Supplier diversity is one of the leading issues driving Diversity, Equity, and Inclusion (DEI) efforts. From scaling internal DEI initiatives to procuring strategic partners in surrounding communities, building inclusive supply chains empowers organizations with a multi-faceted approach to equity. Yet, DEI conversations too often center around human resources, limited to areas like pay gaps, promotions, and governance. According to the HR Research Institute, over half of DEI responsibilities fall under human resources departments, with only 12 percent of organizations maintaining independent DEI departments. By focusing solely on internal human management, organizations forego the widescale impact external DEI efforts like diversifying supply chains can have.
While supplier diversity is often associated with the private sector, it also presents a massive opportunity for the public sector. With the Biden Administration pushing equity considerations to the forefront of federal, state, and local projects, diverse procurement pipelines are crucial to the success of public agencies. Despite the increase of governments prioritizing DEI, Minority and Women-Owned Business Enterprises (MWBEs) remain drastically underrepresented in contracting, especially at a local level. With the recent influx of federal funding like the Infrastructure Investment and Jobs Act (IIJA) and CHIPS Act, organizations can make diverse supply chains the new normal. Increasing MWBE representation in public sector contracts will make supply chains more resilient and innovative, create much-needed jobs, and generate greater local economic outputs.
Before the Bid
Even before the bid process begins, MWBEs face an uphill battle. Beyond the burdensome MWBE certification process, local, state, and federal entities don’t often accept reciprocal certifications. As a result, many MWBEs miss out on opportunities for which they’re fully qualified. Some municipalities have created intentional solutions to combat this inequity. For instance, in 2022, Chicago Transit Authority (CTA) and Southeastern Pennsylvania Transportation Authority (SEPTA) entered a memorandum of understanding to recognize each other’s certified Small Business Enterprises, demonstrating a model for MWBE reciprocity at the local level.
Once certified, MWBEs face a new set of challenges. Governments often share Requests for Proposals (RFPs) on pay-to-play vendor sites or bid aggregators, which can be cost-prohibitive and exclude vendors working with limited capital. Ensuring that RFP information is publicly available for free and partnering with organizations that coalesce target audiences – such as Black and Latinx Chambers of Commerce – can increase awareness and accessibility for public sector contracts.
Small businesses and younger MWBEs that are technically qualified for or aware of RFPs can still lack the capacity or institutional knowledge to submit compelling bids. Public agencies are uniquely equipped with the expertise to support MWBEs with certification, finances, and bid response development. In fiscal year 2021, the Minority Business Development Authority (MBDA) helped MWBEs secure $3.5B in contracts and financing. In July 2022, President Biden announced the MBDA would award $3M to 26 of its Business Centers to hire federal contract specialists to provide technical assistance, facilitate access to capital, and connect underserved businesses with government acquisition offices and prime contractors. If successful, this investment could significantly boost MWBE procurement and associated contract values.
Public-private partnerships can also facilitate the RFP process. The Department of Transportation and the Small Business Administration started a program to encourage small business investment companies (SBICs) to direct capital to small, disadvantaged businesses (SDBs) focused on IIJA contracts. In its first year, the SBIC program led to $7.1B in financing for over 1,000 SDBs.
Expanding the reach of these types of programs within local communities can exponentially increase the number of small and MWBE businesses that will benefit from public contracts. By increasing MWBE contracting, local leaders can ensure businesses remain viable, while also reducing the racial wealth gap. The 2019 Survey of Consumer Finances found that closing business ownership gaps between Black and white households and Latinx and white households can decrease the gap in average net worth by 22 percent and 17 percent, respectively.
Awarding the Contract
Government contracts that go through a competitive bidding process are disproportionately awarded to larger, more established firms, particularly those of higher value. In 2022, the average New York City contract value to non-MWBE-certified firms was $5M, compared to $679K for MWBEs. But MWBEs are not homogenous, and this disparity becomes more acute for specific cross-sections. The average value of a contract registered to Asian-American women-owned MWBEs was $373K and only $137K for Latina-owned MWBEs, compared to $982K for white women-owned MWBEs. Setting tailored goals for MWBE subgroups can drive strategic partnerships with community organizations trusted by and best equipped to support the most underrepresented demographics.
Making noncompetitive awards available for MWBEs with increased thresholds (the maximum dollar value allowed for the contract) can also facilitate MWBE contracting. Representing a broader trend, in 2022, the New York City Capital Reform Task Force found that MWBEs have fewer opportunities to bid on city contracts above small purchase thresholds.
When MWBEs are awarded contracts, they’re commonly retroactive, meaning they aren’t registered with the city until after the contract begins. This can delay payment and financially stress small businesses with limited working capital. Developing more robust and standardized electronic filing and tracking systems can make MWBE participation in government contracts more efficient and sustainable.
Measuring Progress
Progress oftentimes isn’t linear. As the public sector begins to diversify its pipelines of suppliers, plans to measure success must be well-thought-out and intentional. A single metric portraying an increase in MWBE partnerships doesn’t tell the full story.
In 2005, when New York relaunched its MWBE program, it did not set goals for Asian MWBEs, claiming they were represented across procurement categories. An external analysis uncovered this was an inaccurate representation of data due to flaws in certification, causing the city to set new goals in 2015, including for Asian MWBEs. Equity requires consistent monitoring and data collection, and it won’t be achieved with complacency. Managing performance and conducting regular procurement disparity studies like those in New York and Chicago can help keep governments accountable for their goals.
Public leaders must implement thoughtful MWBE engagement strategies and support mechanisms with hyperlocal data and analytics as their North Star. Sheltered Market programs, which reserve contracts exclusively for MWBEs in areas where they have historically been excluded, provide an example of how to effectively operationalize data (e.g., Illinois’ IT industry).
The public sector has a historic opportunity to set the future standard for supplier diversity. Procurement provides a pathway for increasing equity quickly, systemically, and unilaterally.
Prachi Mehrotra is a core member of Ichor’s DEI Practice. She works out of the New York office on the Research Team.