Minority Business Development: Economic Value … Business Development: Economic Value And Benefits...

The Telecommunications Industry

Minority Business Development:Economic Value And Benefits

MED Week 2001

This Report Was Written And Produced For:

By:By:By:By:

The Asaba Group, Inc.Lakeview Office Park www.asabagroup.com214 North Main Street, Suite 207 Tel. 508.655.8100Natick, MA 01760 Fax. 508.655.1955

U.S. Department of Commerce

Minority Business Development Agency

Ronald N. Langston

National Director

This analysis on the economic value and benefits of the telecom industry was prepared by The Asaba Group and is the Group’s interpretation of the economic trends of the telecom industry. The study is not a Commerce Department report, but was developed for the sole purpose of discussion amongst industry experts. The conclusion and analysis of the report do not necessarily reflect the views of the U.S. government.

Express Gratitude And Acknowledgement ForContributions To The Project:

Minority BusinessDevelopment AgencyRonald N. Langston

AT&TWinston SmithVicky Liston

TellabsSteve McCartyKimberly Johnson

Lucent TechnologiesHeather Herndon-Wright

SBCJoan Kerr

FujitsuJavier Fernandez

Verizon CommunicationsJeannie DiefenderferJulian Birdsong

ADCKathleen Riopelle

HCI TchnologiesR. Martin

Harvard TechnologiesManny Chavez

MotorolaBud BowenNannette Kelley

Advanced Fibre CommunicationsIrene Fay

Cisco SystemsDenise Coley

GraybarKaren Buckhart

Cornet TechnologiesSant Gupta

Communications Production, Inc.Keith Doucette

MCI Communications Vern DavisLisa Smith

Ericsson, Inc. Vicky Bunch

Lexicom TelecommunicationsAlexis Scott

AlcatelTony Shumaker

Content

Project Overview/Introduction 3-6

Industry Trends 7-18

Demographic Realities 19-27

Minority Energy Markets 28-38

Minority Business Value Proposition 39-44

State of Minority Sourcing 45-53

4

Project Charter

Business case should place emphasis on the following:

� Focus on business imperatives and free market forces

� Leverage minority demographic shifts and emerging purchase power

� Ensure alignment with current industry trends and strategies of key players

� Drive increased participation in minority business development

The Asaba Group Retained To Assist Building Business Case

Develop A Report That Shows The Economic Value To Corporations From Doing Business With Minority-Owned Companies

5

Project Approach

• Market and customer opportunities

• Revenue expansion and growth

• Market trends

• Industry dynamics

• Major player’s reactions

• Brand differentiation

• Supply chain flexibility

• Channel and market access

• Current state

• Issues and challenges

• Future perspectives

Industry Trends/Dynamics

Minority MarketAssessment

Minority BusinessValue Proposition

Minority Sourcingand Partnerships

6

Executive Summary

Telecommunications services have grown 8% annually over last 5 years

Broadband, wireless and data services expected to accelerate growth in the future

Economy slowdown and industry slowdown has increased focus on developing strong consumer value propositions

Service providers will use new innovative products to increase consumption and build brand loyalty to ensure profitability

Minority consumers estimated to spend $56 Billion on telecommunications services

One of the fastest growing consumer segments and expected to account for significant share of future revenues

Service providers view minority segment as essential to long term success

Industry committed to minority business development – spending $7.8 billion with MWDVBE suppliers

Minority suppliers spend estimated at $4 Billion

Future efforts should focus on high growth areas of the industry

Content







8

Key Trends In The Telecommunications Industry

Telecommunications services revenues in 2000 approximately $283 Billion and growing at 8% annuallyIndustry undergoing rapid change as a result of deregulation

� Started with Telecommunications Act of 1996

� New industry forces and business models emerging

– From constrained bandwidth (narrowband) to unconstrained bandwidth (broadband)

Recent industry declines in sales and market values has sharpened focus on building customer-focused value proposition

� A function of reduced levels on capital expenditures by service providers

� Consumer adoption of new services is essential to future success

Long-term industry fundamentals remain quite strong� Data traffic has grown significantly surpassing voice

– But voice still accounts for significant share of total revenues

� Wireless and internet traffic continues to grow

Fragility of revenues a continuing trend with service providers� Traditional voice revenues approach commoditization and pricing pressures

� Bundling new services (e.g., data and voice) essential to hold on to customers

� Service providers seek new avenues for brand differentiation and customer loyalty

9

Telecommunications Services Industry Seen Modest Growth During Last 5 YearsWireless Services Has Been Fastest Growing Segment

SOURCE: Multimedia Telecommunications Association, Cellular Telecommunications & Internet Association

$0

$50

$100

$150

$200

$250

$300

$350

1997 1998 1999 2000Local$109B

$ Billion

24.1%

Local

$95 B

$230 B

3.9%

7.1%

$245 B$264 B

$288 B

Toll

$101 B

Wireless$34 B

Local

$100 B

Toll

$105 B

Wireless$40 B

Local

$109 B

Toll

$108 B

Wireless$47 B

Local

$117 B

Toll

$113 B

Wireless

$58 B

Telecom Service Revenues (1997–2000)

CAGR

97-00

8.1%

10

Industry Slowdown Is A Function Of Reduced Levels Of Capital Expenditures By Service ProvidersSpending Levels And Future Growth Expected To Trend Downward

Telecom Service Industry Average Capital Expense Growth1

Telecom Service Industry Average Capex to Sales Ratio

-4.7%

11.0%

21.0%

27.0%

1.0% 1.5% 3.0%

-20%

0%

20%

40%

1991 1994 1996 2000 2001 2003 2005

11.1%1991–2000Average

0.160.17

0.27

0.16

0.210.190.19

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1991 1994 1996 2000 2001 2003 2005

Capex to Sales Ratio

1. Includes AT&T, BellSouth, Quest, SBC, Verizon, Worldcom, CenturyTelSOURCE: Morgan Stanley Dean Witter, Financial Times

0.161991–2000Average

11

However Demand Drivers Are Still StrongData-Based Products Growing Faster Than Voice Products

Telecom Service Revenues

Voice

$270 B

Voice

$221 BVoice

$154 B

Data

$150 B

Data $51 B

0

100

200

300

400

500

1995 2000 2005

SOURCE: McKinsey & Company, JP Morgan, Asaba Group Analysis

$ Billion

$164 B

$272 B

$420 B CAGR 95–00 00-05

38.5% 24.1%

7.5% 4.1%

Future Growth Will Be Driven By Data

Data$10 B

12

U.S. Internet Household Penetration Hours Spent Online Per Month

Internet Access And Usage Are Strong Drivers For Data ServicesExpect Higher Penetration And Usage With Broadband Access

6.6 12.020.3

30.1

42.4 46.7

60.961.8

64.7

2.51.70.20

10

20

30

40

50

60

70

80

90

1Q99 4Q99 1Q00 4Q00 4Q01 4Q02

Million

15.9

21.4

0

5

10

15

20

25

Using Narrowband After Switching toBroadband

SOURCE: Telecommunications Reports International, Industry Standard, McKinsey & Company, Merrill Lynch, Asaba Group analysis

Hours Per

Month

Broadband Service Is New Growth Platform In The Industry

Dial-upBroadband

44.1 MM

30.3 MM

49.2 MM

67.5 MM73.8 MM

85.0 MM

13

Wireless Subscriber Growth Has Been Significant In Last Five YearsLargely Driven by Small Business and Residential Customers

0

25

50

75

100

125

1995 2000

SOURCE: Cellular Telecommunications & Internet Association

Subscribers (MM)

U.S. Wireless Subscribers

Key Trends

• Largely voice-based service

• Huge potential for data-based services

• Full-service mobility for competing and interactive entertainment applications

Demand Drivers For Wireless Service Expected To Be Strong

34 MM

109 MM

CAGR95–0026.2%

14

Broadband, Wireless, And Calling Cards Fastest-Growing Product Segments

SOURCE: MultiMedia Telecommunications Association (MMTA), Federal Communications Commission

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

1999 2004

Local

$109 B

Long Distance

$108 B

CAGR99–04

$ Billion 89.6%

6.7%

Wireless$47 B

Calling Cards $3.0 BBroadband $0.8 B

$268 B

Local

$151 B

Long Distance

$136 B

Wireless

$108 B

Calling Cards $5.2B

Broadband $19.6 B$420 B

11.9%

18.4%

4.7%

Telecom Products/Service Revenues (1999–2004)

Residential And Small Business Customers Expected To Account For Significant Share Of Future Revenue

9.4%

15

Residential Customers Account For Significant Share Of Broadband Customers For ILEC’s And Cable Operations

SOURCE: TeleChoice, MultiMedia Telecommunications Association, Merrill Lynch, Asaba Group analysis

0%

25%

50%

75%

100%

ILECs CLECs Cable

Millions of Customers

Broadband Customer Mix (2000)

Residential

80%

Business

20%

Residential

29%

Business

71% Residential

87%

Business13%

2.7 MM 0.3 MM 5.1 MM

16

Residential Customers Account For Most Growth In Long Distance

Residential

42.4%

$45.9 B

Residential

36.1%

$24.1 B

Non-Residential

57.6%

$62.4 B

Non-Residential

63.9%

$42.7 B

0%

25%

50%

75%

100%

1990 1999

SOURCE: Federal Communications Commission

5.5%

4.3%

7.4%

$66.8 B $108.2 B

Toll Revenues: Residential vs. Non-Residential

CAGR90-99

17

Consumer Telecommunications Expenditures Have Risen Over Last 4 YearsA Significant Monthly Expenditure For Consumers To Seek Competitive Providers

ServicesServices

Estimated Residential Communications Spending/Month

19961996 20002000 TrendTrend % Change

% Change

Building End-Consumer Loyalty Essential In Achieving Sustainable Long-term Growth

1. Includes internet accessSOURCE: Wall Street Journal, The Yankee Group, Asaba Group analysis.

Local 25.50 34.50 �� 35.3%

Long Distance 28.00 25.10 �� (10.4%)

Cable 26.20 39.30 �� 50.0%

Wireless 44.30 44.00 �� (0.7%)

Internet Access 19.95 24.50 �� 22.8%

Broadband1 NA 42.00 NA NA

TOTAL 143.95 209.40 �� 45.5%

18

ILEC’s End User Lines

Competition With Local Services By CLEC’s Focused On Large Commercial Customers

Residential Small

Business

79%

140.5 MM

Residential Small

Business

79%

143.4 MM

Other*21%

38.4 MM

Other*21%

37.9 MM

0%

20%

40%

60%

80%

100%

Dec-99 Jun-00

* Other = Medium and Large Businesses, Institutional & GovernmentSOURCE: Federal Communications Commission, June 2000

181.3 MM 178.9 MM

CLEC’s End User Lines

Residential/ Small

Business36%

4.6 MM

Residential/ Small

Business

41%3.4 MM

Other*

64%

8.1 MM

Other*

59%

4.9 MM

0%

20%

40%

60%

80%

100%

Dec-99 Jun-00

8.3 MM 12.7 MM

Residential And Small Business Important To ILEC’s

Content







20

Minority Populations Are Essential To U.S. Long Term Economic Stability

• Even though Minorities have experienced significant growth in purchasing power, they still lag in economic producer power

• Minorities still experience significant barriers to economic opportunities

• Minority Groups becoming a significant force in politics – Influencing outcome of elections and public policy

• Minorities occupying more political offices and contesting elections

• California now a majority minority state• Not acknowledging demographic changes has led to social tensions with

communities and advocacy groups

• Minority population fastest growing segment of the U.S. population• Workplace demographics reflecting the growth of minorities• Minority population much younger than non-minority population

– Minority median age 28.2, Non-Minority median age 36.6

Demographics

Speed ofChange

Political Factors

Socio-Economic

Telecom Service Providers Must Anticipate And Reflect These Realities In Their Business Models

BUT...

21

Minority Population Minority Buying Power

In the Last Decade, Minorities Experienced Growth In Population And Buying Power

82.4 MM

62.4 MM

0

30

60

90

1990 2000

SOURCE: U.S. Census 2000, University of Georgia Selig Institute

MM

$647 B

$1,300 B

0

500

1,000

1,500

1990 2000

$ Billion

An Attractive Market Segment

CAGR90-007.3%

CAGR90-002.8%

22

Minorities Are 29% Of U.S. Population, But Are 40% Share In Top Ten Minority States

SOURCE: U.S. Census

U.S. Population (Minority Share)

Minority Population

40%

Minority Population

29%

Non-Minority Population

60%

Non-Minority Population

71%

0%

25%

50%

75%

100%

U.S. Top Minority-Concentrated States

164 MM 272 MM

Top Minority-Concentrated States

• California

• New York

• Texas

• Florida

• Illinois

• New Jersey

• Georgia

• North Carolina

• Virginia

• Maryland

23

Minority

47.6%

79 MM

Minority

40.4%

55 MM

Non-Minority

52.4%

87 MM

Non-Minority

59.6%

82 MM

0%

20%

40%

60%

80%

100%

2000 2025

U.S. Population

Minority Population Expected To Account For Significant Share Of Future Consumer GrowthParticularly Significant In Top 10 Minority-Concentrated States

Minority

129 MMMinority82 MM

Non-Minority

209 MMNon-

Minority

195 MM

0

50

100

150

200

250

300

350

400

2000 2025

Million

SOURCE: U.S. Census, Asaba Group analysis

7.2%

57.3%

22.0%

Top 10 Minority States (% Share)

(12.1%)

17.8%

% Change

% Change

277 MM

338 MM

166 MM137 MM

24

Top 10 States

55.6%

2.4 MM

Top 10 States

50.8%

44.3 MM

Top 10 States

51.4%

98.5 MM

Top 10 States

49.2%

300 B

Other

44.4%

1.9 MM

Other

49.2%

42.9 MM

Other

48.6%

93.1 MM

Other

50.8%

310 B

0%

25%

50%

75%

100%

Local Lines Long Distance Minutes Wireless Subscribers Broadband Lines

Minority Dominant States Account For Significant Share Of Telecom Services

SOURCE: Federal Communications Commission

Minorities Are Significant Consumers In These States

Top 10 Minority Market Share

191.6 MM 610 B 87.2 MM 4.3MM

25

56.2%

Growth Trend Expected To Continue For The Next Two Decades

Minority

82.4 MM

Minority

128.7 MM

Non-Minority

195 MM

Non-Minority

209 MM

0

50

100

150

200

250

300

350

2000 2025

Population Projection (2000-2025)

SOURCE: U.S. Census, Asaba Group Analysis

Minority Households Projection (2000-2010)

MM

26.3 MM

31.3 MM

20

25

30

35

2000 2010

MM

7.2%

277.4 MM

337.8 MM%

Change

% Change

19%

Greater Political And Economic Leverage

26

Share-holders

Business Partners/ Alliances

Customers Suppliers Employees

Community and

Advocacy Groups

Environment

Economic Value AddSocietal Value Add

Regulators

Striking An Optimal Balance Between Economic And Societal Value Add Is Essential For Long Term Success

Telecommunications Stakeholders

Creating Long-Term Shareholder Value Requires Addressing All Stakeholders

27

Minority Business Development Is A Key Initiative Which Optimizes Both Economic And Societal Value Add

High

LowLow High

SocietalValue

Created

Not For Profit

Government/NGOs

Non-Value-Added Activities Unsustainable Business Model

Short Term Focused

Economic Value Created

Minority Business

Development

Sustainable Business Model

Long Term Focused/Profitable

Doing Business With Minority Businesses Is Essential To Long Term Profitability

Content




Minority Telecommunications Markets 28-38



29

Minorities Spent $56 Billion On Telecommunications Services In 2000

1. Includes Calling Cards, Ancillary Services, PagingSOURCE: Bureau of Labor Statistics, Federal Communications Commission, National Telecommunications and Information Administration,Asaba Group analysis

0

10

20

30

40

50

60

2000

Local

$11.2B

Long Distance

$19.8B

$ BillionInternet-Related $2.1B

$56.3B

Minority Telecommunications Spending (2000)

Wireless$8.5B

Basic Cable$7.2B

Premium Cable$4.9B

Other Services1 $2.6B

30

Minority Expenditures Will Grow To $90 Billion In Five Years

$56.3 B

$89.6 B

0

25

50

75

100

2000 2006

SOURCE: Bureau of Labor Statistics, Federal Communications Commission, National Telecommunications and Information Administration, U.S. Census, Asaba Group analysis

$ Billion

Minority Telecommunications Expenditures (2000–2006)

CAGR00-068.1%

31

Internet And Wireless Services Account For Significant Share Of Future Growth

1. Calling Cards, Paging and Ancillary Services2. Includes Broadband SOURCE: MultiMedia Telecommunications Association, Gartner, Bureau of Labor Statistics, U.S. Census, Asaba Group Analysis

0%

20%

40%

60%

80%

100%

2000 2006

Minority Telecom Market

Local

$11.2 B

Long Distance

$19.8 B

$56.3 B

Wireless$8.5 B

Basic Cable$7.2 B

Premium Cable$4.9 B

Internet-Related $2.1 BOther Services1 $2.6 B

Local

$13.4 B

Long Distance

$21.0 B

$89.6 B

Wireless

$22.0 B

Basic Cable$11.2 B

Premium Cable$8.0 B

Internet-Related $9.7 B

Other Services1 $4.2 B8.0%8.2%29.0%

8.4%

7.7%

17.3%

1.0%

3.0%

CAGR00-06

32

Sixty-Seven Percent Of Minority Telecommunications Spending In Top 10 Minority States

SOURCE: U.S. Census, U.S. Department of Commerce, Telecommunications Industry Association, Asaba Group analysis

Top 10 Minority States

70.4%

$63.1 B


67.3%

$37.9 B

Other

29.6%

$26.5 B

Other

32.7%

$18.4 B

0%

25%

50%

75%

100%

2000 2006

$56.3 B $89.6 B

Easy To Target Minority Consumers

33

Top Ten Broadband Cities Account For 44% Of Total RevenuesMinority Consumers Are 40% Population Share In These Cities

Top 10 Cities

44.0%

Other

56.0%

Minority

40.0%

Non-Minority

60.0%

0%

20%

40%

60%

80%

100%

Broadband Revenues Top 10 Cities

SOURCE: AC Nielsen/Net Ratings, Merrill Lynch

Top 10 Cities% Minority Population

Boston, MA 14%Chicago, IL 39%Dallas, TX 32%Detroit, MI 25%Los Angeles, CA 60%New York, NY 46%Philadelphia, PA 24%San Diego, CA 44%San Francisco, CA 47%Seattle, WA 16%

U.S. Broadband Market 2000

$3.0 B $84.3 MM

Future Broadband Penetration Will Depend On Minority Consumer Adoption

34

$2.4 Billion Exist In Near-Term Minority Telecommunications OpportunityFunction Of Differences In Penetration Rates

26.3%

3.0%

52.0%

33.1%

5.0%

55.3%

39.6%41.2%

0%

15%

30%

45%

60%

InternetAccess

BroadbandAccess

Cable WirelessCellular

SOURCE: U.S. Census, U.S. Department of Commerce, Telecommunications Industry Association, Asaba Group analysis

2000 Household

Penetration %


$1.6 B

Other

$0.8 B

0%

25%

50%

75%

100%

2000

Household Penetration Rates (2000) Opportunity Dollars ($ B)

MinorityNon-minority

$2.4B

$1.6 Billion On The Table Today In Top 10 States

35

Capturing Minority Customers Is Pivotal To Service Providers’ Long Term Success In States With Local Retail Competition, Minorities Account For 31% Of The Market

% Minority Households

31.4%

52 MM

% Non-Minority Households

68.6%

114 MM

CA

$12.3 B

TX

$6.5 B

NY

$4.9 B

FL$3.6 B

GA $1.9 BNC $1.5 BPA $1.2 BSC $0.9 B

0%

20%

40%

60%

80%

100%

16 States Population Minority Telecom Spendingby State

SOURCE: Wall Street Journal, Federal Communications Commission

States With Local Service Competition

166 MM

Approved• Texas• Oklahoma• Kansas• New York• Massachusetts

Filed/Pending• California• Nevada• Arkansas• Florida• Georgia• South Carolina• North Carolina• Pennsylvania• Connecticut• Rhode Island

$35.7 B

States Where RBOCs Expected to Offer Long Distance

AK $0.3 BNC $0.4 B

Other $2.2 B

36

Minority-Owned Firms Provide Incremental OpportunitiesGrowing Fast; Most Believe E-Commerce Is A Competitive Advantage

MBE Firms (Sales Greater Than $500K)MBE Firms That Believe E-commerce

Capabilities Is A Competitive Advantage

55,622

169,560

0

40,000

80,000

120,000

160,000

200,000

1992 1997

64.0%

17.8%

11.7%6.5%

0%

10%

20%

30%

40%

50%

60%

70%

Agree/Strongly

Agree

NeitherAgree norDisagree

Disagree/StronglyDisagree

Don'tKnow

SOURCE: Thomas Rivera Policy Institute, U.S. Census Survey of Minority-Owned Business Enterprises

37

Internet Connection1 Estimated Broadband Revenue2

Commercial Broadband Opportunities Exist With Minority BusinessesMBE Firms Have Low Broadband Penetration Rates

1. 85% of minority businesses have internet access2. Based on 1997 total for minority-owned firms3. DSL, Cable, T1/OtherSOURCE: U.S. Census Survey of Minority-Owned Business Enterprises, Tomas Rivera Policy Institute, Asaba Group Analysis

63.7%

36.3%

0%

25%

50%

75%

Modem High Speed

Top 10 States

72.3%

$185 MM

Other

27.7%$71MM

0%

20%

40%

60%

80%

100%

Minority

$256 MM

3

Potential $256MM Opportunity For Service Providers

38

Minority Markets Provide Significant Revenue And Growth Opportunities To Service ProvidersOver $35 Billion Incremental Telecommunications Expenditures By 2006

SOURCE: Federal Communications Commission, MultiMedia Telecommunications Association, Bureau of Labor Statistics, University of Georgia Selig Institute, U.S. Census Survey of Minority-Owned Business Enterprises, Asaba Group Analysis

$90.0 B$0.3 B$7.1 B$13.6 B

$7.6 B$5.0 B

$56.3 B

0

20

40

60

80

100

2000Residential

MinorityMarket

Voice Data Wireless InteractiveEntertainment

CommercialBroadband

2006 MinorityMarket

$ Billion

Voice = Toll/Local Revenue, Paging, Auxiliary Services, Calling CardsData = Dial-up Internet, BroadbandInterative Entertainment = Basic/Premium CableCommercial Broadband = Function of Minority Firms w/Sales >$500K switching to Broadband Service

GROWTH POTENTIAL BY 2006

Content







40

Benefits of Minority Business Development

Minority businesses are vital links in connecting with the minority consumer base

� These consumers in certain markets account for greater share of future Telecom consumption

– Typically one of the highest growing consumer market

Minority business development enhances community development efforts

� Potentially a circular process with significant multiplier effect on wealth creation

– Drives increased Telecom expenditures and consumption– Increases the tax base and levels of discretionary income (essential for Broadband

adoption)

Provides effective representation of interests with government and political constituencies

� Minority population are a significant political force and are swing votes on critical issues

Minority Business Development Can Impact Customers And Government

41

Value Propositions For Doing Business With Minority-Owned Businesses

Contributes to ability to meet government mandate/compliance without sacrificing profits or increasing cost e.g. Public Utility Commission Requirements (e.g., California CPUC General Order 156)

Regulatory Value

Market Access

Increase Customer

Loyalty

Supply Chain

Flexibility

Stakeholder Satisfaction

Provides access to new growth and strategically important market segment or consumers.e.g. Access to national commercial accounts, industrial and residential customers Supplier diversity rapidly becoming a key criteria with vendor selection

Enhances ability to build differentiation and build customer loyaltyEnables increased and sustained profitability from existing customer base

• Essential in reducing customer churnProvides opportunities for new revenue sources – Increase Share of Wallet (SOW)e.g. Loyalty drives down cost associated with customer retention and acquisition.

Provides second sourcing alternative in supply chain• Reduces supplier concentration risk

Take on supply chain roles which are essential to service providers (e.g., rapid deliveries, installation, and turn ups)Lower cost alternatives to certain suppliers and business processes

• Customization of equipment for specific customer needs

Satisfy needs of key Stakeholders, employees, advocacy groups, and community• Develop and Enhance Corporate Image

42

Minority Businesses Provide Value To Industry PlayersProvide Added Value As Companies Increase Focus And Develop Core Competencies

Broadband Impact (Emerging Dynamics)Broadband Impact (Emerging Dynamics)

Impact on Industry Players

Impact on Industry Players

IndustryFocus

IndustryFocus

Minority Business Value ContributionMinority Business Value Contribution

• Power shift from providers to customers

• Value creation in leveraging intangible assets

• Accelerated innovation– New price/

performance characteristics

• Shorter revenue cycles from deployment to maturity

• Increased pressured from Capital markets

• Basis of competition– Moore’s Law and

demand elasticity

• Focus, define and leverage core competence– Brand equity

– Knowledge base

• Access partners to rapidly growing customer segment– Generate brand

differentiation

• Partner in developing new revenue-making applications

• Higher degree of collaboration– Virtual integration

– Extended enterprise

• New interactions with supply chain partners– Supplier collaboration

– Shared risks

– Cross-industry collaborations

• Low-cost supply chain flexibility

• Wide pool of technological partners

• Cost-effective sourcing

• Maximize ROCE

• Increased focus on economics of scale

• Rapid deployment– 3rd party logistics

– Low-cost sourcing

• Partners in rapid installation and turn up (EF&I)

• Lower-cost structures

• Flexibility operating models

43

Minority Business Partnerships And Development Provides Customer DifferentiationEspecially In Minority-Dominant Markets

Customers increasingly choose among various providers of telecommunications products

� Product and service attributes are becoming “Table Stakes”

� Relationship attributes increasingly important differentiator

� Minority sourcing programs can become a tool in building brand differentiation

Price and Corporate Image become the most important criteria for making a purchasing decision

� Small business and residential customers say price, value, and corporate image are important considerations

� Price is largely market-based; corporate image is the lever controlled by the service providers

Ability to defend and increase market share with minority consumers will depend on building differentiation

Minority Consumers Will Ask“What Are You Doing In My Community?”

44

Minority Business Development Is A Prime Way Connect with Minority Consumers

15.9%

57%

47.6% 47.2%

11.6%

0%

10%

20%

30%

40%

50%

60%

All Firms HispanicOwned

AfricanAmerican

Owned

Asian/PacificOwned

Non-MinorityOwned

% PenetrationWith 50% Or

More Minority Employees

SOURCE: U.S. Census 1997 Survey of Minority-Owned Business Enterprises, 1992 Characteristics of Business Owners, Asaba Group Analysis

Penetration % of U.S. Firms With 50% Or More Minority Employees

Minority Business Development Is A Lever To Connect With Minority Consumers

Minority Businesses Hire More Minority Employees Compared To Non-Minority Firms

Content







46

Key Observations From Industry Sourcing Efforts

High concentration of minority sourcing dollars in traditional “minority” categories� Value-Added Resellers (VAR), Maintenance Repair and Operations (MRO) account for greater than 50%

of total expenditures

� May be indicative of early efforts to achieve “quick wins” and build program momentum

Industry participants committed to minority business development� MWDVBE spending has grown from $4.2B in 1994 to $7.8 in 2000

� SuperComm diversity challenge signatories increased from 14 in 1995 to 72 in 2001

Current minority business development efforts focused on product sourcing or supply chain processes

� Need to evolve process and metrics to include roles associated with market/channel access

� Business process outsourcing, asset sales and divestitures

Currently used metrics and measurements of minority “sourcing effort” focused on quality of dollars purchased from MBE's

� Need to increase emphasis on “quality of spending” — commodity margin and growth

� Increase representation along the value chain: how best to leverage Telecommunications Industry Group

� Inclusion in high-value (growth and margin) categories — Contract manufacturing, optical networking, software development, etc.

� Define value from reduction in operating risk to top-line growth

47

Senior-Level Commitment For Diversity Sourcing Efforts

“Diversity is not a game of quotas or headcount—It’s a way of seeing, broadening of the corporate vision to encompass a wider

and more-varied employee, [supplier] and customer base.”— Ivan Seidenberg,

CEOVerizon Communications

“Supply chain diversity will remain a priority for Lucent as we move into the 21st century.”

— Henry Schacht, Chairman and CEO

Lucent Technologies

“SBC Communications is committed to supporting minority- and women-owned businesses.”

— Edward Whitacare, Chairman and CEO

SBC Communications

“As we focus on building the strengths of our businesses, supplier diversity will continue to be valued.”

— C. Michael Armstrong, Chairman and CEO

AT&TSOURCE: Company Reports

48

72

28

14

5

30

55

80

1999 2000 2001

Number of Signatories

SOURCE: Telecommunications Industry Association

$ Billion$7.8 B

$4.2 B

$5.5 B

4

5

6

7

8

1998 1999 2000

MWDVBE SpendingSupercomm Signatories

Supercomm Signatories: Telecom Industry Committed To Minority SourcingHave Achieved $7.8 Billion In MWDVBE Spending

49

Value Added Resellers And MRO Expenditures Account For 61% Of Total Spending

SOURCE: Telecommunications Industry Association, Company Reports, Asaba Group analysis

0%

20%

40%

60%

80%

100%

2000 MWDVBE

Telecommunications Minority Sourcing by Category

VAR

36%

MRO

25%

$7.8B

Component Parts13%

Outside Plant/EFI13%

Professional Services9%

Contract Mfg. 4%

50

100%

Commodity B

100%

Commodity C

100%

Commodity D

VP Sourcing/Purchasing

• Set goal for 5% of total purchases for minority suppliers

• Cascade 5% objective to commodity buyers

Distribution

Commodity Buyers

Construction OutsidePlant MRO

• Need to meet 5% minority supplier objective

• Also rewarded on achieving commodity wide cost savings and lowering supply chain risks

100%

Commodity A

Danger Exists That Buyer May Source to Minority SuppliersTheir Low Value\Margin Products

Leads to High Fragmentation Within The Supply Base

Illustrative Example

Cascading Minority Sourcing Objectives Present Unforeseen DilemmasIntensifies The “Quantity Of Spend” Versus “Quality Of Spend” Conflict

51

Challenges With Minority Business Development –Perspectives From Program Managers

Ongoing industry consolidation and divestitures increases level of uncertainty with minority business initiatives

� How to include minority business development in the Post-Merger Integration (PMI) Process

� Most PMI processes view sourcing consolidation as source of cost savings and “synergy” dollars

Capital intensity associated with some high-value opportunities requires that MBE's have access to substantial capital (e.g., Contracting Manufacturing, etc.)

� Current minority business definition based on ownership structure

– Constrains ability to raise equity capital

� Debt financing of growth increases the MBE’s operating risks during industry slowdown

Size and scale also identified as an inhibiting factor� Most sourcing opportunities require national or global coverage

� Corporations increasingly hesitant to maintain fragmented regional suppliers

� Seen as a determinant of ability to manage risks associated with demand slowdowns

Some concerns expressed with the practice of VARs and customer revenue concentration

� Current slowdown increasing the scrutiny of “middleman roles” to ensure its truly a value-added proposition

� High customer sales concentration increasingly seen as a problem when sourcing new business

52

Future Challenges And Trends That Must Be Incorporated Into Diversity Supplier Initiatives

MBE programs must understand the impact of industry dynamics (e.g., convergence) and sourcing initiatives

� Convergence in the network: Optical, Sonet, and Ethernet

� Convergence in industry boundaries: Communications, Computing, Storage and Entertainment

� Convergence in application: Voice, Data, and Environment

Convergence will define new relationship along the supply chain (rapid deployment, obsolescence and product development)

� Migration to a highly integrated supply chain—virtual integration

Redefining metrics of success that make sense to business practioners and corporate senior managers

� Current metrics more focused on external reporting and advocacy constituencies

� Need to evolve from “% spending” to include economic value created by initiatives

– “% spending led to 3% cost savings”

– “% spending grew sales by __%”

Minority business inclusion must exist throughout the industry value chain� Opportunity for first tier sourcing from service provider will become increasingly difficult

� Need a credible second and third tier program

– Equipment manufacturers, technology providers, electronic manufacturing services, etc.

� Potentially Leverage Telecommunications Industry Group (TIG) to drive this initiative

53

Future Challenges And Trends That Must Be Incorporated Into Diversity Supplier (Cont’d)

Several high technology minority-owned firms exist today, most providing services to government agencies (e.g., Jackson and Tull, Cornet Technologies, etc.)

� Need to develop outreach initiatives to attract these companies into the industry

Achieving size and scale through alliances and joint ventures is a viable option for MBE's

� Can leverage best practices from Automotive Manufacturers success with minority suppliers and large-tier one suppliers

� MBE-to-MBE alliances in most instances will be suboptimal

– Similar to two smaller players merging

54

Proposed New Methods/Framework To MeasureMBE Spending

Places new emphasis on measuring “Quality of Spending”

Asaba Group Quality Index (AGQI™)

Functions of the following

• Total Minority Spending (% of Total Purchases)• Weighted average commodity category margin• Weighted average category growth factor (0.1 = Low, 0.5 = Mid, 1 = High)

• AGQI solves the issues of MBE Concentration in weak value chain positions�Forces Commodity Buyers to provide higher quality opportunities

• AGQI enables better recognition of Lower Tier minority efforts

Reflects Industry Supply Chain RealitiesWithout Compromising Inclusion

55

Asaba Group Quality Index (AGQI™) – Illustrative Example

200Fuel

Delivery

100 Safety

250

Trim

250Plastic

Molding/Foam

500

Non-Production

Margin % Growth Rate

3% L

6% M

6% M

10% H

10% H

$2 B $2 B Margin % Growth Rate

3% L

3% L

3% L

Two companies with $2 Billion in MBE spending (10% of total purchases)

Company A Company B

AGQI Rating:

10% * 8.1% * .62

0.5

AGQI Rating:

10% * 3.0% * 0.10

0.03

$ B MBESpending

$ B MBESpending

300

Navigation

300

ElectronicManufacturing

100Non-Production

56

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