Supplier Diversity Through Mergers and Divestitures
Mergers and acquisitions — and other changes in organizational structure — can be disruptive to supplier diversity programs and environmental, social and governance (ESG) efforts.
Predictions suggest that there will be an uptick in M&As this year, creating a likelihood of even greater impact on such programs.
Creating One Program
Mergers — when two companies are consolidated into a single entity — can be disruptive for everyone involved.
As leadership pieces together organizational units, they must (1) select the best practices and systems from both the acquired and existing organizations, (2) eliminate duplication and (3) align reporting. Conceptually it seems simple to identify the use of diverse suppliers and consolidate spend by supplier and category; however, in practice, it can be a nightmare that involves migrating to a single reporting tool. Often, it reveals differences in the underlying data, missing data feeds and differences in classifications.
The conversion process takes time, patience and persistence. For a supplier diversity professional, it can be tedious work to estimate spend with diverse suppliers as a percentage of sourceable spend (this refers to discretionary spend and excludes costs like taxes, fees and salaries). The initial “back of the envelop calculation” can change dramatically as the reporting systems and supplier records are combined.
Introducing a supplier diversity program that fits across both legacy companies is logical, but not easy. It needs to encompass both organization’s policies, processes and systems to create a shared post-merger vision with combined goals. It can feel like changing the tires on a moving car.
Senior leadership should be prepared for a final state that will not be a straightforward summation. The data consolidation can and often will alter the numbers. This is normal since both heritage organizations used different hierarchies and categorizations and often have different suppliers identified as being diverse.
Leadership support of supplier diversity programs is essential for success. During a consolidation, when everything is in flux, there is comfort and predictability in expanding established relationships with incumbents. These conversations are often at odds with established supplier relationships and preferred pricing agreements. Leadership must require strategies, processes and procedures that require the inclusion of diverse suppliers in future bid opportunities.
Divestitures Can Be Just as Difficult
On the opposite end of the spectrum, shedding portions of a business can also strip off diverse suppliers. Often, diverse suppliers are used more heavily in some lines of business or commodities and not spread equally across an organization.
It could be that the division that is spun off is responsible for a high proportion of the spend with diverse suppliers, thus impacting the company’s remaining supplier diversity program.
In preparing for a spin-off, assess the potential impact on your supplier diversity program; this should become your new baseline. Then, develop realistic strategies for moving forward, realizing that growth can take time. By avoiding surprises, leadership can be positioned to provide the narrative and necessary support.
When Diverse Suppliers Are Acquired
When small or diverse suppliers are acquired, they will need to adjust to their company’s new persona. Their new classification will depend on their size or ownership makeup, in either case, this change should be viewed as a positive. Does the newly acquired company have an obligation to tell its suppliers about its change in diversity designation? Most do not. Instead, they wait until the change is discovered during a data scrub.
This is a missed opportunity. Used properly, it can begin conversations about repositioning your relationship. Your suppliers can use your growth to inspire other minority/women-owned business enterprises (MWBEs), and you can offer to mentor their diverse suppliers and report your Tier-2 spend. Remember: You won contracts because of your ability to deliver superior results, not because you were an MWBE.
Newly minted non-diverse businesses should track their spend with diverse companies and have processes for supporting and doing business with MWBEs. Simply put, they need to create their own supplier diversity programs.
Be Mindful of Impact
Supplier diversity is an essential pillar of ESG. Mergers, divestitures and changes in classification will change this data point. It can be difficult to be prepared, especially with a supplier base containing multiple diverse suppliers across all categories.
A pragmatic approach is to prepare senior leadership for a recalibration that may take time to complete. In mergers, the full impact will not be known until accounting systems are consolidated and suppliers are reconciled. Spin-offs will need to establish a new baseline and growth strategy that includes supplier diversity.
The most important consideration is having the support of senior leadership to position supplier diversity as a strategic initiative. Be transparent, enabling internal and external partners to understand how your organizational change will impact your supplier diversity program. And focus on the basics: You have implemented tracking, adjusted strategy and are excited about the journey.
Mergers, divestitures and spin-offs can be disruptive in the short term. Managed correctly, with the full support of leadership, they can create stronger vibrant supplier diversity programs.
(Photo credit: Getty Images/Cagkansayin)