October 26, 2016 | Supplier Management Strategy Blogs
Recently, there has been an increased emphasis on supplier diversity programs across the globe, with many firms introducing this initiative across its key spend areas. Supplier diversity is seen as a business strategy that ensures a diverse supplier base for the procurement of goods and/or services, simultaneously resulting in the inclusion of diverse groups in a company’s procurement plans. And, according to recent findings, firms that embrace diversity are more profitable than the ones who don’t.
There is a general misconception in the industry about diversity being a quota-based system introduced for the benefit of selected groups, and that these add no value to the bottom line of a company. However, companies that have already implemented well-planned supplier diversity programs across key spend areas have realized multiple benefits. An effective and well-planned supplier diversity strategy can benefit a firm in a number of ways. Promotion of innovation, driving up the competition by providing multiple channels for the procurement of goods and services and a commitment toward corporate social responsibility are just a few.
One key category where diversity programs have been introduced over the last decade is background screening, primarily by banks and financial institutions. A diverse supplier market in the background screening services industry is highly fragmented. Market share for the top five diverse firmsꟷnamely Infomart, FirstChoice Background Screening, Employee Service Screening, Accurate Background and American Checkedꟷdoes not exceed 18 to 20% in the United States.
How do bigger financial institutions source this category?
Firms enter into annual contracts with one of the bigger vendors (mostly a non-diverse one) with strong capabilities. With diverse vendors, companies typically give a few a trial period (with a simple statement of work). Validation and accuracy checks are carried out by procuring the same services from the main vendor and, only once they are completely satisfied with the performance of the diverse vendor, is a volume carved out (typically less than 15%). Most financial firms split the volumes of their screening business, with a larger share to a top rated non-diverse supplier (such as First Advantage, Altegrity, Sterling, etc.) and a smaller share to a diverse supplier (about 15 to 25%, depending on the performance).
There are challenges that need to be addressed while implementing a supplier diversity program. For example, in the background screening space, a primary challenge is FCRA certification. Diverse boutique firms must have an FCRA certification, which isn’t always the case for small local players. In addition, companies are concerned about scalability and risk management. So, though supplier diversity is beginning to be seen as a strategic tool across some of the spend areas in the industry, caution needs to be exercised during the supplier selection process to ensure a mutually beneficial relationship.