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Supplier Diversity: Food for Thought August 2010 By Kenton Clarke President & CEO DiversityBusiness.com
|DiversityBusiness.com Article/- DiversityBusiness.com Article/- For starters, let me share a brief definition about supplier diversity for those who may be unfamiliar with the term. “Supplier diversity is a business program amongst Fortune 1000 companies that encourages the use of privately-held companies owned by historically under-utilized businesses when purchasing goods/services.” Since I last shared my notes on supplier diversity, layoffs, program elimination and the overall economy in 2008 & 2009 have caused setbacks within supplier diversity programs.
Today, there are indications that these setbacks have leveled off and appear to be on an upward trend. During 2010 we have seen hiring for supplier diversity positions return and spending continue to increase. The industry continues to drive spending through 2nd tier initiatives and procurement contract goals in this area. Reporting requirements have become a “Must Do” and are now audited on a regular basis. This trend has been moving forward for the last 5 years and is no longer taken lightly. Each day, companies are expanding the number of prime suppliers required to report to them and many new corporations have begun implementing similar programs.
Reality of Supplier Diversity
I am happy to report the industry is getting back on track but there are still findings of fundamental issues that need to be addressed in order to continue moving forward. For instance, margins which are squeezed at the “Prime” level continue to be a challenge for 2nd tier diverse suppliers who in some cases are required to streamline some of the work down an additional level (3rd). There are also indications of large companies asking their supply chain to be proactive, (buy from diverse companies) which in most cases, they are not willing to execute themselves (unless required by their customers). This “Circle Jerk” has created apparent opportunities on the 2nd tier which could have been procured on level 1 (no procurement executive would admit to this). Spending that is reported by both companies often results in overly inflated diverse spending.
Finding additional “Spend” through data scrubbing seems to have become a permanent process amongst many companies. While a significant number of companies have their Accounts Payable records coded in the front-end to capture diverse spend, squeezing out additional dollars from uncoded suppliers to meet targets is commonplace. The uncovering of this “Mystery Money” is now an acceptable practice at all companies for measuring performance goals and targets. It also indentifies suppliers who in turn are forced to participate in the certification process.
Large contracts (in excess of $10,000,000 or more) continue to be awarded to diverse suppliers as an additional spend driver. A significant number of these contracts (when made public) are corporate pass-throughs, or so they appear to be. Discussions on the value of these awards to the diverse business community are questionable and can create brand liabilities for the large company when revealed. The idea of strategic partnerships has been stretched to create corporate/diverse business partnerships with invoicing always occurring through the small “company” and, the majority of the work and profits going to the large corporation. In most cases, the RFP process has put weight on the diversity spend component and these partnerships have been created for a competitive advantage. There is still a zero sum game for diverse suppliers although huge dollars are being reported as diverse spend. This has resulted in an opportunity for large corporations to win more contracts based on their diverse partner and all the procurement (money) is still in large company coffers. Everyone is participating in this questionable practice with no SHAME!!
Nearly all corporations have declared the mission of Supplier Diversity to be bottom line driven but unlike other profit center functions, no one can quantify revenue gained from diverse spend. With the exception of a few financial services companies I provide data too (not initiated or known about by supplier diversity teams), there is still no supplier diversity process that feeds data directly to the multicultural marketing function. I will correct myself. About 10 years ago IBM had a (very) senior level executive assigned to all major diverse suppliers they were doing business with to market IBM products/services. This was a successful process for them. Bank of America around the same time had a tickler sent to their marketing department every time a diverse supplier registered (DiversityBusiness.com provided this service) that had over $1 million in annual revenue. These are the only direct marketing efforts of which I know of.
Arizona Proposition 200 and a recent Wall Street Journal article “U.S. Virginia Senator Webb Calls for End to Diversity Programs” have dampened some efforts and success gained by diversity practitioners. Diversity & Inclusion practices at major corporations are continuing to gain momentum, strength and visibility in the C-suite. These efforts need to be recognized and made known to the general public not keep secret within the diversity network. More press outside diversity media publications is key to broader exposure of corporate business diversity processes and achievements. There are more good things happening in America that most people know about.
Organizations charged with the mission of economic development for diverse communities are still stuck in the 60’s. The programs, processes and management of government agencies and not-for-profit groups have not changed and have no new vision of their mission. Hung up on spending over 50% of their time raising funding to pay for staff salaries, no real efforts are accomplished in working with small/diverse businesses. They continue to be viewed by business owners as handout groups that serve as window dressing for corporate and government initiatives.
Generational differences with supplier diversity programs are not being addressed by anyone. Gen Y and some Gen Xer’s see no need for inclusion programs due to more naturally open and accepted cultural, gender and ethnic differences. Gen Y entrepreneurs are creating highly successful businesses without participating in the supplier diversity process. Tony Hish, CEO of Zappos (recently sold to Amazon for $1.4 billion); Jerry Yang of Yahoo; or Chris Huges, Facebook founder, would have no inclination of having any diversity officers in their companies. They simply Get-It. Within five (5) years most managers within large corporations will have a different mindset on diversity and the chance of budgets being approved for 60’s activities (sponsorships, events, trade fairs, etc….) will be ending.
True Measure of Success
With so much to do and no time to plan, supplier diversity professionals continue to have a difficult job dealing with internal and external demands. Industry discussions stay focused on “Best” practices which would be best described as “Common” practices. Showcasing and success stories are the norm, but if looked at by cross-functional teams (Legal, Accounting, Marketing ,…..) would raise “Don’t Do” flags if underlining data was exposed. The percentage of (real) ownership, work performed, margins retained and number of jobs for diverse employees has all been overlooked just to create “Spend”. It’s impractical to think C-suite executives would take a deep dive into the data and reports presented to them or supply chain executives would change their goals. It’s simply too easy to chase numbers.
What Business Owners Think
So what are business owners thinking these days? Okay, I don’t have to ask them because they come to me and tell. There is the general sense in the marketplace that using diverse status for additional marketing opportunities may yield results. At the same time, there is also hesitancy for most companies to promote themselves with any labels that have unjust negative implications. For example, diverse company’s products/services cost more or offer mostly inferior products/services. Like it or not, that is a real perception amongst buyers at large companies. In spite of efforts to eliminate this myth, it still caries false perceptions and business owners would rather stay away from this process. Less then 25,000 businesses have 3rd party certifications (from the 2 major agencies) out of over 7 million diverse owned companies.
These businesses also believe that large companies invite suppliers to register and to chat at trade fairs and events as a way of showing “goodwill” to the public but knowingly having no intention of providing opportunities to these small companies. It is proven that for the last 5-7 years all the opportunities with large corporations are going to mostly well established diverse companies with annual revenues over $10 million. While it’s true that a small company doesn’t fit with current sourcing practices, large companies should be truthful and not mislead small companies into perceiving that they have the size, scoop and scale to meet their requirements.
How can we implement change?
One word, leadership. Leadership in moving the industry forward is non existent as practitioners have to stay focused on targets. Organizations are stuck in a time warp. Receiving “great” feedback on spend reports and how “successful” your diversity departments programs and policies are doing isn’t enough. As previously pointed out, the vast amount of the information received is often overstated. As an example, it should be obvious right now that if auto company’s are claiming that they spend over $10 billion in annual procurement with diverse companies, why are economic conditions still worsening for diverse companies in Detroit? Are they selling more vehicles to this marketplace; has anyone check the GDP lately? This is not rocket science here; everyone is simply reporting spend to the C-suite and not showing any impact analysis. Going forward with shut eyes on real results will eventually give senior management a reason to eliminate programs.
New research from the Hackett Group found that while world-class procurement organizations continue to outperform their peers in driving supplier diversity spending, most companies still make major errors in how they operate and measure the performance of their supplier diversity efforts. Most rely on overly simplistic measures to evaluate the progress of supplier diversity programs, and they never truly assess whether programs are meeting corporate objectives. Most companies also fail to consider whether having a few large suppliers or many smaller suppliers’ best supports their corporate goals.
As a result, leadership is under the impression that everything is running smoothly when in reality it is all a façade. In order for this cycle to stop and for change to come, it has to start with the top. Senior management has to become aware of what is really going on and that can only be done by being more engaged with their diversity departments. This could actually involve creating and enforcing performance measuring tools along with the department and clearly communicating what is to be expected rather than leaving it up to them alone. It may even involve periodically attending diversity trade fairs, conferences, or exhibits. It may also involve talking to suppliers or external industry experts or reading industry articles or journals to get outside perspectives. The information is out there, businesses are voicing their frustration, so there is no excuse for leadership to have a blind eye.
Leadership must remember how many small businesses that are overlooked and negatively affected by their continuance of keeping a blind eye while larger businesses reap the rewards. These same businesses purchase your products, stimulate demand in the market for your goods and services, which in turn increase your organization’s revenue and enhance shareholder value. They are the driving force of the economy and it is sad to report, they aren’t receiving the same opportunities as you are led to believe in the spend report.
The basis of this article is to bring to light issues that are often swept under the rug and ignored. It is something to think about.
The internet may prove to be the “Great” motivator. After all, this article will be delivered to over 2 million inboxes, hundreds of blogs and magazines.
Launched in 1999, DiversityBusiness, with over 50,000 members, is the largest organization of diversity owned businesses throughout the United States that provide goods and services to Fortune 1000 companies, government agencies, and colleges and universities. DiversityBusiness provides research and data collection services for diversity including the "Top 50 Organizations for Multicultural Business Opportunities", "Top 500 Diversity Owned Companies in America", and others. Its research has been recognized and published by Forbes Magazine, Business Week and thousands of other print and internet publications. The site has gained national recognition and has won numerous awards for its content and design. DiversityBusiness reaches more diverse suppliers and communicates more information to them on a more frequent basis then all other organizations combined. We also communicate with mainstream businesses, government agencies and educational institutions with information related to diversity. Our magazine reaches over 300,000 readers, a monthly e-newsletter that reaches 2.4 million, and website visitors of 1.2 million a month. It is a leading provider of Supplier Diversity management tools and has the most widely distributed Diversity magazine in the United States. DiversityBusiness.com is produced by Computer Consulting Associates International Inc. (CCAii.com) of Southport, CT. Founded in 1980.
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