Depot “violated” state contract



As if the California auditor’s report at the end of August wasn’t bad enough, his North Carolina counterpart has now suggested that his state’s purchasing department should consider debarring Office Depot from doing business with state agencies after the Florida-based supplier "violated" the terms of the statewide contract.


The latest blow to Office Depot’s increasingly tarnished reputation comes as the North Carolina audit that was published on 9 September found that over a six-month period from July to December 2007 the office supplier overcharged the state by just over $294,000.


Furthermore, according to Office Depot’s own findings – revealed in a memo addressed to the auditors dated 13 March 2008 – the state was overcharged by $594,000 in a 12-month period to 1 March 2008.


On its own, this could lead one to conclude that Office Depot conducted a deliberate policy of overcharging the state.


However, the 13 March memo also sees Office Depot admitting to more than $800,000 in undercharges during the same period! This now smacks of, to put it kindly, poor contract management rather than any deliberate policy to mislead.


It was a similar story with the California contract where undercharges were found to be greater than overcharges partly because, in October 2007, Office Depot had "inadvertently" uploaded the incorrect file during a catalogue update.


While the overcharging issue was significant in North Carolina, where overcharges come in alarmingly at over 10 percent of the $2.7 million spent during the auditing period, in California it amounted to 0.13 percent of the total of $26.4 million that was spent on core and non-core items, a rate which led to Office Depot to praise itself for its "outstanding performance".


The area of "significant concern" raised by the California audit was the fact that 35 percent of purchases – or $14.2 million out of a total of $40.6 million – were related to a third category of products or "non-contract" items that Office Depot sourced from wholesalers and were not attributed the expected discounts.


Office Depot contends that it was unaware of the restrictions in the contract that prevented it from offering non-contract items, a view that is rejected by the audit which concludes that the selling of this category was "not allowable".


What becomes apparent from reading the audit is that Office Depot was aware of the problem of these non-contract products as early as October 2006 when the issue first appeared on a meeting agenda to "provide the state with a list of non-core items that do not fall in a category basket". However, the issue was still not resolved when it appeared on the agenda of a conference call on 24 May 2007, but does not seem to have been considered significant as "both parties were busy with other contract issues".


Interestingly, a significant reduction in the number of transactions of these non-contract items took place from July 2007 as products were moved – by Office Depot – into non-core category baskets which benefited from the higher agreed discounts.


This would suggest that Office Depot contract administrators knew that items in this third category should have been allocated to one of the non-core category baskets and therefore eligible for higher discounts from the start of the contract. However, there is no evidence to suggest the Office Depot sought to inform the state of the error and to backdate the correct pricing.


It was only when the audit brought this issue to light that Office Depot agreed to pay the state $2.5 million for the lost discounts. Though, once again, Office Depot does not admit any error on its part; the "disagreement arose between Office Depot and the DGS relating to the interpretation of the contract", spokesman Jason Shockley told and the $2.5 million payment was offered as an "additional discount … in the spirit of cooperation and customer satisfaction".


It is unfortunate that this "spirit of cooperation and customer satisfaction" did not manifest itself earlier on in the contract.


While Office Depot was praised for its (mostly) swift correction of problems highlighted by the California audit, a lack of pro-activity is clear in a number of areas such as the visibility – or lack of it – of the best priced items on the website, the availability of items that should have been blocked under the contract, the uploading of incorrect database files to the online catalogue and the continued availability of core items that should have been discontinued.


This pattern is repeated in North Carolina, where "numerous pricing errors" were found, unauthorised items were added to the catalogue, products were "misclassified" so that they didn’t receive their full discounts and a random test of products found 41 percent were discontinued or unavailable, leading to users purchasing higher priced items.


More seriously, Office Depot was accused of inflating its retail prices to make discounts appear more attractive. The audit found that state agencies could purchase some items for a lower price on Office Depot’s retail website with no discount than they could through the state’s online catalogue that offered a 71 percent discount.


It was also stated that Office Depot took advantage of a weak contract that allowed it to change product codes for its own gain, a practice that was highlighted in Rick Marlette’s study of Office Depot’s Georgia contract back in January.


But the responsibility for the many contract issues is not just being heaped on Office Depot.


In both California and North Carolina, the states’ purchasing departments come in for heavy criticism from the auditors.


The California audit states that a "cursory review" would have revealed the existence of the third category of products, while the contract administrator admitted that she did not actively review the usage reports for pricing issues! The whole issue of the non-contract items suggests unsatisfactory follow-up and action following meetings and conference calls.


In North Carolina, state auditor Leslie Merritt found fault with many aspects of the Purchase and Contract division’s handling of the contract, all the more damaging since a previous audit two years ago had highlighted pricing issues.


Hopefully, this will now prove to be a wake-up call for states to tighten up on their control procedures and resist the temptation for contractors to adopt practices which, while not necessarily illegal, do not appear to be in the best interests of their clients.


As Eric Lamoureux, Media Relations Manager at California’s Department of General Services, told "We have implemented a tool that compares actual price with contract price for every item purchased. It is sophisticated enough to deal with common measurement pitfalls at a macro level such as CPI movements and a micro level such as packaging changes to normalise unit of measure."


Now, in an ironic twist, one state will have the chance to put these tighter controls to an immediate test.


After the Nebraska state auditor’s report in April 2008 heavily criticised Office Depot’s performance, the state put its contract out for rebid.


And at the end of August, Nebraska awarded the new contract to …. Office Depot!

You couldn’t make this up!