The State of California’s office supplies contract has been the subject of keen interest in the last month after an investigation by Office Depot whistle-blower David Sherwin which alleged that the big box was using two independent dealers as ‘fronts’ to service the contract.
The two dealers in question, The Primary Source and The Very Last Word, were part of a nine-member small business consortium that Office Depot had put together when it won the California state contract in 2006. At the time, this consortium was trumpeted as a winning combination of small businesses and big boxes working together, but soon ran into allegations that the dealers were acting as fronts for Office Depot and not performing a commercially useful function (CUF).
A 2008 audit by the California Department of General Services (DGS) confirmed the CUF of the dealers, but doubts still persisted, leading to the introduction of legislation on small business contract participation.
However, the audit did find Office Depot guilty of pricing “non-compliance” – prompting the office supplier to make a payment of over $2.5 million – and a new bid process began in August 2008 after Depot’s contract was not renewed.
However, it was not until late 2010 that a new award was made. To general surprise, the contract went to a relatively unknown independent dealer National Office Solutions (NOS), which won ahead of big box Staples and full-service California dealer Office Solutions.
The original bid documents for the new award estimated the annual spend on the contract to be $24 million. Information obtained by Sherwin following a public records request show that the annual run-rate is closer to $34 million.
Between 1 February 2011 and 15 February 2012 the state spent around $10.3 million with NOS while from March to December 2011 $19.4 million was spent in ‘off-ramp’ purchases with 280 certified small, disabled and veteran-owned businesses (SB/DVBEs). Of the $19.4 million, about $958,000 was with The Primary Source and The Very Last Word.
Office Depot doesn’t deny that it still has a relationship with the two dealers. “Like many others in the industry, Office Depot works with SB/DVBEs across the country to service its customers, both public and private,” the company stated.
There were allegations in May last year that orders placed with The Primary Source were still using the expired Office Depot state contract. An internal audit conducted by the DGS concluded that, while these orders were placed with Depot’s electronic ordering system, the payments were made to the dealer and no transactions used the expired contract.
Whether these types of relationships will continue to qualify as performing a CUF in California, however, is a matter for debate.
A small business bill introduced in February this year states: “A contractor, subcontractor, or supplier will not be considered to perform a CUF if the contractor’s, subcontractor’s, or supplier’s role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of small business or microbusiness participation.”
The bill also lists a number of conditions which must be met for a small business to be deemed to be performing a CUF. One of these states the business must be “responsible, with respect to materials and supplies required for the contract, for negotiating price, determining quality and quantity, ordering material, installing, if applicable, and paying for the material”
There have been suggestions elsewhere that NOS is being ‘swindled’ out of its fair share of the state’s office supplies purchases in a ‘scam’
It should be noted that the current contract covers about 2,000 items, which is very low for this type of agreement. It is therefore not surprising that two-thirds of the total spend comes from off-ramp (non-contract) purchases for which there are specific requirements depending on whether orders are less or greater than $5,000.
The fact that these purchases have to be made from certified SB/DVBEs should be seen as an encouraging development for small dealers. According to OPI calculations, about 3.5% of the estimated $34 million that the state spends annually on its office supplies is made to the two dealers that partner with Office Depot, meaning 96.5% (approximately $33 million) goes to other independent dealers and small businesses.
While we are not suggesting that the DGS does not need to question whether all contract participants are fulfilling a CUF, it may well be that any in-depth CUF review could raise awkward questions about the relationship between stockless dealers and wholesalers and the roles they perform.