Organizations with diverse supplier programs do all they can to ensure that participating firms are in fact women- or minority-owned, but sometimes firms with others running the show behind the scenes can fool them.
Deborah Stallings, leader of a women-owned business enterprise, or WBE, certified by the U.S. Small Business Administration, has attended the agency’s networking events and heard stories from legitimate diverse suppliers about fraudulent WBE firms getting contracts over them.
“It’s unfair because the playing field isn’t level — it’s unethical essentially,” said Stallings, president and CEO at HR Anew, an HR management and consulting services firm in Columbia, Md. “If you are truly a business owned by a woman, you might have a husband giving input and influencing choices, but I think everyone is looking to have fairness in the process of being able to compete for business opportunities.”
Lane Kelman, a partner in the construction group for law firm Cohen Seglias Pallas Greenhall & Furman PC in Philadelphia, said some of his clients have had their WBE or MBE status challenged. He said most of those firms unintentionally failed to comply with certification rules, but sometimes firms are trying to pull a fast one.
“The way I approach it initially is, does it pass the smell test?” Kelman said. “When a firm is intentionally avoiding the legal requirements, it becomes pretty evident after just a nominal amount of investigation.”
On its face there could be paper compliance under certification, but in practice, behind layers of paper, a WBE or MBE may not be controlled by a woman or minority, he said. Proper due diligence for executives overseeing diverse supplier programs includes determining whether a male or non-minority is signing off on the contracts, going to important meetings, making decisions on behalf of the company and controlling the money on both a daily and long-term basis.
Kelman also advises diversity officers to visit the warehouses of suppliers in their programs.
“A firm holding itself out as a WBE or MBE may just be a de facto supplier and is in reality nothing more than a broker — a pass-through for non-diversecompanies who are actually supplying the needed products and services,” he said.
Cincinnati-based Cintas Corp., a business service organization that uses suppliers to help it provide uniforms, first-aid safety kits, fire protection services, document management and other services to its clients, relies on the certification programs from national organizations such as the Women’s Business Enterprise National Council and National Minority Supplier Development Council (see “The Path to Certification”), said Pamela Brailsford, Cintas’ senior director of supplier diversity and sustainability.
But Brailsford admitted the process may not be foolproof. She said the organization goes to great lengths to ensure it uses suppliers that are minority- or women-owned, but it can be challenging to be certain because of the size of the business. “It can be difficult to take a hard look at every single supplier we currently manage,” she said. “While the number of suppliers that turn out to be non-legitimate are a much smaller pie, they do tend to soil things a bit.”
Cintas has not encountered a situation where the company signed a contract with a diverse supplier and then discovered the firm was illegitimate, but Brailsford said team members do check certifications that don’t look entirely legitimate, and companies are required to validate them. Brailsford also makes onsite visits to suppliers’ facilities, asking questions to make sure they comply with diversity requirements.
“Sometimes we will work with a supplier that has a relationship with a non-diverse company, a strategic alliance, and we ask them to provide a diagram of who does what,” she said. “That way, we can determine whether the woman or the minority company has a pretty good level of responsibility, and not just billing or customer service.”
In fiscal year 2013, 10.5 percent of Cintas’ total dollars spent with suppliers was spent with MBEs or WBEs, totaling about $160 million. For FY2014, the company is projecting a 10 percent increase. Brailsford said it is a priority to set new target goals for supplier diversity initiatives every year.?
Health insurer Aetna Inc. in Hartford, Conn., also relies on the certification programs of the two aforementioned councils as well as the National Gay and Lesbian Chamber of Commerce, U.S. Business Leadership Network, U.S. Department of Veterans Affairs and the Small Business Administration. The company will evaluate certification from other state, county and city agencies on a case-by-case basis, said Rose Hatcher, Aetna’s director of supplier diversity.
Hatcher said she has not come across any certified firms being dishonest, though some were required to provide their certificate, but she has heard about fraudulent suppliers from peers while attending diversity events.
“We talk about how to deal with it,” Hatcher said. “It is standard practice that we ask questions at our quarterly business reviews with suppliers to determine if anything has changed in their ownership status. If it has, they are treated as a non-diverse supplier. If another review by the certifying bodies results in the firm becoming decertified, we stop counting their spend.”
Hatcher said she prefers suppliers receive certifications from one of the national organizations, “as I am not aware of other organizations that have such stringent of a certification process.” Through a combination of screenings, interviews, audits and site visits, these organizations ensure the business is actually owned, operated and managed by the appropriate diverse designation. Certification is valid for one year, and suppliers must recertify every year.
However, to compete for the business of certain state, local and government entities, Aetna will accept certifications from agencies within those locales.
“For example, Aetna may respond to an RFP in the city of Chicago that has diverse subcontracting requirements,” she said. “Since Aetna does not qualify as a diverse supplier, we will commit to a subcontracting plan in order to win the business.”
In 2012, Aetna purchased more than $211 million in goods and services from diverse suppliers, through either first- or second-tier relationships. As of September, Aetna has direct relationships with 238 diverse suppliers.
Cathy Kutch, director of supplier diversity at Kellogg Co. in Battle Creek, Mich., said the company recently reviewed its supplier diversity database to ensure all suppliers designated as diverse have third-party certification on file. The company supports organizations that certify business owners who have disabilities, are lesbian, gay, bisexual or transgender, minorities, service-disabled veterans or women.
“This was a huge undertaking, and to be honest, we lost some of our spend as a result,” Kutch said. “But we now feel confident that all dollars we report both internally and externally are indeed verified.”
Kellogg relies on third-party verification of ownership to avoid being accused of bias, she said. In addition, the company added a caveat to its “second tier” report form that all reported dollars must include the supplier name and certification number to ensure its supply chain is aligned in support of certification.
“Prior to rollout of this new requirement, we worked closely with our procurement center of excellence team to develop an automated system that alerts us 90 days prior to any business’ certificate expiration date,” Kutch said. “This allows us to contact the supplier and request an updated certificate with ample time to allow for renewal. We have put our confidence in the diversity certification system due to the stringent requirements that businesses must meet in order to become certified.”
Kellogg’s new process includes proof of ownership, proof of control such as annual meeting minutes, sales contracts and leases. Further, certifying agencies conduct a site visit to observe the business owner at work and tour the physical surroundings.
In 2012, the company achieved $380 million, or 7 percent, of its combined U.S. and Canadian expenditure with certified diverse suppliers. At deadline Kellogg was on track to meet its goal of increasing it by 3 percent for 2013.
“Our best advice for other supplier diversity professionals is to create and maintain a strong network,” Kutch said. “Don’t hesitate to reach out to others for advice, best practices or supplier referrals. We are all on the supplier diversity journey together, and while some are further ahead than others, it is safe to say that none of us has completed the journey.”
Katie Kuehner-Hebert is a California-based journalist. She can be reached at editor@diversity-executive.