Media - Industry News

WHITE PAPER ADDRESSES DEVELOPMENT OF MBEs, WOMEN IN TELECOMMUNICATIONS INDUSTRY BY SUE COFFMAN

MBN USA - June 2003

“The times they are a changin’’’ for all disadvantaged business enterprises (DBEs), said Courtland Cox, a consultant to the Joint Center for Political and Economic Studies and the former director of the U.S. Minority Business Development Agency.

Changes in the telecommunications industry, and conclusions and recommendations for DBEs and supplier-diversity managers, have been detailed in a paper commissioned by the Joint Center and the Telecommunications Industry Group.

Though the paper addresses numerous issues related specifically to telecommunications, its overall findings and recommendations are pertinent to DBEs, supplier-diversity programs and corporations across industry lines.

The study was conducted after the Joint Center received a grant from the AT&T Foundation to look at minority business development, Cox explained. “We came up with the idea of looking at particular industries, with a focus on minority firms with $10 million or more [in annual revenues],” he said. “We went to the Telecommunications Industry Group meeting last July and proposed the idea.” A partnership was formed, with TIG providing additional financial support for the study.

Titled “Industry Study on Sustainable Development of Minority, Women, Disabled Veterans Business Enterprises in the Telecommunications Industry,” the study will be released at SUPERCOMM 2003. The research was conducted by The Asaba Group, a Boston-based strategy and management consulting firm specializing in supplier-diversity business issues.

The impetus for the study was the recognition that a significant number of DBEs are failing but that “it was not a supplier issue,” said Victor Edozien, a principal with The Asaba Group. “The data gathered in the study show that it’s a systemic problem [related to] the way all constituencies were involved in the process.”

Issues and challenges

The study focused on gaining insight into a number of issues, such as industry trends in the supply and value chains that affect supplier-diversity initiatives and DBE suppliers; industry-specific challenges regarding the sustainability of DBEs; and best ways to change DBEs’ current mind-set from “What contracts are available?” to “How can I provide value-added solutions?”

The study identified a number of challenges that are applicable both within and outside the telecommunications industry, including the following:

• Slowing growth or a decline in DBE spending by corporations
  
• Limited DBE presence in core value-added activities
  
• Inability to clearly articulate the economic value-added proposition for supplier diversity

The paper’s most important finding was that in order for DBEs to proceed—and succeed—they need a new frame of reference, noted Cox. “The new realities are that there are fewer and fewer suppliers to businesses. They’re no longer unbundled, [and we’re in] a global marketplace” with a growing migration of services—as well as manufacturing—offshore, thus increasing the competition.

Declining revenues for DBEs

The decline in DBE suppliers’ revenues in the telecom industry has been significant. Annual telecom spending with DBEs had previously been touted by TIG as a success, and SUPERCOMM’s corporate signatories that have pledged to increase their DBE spending have reported steady increases.

However, the data gleaned during the study indicate that this increase is due more to membership growth among the signatories than to increased DBE spending by any given corporation. Thus, the study concluded, the SUPERCOMM result “creates a distorted view of historical trends and the current situation.”

Telecom spending with DBEs has decreased since 2000. There has also been a 30 percent reduction in the number of DBE suppliers, and DBE bankruptcies have resulted in close to a $1 billion loss in DBE revenues in the industry.

A factor in the decline of real increases in telecom corporate spending with DBEs is that corporations have been focusing on purchases to meet profit targets. “This pressure,” the study found, “led to the emergence of strategic sourcing initiatives that reduce cost in the procurement process.”

This approach has led to a consolidation of spending with fewer vendors, coupled with an increase in bundling. These practices have begun to have a significant effect on supplier-diversity programs and their DBE vendors.

Size and scale challenges

The study concluded that most DBEs “do not have the scale and/or scope to either compete effectively with offshore competitors or take on large outsourced projects.” Such a difficult environment translates into a shift of operational modes: it has become one of survival in an environment where the relevant opportunity space continues to shrink, noted Cox.

“Everybody’s not going to be in the game,” he emphasized. “At tier one, there will be a limited number of DBEs per industry. The opportunities at tier two and three will be greater.”

“Creating sustainable minority business supposedly involves giving them access to where they can win business,” noted Edozien. “These opportunities are mostly on the low end, but that doesn’t build sustainable businesses. Size and skill will eventually be victorious.”

The value proposition

Given the realities of the telecom industry, the study concluded, supplier-diversity initiatives will never again focus solely on “creating diversity in the supply chain based on non-economic business reasons . . . . every corporate manager today wants to see how an additional dollar spent on supplier diversity trickles down to the bottom line, either by adding value (revenue growth) or by eliminating costs.”

The implication for supplier-diversity professionals, not only in the telecom industry but across the board, is that the business case must be “clearly and succinctly articulated and, where possible, quantified in an economic model,” Cox said.

DBEs must understand that they have to add value to the firms they supply; they can’t be on the periphery, added Cox. They must address questions such as “Where can I create value in the supply chain?” and “Where are the high-growth opportunities?”

They also have to “think strategically and get embedded in the industry and sector,” he said. “They need to get beyond procurement professionals to decision makers in order to develop an understanding of the solutions they can bring.”

“Small companies need access to R and D,” added Edozien. For example, he noted that one supplier-diversity manager was attempting to recruit IT services from DBEs without realizing that the company was outsourcing its entire IT business to one large majority firm.

Today’s Realities

Anecdotal evidence gathered during the study indicates that DBEs that are suppliers to telecom companies are concentrated in commodity categories “in which they have limited value creation opportunities and weak strategic control in sustaining the value they create.”

For example, in studying 71 telecom suppliers with annual revenues exceeding $10 million, The

Asaba Group discovered that 81 percent could be placed in the commodity or service category, with low technology or innovation requirements. Firms certified by the National Minority Supplier Development Council and the Women’s Business Enterprise National Council had a strikingly similar pattern, with 85 percent in the low technology or innovation commodity categories.

In such an atmosphere, the study found, corporations set goals for DBE spending and met them by “sourcing lower-risk commodities to diverse suppliers. These commodity categories typically required low entry barriers, and product and service specifications were uniform and independent of the type of vendor. As a result, vendors were interchangeable, with price being the determining factor for vendor selection.”

Supplier-diversity programs

The model for corporate supplier-diversity programs has been a focus on outreach efforts. According to the study, 78 percent of telecom supplier-diversity spending with DBEs (including 31 percent for trade shows and matchmaking events) went to external activities such as advertisements and sponsorships. Though these may provide positive public relations for corporations, they do not reap significant rewards for DBE development within organizations.

One program manager surveyed made this telling comment about trade shows: “The [DBEs] we end up doing business with are not the ones we meet at trade shows. We are significantly falling back on our spend allocated to this activity. The reason we will continue attending such gatherings is simply because it would mean too much negative PR not to.”

Given this reality, the study concluded, “ways must be found today to limit corporate exposure to negative PR. This would allow supplier diversity efforts to be directed where they are needed the most.”

Program managers included in the study agreed that time and money would be better spent in supplier development and the development of internal growth opportunities.

Interviews with these managers also revealed their concern about “the lack of collaboration among the various corporate supplier-diversity programs.”

For example, the study’s analysis of diversity suppliers showed that only one of 71 suppliers was a common supplier to five corporations in the sample, and 64 had relationships with just one corporation.

This reality underscores the importance of TIG’s objective of sharing best practices and suppliers among members. “Such unity of corporate diversity efforts would have identified and consolidated spending with only two or three best-in-class [DBEs] in each commodity category,” said Edozien. “This is how large, competitive and sustainable diversity suppliers can come into existence and be sustainable for the long run.”

Another issue identified in the study was that the majority spent their time on “activities that have little to do with development [of DBEs that] have already managed to make the first step through the door.” In fact, they spent less than 20 percent of their time identifying internal opportunities for these suppliers.

“There has to be a different role” for these managers, said Edozien. They need to “see where the industry is going,” identify needs and then develop profiles of DBEs that can address these needs. “It takes a lot of resources to do this.”

These are some of the questions that supplier-diversity managers must ask themselves, noted Edozien: How do I use supplier diversity to drive competitive advantage? How can I use supplier diversity as a marketing tool? How many people are on my leadership team? How are resources deployed?

To create “competitively viable suppliers,” the study recommended that “supplier diversity practitioners need to evolve from the current mindset and create a new paradigm” that requires the following:

• A shift “from creating minority jobs to creating business capacity”
  
• A shift “from creating access to bids to creating a strong competitive set of suppliers”
  
• A shift “from supplier diversity as ‘corporate altruism’ to ‘how can it enhance and enable competitive differentiations’”

Recommendations

The study identified five key constituencies that will be critical in achieving success. The industry “must focus on a pentagon” of players: DBE suppliers, the Telecommunications Industry Group, corporations and supplier-diversity program managers, advocacy groups such as the NAACP and Rainbow/Push, and advocacy organizations like WBENC and the NMSDC. “In each of them the roles have to change,” Edozien emphasized.

The study recommended that supplier-diversity managers focus more on the development of DBEs—creating information for them so they can bring solutions, making sure opportunities are presented to them, and helping them with strategic thinking and management, Edozien noted.

“This is more important than the outreach process.”

Progress will require more cooperation among the DBE community, the advocacy community, and the corporate and financial communities, he added. “All of them need to think about these issues to promote growth.

“We also thought it was important that DBEs have an understanding of where an industry is going in five to seven years,” said Edozien.

Because of profound demographic changes, “we need strong businesses in minority communities,” he stressed. With the aging of the white population and the increase in business growth among women and minorities, “we need to begin to develop strong businesses in order to have a strong economic infrastructure in the country.”