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The Economic Basis for Greater Diversity in the Legal Profession

Article

The Mid-Market Report

February 28, 2018

Corporate Clients and Supplier Diversity

Supplier diversity is a proactive business program that encourages the use of suppliers that are minority owned, women owned, veteran owned, LGBT owned, service disabled veteran owned, and other historically underutilized business owners. Supplier diversity is also a means to provide diverse suppliers with equal access to commercial sourcing and purchasing opportunities. Supplier diversity promotes supplier participation that reflects the diversity of a company’s customer base and the diverse business community. To qualify as diverse, suppliers generally must show at least 51 percent ownership and control by a diverse party.

Historically, supplier diversity was viewed as part of corporate social responsibility. Supplier diversity began in the late 1960s and early 1970s in the United States in conjunction with the Civil Rights Movement. Through executive orders and federal legislation, minority-owned firms were provided opportunities to bid on government projects and those of major corporations supplying the government. Until recently, supplier diversity was largely viewed as a feel-good extracurricular activity.

The effects of globalization and the increase in the minority population and purchasing power have led corporations to evaluate their diversity track records in their purchasing decisions. As a result of rapidly changing demographics, today’s purchasers are markedly different from those of the 20th century. Given current population growth rates, it is estimated that the U.S. population will become “majority minority” in 2044. Based on economic forecasts, by 2045, minority purchasing power is projected to reach $4.3 trillion.

As companies continue seeking to reach increasingly diverse consumer bases, the move beyond “corporate social responsibility” drivers comes down to the simple fact that it makes good business sense to expand corporate growth through supplier diversity, given that Certified Minority and Women Owned Business Enterprises (MWBE) are increasing at a rate six times faster that of non-MWBE companies.

Modern global brands are now utilizing supplier diversity as a strategic sourcing tool to improve business efficiency, obtain more competitive pricing for goods produced, support sales, and gain access to new cultural markets. Companies that invested in supplier diversity saw improved quality and were often able to obtain other benefits, such as increased market share and access to new revenue streams. In a recent Harvard Business Review survey of 1,700 companies across eight countries, companies from different industries and sizes were evaluated for diversity in management positions. The research showed that companies with above average total diversity on average had 19 percent higher innovation revenues and 9 percent higher EBIT.

Corporate Clients’ Requirements for Outside Law Firm Diversity

Until recently, corporate legal departments were hesitant to put specific metrics on diversity expectations, despite the fact that they have already been using metrics to track the business aspects of law firm performance. However, as customer demands for diversity change the demographic makeup of corporate clients, many corporations feel more pressure to diversify their ranks and are now beginning to require that their outside counsel meet specific diversity metrics. Many corporate legal departments aren’t just asking outside counsel to field diverse groups of attorneys; they are asking those firms to put attorneys in leadership positions as well as provide data to back up their efforts. From the corporate client’s perspective, diverse legal teams provide better legal services. The market research firm Acritas supports this perspective; its research found that mixed-gender legal teams performed better than single-gender teams in multiple categories, with the largest gains in performance found in strength of relationships, consistency, and responsiveness. The increase in quality of legal services is of value to corporate clients. Important examples of corporate clients demanding diverse outside counsel include:

(1) HP Inc. will withhold payment on up to 10 percent of bills from firms that do not meet or exceed HP’s diverse staffing requirements.

(2) Macy’s sets diversity requirements that firms identify in its e-billing system the ethnicity and race, among other criteria, of the attorneys working on its matters.

(3) Microsoft offers 2 percent bonuses on the prior year’s fees to its premier provider firms if they reach quantifiable diversity goals.

(4) Facebook requires outside counsel to field outside legal teams with at least 33 percent women and ethnic minorities.

Another example of corporate clients’ intention to increase the diversification of the legal profession and their outside counsel is “The Mansfield Rule,” which has the support of more than 55 corporate legal departments. This rule was one of the winning ideas from the 2016 Women in Law Hackathon that was hosted by Diversity Lab in collaboration with Bloomberg Law and Stanford Law School. The rule measures whether law firms have affirmatively considered women lawyers and attorneys of color in at least 30 percent of the candidate pool for promotions, senior level hiring, and significant leadership roles in the firm.

Conclusion

Law firms should embrace diversity and strive to increase and retain their minority ranks not just as a form of corporate social responsibility, but also because it makes economic sense. Law firms are in the client service business and the market for legal services is very competitive. Law firms are constantly seeking to provide added value in services to clients. The changing market dynamics brought about by globalization and the growth of the minority population has presented opportunities for law firms that are willing to challenge conventional thinking and take new approaches to delivering legal services. As corporate clients reach more diverse customers and adopt supplier diversity programs, their in-house corporate legal departments have begun to insist that outside legal counsel implement their diversity values. This shift has provided an opportunity for law firms, especially those representing companies with robust supplier diversity programs, to use supplier diversity to complement existing workplace diversity programs. In a highly competitive legal industry, a law firm’s commitment to increasing and retaining a diverse legal force can provide strategic advantages in terms of sourcing, request for proposal competition, and business generation from major corporations, as well as increase the quality of law firms.



Reprinted with permission from the February 28, 2018 issue of The Mid-Market Report. © 2018 ALM Media Properties, LLC.
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