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How To Build A Robust Supplier Diversity Program Using Socioeconomic Data
How To Build A Robust Supplier Diversity Program Using Socioeconomic Data
Introduction
Dedicated supplier diversity programs are now standard operating procedure for nearly all large corporations. As we mentioned in our thought piece “Measuring Supplier Diversity Programs” , 85% of Fortune 100 corporations have dedicated supplier diversity programs, and spend approximately 10% of their procurement budget on diverse businesses. This statistic is one example of how widespread these programs have become, particularly in the largest companies that collectively drive a significant part of our economy.
Yet according to interviews our founders at Equity Quotient conducted with various stakeholders at Fortune 500 companies, many are struggling to determine the best approach for measuring and managing their programs.
with various stakeholders at Fortune 500 companies, many are struggling to determine the best approach for measuring and managing their programs.
A significant opportunity exists to help dedicated supplier diversity programs become a powerful force in our economic growth while also creating positive socio economic impact. To achieve that, these programs require a data driven approach to inform and guide the ecosystem, both on the supply and demand sides of the equation.
Why Supplier Diversity Programs Are A Standard Good Business Practice
From a company standpoint, organizations are trying to remain competitive in order to achieve sustainable, long term performance for their stakeholders. Supplier diversity programs help them to balance a myriad of daunting challenges related to driving new growth, managing risks that could compromise investments, and achieving compliance:
- Drive New Growth
Every organization’s ecosystem of suppliers plays a critical role in its ability to meet the needs of current customers and its commitments to them while scaling new programs that can drive growth. This inevitable interconnectedness makes procurement strategies and the execution of them mission critical to any firm’s success. Therefore, ensuring strong relationships with sound business partners and building in redundancy are critical to remaining relevant and viable.
- Manage Risks
Due to the inevitable interdependence of firms and their suppliers in achieving growth, organizational leaders must proactively determine where risks might exist and anticipate initiatives needed to mitigate potential disruptions to the business. These initiatives involve complex variables at both a micro and macro level, such as individual supplier risk, evolving geopolitical dynamics, climate impact, and other factors. - Achieve Compliance
Increasingly, all organizations are facing pressure to proactively achieve and report on supplier diversity to convey their commitment and contributions to sustainable growth for themselves and the broader economy. These compliance pressures are coming from both government and markets in the form of regulatory reporting requirements, ESG scores, and stakeholder expectations.
Taken together, these three key imperatives have catalyzed the expansion of dedicated supplier diversity programs to the point where the vast majority of companies now have them in place as part of their core operational approach.
Though dedicated supplier diversity programs are now standard operating procedure for nearly all large corporations, yet all firms are struggling to determine the best approach for measuring and managing their programs. This is both an internal issue (among leaders and their cross-functional teams) and an external one (stakeholders calling for transparency and mandating more reporting requirements).
What are the biggest challenges for dedicated supplier diversity programs?
Many companies are struggling with the following:
- Demonstrating commitment to improving diverse supplier metrics
All organizations are establishing targets for improvement, or long-term goals that take them from their current state of <10% and a future state of ~15% over a 3-5 year horizon. - Limited pipeline of qualified vendors based on current approaches
As mentioned in our other thought piece, the current approach anchored in MWOB/VSOB certification is not achieving its objective as noted above and significantly exacerbating the pipeline challenge that many are endeavoring to overcome. - Lack of data needed to invest in diverse suppliers and create positive impact
Data currently being used to understand supplier diversity and related impact is incomplete, inaccurate, and even irrelevant.
Additionally, companies also struggle with sourcing and accepting diverse businesses into their procurement process that have the financial robustness and operational maturity to serve as viable suppliers at scale. As one Fortune 1000 company put it, their process for onboarding suppliers requires 6-9 months to get through the contracting gauntlet, which is typical for most large firms. Yet the current pipeline that uses the MWOB system has the following key issues:
- Demand/Supply Mismatch
The offerings that the current pool of MWOB certified businesses provide are largely not within the demands of what bigger companies need.
- Financial Position
The majority of MWOB certified small businesses’ financial standing would not be significantly robust to withstand the rigorous requirements that most larger firms require as part of their supplier onboarding process.
- Foundation to Scale
The organizations that can provide goods and services of what larger corporations need and have the financial position that enables them to scale to the level needed to deliver larger firm orders are mostly owned by more than one party, making the 51% threshold for ownership in any of these categories (women, minority, veteran, disabled) impossible to achieve.
The key to overcoming the demand-supply disconnect is to take a fresh look at how programs are being measured and managed and how the full procurement funnel can be measured. The full procurement funnel would include transparency on Tier 1, 2 and 3 suppliers. Additionally, these programs would be managed to achieve a win-win-win for corporations, diverse businesses, and their surrounding communities.
What Are Tier 1, Tier 2 and Tier 3 Suppliers?
Suppliers that are used by a company are generally broken down in three categories (Tiers 1-3).
- Tier 1 Suppliers: Direct suppliers.
- Tier 2 Suppliers: The companies that your direct suppliers subcontract to help them achieve their business goals with you.
- Tier 3 Suppliers: These are the suppliers or subcontractors of Tier 2 – so the suppliers of your supplier’s suppliers.
As you can see just from the explanation, this chain can become complex and difficult to follow incredibly quickly. But transparency through all of these tiers is necessary for both a supplier diversity program and for basic minimization of risk to your company. Common risks are:
- Operational (e.g. quality control and timeline issues)
- Governance and Compliance (are all suppliers following local laws)
- Environmental (E.g. carbon emissions and waste)
- Social (e.g. poor labor conditions, human rights violations, poor worker compensation practices)
- Cybersecurity
The best way to achieve a transparent, more robust diverse supplier ecosystem in the U.S.
On one side of the equation companies committed to supplier diversity with programs. On the other side of the equation, you have diverse communities that are eager to engage in the economy and overcome the racial wealth gap. Within those diverse communities, you have hard working diverse entrepreneurs that want to gain access to these large accounts. Historically, they have struggled to break in for a myriad of reasons, particularly based on limited relationships, access to growth capital, and constrained scale.
Key ingredients for success include:
- Dedicated Supplier Diversity Program
With full company/ executive commitment dedicated supplier diversity program that’s operationalized as core to the overall procurement strategy and seen as foundational to sustainable long-term growth. - Healthy Diverse Economic Ecosystem
Surrounding the company where diverse SMBs have the ingredients to thrive–i.e., access to credit, strong workforce, and other required resources. - Economic Development Partners & Impact-focused Financing
Committed to helping diverse suppliers thrive and connecting them with the people, process, technology and other resources to surround them as they evolve, grow, and scale to support Tier 1 enterprises as part of their supplier ecosystem. - Operationalized Data, Analytics & Measurement Platform
The entire continuum of decision making requires rich data and analytics that can be difficult and expensive to achieve with in-house teams. Ideally, stakeholders on both the demand and supply sides of the equation need a detailed understanding of the socioeconomic landscape as they assess the current state of the procurement portfolio, establish goals to increase investment in diverse suppliers, and begin collaborating to execute against these objectives. Beyond rich data and analytics from external sources profiling relevant communities and industries, cross-functional teams also require the ability to integrate internal system data to achieve benchmarking, track progress, and automate reporting to various audiences over time.
How should dedicated supplier diversity teams use this data to improve the success and impact of their programs and measure outcomes over time?
The most important consideration is that every company is unique based on the following:
- Population demographics vary dramatically by region,
- Each region’s economy, or its industry drivers, are also very unique, and
- Every company faces distinct challenges and opportunities due to its performance goals, broader competitive landscape, global macroeconomic dynamics, and firm size/maturity.
Additionally, there are three critical boundary conditions that dedicated supplier diversity programs need to achieve a measurement framework that is both ambitious and achievable, including:
- The Community “Denominator”
A sound measurement standard must incorporate the uniqueness of the surrounding community from a demographic and industry/economic perspective as the denominator, or quantitative view of what is possible in terms of diverse suppliers and possible impact metrics. - Corporate Performance Objectives
Without strong financial performance, both from a top-line and bottom-line perspective, companies cannot remain competitive or viable, which would render a dedicated supplier diversity program moot. To be relevant, dedicated supplier diversity programs must incorporate financial performance goals and inputs needed to achieve them to avoid diminishing returns, or unrealistic expectations regarding diversity goals that cannot be achieved without materially compromising performance objectives. - Comprehensive Supplier Diversity “Success” Variables
Dedicated programs need to evolve to a standard measurement platform that looks beyond diverse ownership as defined by SBA certifications to include a broader socioeconomic impact lens. This can achieve multiple positive outcomes, including broadening the aperture of the diverse supplier pipeline and gaining a full picture of a procurement strategy’s financial and socio economic impact, both internally and externally.
An objective, data-driven lens makes it possible to align diverse interests across the demand and supply side of the equation around the current state procurement investment portfolio compared to the relevant region(s) and industry(ies). This broader understanding of socioeconomic dynamics at a geo and industry level is key to understanding what is possible and establishing realistic goals for cross-functional teams.
Based on these requirements, a viable approach to measuring and managing a dedicated supplier diversity program must include:
- Data Richness & Granularity
Providing more detailed visibility into the firm’s current state supplier ecosystem and procurement spend portfolio as well as what’s possible based on their industry dynamics and the geographic where they operate. This internal and market data must be at the geo/industry level and include other relevant factors beyond business owner certification–i.e., overall impact on GDP, diverse employees compared to regional workforce, pay equity compared to regional benchmarks, and healthcare coverage compared to industry standards. - Internal & External Data Combined
Achieving #1 requires easy, cost effective, and dynamic access to external socioeconomic data that can be intersected with internal company and supplier data to gain a full understanding of both the “denominator,” or what’s possible in the relevant supplier base versus current state suppliers. Furthermore, this view enables leaders to establish clear goals that are both ambitious and achievable while focusing procurement investments they’re making to bolster the diverse supplier pipeline where they will have the most significant ROI–return on investment and return on impact. - Dynamic, Operationalized System
Optimizing Supplier Diversity is not a one-and-done exercise for the C-suite and their cross-functional teams. Like all important business growth imperatives, the program requires proactive, relentless measurement and management that helps everyone understand how metrics are evolving internally with the current supplier ecosystem and externally in the broader marketplace and global economy. By understanding trends and what is working or failing to achieve desired goals, teams can stay ahead of risks and achieve growth mandates. They can also automate onerous compliance reporting that is currently done by disparate teams in a one-off way that is expensive and error prone.
Achieving these three components requires a platform that can provide an outside-in lens where each stakeholder has the ability to see data that is critical to their demand or supply side of the equation. It also requires the ability for each stakeholder team to achieve the same view of the socioeconomic landscape that is dynamically evolving, share relevant information, and track their joint goals and impact together over time.
Beyond this core Equity Assessment for each company in the procurement portfolio, rich data and analytics can provide valuable contextual data for firms regarding the socioeconomic health of their surrounding communities. These factors can provide valuable cause and effect insights that impact the availability of a high quality workforce, supplier ecosystem, and/or customer base.
- General Socio Economic Landscape A broader picture of the key factors that underpin a community’s viability can provide important context for corporations seeking to achieve successful, sustainable supplier diversity programs. Those factors include the overall racial and ethnic diversity of a community, educational attainment, unemployment rates, median income, home ownership, and business ownership.
- Home Ownership Homeowners have a median net worth that is 40x that of renters on average, making it the most significant source of wealth generation for most Americans. Looking at the racial wealth gap, it is evident that the gap in home ownership and access to credit are at the heart of the challenge. The difference in home ownership across racial lines is significant, with 70% of white Americans owning a home and only 42% of black Americans.
- Access to Credit Another significant factor in the racial wealth gap is the difference in approval rates between black and white mortgage applicants across income levels. For example, looking at all mortgage applications nationally for borrowers with incomes of $150K-$200K, we see 74% approval rates for white applicants vs. 60% for black applicants.
- Public Health Along with these key socioeconomic factors, a picture of a community’s health can also provide important insight into its ability to sustain itself and the companies that are operating within it, including the larger companies seeking to advance their dedicated supplier diversity programs.
What is the best way to get started in finding these data metrics in a comprehensive dashboard?
Equity Quotient is a SaaS technology platform focused on helping companies measure and manage their social impact in conjunction with their financial performance objectives. Powered by a rich data platform achieved by intersecting hundreds of data feeds from over a dozen sources, Equity Quotient provides a comprehensive picture of the socioeconomic landscape of every region across the United States. Dedicated supplier diversity teams on both the demand and supply sides of the equation are able to achieve their key objectives related to their dedicated supplier diversity programs and broader business objectives through exploring the following questions together:
- Power Strategic Planning for Growth
- Where is the next generation of growth going to be sourced and how will we support that growth with the right mix of stakeholder strategies across our workforce, supplier ecosystem, and target customers/ market segments?
- Which supplier sectors are most critical to supporting that growth and which are in a position to achieve greater diversity as part of our procurement strategy?
- Does the diverse supplier ecosystem have all of the ingredients it needs to support growth and scale, particularly from a financing and cash flow standpoint?
- What investments are needed by our organization and other public/private sector initiatives to ensure that healthy infrastructure is in place to support growth objectives now and into the future?
- Proactively Manage Risk
- What is our risk posture now and based on where we’re headed, particularly across our stakeholder portfolios?
- How do our employees compare to the broader workforce in our surrounding communities on relevant dimensions–diversity, educational attainment, household income, pay equity, health insurance coverage, home ownership?
- What is the business landscape of our surrounding communities, particularly related to industry growth drivers, workforce diversity, and supplier diversity?
- How do our surrounding communities fare from a public health and education standpoint, and are they in a position to foster the stakeholder portfolios we need to underpin our growth?
- Will our suppliers have what they need to support their growth from a workforce standpoint?
- Is the supplier landscape in our community and across the U.S. in a position to support our operations and avoid disruption?
- What initiatives might we take to proactively address potential risks?
- Automate Compliance Reporting
- Do our teams across HR, Finance/Procurement, GRC, and other parts of the organization have everything we need to achieve reporting requirements, from both regulatory mandates (SEC disclosures), market pressures (ESG scoring models), and other stakeholder-led initiatives (Annual Impact Reports)?
- Beyond our own internal data, where can external data and analytics regarding our surrounding communities and target markets provide valuable insights and inputs into our reporting strategy and execution across the organization?
- Could a centralized data source powering all of our disparate reporting requirements help our teams save time and money while achieving a more efficacious outcome and focus our teams on higher value activities?
After answering these questions and devising a plan for growth on both the demand and supply sides of the equation, it is time to operationalize that plan and track how performance and impact track to defined goals over time. Continuously checking in on plan versus actual performance on shared goals can help teams stay committed to strong execution success in the face of inevitable change. Trial and error are part of every business and every ambitious endeavor. Having the right data and analytics to help teams remain objective and aligned in evaluating challenge and opportunity can be the difference between success and failure.
Get started on your journey to a robust data-driven supplier diversity program by contacting Equity Quotient today.
