The Business Case for Tier 2 Diversity Spend
Why counting the diverse businesses your Tier 1 suppliers hire is worth the effort, and where the next increment of diverse spend actually comes from.
Hetal MehtaFounder & CEOPublished
Tracking Tier 2 diversity spend is worth the effort because it is the only way to count — and influence — the diverse businesses your supply chain reaches beyond the ones you contract with directly. You can only award a contract to a Tier 1 supplier, so every diverse business further down the chain is reachable only through the Tier 1 partners you already pay. A program that measures Tier 1 alone reports a fraction of the diverse economic activity it creates, and it gives up the cheapest lever it has to grow that number: asking an existing Tier 1 supplier to subcontract differently, rather than re-bidding the contract.
The definitions below are the short version. Our guide to Tier 1 vs Tier 2 supplier diversity spend sets out the full comparison — what counts in each tier, the tracking tools each one needs, and the reporting each one demands.
Tier 1 supplier diversity spend is a measure of the value of goods and services that an organization procures from minority-owned, women-owned, disabled veteran-owned, lesbian, gay, bisexual, and transgender (LGBT)-owned suppliers.
This includes any tangible goods or intangible services provided by an organization’s prime suppliers as well as prime contractors who hire from diverse suppliers. It does not include subcontractor spending or purchases made through third parties.
Tier 2 supplier diversity spend refers to the value of goods and services that an organization procures through its Tier 1 suppliers with minority-owned, women-owned, disabled veteran-owned, lesbian, gay, bisexual, and transgender (LGBT)-owned suppliers.
Some organizations also choose to track Tier 3 diversity spend to better understand the diversity spend deeper within their supply chain. This kind of supplier spend tracking is becoming a more important part of corporate social responsibility practices as businesses realize how critical it is to support local economies and communities in which they operate by ensuring that some portion of their business goes to minority- and women-owned businesses.
Diverse organizations are more profitable and do more good for the world.
Studies have shown that companies with diverse leadership teams perform better on a variety of metrics, including profitability, customer satisfaction, employee retention rate, and return on investment (ROI).
For example:
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A study by McKinsey found that gender-diverse companies were 15% more likely to outperform industry peers on profitability.
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According to a report from Credit Suisse Research Institute LLC’s Gender Diversity Index (GDI), companies with a higher percentage of female executives in their leadership teams had an average market cap that was $2 million higher than their male-dominated counterparts.
How much Diversity Spend is too much?
As a general rule of thumb, Tier 1 suppliers should be selected based on the quality of their goods and services. They should also have an excellent track record in delivering high-quality products and services to customers.
A business can only choose its Tier 1 suppliers. The Tier 1 suppliers actually control the Tier 2 suppliers. Tier 2 suppliers manage the Tier 3 suppliers. Does it mean the business has no control over the Tier 2 and Tier 3 suppliers? It’s true, however, Tier 2 suppliers are responsible for delivering quality goods to Tier 1 suppliers and Tier 1 suppliers are responsible to provide the agreed quality of goods and services to the business.
As a matter of fact, companies can get more out of their Tier 1 supplier diversity relationships by having only a few suppliers that understand the value of this concept and are willing to work with them on it.
The most important thing you should know about supplier diversity spend is:
Owning your data will help you make better decisions about who to work with and what kind of relationship they have with one another.
Conclusion
The case for Tier 2 is the case for measuring what your program already causes but cannot yet see. Supplier diversity and inclusion software is what turns a Tier 1 supplier’s self-reported subcontracting into a number you can put in an annual report — and those existing Tier 1 relationships, not a new bid cycle, are where the next increment of diverse spend comes from.