For most business functions, quantifying return of investment, or ROI, is an imperative.
It is no different for supplier diversity.
Within your business, procurement organizations may expend financial resources, dedicated personnel and systems to support diverse enterprises within your supply chain, and it is prudent to understand the ROI. In supplier diversity, this is especially essential because metrics surrounding the value proposition are a key component of a larger business case. It’s important to be armed and prepared to protect and promote your supplier diversity efforts to executive management to retain their buy-in and commitment.
Many advocacy organizations, as well as consulting firms, offer formulas based on financial management principles to come up with a true ROI for supplier diversity. However, often times corporations that work with diverse suppliers also recognize that the true value of diverse businesses, can be difficult to pin down to a purely financial calculation.
The Council of Supplier Diversity Professionals (CSDP), which was established in Detroit in 1998, offers a supplier diversity ROI formula in a presentation outlining the business case for supplier diversity as “Gain from Program – Cost of Program)/Cost of Program.” The formula opines that “1. Gain = cost savings/cost avoidance/reach into emerging markets/and innovation 2. Cost of Program = Supplier Diversity Budget.”
Other formulas may calculate a gain from an actual investment against the dollar cost of the investment, and others will subtract the investment cost from revenues that an investment expects to generate, then dividing by the investment cost to discern ROI as a percentage.
While determining the tangible value of a financial return for supplier diversity is important, so too is understanding and weighing “intangibles” of the investment. In some respects, the intangibles can be as important as financial returns. One key intangible is innovation. Diverse firms tend to be smaller firms, and they must operate with an entrepreneurial fervor to survive. If you are able to identify and help bring along these truly innovative diverse firms into your supply chain, undoubtedly your operations will benefit by the enthusiasm they bring, not to mention any new ideas, expertise and inventions for improving processes.
In addition, as corporations consider the true ROI of supplier diversity, increasingly they are considering the economic impact on local communities. The National Minority Supplier Development Council (NMSDC), a certification organization, has studied diverse supplier economic impact, and noted in one study that minority businesses under its certification umbrella have a total economic impact of more than $400 billion dollars in output, resulting in the creation of and/or preservation of more than 2.2 million jobs. Besides jobs, the NMSDC study points out that as diverse suppliers are engaged, they are contributing to public treasuries through the payment of federal, state and local tax dollars.
Yet another economic impact will be the effect on Tier 2 reporting, as larger diverse suppliers will have the ability to extend contracts to even smaller firms as part of the procurement process, and this Tier 2 activity can be counted toward supplier diversity spend.
Measuring the ROI of supplier diversity gets to the value proposition of a program. A vibrant supplier diversity program will encourage the success of diverse firms based on their productivity and business value to the organization, and they will develop ROI metrics to establish the business case. While ROI relates directly to the actual investment the company makes, it’s important not to lose sight of the many intangibles to be realized from developing a supplier diversity program.