverse suppliers into corporate headquarters to pitch ideas that would help the organization meet sustainability goals, a major corporate priority. Prior to launching the program, business partners throughout the organization came together to review strategies and define the business needs. Through conventional marketing and social media, the organization encouraged both diverse and nondiverse suppliers to submit a quick and easy application for the program. Eighty percent of the applicants were diverse suppliers, of which 26 were invited to “Pitch Day.” Each supplier had three minutes to present a targeted and innovative solution they could provide to meet a particular business need. The winning 12 suppliers were awarded pilot projects in different locations. Upon completion of the pilot period, the organization would determine whether a successful solution would be scaled regionally or globally. The program helped the organization reduce water consumption by 15 million gallons, reduce greenhouse gas emissions by 800 tons, and increase diversity spend from 15 to 23 percent.
COMPONENT NO. 5: RETENTION
The final component of a best-in-class supplier diversity program is taking steps to retain the diverse suppliers in your supply base. Without ongoing retention efforts, you will constantly be plugging a leaky bucket and backfilling your supplier diversity programs to reach your goals. Interestingly, retention efforts can also increase the number of diverse suppliers a company works with: Gartner research found that organizations are twice as likely to select a diverse supplier in a sourcing event if they conduct retention activities, as opposed to only conducting supplier identification activities.
Internal business partners will often have inaccurate perceptions about diverse supplier’s capabilities and harbor bias toward incumbent suppliers, making retention a challenging task. As illustrated in Figure 2, diverse suppliers often can’t compete against larger suppliers because they typically start out on smaller, more tactical contracts and are not as well known across the business. Due to the smaller size of the contract, the discounts and cost savings over time are not as substantial as those provided by incumbents, and procurement typically ends up devoting more time to larger, strategic contracts. This creates a vast retention gap between incumbent suppliers and diverse suppliers that becomes harder to close as time goes on—making it imperative to tackle negative perceptions early in the procurement cycle, before they can take root.
[Figure 2] Incumbent bias widens retention gap over time
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One effective way to mitigate this situation is to establish a mentorship program for diverse suppliers that gives them the opportunity to expand their network across a buyer’s organization. One global health insurance organization began a mentorship program to help suppliers build deeper connections not only across the company’s different business functions but also among their industry peers. A typical cohort lasts for 12 months and is a mix of both current and prospective diverse suppliers. Rather than a typical one-to-one mentorship relationship, the program is tailored to the specific needs of diverse suppliers and connects them with different individuals each month. The curriculum is needs-based, evolving as capability gaps are discovered or filled. This connection-based mentorship approach helped the organization increase business partners’ confidence in the supplier diversity program, improve engagement, and strengthen relationships with diverse suppliers.
Another example of an effective retention activity is providing scholarships or aid to diverse business owners and their key employees for training and educational programs that will help them improve business operations or increase competitiveness. Other initiatives include providing more support during supplier onboarding to ensure they meet expectations from the onset of the contract and adjusting supplier performance evaluation to ensure the diverse suppliers’ unique strengths and contributions are recognized.
How to get started
With these five components in place, the procurement organization can demonstrate the long-term value of a supplier diversity program, while increasing the capabilities of diverse suppliers and influencing internal business partners to expand their use of diverse suppliers.
How can you get started? If you oversee supplier diversity at your organization, there are both short-term and long-term actions you can incorporate into your program’s strategy.
Over the next three to six months, challenge your organization to expand its definition of success by tracking a broader range of outcome metrics. Plan an event to build awareness and recruit passionate employees to be a voice for the program in different geographic regions or business units.
In the long term, build a mentorship program and track retention of diverse suppliers year over year. Use your entire ecosystem to help the suppliers build their business. When the capabilities of diverse suppliers are strengthened, we introduce more competition to the market, have a positive impact on local communities, and grow our supplier diversity programs.
Finally, don’t forget to celebrate how far you’ve come—even if it’s just a few percentage points higher on your spend metric—in the journey to balance profit with impact.
Editor’s note: For more about incorporating supplier diversity in your procurement strategy, see “The Fierce Urgency of Now: Why working with minority suppliers still matters,” in the Q3 2016 issue of CSCMP’s Supply Chain Quarterly.