The Business Case for SUPPLIER DIVERSITY
April 28, 2022, By Jonathan Dutton FCIPS, CEO at PASA
A practical guide
Stakeholder pressure – from shareholders, the public, staff and customers alike – is increasingly demanding respect for diversity. BUT does this include the supplier base too? And, if so, is there a natural business case to justify any extra effort or expense on the supply side? Jonathan Dutton enquires for SUPPLY CLUSTERS members ….
Sustainable Procurement momentum 2019-22
As we have already well established in prior discussions, the momentum behind Sustainable Procurement efforts in the procurement profession is real and in itself sustained; even after Covid.
Post-Covid, it seems that, if anything, the focus of sustainable procurement has narrowed, however. People accepting that it is difficult to do everything and much easier, and perhaps more rewarding, to achieve traction in a few key areas. People seem to be prioritising sustainable procurement effort where most good can be done by them. Using ‘relevance’ as a key tool to decide where they can most add value – relevance to their business, their products, their customer segments, their brands.
In other areas, people will comply (especially where required by law), but otherwise it is more defensible to prioritise and select the area of sustainable procurement effort where they can do most good, or achieve most relevance.
Diversity, Equity and Inclusion (DEI)
Supplier Diversity is a relatively new term in Australia. And increasingly abbreviated to DEI as a catch-all term, perhaps. Wikipedia long-windedly defines supplier diversity as ‘a proactive business program which encourages the use of minority-owned, women-owned, veteran-owned, LGBT-owned, historically underutilized SME sized businesses, rehabilitation centres, disabled centres and other similar organisations.’ In other words, a way to support chosen minority segments through procurement.
As yet such programmes are rarely formalised here in Australia, but are more common in some other countries. The USA has had such policies more formally for decades and the South African Black Economic Empowerment (BEE) laws are well established.
That said, the federal government in Canberra currently have defined Procurement Connected Policies (PCPs) which outline exactly which handful of policies can be driven through using federal procurement as an instrument of these approved PCPs by federal government buyers.
Diversity is itself diverse. But the generally accepted measures of diversity are listed aside. Achieving world-class results in each segment of diversity is challenging. Maybe prioritising helps people get started. A good first step being sensitive measurement of where you stand currently with your supply base?
Supply side issues with diversity
That said, there are a number of clear, and not so clear, obstacles that will be faced in building a more diverse supplier base for your organisation – particularly in Australia and New Zealand perhaps – and beginning with measurement itself:
i. MEASUREMENT - How do you measure where you are today? A survey of suppliers? All suppliers? Just regular suppliers? Just in ANZ, or overseas suppliers too? Do you hope to influence them as well? Can your systems help measure supplier diversity? How?
ii. VALUE – Which segment of diversity (within the scope of DEI that is) is most important to your business? How do you prioritise? Why address overseas suppliers if your priority is indigenous/māori representation? Are disabled suppliers more valuable to your brand values than gay suppliers perhaps? How on earth do you decide?
iii. SIZE – Australia and New Zealand is a small market in global terms – an oligopoly. Limiting supplier choice by a whole new parameter such as diversity makes a small market smaller. At what point do you pay a premium for diversity in a small market? In terms of supplier size, can small SME sized suppliers actually comply with large company diversity aims? Does it put them at a disadvantage perhaps? Especially in a tight labour market with very low unemployment?
iv. COMPLIANCE - there are rules in how to manage diversity – mandatory and non-mandatory accepted ways – which vary by jurisdiction; so it is hard to be consistent when some rules are mutually exclusive (say between the UK and Australia, for example) or are the law in one country or state and not another.
v. EXPECTATIONS – stakeholder expectations are universally high in all segments of diversity – prioritising suggests some stakeholder groups might be disappointed if their interest area is de-prioritised. Expectations expect success on all fronts – not just against your priorities. Is this even possible? How do you weight what gender balance you hope to achieve (a relatively easy question) to what percentage of old-aged supplier’s you have (a more difficult question)?
vi. A BUSINESS CASE – is there business benefit in diversity? How much? What is it worth to your organisation? How do you measure it? Tangibly or intangibly?
Building the business case for DEI
How do you build a business case for diversity?
Is it obvious, or not so much when you face the challenge of writing it down? Imagine pitching to a grumpy CFO. You eloquently present a plan to achieve greater diversity in your supply base. Then they ask, “what will all this cost us?” and, you mumble some generalities inferring time, money and effort required. Maybe even some specific costs. The CFO then asks, “so, what’s in it for us, what RoI can we expect? Or are you suggesting we pay some suppliers more for greater diversity?” They might even add, “I thought your job was to get costs down.
That is a tough question. Whilst everyone can see a clear trend to greater diversity, is that enough to convince a grumpy CFO? “Everybody’s doing it …” is a lame business case.
“We felt that our supplier base should reflect the same level of diversity as our customer base and, increasingly, our staff base.”
One former CPO
In an organisation with strong leadership on this topic, from the CEO perhaps,. It is relatively easy to build a supplier diversity programme and, maybe, not face a grilling from the CFO. But in many organisations, perhaps not. So – how do we build a business case.
“There's a pure and simple business case for diversity: Companies that are more diverse are more successful.”
Mindy Grossman, CEO – WeightWatchers Intl
Business leaders in diversity might say things like ‘Building diversity in all aspects of our business is good business’ but it is difficult when the burden of proving this falls upon a humble line manager – such as a procurement manager looking to grow diversity in their supplier base. So where to start?
a) Stakeholder expectations & social licence
It is relatively easy to survey and capture your stakeholder views or desires for greater diversity. Customers are especially powerful as a voice within industry and citizens (voters) within the public sector. Shareholders too, and policy-makers (politicians) within government. Open data may also provide evidence (by geography) of changing attitudes and beliefs towards diversity.
Moreover, is there perhaps a real cost to not being more diverse in future – will consumers punish non-diverse organisations in future? Environmental, social & governance (ESG) pressure on boards is very real nowadays – your annual report may also offer a few clues of where your brand priorities may lie.
“A CEO recently told me that, a short while ago, ESG was the last question that would come up in an investor meeting, if there was time. Now those meetings start with that question.”
— Charles Emond, President of global super fund CDPQ
In effect, clear effort on ESG areas maintains and builds an organisation’s social licence to operate. And, it turn, low effort (or none) can diminish or even remove an organisation’s social licence.
In different jurisdictions, different rules and norms apply. And different trends are apparent. One jurisdiction may have a firm law on a topic, whilst others just a trend, yet others barely an acknowledgement of an issue. Nonetheless, organisations have to increasingly ‘comply’ with general expectations (above). For example, if the UK and Australian have modern slavery legislation to comply with, doing so across your entire network shows leadership to other areas.
One difficulty is different approaches also vary. Different policies. What make the law in one country (or state) such as positive discrimination, may actually count as discrimination in another. Asking about race to collect data may be the law in the EU but illegal in Australia perhaps. Being clear about compliance needs adds strength to your business case as well as your case for leadership.
A strong case can be made, in many industries, that proven diversity enables more sales:
In the B2C world, where consumers ‘vote with their wallet’ it is possible in many cases to map consumer sentiment towards diversity and related ESG issues.
In the world of B2B, it is easy to point to sales growth potential when diversity is placed as a tender prerequisite. One CPO explained that as a large-scale construction company, prospective clients (often public service departments) stipulate clear requirements on ESG questions, including diversity, and can even stipulate minimum targets or quotas for employee and contractor ratios. They had established a hot-link into their tender teams bidding for work, who need to validate company-wide efforts on ESG questions, including diversity. In this sense “compliance” to customer policy is very clear. Non-compliance means a non-compliant tender pitch and no sale!
In the not-for-profit world, expectations are usually higher. NFP organisations are often held to a higher standard and must comply with values and expectations which align to their brand and their purpose, no question. But, also, comply with demonstrated expectations of the general benefacting public as well.
d) The extra benefits from small suppliers
Within an oligopoly, large buyers are predisposed to buy from other large companies. This presents less risk, they often reason. Not so much disposed to buy from small SMEs perhaps.
Yet SME sized suppliers can be more agile and more flexible to meet new targets such as diversity quotas. And can build around social causes much more readily. Anecdotal case studies of social enterprises offering more gratitude for contracts and, with it, greater commitment, improved quality (especially delivering humble roles in the service sector) and soliciting greater support from users, bring added perceived benefits to your staff base and, in turn, their customers, both internally and externally.
One example of this flexibility is the number of SMEs now registered through Supply Nation as indigenous owned businesses – this numbers has risen in Australian from around 150 firms when the federal government’s Indigenous Procurement Policy was first introduced (July 2015) to over 1,500 firms more recently.
Measuring business benefits (and disbenefits) can be difficult. Putting a literal dollar value on them, even more difficult. But much work has developed in recent times on both tangible and intangible measures of business performance. An area well worth looking in to, and not just for ways to measure diversity or other ESG metrics.
How to develop diversity in your supply base
A recent eBook published by business spend management software company, COUPA, which draw on contributions by Bain & Co, Deloitte, The Hackett Group and others, offered a 7 step approach on “How to build a diverse supplier base” and is freely available here
In this book Coupa claim that some 7.5% of the total spend funnelled through their systems in 2020 by their clients, goes toward diverse suppliers. Perhaps they already have a clear way to measure spend by diversity?
7 step approach to building diversity within your supply base:
How to build a diverse supplier base
1. Benchmark diversity by spend
2. Create policy ownership
3. Make it easy for users to channel spend to diversity
4. Fill your diversity gaps
5. Define default criteria
6. Vet suppliers & monitor compliance
7. Measure improvements by goal
One thing that will make any drive towards DEI stronger, more justifiable and more successful is a central principal of strategic procurement, which too often is ignored, that of GOAL ALIGNMENT.
In this case, not only alignment to the corporate purpose and the corporate strategy, but also to its values, its brand, its target marketplace, its stakeholders’ direct interests and to the way it wants to be perceived in the marketplace.
For example, BP, the oil company, after Deepwater Horizon, made a strong acceleration towards environmentalism. A bright green & yellow logo paints this vividly for everyone to see. If they prioritise environmental matters over other aspects of ESG, it is easy to see why. And is easily defendable. Not that they skimp on other questions, but their priority is clear and reasoned.
So, what is your primary ‘cause’ that reflects the primary interests for your organisation, its brand and its stakeholders? And where does DEI fit within that scale? And what level of investment does it warrant? How will you justify a more diverse supplier base?
Jonathan Dutton FCIPS has a non-executive role at SUPPLY CLUSTERS and writes a monthly column for the website. Jonathan is the CEO of PASA who run a wide range of procurement events and training programmes each year www.procurementandsupply.com and cover all aspects of sustainable procurement thoroughly, including supplier diversity. He has also worked extensively in the past as a procurement practitioner, consultant & trainer and is a former non-executive director for over four years of the Australian Centre for Corporate Social Responsibility (ACCSR).