For most business functions, quantifying return on investment, or ROI, is an imperative.
It is no different for supplier diversity. ROI applies to companies that already have a solid program as well as to those that are considering or are just starting to build a program. This means that you need to be prepared to quantify the value that supplier diversity brings to your organization in comparison to the investment that applies.
Within your business, supply chain and procurement organizations may dedicate financial resources, personnel, travel expenses and systems to support supplier diversity efforts, and therefore it is a must to understand the ROI. What is the value that supplier diversity is bringing, if any? How do you quantify such a value? It’s critical to be armed with data to answer these questions, particularly considering the shift in expectations in supply chain and procurement.
In accordance to the CPO Deloitte survey in 2018, procurement is extending its role beyond cost reduction. The top business strategies for procurement leaders are cost savings (78%); followed by new products / market development (58%); and managing risks (54%). As you can probably note, procurement bears a critical role in innovation together with traditional cost reduction. This also has an impact on the responsiveness and agility of supply chains.
Many advocacy organizations, as well as consulting firms, offer formulas based on financial management principles to determine the ROI for supplier diversity that looks like “Gain from Program – Cost of Program)/Cost of Program.”
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 these formulas agree on the denominator or cost of program, challenges arise to quantify the value that the cost of program brings. This becomes more complex when procurement is expected to deliver not only on cost reduction but also on innovation.
Diverse firms tend to be smaller firms. They must operate with an entrepreneurial fervor to survive and thrive. They must anticipate and respond fast. 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.
This is what The Hackett Group states in its report titled ¨Top Supplier Diversity Programs broaden value proposition to drive increased market share, other revenue opportunities. ¨Indeed, the report highlights that 76% of diverse suppliers meet expectations and another 23% exceed expectations on their performance. Furthermore, this is accomplished with no loss in efficiency.
This is where ROI adopts an enhanced meaning for supplier diversity that is not limited to cost reduction and regulations compliance. Top performers in supplier diversity unlock opportunities to access new markets and improve supplier relationships. ROI reaches a new level, as such top performers obtain a new type of ROI: Rewards Of Innovation.
In addition, as corporations consider the true and enhanced ROI of supplier diversity, increasingly they are considering the economic impact on local communities. The National Minority Supplier Development Council (NMSDC), a diverse certification agency, 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.
This is a win-win situation. Companies with a strong supplier diversity program leverage it as a ¨reputation builder to help increase market share and retain talent and rely on social media to develop customer and brand awareness¨, in accordance to the report by The Hackett Group.
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 diverse 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 both diverse firms and corporations. By taking into account the recent context for procurement and supplier diversity, ROI metrics to establish the business case encompass cost reduction, new markets, and innovation. For supplier diversity, the ROI goes further from return of investment to provide your organization with the new ROI, Rewards of Innovation.