In their efforts to increase their purchases from diverse suppliers, major companies have encountered a problem: They cannot find enough with sufficient scale and capabilities to meet their needs. This article explores a solution that Google and others have adopted: pairing the diverse supplier with an established supplier in a formal mentoring relationship.
For decades, major companies have aspired to help close the wealth gap in the United States by intentionally buying goods and services from diverse suppliers — businesses that are at least 51% owned and operated by individuals or groups of individuals who are part of a traditionally underrepresented or underserved group (e.g., racial or ethnic minorities, women, LGBTQ, veterans, and people with disabilities). But a core challenge has chronically impeded these efforts: purchasing corporations cannot find enough qualified diverse-owned businesses with sufficient scale and capabilities needed to meet their requirements. Without adequate scale and capabilities, the diverse suppliers cannot be awarded new business, and without being awarded new business, they cannot gain scale or learn new capabilities.
Some major purchasers have tried to address these issues by pairing diverse businesses with larger, more established suppliers. But after decades of these alliances, diverse suppliers are still mostly subscale, and major purchasers still struggle to find diverse suppliers with sufficient capacity and capabilities to meet their needs. An innovative solution that holds great promise is a growth-focused alliance. Sponsored by the purchasing company, it is intentionally structured to provide the participating diverse supplier with measurable opportunities to grow capacity, gain capabilities, and take on roles in senior management — which can then be leveraged to access larger, broader opportunities in the future.
One of the pioneers of this approach is Google, whose efforts have yielded positive results for participating diverse suppliers. Here are four lessons from its experiences and those of others.
Ensure the diverse-owned business has a meaningful role in the alliance.
Together, the purchasing company, the established supplier, and the diverse supplier should assess the diverse supplier’s role to ensure two things:
- Its scope of work is larger than the size of projects it typically handles in order to create an opportunity for it to expand its capacity.
- It is getting experience with new capabilities that will help to grow its business (such as entering adjacent markets or taking on a new part of the value chain).
The diverse supplier should also participate in senior management tasks (e.g., setting strategy or allocating budgets) and decision-making related to personnel or business development. Without this, the diverse supplier may be relegated to a position that looks more like a subcontractor than co-owner, which won’t have the same effect on its growth or ability to win business on its own.
Set clear expectations for the mentorship.
If mentorship relationships exist within traditional alliances at all, they are almost always informal. In a growth-focused alliance, they should be formal: Their objectives should be codified in an agreement between two suppliers and measured and tracked regularly.
For example, the mentorship agreement might require the mentor supplier to spend five hours training the diverse supplier’s employees to help it acquire a particular capability. The agreement might also call for the mentor supplier to allow employees of the diverse supplier to first observe the mentor’s employees executing a part of the work requiring that capability and then help the diverse supplier’s employees execute the remaining parts of the work.
It’s important for the leaders of the purchasing company’s supplier diversity program to hold the mentor suppliers accountable for carrying out the agreement. To do this, Google seeks to engage in a series of discussions with the suppliers to memorialize the mentorship objectives in writing. To hold both suppliers accountable, Google’s supplier diversity team regularly checks in to ensure each supplier is fulfilling the mentorship objectives.
Don’t insist that the diverse supplier has a majority stake right away.
Many companies have historically engaged with alliances only if the diverse supplier’s ownership stake was above 51% from the outset. They should be more flexible: Given the potential to grow and evolve the diverse supplier’s role over time, the purchasing company should be willing to engage alliances that are initially less than 51% owned by the diverse supplier.
Structure the alliance as a long-term relationship.
A growth-focused approach should not just focus on the present purchasing deal; it should also anticipate subsequent deals that should become larger over time. To that end, the two should structure their alliance (perhaps by making it a legal joint venture) to cover opportunities beyond the immediate project and include a contractual mechanism for the diverse supplier to buy out the partnering supplier’s share.
For example, a diverse-owned general contractor in Michigan that served the automotive industry owned 51% of an alliance with another general contractor. Through the alliance, the diverse supplier expanded its work to universities, utility companies, and refineries and vastly increased its revenues. Twenty years after the alliance was formed, the diverse supplier bought out its partner’s interest. In cases like these, the purchaser’s supplier diversity program should ensure that its relationship with the diverse supplier doesn’t end with the alliance.
Supplier diversity programs are meant to help create a more equitable economy. By sponsoring a growth-focused alliance between a diverse business and an established supplier and playing an active role in ensuring its success large companies can accelerate their progress in achieving that goal.
The authors acknowledge the contributions of Tom Rapp, a Boston Consulting Group (BCG) managing director and partner; Justin Dean, a BCG managing director and senior partner; Frank Palmer, a BCG partner; Abiola Eisape, a supplier diversity program & transformation lead at Google; Shirley Cao, a supplier diversity program manager at Google; Michelle Geris, a supplier diversity partnership lead at Google; and Steve Ford, regional director, construction and delivery, at Google.