*NEWS*IS OFFICE DEPOT SCAMMING THE STATE OF CALIFORNIA ?

Great deals vanish
Acme scissors were among items offered at a great fixed price: 15 cents. But later, only the Office Depot generic brand (above) was available at that price; state agencies that bought Acme scissors paid more than $3 a pair after the price change.

List price jumps
On other items, the state was promised a firm discount: 25 percent or more off the “base price.” But the base price of items often jumped, even if the manufacturer price held firm. One example: The base price of a Hewlett-Packard laser printer cartridge rose from $42.99 to $52.49.

Two years later, a Mercury News investigation has found that the contract failed on both counts.The nine small businesses rarely play a role as state employees place orders each weekday for scissors, copy paper and batteries. In fact, not a single employee of any of these companies actually works at the Lafayette office where orders are processed. Instead, that office – which all nine listed as their address on state forms – is staffed by an Office Depot subcontractor.

The state spent more than $32 million for office supplies in 2007.
As for the savings, a Mercury News analysis shows the annual cost for office supplies rose 20 percent under the contract and included tens of thousands of dollars in overcharges.”I think it’s a scam,” said Rick Marlette, a professional marketing analyst whose audit of the office supply contract in Georgia spurred state officials to kill their deal with Office Depot last month. “They’ve played these tricks inthe past, gotten by with it, and they’ve gotten bolder and bolder.”

In Marlette’s study of California’s contract and billing records – more extensive than that conducted by the newspaper – he concluded the state has overpaid more than $1 million in office-supply purchases. After being presented with Marlette’s findings and other small-business owners’ concerns, the state launched its own audit.Office Depot contends that the company has worked to save the state money and that billing errors more often than not favored the state. The company noted that price increases either were within the contract or received specific state approval.

‘Spot checked’
The California audit follows a two-year stretch in which state officials paid the bills with virtually no scrutiny.State contract manager Hiroko Kurosawa said she “spot checked” the amounts the state was billed for goods against the contract prices. Overcharges were rare, she said. And when they did happen, she alerted Office Depot and trusted that the company corrected the problem. “I didn’t keep a tally,” she said. ‘I didn’t track it.”The contract proposal was presented as a hybrid business model that could give employees the best of both worlds: the personalized care of a small business, combined with the vast product offerings of a giant supplier.

The state was deeply involved in crafting this model from the beginning.
In spring 2006, after the state had already issued its invitation for companies to bid on the massive contract, the Department of General Services held two job fairs to match small businesses – even those without prior office-supply experience – with four Big Box office supply companies.Office Depot beat its competitors for the contract in two moves. First, it offered the lowest-priced items, agreeing to sell dozens of key or “core” items for prices that were far below retail rates: $3 scissors for 15 cents, a $30 chair mat for $1.84, and a $20 three-hold punch for $4.49.Then it added nine small companies to the contract, more than doubling the participation other Big Box companies promised in their proposals. Only four of the small companies had prior experience selling office supplies, but the state gave Office Depot bonus points for each company nevertheless.But reasons to question the Office Depot proposal were quickly evident. There was, for one thing, the fact that all nine small businesses listed the same Lafayette office, with the same customer-service number and the same San Francisco billing address.The Lafayette site is an unmarked office filled with brown cubicles and computer screens

that blink with Office Depot’s red and white home page.
It is staffed not by the nine businesses but by Office Depot subcontractor Epylon – which crafted the online ordering system for the contract. Epylon’s dozen employees in the office manage the Web site, answer the customer-service calls, respond to e-mails from state employees and process the orders. When state employees log in to place an order, they are switched automatically from a portal bearing the name of one of the small businesses to the Epylon site where they order from a large list of Office Depot products.”Somebody in the state should have said, ‘Hey, this doesn’t pass the smell test,’ ” said Bill Jones, vice president of a Redwood City office-supply company, who has joined with other small-business owners to ask for the state audit.State officials said they are investigating now to see whether the contract violates a state law that requires small businesses to play active roles in contracts they sign with the state. Assemblyman Ira Ruskin, D-Los Altos, has launched his own investigation into the contract.Owners of firms involved in the Office Depot contract insisted they are very involved in the deal, acting on the front and back end, as sales agents and bill collectors. “I’m helping customers with product selection. I answer questions about invoices,” said Bonnie Cerkleski, owner of Rancho Cordova-based The Primary Source. “I collect. I’m always out there collecting.”

Price questions
There were other early signs in the contract that state officials might have questioned.For example, how could Office Depot promise a two-year fixed rate of 15 cents for a pair of Acme scissors when retail is about $3 and the cost to the supplier would be closer to $2?”You can’t even make them for that price and everyone in the office-supply business knows it,” said Mark Leazer, board chairman for an office supply trade group, American Office Products Distributors.Halfway through the contract, Office Depot officials came to the state and asked if the scissors and 39 other low-priced core items could be swapped out for a host of generic Office Depot brand items at the same price.

Contract manager Kurosawa agreed.
But the Mercury News analysis found instances when state employees continued to purchase the original items, rather than the cheaper substitutes. In some cases, state agencies bought Acme scissors even at $3.79 a pair. Similarly, California workers bought the Rubbermaid chair mat for as much as $40, far beyond the original price of $1.84.

State contract officials declined to comment on price discrepancies found by the Mercury News until their own audit is complete.Other price changes – which the state approved – came in fall 2007. More than 2,900 of 8,000 prices increased on a second shopping list, called the “Market Basket.” On these items, Office Depot promised to apply a fixed discount rate, but raised the price on which the discount was applied.Although the company claimed that this “pricing strategy will yield the lowest net prices to the state,” the newspaper analysis identified more than 800 cases in which Office Depot increased the cost to the state even though the manufacturer’s price remained steady.In addition to the price spikes, the Mercury News found the prices were unreliable, leading to $142,918 in overcharges and $70,356 in undercharges. Marlette’s analysis includes more items, and also does not consider undercharges, since the contract sets limits but permits prices to fall below the contract price.

In its own analysis, Office Depot said its findings found that undercharges exceeded overcharges by more than $45,000.Georgia officials said the price variances, and repeated overcharges, were a factor in the state’s decision last month to cancel its contract with Office Depot. Office Depot said it was “surprised” by that action, and said the company is “committed to the highest level of ethics, pricing, service and integrity in the fulfillment of these contracts.”

Contracts elsewhere
Other states are examining their own contracts with Office Depot. North Carolina won reimbursements after identifying overcharges in an audit. Nebraska is expected to release its audit next week. And officials in New York and Wisconsin have called meetings with Office Depot, but it’s unclear whether formal audits will be ordered.

Office Depot continues to believe it will be vindicated and says the state enjoys a great deal through bulk buying.But last week, the Mercury News went onto the Office Depot retail Web site and found dozens of items, including data storage tapes, toner cartridges and batteries, that were either the same price or cheaper than the special rates stated in the California contract.