Senior Vice President at Insight Sourcing Group leading the consulting practice for supplier diversity and responsible sourcing.
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according to an EY report prepared for the American Investment Council, there were approximately 16,000 US private equity backed companies and 4,500 PE companies in 2020. In 2020, the sector directly employed 11.7 million workers who earned $900 billion in wages and benefits and generated $1.4 trillion of GDP. Suppliers to the US private equity sector employed an additional 7.5 million workers, earning $500 billion in wages and benefits and generating $900 billion in GDP.
One of my firm’s clients, private equity firm Apollo Global Management, recently announced that they are launching a supplier diversity program aimed at increasing direct and indirect spending with diverse companies in their portfolio, aiming to grow by 2024. more than $1 billion in annual spending.
In my 25-year career in procurement and supplier diversity, I had never heard of a PE company making such a public commitment. I started thinking about what these and similar commitments could mean for various companies and the PE industry.
As the PE industry continues to grow and more PE companies become aware of the massive impact that supplier diversity and inclusive procurement programs can have on overall ESG (environmental, social, governance) efforts, both the economic and social benefits could be enormous. In my view, here are some of the main benefits:
Encourage more PE companies to follow
A key objective of PE firms is to increase the value of portfolio assets. As a former Chief Procurement Officer, I have seen firsthand how supplier diversity led to increased profitability. Executing a sourcing and procurement strategy that included inclusive sourcing practices helped to increase supply chain competitiveness, generate cost savings, unlock innovation and strengthen brand loyalty. These are all qualities that increase business value while pursuing ESG goals. I am hopeful that more PE companies will join this important movement.
Growth opportunity for various companies
Billions of dollars in spending under the control and influence of PE companies represent potential growth opportunities for various companies. However, this is only the beginning of the story. PE firms typically provide their portfolio companies with varying degrees of operational support and infrastructure to accelerate growth. To some extent, these support services could be extended to various suppliers that become part of the ecosystem. This could ultimately prove to be a source of attractive portfolio investments.
Portfolio companies implementing supplier diversity early
News headlines usually emphasize the big, mega PE deals. While a large number of large PE companies acquired may have supplier diversity programs, I have found that most PE-backed companies are relatively early in their growth trajectory and do not. However, I have learned that instilling this inclusive mindset and focus earlier can lead to a greater chance of building a more diverse and inclusive company culture.
Market leverage to accelerate the growth of supplier diversity
I consider the level two diversity spend reporting to be a “multiplier” of supplier diversity. Tier one diversity spending is the measure of spending between buyer and various suppliers. While it’s the most direct way to make an immediate impact on an organization’s spending, spreading the “gospel of supplier diversity” throughout the supply chain doesn’t help.
On the other hand, the tier two diversity spending is the measure of spending between a company’s main suppliers (tier one) and various suppliers downstream. Many leading practice firms contractually require Tier 2 reporting from their major key suppliers. It’s not just about measuring spending, but more importantly, it’s about developing diverse next-generation suppliers that can serve as first-rate suppliers in the future. Just as PE companies control and influence billions in spending, they also have significant influence over hundreds of major suppliers representing some of the largest companies in the world. PE firms implementing supplier diversity efforts, including robust second-tier programs, could really have a multiplier effect in making supplier diversity programs ubiquitous across the corporate landscape.
Visibility on attractive spending areas/industries with a lack of diverse business participation
One of the primary goals of supplier diversity programs is to increase spending across multiple suppliers. In my experience, the first step is to measure diversity at the expense category level (cloud services, facilities, IT, professional services, human resources, etc.). This allows a company to determine where they are doing well or less well based on the availability of various suppliers within targeted categories. However, this exercise can also reveal potential growth opportunities for several low-supply suppliers. This could be a proprietary deal flow for a PE company.
Best Practices
Over the years, I have found that companies that are leaders in supplier diversity demonstrate competence in several dimensions. Here are some leading practices in the top five dimensions:
1. Executive sponsorship and governance: Support from the top of the organization is an important ingredient for success. Cross-functional responsibility is typically driven from the C level, with supplier diversity program performance linked to executive pay.
2. Change management and awareness: Establish champions in all business units or functions and develop communication channels to drive ongoing awareness and engagement.
3. Diversity Data Management and Reporting: Leading companies often use automated tools to facilitate data collection, tier one, and tier two impact reporting.
4. Diversity Stats and Goals: Define KPIs that measure both the process (correct behavior) and the results (correct outcomes). Also set growth targets based on category targets and supply availability.
5. Supplier Diversity Policies and Procedures: Clearly state the accepted diversity designations and expectations that each procurement event includes xx% diverse supplier participation.
I commend the PE firms making bold public commitments. I believe that more commitments to supplier diversity will not only have a positive impact on the PE industry, but also improve the lot of many diverse companies in the coming decades. More such pledges are likely to increase the industry’s impact on GDP.
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