NEW REPORT: The State of CLM and AI-Powered Contract Intelligence

Talk, Walk, Commit: The Critical Role Your Contracts Play in Supplier Diversity

By Bernadette Bulacan

It's been a year since national protests for racial justice prompted corporations to promise action on numerous fronts, from how they hire to how they source goods and services. One concrete goal several high-profile companies established was to increase spend with diverse suppliers—typically defined as businesses at least 51% owned and operated by an individual or group that is part of a traditionally underrepresented or underserved population.

Microsoft, for example, committed to double its number of Black-owned suppliers—one of several aggressive supplier diversity goals set last spring.

Sharing these goals publicly is an important and necessary first step; however, companies must also succeed in carrying them out across their organizations. Large companies may be working with thousands of suppliers—all of whom in turn have their own suppliers. Clearly, fulfilling supplier diversity initiatives across such complex business landscapes requires more than just pronouncements—it requires organization-wide visibility into whom a company is doing business with and on what terms, and mechanisms to ensure those terms are being met.

As such, contracts, and digital technology to scale contract practices and obligation management across large organizations, are critical tools in supplier diversity initiatives. Call it the "talk, walk, commit" approach to supplier diversity:

Step 1 – The call to action (talk): The first step in a company's move to increase supplier diversity is a promise to do better—a public pledge empowering the public to hold the company accountable to see the intent through to tangible results. For instance, a recent McKinsey study found that 75% of Gen Z consumers will boycott companies that discriminate against race and sexuality across advertisement campaigns; accordingly, companies must articulate their stance on social justice to attract an ever-growing base of socially responsive consumers. Public pledges will also spur action among rival companies to stay competitive in the marketplace—where brand reputation around environmental, social, and governance (ESG) practices carries serious implications for both the top and bottom line.

Step 2 – Establish policies (walk): Once these pledges are made, companies must set policies to guide execution and provide goals to define what success will look like. These can involve not only increasing spend to diverse suppliers, but, more ambitiously, establishing requirements for a company's suppliers to enhance diversity in their supply chains. For example, as of 2019, Target spent $1.4 billion on goods and services provided by first-tier diverse suppliers, and influenced its first-tier suppliers to increase their spend on second-tier diverse suppliers.

Step 3 – Operationalize with contracts (commit): With policies set, companies must then operationalize them in a consistent, repeatable, and auditable fashion across the organization to ensure they deliver on their promises.

The first step is to audit your contract repository to identify which contracts currently contain supplier diversity clauses; this audit is far easier when your contracts are digitized. The second is to make sure up-to-date supplier diversity clauses are included in all appropriate contracts going forward by incorporating them into your clause library.

For instance, a clause might outline the certification obligations of a prime supplier:

"Supplier Diversity. At the request of Buyer, Seller shall provide certifications qualifying the Seller as a Diverse Supplier, for purposes of Tier I Supplier Diversity reporting, and information regarding their involvement with Diverse Suppliers, for purposes of Tier II Supplier Diversity reporting."

If a company has a centralized and dynamic contract template and clause library—considered a best practice for driving standardization and compliance—these clauses can quickly be distributed across the organization, meaning intent can quickly translate into action.

Yet the work doesn't stop there. Once contracts are in place, a company must ensure these provisions are being carried out in the real world. After all, if contract commitments aren't upheld, they might as well not exist at all! It's just more "talk" and no "commit."

This is especially important for large organizations where public scrutiny is high and operations are sprawling. These companies must take a systematic approach to tracking supplier diversity obligations and identify areas where automation can help.

An emerging approach to post-execution obligation management is to "connect" contract language to operational systems that monitor performance—be they delivery systems, point-of-sale systems, or, in this case, compliance documentation systems.

For example, imagine that a contract requires a supplier to subcontract a certain percentage of work to disadvantaged business enterprises (DBEs). When the contract is executed, it can be stored in a cloud-based contract management system with a collaboration portal. The supplier can, on a periodic basis, upload its documentation or certifications to the portal for quick and easy verification of compliance. Alternatively, if documentation is not filed, the contract system can detect the noncompliance and alert managers for action.

It's imperative that businesses embrace this "talk, walk, commit" approach to supplier diversity. The public has applauded those in the business world who have stepped up to address historical injustices; but, with equal passion, the public's patience will wane for those organizations that provide excuses about why improvements can't be made. Properly managed, contracts can be a powerful tool in this important work. Conversely, without a system to track supplier diversity initiatives, all the talk about diversity and equity will remain just that.

To learn more about how companies create more diverse, equitable supply chains, download our eBook: 5 Ways to Increase Supplier Diversity.