Keywords: Office, Depot, Neil, Austrian, big, interview, audits

Big interview: Neil Austrian part two

Austrian on audits

When OPI interviewed Office Depot CEO Neil Austrian back in September, one line of questioning related to the continued controversy surrounding allegations of overcharging in the company’s government contracts business. 

Published exclusively for this annual review, here is that part of the interview in full.

OPI: Let’s turn to the North American Business Services Division (BSD). One area that OPI readers are very interested in is the public sector audits that have been performed over the last two or three years. We had two more reports recently from Dallas and Detroit claiming that Office Depot had overcharged them. So it seems to be a problem that’s not going away. When and how is all this going to end?

NA: Well, I can’t answer when it’s going to end. Both of those audits – Dallas and Detroit – relate to a contract entered into many years ago that has now expired. As you probably know, public sector contracts are extremely lengthy, the wording is difficult, the interpretation can be on either side and in some cases these contracts run hundreds of pages. I’m not denying that we’ve made mistakes because we have. In Dallas, though, we strongly disagree with the auditor’s assertions that the County was entitled to certain additional discounts. The auditor’s contention is based on a fundamental misunderstanding of the contract. In Detroit we are aware of, and have been cooperating with, the audit by the Detroit Public Schools. As we understand it, the audit is ongoing and we are continuing to work with the customer to ensure that the results are based on a correct understanding of the relevant contract terms. 

But let me say, at the end of the day if we were wrong, we make it right. And I would say that in the past, in a large number of these situations where we had public sector issues, the customers have stayed with Office Depot going forward. That indicates something. It indicates the fact that they have the confidence in us, in the new systems that we’ve put in place in terms of contract compliance, in terms of how we’re going to go to market and really define things in the contract on both sides far better. And I think if you look at the former US Communities customers, we’ve retained over 85% of our customer base.

OPI: The latest figure you have quoted is 86%. Does that refer to the number of customers or the sales figure?

NA: Basically our revenue and our customers. It almost matches. It’s pretty close.

OPI: Does that include other US Communities contracts? I know you have
a separate contract for school supplies and you also have something with Tech Depot as well. 

NA: It’s inclusive in terms of what we’ve kept.

OPI: So, as far as you are concerned, the impact of all this has been fairly minimal on the business.

NA:  You know it’s certainly hurt our reputation. I’m not going to deny that, but I think we’re gaining it back. I think people understand that mistakes were made; we’ve admitted that and we’re moving forward. On an economic basis that has not been the major issue in terms of the performance of the company.

OPI: Where have the former US Communities customers gone in terms of your other cooperative contracts? I know you were pushing TCPN quite hard earlier this year.

NA:  We’ve got two different consortiums that we’re involved with: TCPN and National IPA. 

OPI: You’ve mentioned some customers coming back to Office Depot who had moved away. Can you quantify that at all?

NA: No, I can’t.

OPI: You mentioned the word “mistakes”. Can you be a bit more specific about what those mistakes might have been?

NA: I think we’ve publicly talked about the two price plans – Option 1 and Option 2 – under our now expired office supplies cooperative agreement. As we have said before, the issue related to concerns regarding the past marketing of the Option 2 price plan, which Office Depot had begun to address before any allegations were made regarding it. Importantly, there was nothing wrong with the Option 2 price plan itself, which simply gave customers the choice of a flat discount from retail pricing. These price plans were implemented several years ago and the contract has now expired. We have made significant changes since that time, including the implementation of a world-class contract compliance organisation and training programmes to ensure that the contracts we enter into are unambiguous and that we can comply with the terms. 

OPI: The message coming out of Office Depot, certainly if I go back to 2008 to 2009, is that these option switches were the work of rogue sales reps and it didn’t go up any higher than that. Would you stick by that version of events?

NA: I’m not going to get into whether it was one salesman or ten salesmen. But as I said before, we have made significant changes since that time and the organisation is benefiting from the new systems, the new training, and the new processes we have put in place.

OPI: There has been a line of argument that all these auditors have been influenced by one “disgruntled former employee” called David Sherwin. How is it that one person could have such a major influence on all these auditors?

NA: I’ve never said that. I don’t know that any company executive has ever said that. (Pause) I’m not going to comment on David Sherwin at this point, Andy.

OPI: Something that has come out of the Dallas and Detroit issues, as well as the Option 1 versus Option 2 pricing, is this issue of most favoured government pricing. Surely that has to be a major concern going forward if other agencies start…

NA: I understand from my teams that Dallas County and Detroit are operating under a fundamental misinterpretation of a key contract provision. But remember, this is a contract entered into several years ago and that has now expired. We are working with and cooperating with these customers. I’m focused on going forward right now.

OPI: There seem to be a lot of disagreements from your side with some of the reports from the auditors.

NA: When you say disagreements, all I’ll say is that with multi-hundred-page contracts, in a lot of cases it’s a matter of how clauses and words and phrases get interpreted. There are usually two sides to every story on that, and Office Depot has a long history of being a reputable company. As I say, in every case that this happened, we’ve provided credits or refunds if warranted. Also, in a large number of cases, we’ve kept the customer. 

OPI: I guess detractors would say it’s a question of smoke and mirrors in the wording of the contracts. Has there been any change in the contracts, the way they’re put together in the last couple of years? I know you’ve had a contracts compliance committee that was put together some time ago.

NA: Yes, we now have a robust and strong contract compliance team. We have invested significantly in people and systems whose function is to ensure contract pricing accuracy and compliance. This includes assembling the team, and implementing software applications and system enhancements to manage written contracts and price changes. 

OPI: And Steve Calkins [who became EVP, Contract Sales Division at Depot in April, taking over from Steve Schmidt] comes from a legal background. Was that a coincidence?

NA: A total coincidence. He wanted to run a business, get P&L experience and move up into general management. He was eager to do it, he knew the people, he knew the business and he knew the customers, so it was a good choice.

OPI: It doesn’t hurt that he has a legal background though.

NA: No, it doesn’t. 

OPI: I know there are some other investigations going on – the Department of Justice and some other federal investigations. Are you able to give an update on the status of where those investigations are at the moment?

NA: No, I’m not. Although I can tell you that we cooperate fully with all regulatory enquiries and investigations.

OPI: Obviously Steve Schmidt was very closely associated with BSD and the troubles that were reported from that division. It just seems strange to an outsider that he’s been put into another high level position within the company.

NA: That’s really a total mischaracterisation of Steve Schmidt’s role in BSD. Steve Schmidt came to BSD after the fact and during his time all he did was try to solve the problems that existed before he got here. Virtually all the contracts we’re talking about were written prior to Steve Schmidt taking over the BSD business. I want to make it very clear on the record that Steve did a yeoman job sorting out the issues, reorganising the department such that we could go forward. The current change here at North America had nothing to do with these contracts. The job that Steve now has is a very high level job and I’m not certain I could have found anybody more capable than Steve to do it. [Ed. – Steve Schmidt has since been appointed President of International]

OPI: Do you think, in hindsight, the whole situation could have been handled in a humbler way? Perhaps being a bit quicker to admit that mistakes were made?

NA: No. I wasn’t here when all this happened, so I’m not sure of that.

OPI: But you were still on the board weren’t you?

NA: I was on the board, but I wasn’t there day-to-day in the trenches understanding who’s saying what and what’s being done. Every situation can always be handled better in hindsight. Hindsight’s great – I could tell you who won the game last night. So sure, I guess the answer has to be yes, because with the benefit of hindsight you’d do some things differently. But just because you can improve on something does not mean that it was handled incorrectly. I believe we have acted professionally and in the best interests of our customers.