In an unprecedented move, a US state terminates a $30 million annual office supplies contract.
Just when it seemed that things couldn’t get any worse for Office Depot, the company’s business services division (BSD) was dealt a further blow by the decision of the state of Georgia in mid-February to terminate its statewide office supplies contract.
As reported in OPI September 2007, Depot was already under pressure from the state of Georgia to improve its performance following a review that had uncovered several major flaws including "numerous pricing, service delivery issues and overall lack of responsiveness". This, in August, had led to the office supplies giant receiving a letter from the state’s Department of Administrative Services (DOAS) demanding an improvement.
At the time, many of the issues with the Depot contract had been brought to the attention of the DOAS by a group of independent dealers represented by OP consultant Rick Marlette. Even after the August 2007 warning letter, the DOAS allowed Marlette to pursue his investigations, giving him access to the sales data from September 2007.
Marlette painstakingly went through this information and the result was a damning report published in January 2008 that strongly condemned Office Depot and the state’s consultants, AT Kearney, which had been instrumental in setting up the Depot contract.
Following the publication of this report, Marlette and representatives of the independent dealers had arranged an 11 February meeting with the DOAS to present evidence that Depot had overcharged the state by a staggering $1.2 million. However, on 8 February, just a few days before this meeting was due to take place, the DOAS cancelled it, stating that it was preparing to terminate the contract altogether.
In fact, on 8 February the DOAS simultaneously informed both Office Depot and the state’s purchasing officers that the contract was to be terminated with immediate effect. In an email to Depot VP Bob Cetina, Timothy Gibney, the DOAS’ assistant commissioner for purchasing, referred to Depot’s "inability to satisfactorily address the performance defects … most notably ongoing mistakes in pricing" that had been brought up in the August warning letter.
Though the email admitted that "some progress has been made in the number of mispriced items", it also stated that "Office Depot continues to misprice items every month", both over- and undercharging the state. Clearly, from the tone of the email, the DOAS had just lost patience with Depot, saying that it had not expected its staff to "constantly monitor and raise these errors with Office Depot rather than these errors being addressed proactively by Office Depot as part of quality control in the ordinary course of business".
In the letter to the state purchasing officers, the DOAS said that its efforts to find a solution have "proved futile and it is simply time to find other sources".
"Other sources", at least for a "suspension period" of 120 days means that state organisations can use any office supplier they choose, including Office Depot if they wish. During this time, the DOAS’ State Purchasing Division will set up a new sourcing team to draw up another office supplies tender. Office Depot, though, will be barred from bidding for this new contract, and after this experience with a national supplier, the independent dealer community looks well placed to be awarded the business.
The independent dealers’ trade association, National Office Products Alliance (NOPA), was quick to praise the efforts of its dealer members in Georgia as well as Rick Marlette, with NOPA president Chris Bates commenting: "This hard-fought win in Georgia will have a huge impact on the ability of dealers in other states to convince their governments to ensure proper oversight of office supplies contracts. The best solution, however, is for federal, state and local governments to seriously rethink their sole-source or limited source purchasing strategies."
When the state of Georgia had initially announced the move to Office Depot as its sole supplier, it was expecting potential savings of up to 30 percent on its annual office supplies bill through a combination of lower prices and reduced administration expenses.
It seemed a deal too good to be true for the Georgia taxpayers, and ultimately it was. If the supplier had been a small business and had failed to deliver on numerous promises, it would have been fired. The state of Georgia should therefore be applauded for upholding these business principles when dealing with a powerful national supplier, despite the additional time, effort and money that is going to be spent on a new procurement process.
However, this may not be quite the end of the story. In a 12 February reply to Timothy Gibney’s email, Office Depot’s associate general counsel Stephen Calkins argues that the decision to terminate the contract "does not seem rationally related or in proportion to the purported reasons" and claims that the state has not "identified the specific provision(s) of the contract that it believes Office Depot has failed to comply with or that form the basis of the state’s alleged termination".
He goes on to request the state to "immediately advise us of the contractual basis justifying its termination of the contract … so that we may evaluate the state’s claims and actions and consider our options", in other words the possibility of taking legal action. This could be something that is set to run and run.
Marlette, meanwhile, will be turning his attention to other Depot state contracts, including California.