Executive Briefing: Divided Communities?

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There may be more to Office Depot’s announcement that it did not submit a bid for theUSCommunities office supplies contract than meets the eye.

 

Office Depot dropped a bombshell last Friday when it announced that it was not going to bid on the new US Communities office supplies contract.

 

Depot has been the sole supplier on the contract for the last 14 years. It is its main vehicle for public agencies with around 10,000 customers and over $500 million in annual sales. Furthermore, Depot had been widely tipped to secure another award, albeit as part of a multiple award this time around.

 

Office Depot’s announcement certainly took those in the industry by surprise. Since the US Communities re-bid was announced in April, Depot has re-affirmed on numerous occasions its intention to go after the new award, telling opi.net: "Office Depot fully intends to compete for the new contract and we view the re-solicitation as an opportunity to affirm and improve the value of our offering to public agencies nationwide."

 

At the lead agency, LA County, they hadn’t seen it coming either.

 

Joe Sandoval, General Manager of the county’s Purchasing and Contract Services division, told opi.net: "We were not aware, nor did we have any indication, of Office Depot’s decision not to submit a bid until the day that the bid closed on July 15th."

 

Why then, the apparent last-minute U-turn by Office Depot?

 

According to the most recent communication from Office Depot, an open letter signed by Business Solutions Division (BSD) President, Steve Schmidt: "We chose not to submit a proposal because the RFP [Request For Proposal] contained terms that were substantially different than our prior office supplies contract with US Communities. We believed these new terms […] would hinder our ability to provide the best value on office supplies, including a low-price structure."

 

What are these "substantially new" terms that Schmidt is referring to, which he also said were "onerous" in a video message, and how will they impact Depot’s pricing structure?

 

According to US Communities, there aren’t any new terms.

 

In a statement, Michael LaPierre, National Programme Manager at US Communities said: "Unfortunately, they [Office Depot] have mischaracterised the supplier commitments as ‘new’ terms. They are not new. They are the same commitments that Office Depot made in 2005 when they won the current office supplies contract with Los Angeles County. Importantly, they recently agreed to the same supplier commitments when they won the schools supplies contract with Fairfax County, Virginia. Nothing has changed in this current solicitation."

 

He continued: "Regrettably, they appear to find the strict obligations in the US Communities programme that are designed specifically to protect public agencies by providing a guarantee of best government pricing to be ‘onerous’ in their words. What they have termed ‘onerous’ we consider a high bar and, until now, Office Depot has always agreed that providing public agencies with that assurance was the right thing to do."

 

Let’s look at those supplier commitments in more detail.

 

This is an extract from the 2005 RFP (bolding not included in the original):

 

Each supplier is required to make three basic commitments to insure the overall success of the national program:

 

Corporate Commitment – A commitment thatU.S.Communities has the support of senior

 

management, and thatU.S.Communities is the primary offering to state and local government agencies nationwide. The supplier shall make its existing local public agency clients aware of its U.S. Communities contract and upon the state or local public agency’s request, such agency will be transitioned to the supplier’s U.S. Communities contract;

 

Pricing Commitment – A commitment thatU.S.Communities pricing is the lowest available pricing (net to buyer) to state and local agencies nationwide and a further commitment that, if a state or local agency is eligible for lower pricing through a state, regional or local contract, the supplier will match the pricing under U.S. Communities;

 

Sales Commitment – A commitment that the supplier will aggressively marketU.S.

 

Communities nationwide and that the sales force will be trained, engaged and committed to offering U.S. Communities to state and local agencies nationwide with a further commitment that all U.S. Communities sales be accurately and timely reported to the U.S. Communities program office.

 

In 2010, the supplier commitments are contained in a separate appendix to the RFP, rather than in the actual RFP itself. The terms are more detailed and lengthy. Below are some extracts (bolding not included in the original):

 

The successful foundation of the partnership requires commitments from bothU.S.Communities and the Supplier.U.S.Communities requires the Supplier to make the four commitments set forth below (Corporate, Pricing, Economy, Sales) to ensure that Supplier is providing the highest level of public benefit to Participating Public Agencies:

 

(a) Corporate. Supplier shall ensure that theU.S.Communities program and the Master Agreement are actively supported by Supplier’s senior executive management.

 

(i) The pricing, terms and conditions of the Master Agreement shall be Supplier’s primary offering to Public Agencies.

 

(ii) Supplier shall advise all existing Public Agencies that are current customers of Supplier as to the value and pricing benefits offered under the Master Agreement.

 

(iii) Upon authorization by a Public Agency, Supplier shall transition such Public Agency to the pricing, terms and conditions of the Master Agreement.

 

[…]

 

(b) Pricing. Supplier represents toU.S.Communities that the pricing offered under the Master Agreement is the lowest overall available pricing (net to purchaser) that it offers to Public Agencies.

 

[…]

 

(c) Economy. Supplier shall demonstrate the benefits, including the pricing advantage, of the Master Agreement over alternative competitive solicitation pricing and shall proactively offer the terms and pricing under the Master Agreement to Public Agencies as a more effective alternative to the cost and time associated with such alternate bids and solicitations.

 

(d) Sales. Supplier shall market the Master Agreement through Supplier’s sales force or dealer network that is properly trained, engaged and committed to offering the Master Agreement as Supplier’s primary offering to Public Agencies. Supplier’s sales force compensation and incentives shall be greater than or equal to the compensation and incentives earned under other contracts to Public Agencies.

 

[…]

 

The full document can be found on the US Communities website under ‘Current Solicitations’.

 

As can be seen, the global meaning of the terms is essentially the same, notably in the commitments to making US Communities the supplier’s primary offering to public agencies and to lowest overall public agency pricing.

 

What is different is a fourth ‘Economy’ commitment to proactively market US Communities over other alternative solicitations (such as state contracts, for example). However, it could be argued that this commitment merely reinforces the ‘primary offering’ commitment.

 

Additionally, the 2010 supplier commitments provide clear examples of what a supplier is required to do in a number of specific cases involving existing and future public agency customers.

 

What this boils down to is that any existing public agency contracts become essentially redundant because a supplier must make ALL existing public agency customers aware of the price benefits of the US Communities agreement (which, by definition is the supplier’s lowest overall pricing offer to public agencies) and give them the option to switch. Why wouldn’t they switch if they were to get a better deal? Of course, when a customer switches to US Communities, sales to that customer are then subject to the programme’s administrative fees.

 

In the case of future third-party solicitations (such as state contracts, or single agency RFPs), if a supplier proposes the same terms and conditions as on US Communities or if "competitive conditions" require pricing lower than the standard Master Agreement pricing, all sales must go through the US Communities programme if the supplier’s bid is successful.

 

The only case where sales wouldn’t go through US Communities is when a supplier’s bid response pricing is higher than the existing US Communities pricing. In that case, why would a state/agency accept the pricing terms when it knew it could get better terms with the same supplier via US Communities?

 

Therefore, rather than simply being the supplier’s ‘primary’ offering, the supplier is left with little choice other than to see US Communities become its sole offering for public agencies.

 

This is what Office Depot referred to in a statement to opi.net when it said that the RFP contains terms that could "negatively impact […] the means to provide cost effective alternatives to public sector customers that buy through the US Communities programme".

 

Again, one could argue that, in essence, these requirements are implicit in the 2005 commitments (which, by the way, are standard on other US Communities contracts, not just office supplies), even though they were not spelled out in such great detail.

 

Depot’s reference to "cost effective alternatives" is also puzzling, as it cannot offer cheaper alternatives if it is sticking to the best public agency pricing commitment in its US Communities contract.

 

And, as US Communities’ Michael LaPierre stated above, Depot accepted exactly the same, more detailed supplier commitments earlier this year when it was awarded the school supplies contract.

 

This school supplies RFP also contained the same revised administrative fees conditions that can be found in the 2010 office supplies RFP. That is to say, a 2 percent flat fee for the first $340 million in sales and 2.5 percent on sales exceeding that amount. Administrative fees are also to be paid monthly, as opposed to quarterly in the existing office supplies contract. This does not materially affect the fee amount that is due, although it might present Office Depot with some cash flow issues. It is doubtful, however, whether this alone would be a sufficient reason to pull out of the whole contract.

 

What, then, has changed since Depot signed that agreement back in April?

 

One thing that was different about that bid was that another national supplier – School Specialty – was also awarded the contract. Had Depot not agreed to the conditions, then US Communities may simply have made a single vendor award to School Specialty and Depot would have been out of the picture in terms of school supplies.

 

Perhaps Depot feels that US Communities is not in a position to award the office supplies contract solely to its rival bidders.

 

As opi.net understands it, the only two bidders were independent dealer organisations AOPD and is.group. An OfficeMax bid had already been ruled out because it did not attend the pre-proposal meeting and it appears that Staples did not put in a bid either after having secured the new NJPA (National Joint Powers Alliance) office supplies contract earlier this year.

 

On the face of it, that may seem like great news for the independent dealer community.

 

However, it would be unprecedented for a national cooperative contract award not to feature at least one of the power channel players, and it is unlikely that the US Communities award would be made without at least one of them on board. Why not?

 

Quite simply, money.

 

No disrespect to AOPD or is.group members, who would surely offer great products and service to public agencies under a US Communities contract, but it is unrealistic to expect them to just be able to pick up over $500 million dollars in business from around 10,000 public agencies in one fell swoop.

 

As US Communities relies on administrative fees from its contractors, any drop in the amount of business done through its contract would hurt it in its pocket. And with fees set at 2-2.5 percent of total sales, the amount at stake is over $10 million.

 

Furthermore, both AOPD and is.group have acknowledged to opi.net that they did not represent the purely price option when bidding and that they would have probably not been able to match one of the power channel players purely on price had one of them put in a bid.

 

Given that 70 percent of the bid evaluation is price based, and that one of US Communities’ stated aims when it announced the re-bid was "to drive added value for public agencies", (i.e. to secure better pricing terms in the current economic climate) make no mistake, price is the number one priority.

 

Therefore, US Communities would fully expect to be able to offer its customers a new contract that offered better pricing terms than the current one. And that is by no means certain if AOPD and is.group are the only awardees.

 

Realistically, the independent groups’ bids were seen as providing their dealers with an opportunity to compete with the big boxes for business which had previously just not been available to them – but competing with a strong service and buy local message, rather than simply on price alone.

 

They had also been encouraged by noises from US Communities regarding the possibility of a multiple vendor award. Some of the wording in the RFP refers to dealers, and the revised administrative fees structure does suggest that US Communities itself was angling towards a multiple vendor award, as it has done in some of its other recent contract awards. In itself, achieving such a multiple vendor award with independent dealer participation would have been regarded as something of a victory. But no-one was expecting a multiple vendor award with only independent dealer participation.

 

In the event that US Communities does award the new contract to the only two bidders (AOPD and is.group), then that would effectively give a hunting licence to the power channel to go after the business outside the US Communities framework – Depot has said that it will seek alternative cooperative agreements or go after the business directly, and Staples has its new NJPA contract – and this could lead to a serious drop in revenue for US Communities.

 

Is Depot’s no bid, therefore, a deliberate attempt to force US Communities to backtrack on the current solicitation process?

 

That’s certainly what AOPD’s Executive Director, Bud Mundt, thinks.

 

"We think the recent announcement by Depot is a strategy to try and get the bid cancelled," he told opi.net.

 

By trying that, Depot might be hoping to force US Communities to implement the final one-year extension on the current contract, taking it to the end of 2011.

 

Does Depot have enough leverage on US Communities to be able to achieve that?

 

Quite possibly.

 

Remember, Office Depot has held the US Communities contract since it started in 1996. It would be a major upheaval for US Communities to go forward with no Depot participation at all. Additionally, neither ‘Max nor Staples are interested, so what alternative does US Communities have but to play along with Depot?

 

On the other hand, US Communities might feel that Depot’s claims that it can keep the bulk of its current US Communities customers are just a bluff.

 

Depot says that it will use other cooperative agreements, new agreements or direct business with public agencies.

 

As far as we are aware, Depot currently has two other cooperative agreements – the first with the Western States Contracting Alliance (recently awarded, but a multiple vendor award that also includes Staples and ‘Max), and the second with The Cooperative Purchasing Network (although this is reportedly set to expire at the beginning of next year and a new contract has recently been awarded to Staples’ subsidiary Quill, OfficeMax and local dealer Gonzalez Office Products).

 

It could also use state contracts to piggyback agencies in those states. The two most important states for Office Depot are Florida and California.

 

The Florida contract is being re-bid at the moment and it seems likely that Depot will be one of the awardees.

 

In California the RFP was recently cancelled, but there are unconfirmed reports that the bidding process is, in fact, still active and that it does not involve Office Depot. If confirmed, that would be a threat to Depot’s public agency business in this key state if it also no longer held the US Communities contract.

 

As to new cooperative agreements, there are no details as of yet as to what these might be. Depot has said that it will be providing more details in its second quarter results conference call next week.

 

The third strategy of dealing direct with agencies would appear to go against the whole cooperative contracts argument. If Depot can offer agencies the same pricing without the need for a cooperative agreement, what’s the point in having cooperative agreements at all and why hasn’t Depot embarked on this strategy earlier?

 

In terms of what happens next, the ball is most definitely in the LA County/US Communities’ court.

 

LA County’s Joe Sandoval was quoted in the US press as saying that his department had "no intention" of cancelling the bid, and he re-affirmed this in an email to opi.net, telling us that the solicitation evaluation process was "moving forward" and that he expected to be able to make an announcement in mid-August.

 

The question is now, will this announcement be a contract award to the two independent groups, an extension of the current bid, or ultimately the cancellation of the current solicitation?

 

That will, to a large extent, depend on what’s left of the relationship between US Communities and Office Depot.

 

There have been signs of a change in that relationship over the last few months.

 

The separate schools supplies award that was given earlier this year to Depot and School Specialty lopped off an estimated $150 million in annual sales (according to the contract’s RFP) from Depot’s existing contract. Furthermore, the prospect of a multiple award on the new office supplies contract – with estimates of Depot losing up to 25 percent of the business – will not have gone down well at company headquarters.

 

For its part, US Communities is also bound to have been exasperated by the barrage of negative publicity, audits and refunds surrounding Depot’s pricing options. Its actions in spinning off the schools supplies business and its apparent willingness to make a multiple vendor award this time around on the office supplies contract could be seen as a slap on the wrist for Depot.

 

Furthermore, US Communities’ reaction to Office Depot’s announcement that it had not bid was unusually critical.

 

It would also appear that Office Depot has already informed US Communities customers of its decision not to rebid and of its intention to develop alternative cooperative agreements.

 

If the relationship has broken down completely, then there is little interest in US Communities extending the current bid to give Depot a second chance, nor would it want to cancel the bid and extend the existing contract for another 12 months.

 

Other options would include issuing a brand new RFP and aiming to complete the whole bidding and award process before the contract expires at the end of the year; or letting the contract lapse at the end of the year and giving up on office supplies. There seems little point in the first of those options even if it was possible in the given timeframe, and the second would represent the worst-case scenario for US Communities.

 

Therefore, it may indeed come back to the current bids on the table from AOPD and is.group, and whether US Communities is prepared to take a punt on them.

 

Neither party is saying much.

 

is.group’s Mike Gentile told opi.net that his group is "positioned and prepared to serve the needs of US Communities", while AOPD’s Bud Mundt said that his organisation was waiting on a response from LA County and US Communities in light of "these unusual circumstances".

 

We’ll get Office Depot’s take on the situation next week, but will probably have to wait until LA County/US Communities confirms its course of action for things to become much clearer.