Among the outcomes resulting from the protests for racial equality that erupted across the U.S. during the summer of 2020 was that many companies made commitments to boost their supplier diversity efforts. After all, if American society would ever reach a point at which it could narrow the wealth gap between Black and white residents, such work is about more than a focus on diversity hiring. For example, Black-owned businesses and entrepreneurs need a fair shake at those lucrative opportunities to become part of a large company’s supply chain or thrive as a service provider.
The result has been a rush to launch and boost supplier diversity programs, with more than one report suggesting that many companies could increase their “diversity spend” goals another 50 percent by mid-decade. Such goals, naturally, often also include commitments to women-owned businesses.
Unfortunately, it turns out that building a more diverse supply chain is more difficult in practice, and as is the case with the hurdles many people of color face in society at large, the barriers to supplier diversity are often structural.
So, what’s the problem? It turns out that larger companies have their standard and established procedures for entering into contracts with their smaller service providers and vendors, articulated in what is generally called a master service agreement, or MSA. These MSAs can cover just about any function, from the supplies of raw materials and parts, to services such as marketing, consulting and training.
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The drafting of these MSAs often falls to a company’s internal or outside counsel, and if we know anything about attorneys, drafting such agreements is all about precedent and ensuring the agreement protects the client. In other words, a law firm doesn’t want to lose a key client, and a company’s head counsel never wants to enter the corner office because of a poorly-written legal document.
That may sound fair enough, but the terms within these MSAs often create onerous hurdles for smaller businesses. And we’re not just talking about payment terms such as “net 60” or “net 90,” which don’t always work for firms that are operating on thin margins. Terms such as requiring unrealistic amounts of insurance, details over product warranties, intellectual property ownership, and dispute resolution may protect the larger company but can put a supplier at risk.
“The burden on the small business who is forced to walk away from a long-sought relationship is clear,” Fortune senior editor Ellen McGirt wrote in her most recent raceAhead newsletter. For big brands, the risk is “the opportunity cost of unmet diversity goals,” she added.
A recent study from the consulting firm Have Her Back (HHB) should put large brands on high alert as they publicize their supplier diversity efforts. If their MSAs include terms that come across as too punitive, aggressive or unachievable by suppliers, a specific diversity pledge could go unfulfilled and that company will have to answer to their stakeholders.
Among HHB’s findings: 64 percent of small business leaders surveyed said MSAs are drafted with only the needs of big companies in mind. Half of these smaller companies walked away from deals with larger firms because of the terms of these agreements, and 60 percent said they are very comfortable walking away from a potential business relationship if they can’t reach what they believe are fairer and more equitable terms with a large brand.
As HHB concluded, “MSAs are not mitigating risk as intended, and instead, MSAs are putting relationships with small businesses at risk.”
Image credit: Scott Graham via Unsplash
Leon Kaye has written for 3p since 2010 and become executive editor in 2018. His previous work includes writing for the Guardian as well as other online and print publications. In addition, he's worked in sales executive roles within technology and financial research companies, as well as for a public relations firm, for which he consulted with one of the globe’s leading sustainability initiatives. Currently living in Central California, he’s traveled to 70-plus countries and has lived and worked in South Korea, the United Arab Emirates and Uruguay.
Leon’s an alum of Fresno State, the University of Maryland, Baltimore County and the University of Southern California's Marshall Business School. He enjoys traveling abroad as well as exploring California’s Central Coast and the Sierra Nevadas.