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The Cost of Broken Trust: Office Depot -Taking Care of Whose Business?

What happens when the insatiable drive for profits permeates the culture of an organization?

Eventually you forget whose business you should be taking care of.

Just ask anyone in the office products industry and they’ll point to Office Depot’s current woes. The number two office products “mega dealer” ascended to their position in large part, due to their strategic focus on the education and government markets. Now they have lost favor with those same markets amid questions surrounding “pricing and other irregularities”.

Consider the following as reported in the Independent Dealer Magazine’s Depot State Contract Watch:

• After the state of Georgia raised some red flags, an internal audit revealed rampant overcharges. An industry trade publication estimated the overcharges as much as $1.2 million. As reported last February by the Atlanta Journal Constitution, the state canceled their $40 million per year contract. Georgia is not alone.
• California: The San Jose Mercury News reported that Office Depot has agreed to repay the state of California $2.5 million for over-payments, state officials said, as they released a state audit concluding that state workers routinely failed to get the best value when buying office supplies the past two years.
• Southeast Florida: Lee County tallied nearly $60,000 in overcharges, according to a report by that county’s internal audit department as reported by the Palm Beach Post.
• Southwest Florida: Fox 4 News reported that in Collier County, Florida a “whistle blower” from within the company has been terminated after voicing his concern for overcharging that county’s government (WFTX video).
• North Carolina: The office of the state auditor in Raleigh, NC announced he found overcharges under an Office Depot contract with the state purchasing agency. That audit examined six months of purchases and identified $294,413 in net overcharges through direct testing of purchase orders.
• Nebraska: State Auditor Mike Foley has concluded an investigation showing the State of Nebraska is paying too much for office supplies because of serious pricing errors and overcharges. Overcharges ranged from less than 1% to over 400% on various items according to the report.

Office Depot’s stock has plummeted from $46.52 in May of 2006 to $1.82 earlier this week, nearly 97% drop as compared with only a 30% – 40% drop in the major stock indexes over the same time frame.

Is there a connection between their B2B pricing strategy and their poor performance? Sales and operating margin dropped nearly in half comparing Q3 07′ to Q3 08′ in their B2B segment.

Time will tell the depth of Depot’s damage as investigations continue throughout the country. One thing is certain, despite persistent denials by Office Depot officials, the tide doesn’t seem to be going in their favor. Are they wrongly accused? Are they simply out of alignment with their core values? Or is this part of a strategic pricing strategy that’s become part of their culture? According to their website, they define integrity and accountability as follows:

Integrity - “We earn the trust and confidence of associates, customers, suppliers and shareholders by being open, honest and truthful in all that we do”.
Accountability – “We are responsible for achieving and sustaining unprecedented results that create extraordinary value to our shareholders…”

Maybe it’s just me, but it seems like their failure to adhere to the former is impacting their realizing the latter.

With ever increasing pressure on corporate earnings, the temptation to slide down the slippery slope of profit margin improvement at the cost of integrity will rise. If your conscious is telling you “this doesn’t feel right”, listen to it. The pennies saved won’t be worth the risk.

How many years and advertising dollars does it take to create a corporate brand built on trust? Not only does bad publicity cause buyers to question your pricing, it causes them to re-think inviting you to bid in the first place.

What can you do to avoid the high cost of broken trust?

1. Don’t do anything in the short-term that could potentially come back to bite you in the long-term. Ask yourself, “would the buyer think this is equitable?”

2. If you work in an industry in which customers already question the trustworthiness of sellers (guilt by association), address issues like pricing head on. Don’t let pricing integrity become the “elephant in the room” that takes over the room. Bring it up first and get it on the table. Transparency is a precursor to trust.

3. Leadership not only has a responsibility to set the tone, it has a charge to snuff out unethical pricing behavior at all levels. Make sure your team knows that you’re not willing to cross the integrity line, not once. “It’s easier to ask forgiveness than permission” is a recipe to inspire the wrong kind of headlines.

Restoring broken trust takes a lot longer than building trust; a reputation can take years to build but only seconds to destroy.

Can you feel it? It’s all around us.

No, I’m not talking about the doom and gloom of the stock market or the latest bank collapse. I’m talking about a the subtle changes where you shop, eat, bank, style your hair and service your car. Despite the dark sky of economic woes, there’s a silver lining – a shift toward the customer.

• Chain restaurant staff are more welcoming.
• Safeway has a sale sign on every item (recognizing that people need to perceive a deal before they’ll buy)
• The local Toyota dealership is offering free Cappuccino’s on Monday, Wednesday and Friday and now leaves you with a bounce-back coupon.
• Staples offered 50% off any copy paper (although tied to their rewards program – not very customer focused)

And last night, while I was at the local Target, the floor manager announced (loud enough for customers to hear) that any employee that helped a customer find a “high ticket” item resulting in the largest sale would get a $5.00 Target gift card.

Think back to not too long ago. Didn’t you feel complacency just prior to the storm clouds moving in? I’m guessing Lehman Brothers, Fannie and Freddie all were perched on their porches in rocking chairs before the tornado came. The shift had drifted to the seller.

New found energy?

Genuine customer focus?

Desperation?

Here’s the question that pulls at me – what if this customer focus du jour transcends beyond the current storm clouds? What if this recent shift back toward customer satisfaction propagates valuable lessons that translate into better service once the sunny days are here again?

Perhaps this is a divine shake up -requiring us to “love you brother as yourself” in order to get back on track.

Those who are truly customer-focused will soak up what works and what doesn’t through these trials. Those that are thinking about these activities as a tactic to wait out the storm will probably revert back to their old ways.

In the short term, buyers benefit. In the long-term both buyers and seller can.

Leland Kuhn
Director, Materials Management
Children’s National Medical Center
Washington, DC

Last week I had the chance to sit down with one of the most professional procurement executives that I’ve had the honor of knowing for more than a decade, both as a customer (when I worked at Boise Cascade), and as a friend. Lee Kuhn oversees a $400,000,000 annual budget with functional responsibility for departments that “turn the wheel” behind the scenes at one of the nation’s leading hospitals, Children’s National Medical Center.

He shared some insights on criteria he uses to retain his existing suppliers, visit with new ones, and make supplier changes.

Even in these challenging times, Lee suggests that while pricing is a factor it’s overrated when compared to the importance of relationships. He goes so far as to say, “Trust is everything.” These are some great insights for sellers in any industry; there’s a lot here to unpack.

Mark: Given the state of the economy, sellers are continually seeking new ways to win business. What advice could you give them, and which factors are critical to your decision-making process for converting to a new supplier?

Lee: This sounds simple, but sellers need to ask their customers to articulate their needs. If you ask us, we will tell you to make us look like heroes. How do you do that? Help us to reduce costs and/or improve quality. If your goods or services can do either one or both, that will get your foot in the door.

Our operating budget is slightly over a billion dollars a year. If our existing spend for your type of product is only $100,000/year and you can give us a better product at a 10% cost savings, you still may not get the sale. Why not? We must weigh the “pain of conversion” factor. If changing to your product is difficult, we may pass even if the savings or improvements are impressive. Conversely, if the change is easy, the savings or improvements may not need to be significant. Find out what you can do for your customer to relieve that pain. In other words, make the juice worth the squeeze.

Mark: As you consider all of the factors that go into decision-making; either to keep or change a given category, describe the importance of the relationship with the selling organization and just how important a role trust plays? Can you give an example?

Lee: Trust is everything, and it only takes one unfulfilled promise to ruin your relationship with your customer.

We have a sales rep whose company provides equipment maintenance service to our hospital. She and her company have given us excellent customer service for years, and have built a strong relationship of trust.

She recently came to us with a somewhat radically different approach to providing service. The effort of conversion was significant, but we were assured that her company would do most of the work. The proposed savings exceeded $900,000 per year. To this day I still believe that she was not intentionally doing anything untrustworthy…she was just trying to make a sale. She didn’t have a good grasp of the concept her company was trying to sell.

After numerous meetings with key players from her company and ours, it became apparent that her proposal wasn’t much more than creative financing with a questionable return. It made her look bad because she clearly didn’t understand what she was selling. It made her company look bad for trying to sell us something that we didn’t want. It made us look bad for wasting our end-users’ time.

We now have an entirely different impression of our sales rep and her company, and it is doubtful that they will ever be able to change that impression. (Note from the author – notice how a high self-orientation dramatically depleted the trust she had accrued).

Mark: In this tight economy, many sales organizations are focusing on reducing their costs, in part to lower their sell prices. What role does price play in your decision making process and how far should sellers go to bring down their costs?

Lee: We say we look at value, not cost. We say that if we can’t get what we want when we want it, price is irrelevant. Both of those statements are true, but when finances are tight, it’s a lot more difficult to justify the purchase of a higher priced item because it is better. We only pay more for quality when we’re clear about the value we get in return. Consequently, I would caution sellers not to reduce their costs to the point at which customer value erodes.

Mark: In live conversations with sellers – what are the biggest turn-offs and what speeds up the trust process?

Lee: Don’t waste our time. Due to the nature of our business, we have thousands of different vendors who sell us goods and services. We don’t have time to meet with each of them, much less their competitors. If you do get a face-to-face meeting, get to the point. A few minutes of personal time to get to know your customer is expected, but then get down to business. Know how much time you have and leave early. When we rush you out of the office so we can make our next appointment, we don’t want to hear that you’ll schedule another meeting so you can finish your proposal. Good luck with that.

Mark: What other advice can you share with sellers to help us with decision-makers like you on “the other side of the desk”?

Lee: You are constantly a customer in your day-to-day life, whether it’s in the drive-through at McDonald’s or in the showroom at Mercedes-Benz (good sales reps always make more than their customers). How do you like being treated? Find out what your customer wants and give it to them. Most of all, listen to them.