The Evolving Scorecard for Supplier Diversity Programs

Spend Matters would like to welcome a guest post from Kurt Albertson, Associate Principle, Procurement Advisory, The Hackett Group. The Hackett Group will be a regular contributor from now on.

While The Hackett Group research shows that the economic recession did not severely dampen executive enthusiasm for supplier diversity programs (unlike broader sustainability initiatives), most companies continue to be misaligned in their stated objectives and how they 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.

Many companies are taking the easy way out with respect to their performance measurement processes, 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 on their stated objectives. Even more worrisome is the manner in which some of the traditional metrics are being calculated with broad liberty taken when it comes to definitions. For example, it is common for companies to exclude large categories of spend from the denominator while calculating percent of spend with diverse suppliers based on the notion that these categories are not realistic opportunities for diverse suppliers. Standards on exclusions, however, are not well adopted across the market.

A Hackett study, which included results from nearly 40 Global 1000 companies, found that there are two primary drivers of supplier diversity efforts. While B2B companies are frequently focused on meeting supplier diversity requirements of customers and/or government contracts, B2C 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 relied on metrics such as "Percent Spend with Diverse Suppliers" or "Recognition by Industry." But less than half 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.

Just by tracking the wrong metrics, companies can act in a manner that ultimately does not drive the objectives of their program. Failing to align program objectives with decisions regarding the number of diverse suppliers with whom they work, for example. 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 6 percent of the total supplier diversity spend. While the objectives of B2B 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.

The continued evolution of performance measurement is nothing new, as evidenced by the significant level of focus on Enterprise Performance Management these days by the Global 1000. In procurement, for example, we've seen the CPO's scorecard evolve over the years to take on many of the metrics of the internal customers to which they serve (e.g. revenue enhancement, innovation, risk mitigation). Supplier diversity programs are no different, and as greater visibility to program information is combined with new techniques for measurement (borrowed from areas such as marketing) we will continue to see supporting performance metrics gravitate toward the specific objectives of the programs (e.g. market share/revenue impact). The Hackett Group will be exploring this topic in greater detail in our latest Supplier Diversity Study due out next month.

-- Kurt Albertson, Associate Principle, Procurement Advisory, The Hackett Group

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