While world-class procurement organizations continue to outperform their peers in driving supplier diversity spending according to a new study by The Hackett Group. The study identified several critical ways that most companies fail in their supplier diversity programs.
Hackett’s latest research found that companies with world-class procurement organizations commit 33% more of their spend to diverse suppliers (13.3% of total spend for world-class versus 10.0% for typical companies). But according to Hackett’s research, 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 never truly assess whether programs are meeting corporate objectives.
Most companies also fail to consider whether a few large suppliers or many smaller suppliers best supports their corporate goals. Hackett’s research also quantified the positive and negative impact that globalization is having on supplier diversity efforts.
“What we see here is serious misalignment,” said Hackett’s North American Procurement Advisory Program Lead Kurt Albertson. “Many companies are taking the easy way out, and as a result aren’t driving real supplier diversity benefits. They are focused on making the numbers they need to meet government requirements, or getting recognition from their customers or industry. But they aren’t showing the attention to detail required to create programs that have real impact.”
The Hackett study, which included results from nearly 40 Global 1000 companies, found that there are two primary drivers of supplier diversity efforts. While business-to-business companies are frequently focused on meeting supplier diversity requirements of customers and/or government contracts, business-to-consumer companies generally focus on the market-value supplier diversity offers, in the form of increasing market penetration in diversity markets, driving social and economic benefits in targeted communities, and improving corporate image.
But while supplier diversity programs are generally aligned with high-level corporate objectives, most companies use relatively simplistic performance metrics to measure progress, and do little to ensure alignment at an operational level. About 90 percent of all companies in the study rely on metrics such as “Percent Spend with Diverse Suppliers” or “Recognition by Industry”. But less than half of the companies in the study track the percentage of their suppliers that diverse suppliers represent, and only about 10 percent of all companies assess the impact of supplier diversity efforts on revenue or market share.
Another key mistake companies make, according to the Hackett study, is failing to align program objectives with decisions regarding the number of diverse suppliers with whom they work. Hackett’s research found that nearly 70 percent of diverse suppliers have less than $100,000 in annual diversity spending with a particular company, and this collectively represents less than six percent of the total supplier diversity spend. According to Hackett, while the objectives of business-to-business companies might be best served by focusing on a few larger contracts to satisfy government regulations, business-to-consumer companies seeking to drive market awareness and penetration should consider focusing their supplier diversity efforts on developing a larger group of suppliers and smaller individual contracts.
Finally, Hackett’s research found that globalization of business services presents both obstacles and opportunities for supplier diversity programs. While nearly 80 percent of all companies studied were global businesses, over 90 percent tracked metrics only for U.S. suppliers. But more than two thirds of the companies said globalization of supplier diversity programs is either very important or critical. About half of the companies in the Hackett study said they expect globalization to have a negative impact on their smaller suppliers, while nearly 20 percent said they expect the impact to be positive.
Overall, Hackett sees an opportunity for companies to align supplier diversity programs with global sourcing initiatives. Hackett believes that most diversity programs will eventually have to address the challenges involved in tracking non-US diverse supplier spend and certification; many will be forced to rethink their definition of diversity to take into account responsible supply, localization and other factors.