Evaluating GTE Minority Contractor Mentorships : Proponents say they help everyone; critics have doubts.
It was the summer of 1987, and the executives of Butler Service Group, one of the country’s biggest suppliers of temporary technical help, faced a dilemma.
A big customer, GTE California, announced that it would shift a substantial share of its business to firms run by minorities as a result of pressure from the California Legislature.
Butler, operated by white men and owned by a company traded in the over-the-counter stock market, had a choice.
It could forfeit what had been a $12-million-a-year relationship with GTE. Or, somehow, Butler could forge an alliance that would let it hang onto as much of the business as possible within the constraints of GTE’s affirmative action dictates.
Butler took the latter course.
It handed over to an employee its Southern California operations, including an office in San Dimas and a work force of dozens of engineers. It stocked the board of directors of the new firm, Telco Services Inc., with Butler executives and signed a contract to handle most of the administration and management of the company for a fee. In exchange, Butler kept 49% of Telco’s stock, leaving Telco’s Latino chief executive with just enough of a stake to satisfy the California Public Utilities Commission’s criterion for minority ownership.
In Butler’s strategy, along with the similar paths charted by other GTE labor contractors, lies a parable about the limits on government’s ability to alter, by fiat, the habits and ties that for decades have blocked minorities’ access to the billions spent by California’s biggest utilities.
Rather than create opportunities for existing minority firms or for new companies independent of what civil rights groups decry as an “old boy” network of contractors, GTE has given more than $9 million yearly in contract labor work to three firms partly owned by and closely tied to longtime, non-minority, GTE contractors--a fact the vendors and GTE acknowledge.
An additional $3 million has gone to a Los Angeles firm--run by a white male employed for years by one of the non-minority contractors--whose minority status has been called into doubt. GTE auditors contend that the white male, rather than the Native Americans who own two-thirds of Main Communications, actually runs the company.
In the process, minority business people have, indeed, gotten a toehold in a segment of the telecommunications business that previously was closed to them. One minority firm late last month bought back the 49% of its stock held by its non-minority “mentor,” securing its independence just short of two years after its founding.
But the entree has been costly. Those firms with ties to a non-minority company have paid out half their profits--and sometimes a significant portion of their revenues, as well--to white-owned companies that had been doing business with GTE all along.
GTE insists that its reliance on minority firms with ties to familiar, reliable, white-owned vendors has aided the phone company and minorities alike.
“Part of the thinking for having mentorships is to get minority companies up and running so they get some . . . work, they develop a capital base and they learn the business, bearing in mind it’s to their advantage to become independent, because they don’t have to split the money for certain contracts,” said Larry Cox, a spokesman for Thousand Oaks-based GTE California.
“I think it’s really unfair,” he said, “for anyone to expect minority companies, brand new to the industry, to be able to go in and compete at the same level as a company that’s been there 10 or 15 years with millions of dollars.”
Assemblywoman Gwen Moore (D-Los Angeles), author of the legislation that persuaded California’s biggest utilities to promise 20% of their business to women and minorities by 1993, disagrees.
65% Are ‘Fronts’
“What you’re describing,” Moore said, “are people who refuse to change and refuse to do business in the manner we proposed.”
The difficulties faced by the state’s utilities in finding capable minority companies--and, perhaps, the utilities’ hesitancy to do business with them--are reflected in experts’ estimates that as many as 65% of the contractors counted by the utilities as minority- or woman-owned in fact are “fronts” controlled by white males.
Of California’s seven largest utilities, GTE has claimed the biggest progress in meeting the 20% minority contracting goal. But civil rights groups have informed the PUC that they are dubious about the $83.2 million in minority contracts that the company claimed for 1988, and GTE has agreed to a complete, independent audit of its minority procurement program.
For years, GTE contracted with an established group of national companies to supply the technical personnel--engineers, cable splicers, linemen and others--needed to extend telephone service to growing communities. Butler, Burnup & Sims, Volt Information Sciences and a few others acted as temporary services, recruiting the workers, serving as their employer and sending them where they were needed by GTE. Only one of the vendors, Carrier Communications, had non-traditional ownership; the Nevada firm is headed by a white woman.
When the Legislature in 1986 ordered public utilities to create or expand minority procurement programs, GTE quickly recognized contract labor as a service that could fairly readily be obtained from minority vendors. “Job shops,” as the temp services are called, require little more than an office and a telephone to start. And GTE was willing to give the new companies time to get established before insisting that they, like their non-minority predecessors, assume the riskier task of bidding on the construction work involved in stringing phone service to fringe developments.
Shift to Minorities
“This was an area where we could break in quickly,” said Steven J. Carr, a GTE purchasing agent who, at the time, was responsible for recruiting labor contractors.
In mid-1987, GTE let its existing vendors know that it would be shifting its contract work to minority companies. Within weeks, according to state corporation records and interviews with the principals of the companies, their minority replacements were in place.
Butler helped form Telco in August. Hood Corp., a Whittier firm that long had done underground construction work for GTE, helped establish Atramentech Inc. Hood purchased a 49% share of the Upland firm (its name is from the Latin word for “black”) and assigned a top executive to help Atramentech’s black president, former college professor Elizabeth Johnson, learn the job shop business.
Meanwhile, Joe C. Baker, who had run Volt’s West Coast job shop operations, took the upheaval at GTE as his cue to quit the big temporary service and devote full time to Main Communications, a firm he had started in 1983 with his wife Jeanine and her father, Arthur F. Main, both of whom are registered members of the Potawatomi Indian tribe.
That fall, GTE began to take job slots away from its longtime vendors, reassigning them to the new firms. Technical workers for the first time were encouraged to jump between companies, if it meant joining a minority contractor. Butler simply transferred most of its work force to Telco.
In December, Volt, with an investment of about $10,000, took a 49% share in the last of the new minority companies, KV Telecommunications. KV’s chief executive, E. Keith McKeague, an ethnic Hawaiian, said he proposed the association to Volt Executive Vice President Jerome Shaw, with whom he had been friends for years. McKeague owns 41% of the firm. Its other minority owner, Vice President John L. Bettis, is a black man who quit a job at Volt to join KV. Bettis owns 10% of the company.
Confused and Outraged
By the end of 1988, the switch-over to the minority firms was complete. At Thanksgiving time, GTE supervisors had informed the last 50 or so Burnup & Sims employees--a group that numbered 300 less than two years earlier--that if they wished to continue working at GTE, they would have to go to work for one of the minority firms.
Though telephone contract workers by nature are itinerants, crisscrossing the country to extend phone service to newly developing communities, many were confused, even outraged, by the turmoil unleashed at GTE. Especially angry were those who left Burnup & Sims: Not only did they give up one of the best benefits packages in the industry, they said, but they also lost service credits toward vacations, sick leave and retirement plans.
Moreover, many simply did not like being told, in effect, for whom they were going to work.
“I won’t ever work for anyone in a forced situation,” said one engineer who refused a job offer when Carrier called to say it had taken over his slot from Burnup & Sims. “This is a free country,” he said, “and I’ll work for whomever I want to work for.” The engineer, who was afraid that he would be unable to work again for GTE if he were identified, left Southern California rather than continue doing his old job for a new company.
And what of the deals cut to create the new firms?
Each of the three companies with ties to a majority contractor contends that it satisfies the state’s criteria for being a minority vendor--51% minority ownership and genuine day-to-day control in the hands of a minority group member. Each has been examined and approved by auditors hired by GTE.
‘It Was a Crock’
Yet the mentorships have drawn much suspicion. Assemblywoman Moore first questioned GTE about the status of Telco and Atramentech--and about Main, as well--in October, 1987, shortly after they began doing business with the phone company. Competitors in the tight-knit world of contract labor cast aspersions on each others’ credibility. The contract workers themselves heard the rumors and wrote off the contracting program as a bureaucratic boondoggle.
“The general feeling I got from everybody out in the field was that it was a crock,” said Doug Parrish, whom Butler assigned to direct Telco’s recruiting efforts and who now is a recruiter for Volt in Orange.
GTE officials concede that it was in the interest of the longtime contractors to lose as little as possible in the transition to minority procurement.
“These guys had been in business with us for quite a while,” said Carr. “It was big business for them--a very lucrative business. To just bail out because somebody changed their mind about what the rules were didn’t make much sense.”
The new companies have varying degrees of independence from their mentor firms.
Take Telco. Carr, the GTE purchasing agent, says Butler “brought forth” Telco. Adds Parrish: “It would be hard for me to say in no uncertain terms that (Telco) ran itself.” According to Cox, GTE decided last week to conduct a new audit of the firm’s minority status.
Telco’s first 51% owner, Ebert J. Vallejos, who now works for a Butler subsidiary in Sacramento, referred calls about the two firms’ relationship to Butler. So did its new majority owner, Kathryn Ellis.
Two Minorities Benefit
Marc D. Freedman, Butler’s general counsel, insists that Telco--whose executive office is at the same New Jersey address as Butler’s--is an independent firm. But he is not shy in explaining Butler’s rationale for helping create Telco. “Would you rather make 100% of a requisition, none of it or some of it?” Freedman asked. “If part of your market is taken away, you as a businessman look for a way to retain as much of it as you can.”
Beyond the protection of Butler’s interests, he added, at least two minorities have benefited from the founding of Telco--Vallejos, a Latino, and Ellis, a white woman. “Their lots in life have improved in terms of experience, compensation and things like that,” Freedman said.
Atramentech, by contrast, severed its formal ties with Hood nine days ago when its president, Elizabeth Johnson, bought out Hood’s 49% stake--in part to put an end to questions about her company’s minority status. Until then, she acknowledged, the doubts, if misplaced, were understandable.
“I’ve read all the federal legislation,” Johnson said before the repurchase, “and we’re organized right out on the ledge.”
Legislators may have intended that contracting programs allow minority firms to stand on their own, Johnson said. But she is convinced that without alliances, minorities will fail.
“From a competitive, capitalistic perspective,” Johnson said, “I don’t think the small company will survive doing it that way.”
Main’s founders know how hard it is to get started without backing. They pooled all their resources--including mortgaging their homes--to raise the $175,000 with which they opened the firm’s doors, according to Joe Baker, the company’s chief operating officer.
Question of Status
But a GTE audit concluded that Main is not a minority company. The auditor said Baker runs the business, and both competitors and engineers employed by Main say they share that impression. While it conducts a new audit of Main’s status, GTE is not counting $2.9 million in business with Main toward its minority contracting goals.
But Baker--outraged that the first auditor based his finding on paper work, never visiting the company’s Westchester office--is insistent that the firm’s three owners share in all major decisions. And he notes that more than half of Main’s 87 employees are minority group members.
Carr says he carefully weighed the new companies’ minority status before inviting them into GTE’s circle of vendors. When non-minority firms proposed blatant “fronts,” he rejected them.
One underground construction firm, Carr recalled, “brought in a black fellow and said, ‘Here’s our boy, we’re going to make him the president and owner of a new company. Don’t worry about the quality of the work; we’ll be taking care of that for you.’ ”
But Carr, in picking contractors with ties to GTE’s traditional vendors, also passed over at least 20 small firms unallied with non-minority companies.
“I had a responsibility to GTE of California to find good people, and in an effort to do that, I had to utilize those companies that could recruit talent we had experience with and understood our system,” he explained. Some of the firms that came forward seemed to have been thrown together over a few beers, Carr added. “I was most comfortable with the companies we went with.”
GTE got more than comfort out of the arrangements, though, according to Johnson, who while benefiting from Carr’s decisions detected some cynicism in the phone company’s strategy.
“It makes GTE’s life easier if a minority company stays with a majority company,” she observed, “because the old grandfather way of doing business is going to continue, and obviously the majority company is going to keep the minority company in line.”
GTE has placed the new contractors on notice that they must “have the resources and ability to stand alone” by November, according to Carr. GTE officials, however, say that standard has not been defined; Carr suspects that it would allow Telco’s relationship with Butler, for one, to continue.
In the meantime, some of GTE’s new contractors shake their heads in wonder at the forces let loose when the phone company set out to dramatically boost its dealings with minorities.
“Up until a couple of years ago, nobody wanted an association with minorities whatsoever,” said Bettis of KV. “Now that there’s money to be made in it, everybody’s jumping on the minority bandwagon.”
GETTING A TOEHOLD: MINORITY-OWNED CONTRACTORS MINORITY COMPANY Atramentech Inc. Upland NON-MINORITY AFFILIATION Originally 49% owned by Hood Corp. of Whittier. Became 100% minority owned July 28. PRINCIPALS Elizabeth Johnson, president and 100% owner. MINORITY COMPANY KV Telecommunications Inc. San Ramon NON-MINORITY AFFILIATION 49% owned by Volt Information Sciences Inc. PRINCIPALS Keith McKeague, president and 41% owner. Katherine D. McKeague, secretary. MINORITY COMPANY Main Communications Co. Los Angeles NON-MINORITY AFFILIATION None PRINCIPALS Arthur F. Main, chief executive, Joe C. Baker, chief operating officer and Jeanine Baker, secretary and owner. MINORITY COMPANY Telco Services Inc. San Dimas NON-MINORITY AFFILIATION 49% owned by Butler Service Group, a subsidiary of North American Ventures Inc. of East Hartford, Conn. PRINCIPALS Kathryn Ellis, president and 51% owner. Source: Listed companies, GTE California, California Secretary of State’s office.
