What to Consider when Measuring ROI on Supplier Diversity

ROI is the most common measure used to evaluate performance by measuring the output of the investment on a particular programme or operation. With regards to Supplier Diversity (or Inclusive Procurement), ROI as a measure is something that is often talked about from interested stakeholders who have invested time and resources in engaging with Ethnic Minority Businesses (EMBs’) as part of their Supplier Diversity programmes.  As Supplier Diversity is part of the Corporate Sustainability agenda (not stand alone as in the US) in the UK there is often the perception that ROI on programmes is hard to determine. This can be attributed to a number of factors such as:

  • The maturity of the programmes in the UK compared to other countries particularly the US where Supplier Diversity has been practice for over four decades.
  • The lack of data collection and reporting on UK programmes.
  • Low number of opportunities provided to EMBs’ that engage with large organisations as part of Supplier Diversity programmes.    

All these factors make ROI on Supplier Diversity challenging and need to be addressed to provide a clearer picture for UK programmes.

Knowing what to measure

Supplier Diversity in the UK is slowly becoming more prominent, large organisations have realised the potential of engaging with ethnic minority, women owned, disable and LGBT businesses. Research by the Hackett Group revealed that companies with well-established supplier diversity programmes have been able to ‘generate 133% greater return on the cost of procurement operations’. This indicates that engagement with minority suppliers can increase value and lead to greater returns. The basis of successful supplier diversity programmes are rooted on sound metrics that evaluate effectiveness of in relation to ROI. A successful supplier diversity programme will have a positive effect on operational outcomes but also on overall business performance.

For those organisations whose programmes are not as well-established or in their early stages there is pressure to demonstrate that supplier diversity provides value on investment, to achieve this those in charge with delivery will have to measure a number of factors in order to quantify supplier diversity’s return on investment. Therefore in order to establish whether a supplier diversity programme is successful in relation to ROI it is important to measure:

  • The representation of underrepresented groups in the supply chain
  • The number of biding opportunities provided to minority businesses
  • Total spend with minority businesses
  • The number of minority business enterprises that have been successful in the biding process
  • The operational and business impact from engaging with minority businesses (Value/Cost reduction)
  • The impact of supplier diversity on revenue or market share

 Moving beyond Measuring

Measuring outputs on Supplier Diversity programmes is important however, large organisations need to take into consideration other forms of engagement with minority suppliers that cannot be measured by the conventional ROI formula. Investment in Supplier Diversity programmes can take other forms that move away from purely transactional practices and are supportive of minority business but can also be beneficial in the long term for large organisations. For example by identifying innovative minority businesses and taking a more active role in their development, large business can foster partnerships that will increase knowledge spill-overs and create a more reliable business environment for themselves. Furthermore playing a role in creating the architecture to develop EMBs into large business also becomes a smart procurement practice.

There are some clear instances within the MSDUK network that corporate members are focusing on a more encompassing form of engagement with a strong emphasis on minority supplier development and a more recent example of this is the ‘Pitch Perfect’ event organised by corporate members in collaboration with MSDUK. Large organisations engaged with minority suppliers have realised that for their supplier diversity programme to be successful in the UK they will have to develop a multifaceted relationship with minority businesses and focus on:

  • Helping diverse suppliers improve their capability through mentoring and training
  • Participating in diverse supplier organisation events. (Meet the buyer/Supplier, Networking round tables)
  • Enable one to one introductions to increase supplier development & engagement

MSDUK is in the process of developing a Supplier Diversity Benchmarking Tool, to be launched at the MSDUK 2016 Conference, which will enable organisations to asses he effectiveness of their supplier diversity programme and measure ROI. This online tool, developed in partnership with Accenture and CVM Solutions, will be the first ever benchmarking tool to asses supplier diversity effectiveness and will also rank individual programmes with best in class and provide support in form of consultancy, for programme improvement.