IBM launched the first supplier diversity program in 1968 in response to the civil rights movement. Many other corporations of all sizes followed IBM’s lead in creating their own supplier diversity programs, whether to gain access to federal contracts or as part of their corporate values statements.
For decades, supplier diversity was categorized as “the right thing to do,” a nod to social responsibility and equality. But as our nation’s demographic makeup began to shift and more and more companies realized the innovation and competitive edge diverse suppliers bring to the table, that attitude also began to shift. Suddenly, we began talking about the ROI of supplier diversity—the jobs created and revenue output and tax revenue generated. Suddenly, supplier diversity started to look like a good business decision.
We saw something of a sea change in 2015, when several reports from different entities were released showing the tangible benefits of engaging with diverse suppliers. Using data from the 2010 United States census as a foundation, these reports revealed that small and diverse-owned businesses were a driving force in the economy and were playing a huge role in economic recovery following the Great Recession.
Here’s a quick summary of what we learned in 2015:
The Hackett Group released an oft-cited report stating that, on average, supplier diversity programs add $3.6 million to the bottom line for every $1 million in procurement operation costs.
A joint report from the U.S. Census Bureau and the Minority Business Development Agency (MBDA) showed that minority-owned businesses continue to outpace the growth of majority-owned firms. According to the report, the number of minority business enterprises (MBEs) increased 39 percent between 2007-2012 (from 5.8 million to 8 million), more than three times faster than population growth among minorities.
In addition, employment at minority-owned firms increased 33 percent to 7.7 million jobs, and gross receipts were up 53 percent from 2007. In contrast, employment at non-minority firms increased 7 percent, less than one-fourth as fast as in MBEs, and receipts in non-minority firms increased 27 percent, half as fast as in MBEs.
In September 2015, the National Minority Supplier Development Council (NMSDC) released the first major supplier diversity economic impact report. Seeking data on how much minority-owned businesses contribute to the U.S. economy, the NMSDC retained the Institute for Thought Diversity (ITD) to conduct the study. The report was a blockbuster, instantly increasing the NMSDC’s profile and drawing mainstream attention to diverse suppliers.
The results of the study illustrate that in 2014, the NMSDC certified that MBEs had a total economic impact of over $400 billion dollars in output, resulting in the creation and/or preservation of more than 2.2 million jobs held by persons either directly or indirectly employed by NMSDC-certified MBEs.
We can see from those reports that in 2015, the conversation was beginning to shift from supplier diversity as a social responsibility/corporate sustainability goal to how supplier diversity contributes to economic growth using measurable metrics. This conversation led to the next big leap in supplier diversity reporting.
Measuring Economic Impact
The 2015 NMSDC Economic Impact Report kicked off a paradigm shift in measuring the success of supplier diversity programs. Just four years later, “economic impact” is a familiar phrase to anyone working in supplier diversity.
Being able to measure economic impact was a giant leap forward for supplier diversity professionals. Now we can share a report with meaningful numbers—revenue output, jobs created, tax revenue generated—with the C-suite and other stakeholders to paint a clearer picture of how our programs benefit the communities where we live and work.
Economic impact legitimized supplier diversity programs in a new way, a way “numbers people” could understand and support. From there, researchers began digging deeper, thinking critically and creatively about how to measure ROI in terms of the company’s bottom line. Watch for bottom-line metrics to bring more clarity to the purpose and benefits of supplier diversity in the next few years.
Tier 2 Spend
As supplier diversity matured and procurement departments began casting a wider net when sourcing products and services, it became obvious that, for most companies, the biggest room for improvement was in Tier 2 spend.
We can extrapolate from the 2010 data that the number of diverse suppliers has grown exponentially since then, which means the opportunity to partner with diverse-owned businesses is greater than ever. However, the majority of those enterprises are small businesses without the current capacity to supply a Fortune 100 or Fortune 500 company. Instead, supplier diversity and procurement teams have begun looking at how to connect diverse suppliers with their own prime suppliers for smaller contracts that can then be reported as Tier 2 spend.
In recognition of this need among their corporate sponsors, organizations like NMSDC, Women’s Business Enterprise National Council (WBENC), the National Gay & Lesbian Chamber of Commerce (NGLCC), Disability:IN, and their affiliates began ramping up their matchmaking and networking events. One-on-one meetings at national and local conferences are among the most popular features for both corporate and diverse supplier attendees.
Some large corporations began hosting their own events for diverse suppliers, offering educational sessions about navigating their bidding processes, signing up for their supplier portals, and pitching their products and services. Often, prime suppliers are also invited to these events so they can form relationships with diverse suppliers that might develop into working partnerships.
Toyota is one example of a company utilizing this type of event to increase their diverse spend. The Power of Exchange event launched in 2014, a spin-off of the original Opportunity Exchange. Not only is this a proactive method of connecting primes and diverse suppliers, but it also reinforces Toyota’s commitment to supplier diversity and resulted in a reported $1 billion in annual Tier 2 spend.
Tier 2 continues to be an area ripe for growth within supplier diversity with no end in sight. With millennials—a diverse demographic—looking at entrepreneurship as an attractive, viable career option, the diverse supplier pool continues to grow wider and deeper.
As we approach the 2020 census and the flurry of new reports that data will generate, I fully expect to see an abundance of attention paid to diverse-owned businesses and what they do for our economy. We supplier diversity professionals already know how integral they are, but it will likely surprise a lot of people outside our niche.
Supplier diversity has changed tremendously since the last census, from the number of companies engaging with diverse suppliers to a greater understanding of the impact our supplier diversity programs have on the world around us to consumer interest in diversity to how we measure ROI. What changes and growth will the next five years bring?