IS OFFICE DEPOT SCAMMING THE STATE OF CALIFORNIA ?

[Anonymous]

Elusive savings in state office-supply contract
ELUSIVE SAVINGS
Savings
from a state office-supply contract were often elusive, for a variety
of reasons. One analyst who studied the state’s purchases called the
contract “a scam.”

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.

Deal for useless items
The
catalog provided in late 2006 offered a great deal on outdated daily
desk refill calendars – just 22 cents. Orders for the requested 2007
model of the same calendar cost state agencies $1.19

State deal benefits giant retailer
SMALL BUSINESSES RARELY PLAY ROLE IN SUPPLY CONTRACT
Press release announcing details of a state office supply contract under investigation
 Elusive
savings in state office-supply contractSACRAMENTO – State officials in
2006 hailed as “unprecedented” their success in getting small
businesses involved in selling office supplies to California
agencies.Exceeding even Gov. Arnold Schwarzenegger’s ambitious target,
small businesses were going to handle a “stunning” 98 percent of the
sales of supplies to state agencies. Even better, the state’s contract
with a partnership of nine small businesses – combined with the
purchasing power of Office Depot – was going to cut costs in half.

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.

Industry experts who track government
contracts say prices are rarely examined with big, established
companies.”I call it the trust factor. No one checks the prices because
they’re too big a name to do it,” said Peter Frost, a London-based
office-supply marketing expert who is fighting the hybrid contracts
internationally. “They trust the big guys.”

[Author]

April 9, 2008 at 1:24 PM