Corporate Social Responsibility Procurement Has Failed
In the plans for the March on Washington for Jobs and Freedom in 1963, Bayard Rustin wrote of “the twin evils of racism and economic deprivation.” This remains true today as Federal Reserve Bank of Atlanta President Raphael Bostic argued recently that “Systemic racism is a yoke that drags on the American economy.” Reducing racism is a public good from which we can all benefit on the bottom line. There is a meaningful role for private actors to play in delivering this public good: procurement.
In the panic of this moment, diversity policy changed from a feel-good conversation about good intentions to a reactive scramble to be seen to be doing something. Large corporations roll out money for projects related to education, justice, and increased opportunities, or they deposit cash with financial institutions serving primarily Black communities. Shocked into recognizing the homogeneity of their workforces, leaders express a newfound interest in outcomes.
All of this ignores the CEO’s greatest power to make the playing field more level for everyone: spending with third-parties. It is a truism that “business spend is a lever that can change the world.” According to Digital Commerce 360, annual U.S. business-to-business sales are $7.4 trillion.
Supplier diversity programs have been an obscure, middling corporate commission in which sourcing from businesses owned by members of historically disadvantaged groups often ends up segregated from mainstream procurement in a box-ticking exercise, consigned to providing inessential goods and services. It is nothing more than “window dressing and marketing fluff.” As McKinsey writes, “Talking purpose without walking it can expose you to claims of hypocrisy — ‘woke washing,’ in the memorable phrase of Unilever CEO Alan Jope.” In practice, corporate social responsibility was nothing more than an ideological diversion from strategy. Too often, supplier diversity quota-filling meant paying an extra couple of percentage points to a diverse managed service provider who then sourced from mainstream companies.
CEOs no longer have the luxury of treating supplier makeup as an administrative after-thought for their procurement departments to manage. The eyes of the world are focused on everything they do. Customers, employees, and governments all want to understand how companies do what they do, including how their supply chains work.
There are specific steps firms can take to ensure they give Black businesses (and small business, generally) fair access to all of their third-party spend:
Reduce Bureaucracy: The primary obstacle, particularly for small businesses, is the administrative burden buyers impose on suppliers, ostensibly as part of a risk management exercise. Vendor management systems require answering convoluted, company-specific questionnaires and supplying documents. IBM, for example, has approximately 70 steps to onboard a vendor with roughly 80% of the steps duplicated across vendors. It is often difficult to find out when buyers are in the market, issuing requests for proposals. Standardize vendor onboarding across firms, develop templates for commonly purchased items, and massively simplify the use experience.
Mentor Small Suppliers: Large buyers and their prime contractors need to develop relationships with smaller businesses so that they can mentor them as sub-contractors and, eventually, as prime contractors. Show them what they need to do to win your business instead of assuming that they should know as others with different networks and backgrounds might.
Implement a Rooney Rule for Sourcing: Just as the NFL requires teams “to interview at least two external minority candidates for head coaching openings, and at least one minority candidate for any coordinator job,” buyers should require that every sourcing project considers at least two businesses led by those from historically disadvantaged backgrounds, either as direct providers or as meaningful sub-contractors with a significant portion of the economics of the transaction.
Disclose Supplier Information: The SEC requires companies with publicly-traded securities to disclose material information so that investors can assess risk and opportunity. CEOs must acknowledge that the makeup of their supply chains is now a permanent risk to corporate viability. They should disclose their targets, their policies, and their performance alongside their financial results.
Of course, there are those who will argue that these suppliers are not chosen because they can’t deliver, that they are too high risk, and that the procurement bureaucracy exists to manage the firm’s risk. The blessing of 2020 has been to demonstrate how weak this argument is. Covid, trade disruptions, and cybersecurity events have shown corporate sourcing was too concentrated, geographically mismanaged, and, generally, brittle. If anything, diversifying the supplier base with local vendors can only strengthen the enterprise.
Corporate America will have to evolve their failed diversity policies into inclusion-driven behavior embedded in the enterprise DNA. Racism is an externality with consequences for everyone. It is a profoundly distortionary drag on economic activity. The biggest argument for eliminating economic racism is not about distribution but rather in terms of efficiency. Corporate procurement is central to unraveling this knot. Fix this and CEOs can have tremendous impact on both their own profits and the wellbeing of society.