is.group’s award of the US Communities contract is being seen as a victory for the independent dealer community. Winning the contract was a major achievement, but the hard work is just beginning
On 18 August US Communities announced that it intended to award its office supplies contract to independent dealer group is.group.
Following several weeks of speculation after Office Depot had surprisingly pulled out of the bidding, the lead agency on the cooperative contract, LA County, released a letter of intent to award the new contract to is.group. LA County’s decision represents a huge boost for the independent dealer community in the US, with the contract worth up to $500 million a year in sales.
Despite the decision of US Communities’ long-time partner Office Depot not to bid on the new contract, it was still felt that Depot may have had some negotiating leverage with US Communities which could have resulted in the current bid process being scrapped. Indeed, there were those that felt that Office Depot’s decision not to bid was merely a bluff to force US Communities into cancelling the whole bid process and extending the current contract for a further 12 months until the end of 2011.
After all, Depot has been the sole supplier on the US Communities contract since 1996 and the two parties had been seen as having a cosy relationship that enabled Depot to win thousands of new customers and US Communities to pocket well over $10 million in annual administrative fees. It was almost a given that US Communities was a Depot contract.
Furthermore, Depot had been widely tipped to secure another award, albeit as part of a multiple award this time around.
Office Depot’s announcement on 15 July not to bid certainly took those in the industry by surprise. Since the US Communities re-bid was announced in April, Depot had re-affirmed on numerous occasions its intention to go after the new award, telling OPI: "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: "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 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."
We speculated at the time on our website whether this strong reaction from US Communities was corporate posturing or a genuine sign that their relationship with Office Depot had, in fact, broken down.
It is now clear that the latter was the case. The extent of which comes out in a letter that US Communities sent out to participating agencies. The letter notifies them of the intent of award to is.group and promising them a "new and improved contract".
Furthermore, three of the enhancements in the new contract that US Communities is touting are lower pricing, a renewed commitment to best overall government pricing, and pricing transparency and accountability, issues that were at the heart of the problems with Office Depot over the last two years following the revelations of ex-Depot employee, David Sherwin.
US Communities also says that the new contract will offer improved access to local and disadvantaged businesses and higher electronic ordering and volume rebates.
It is also clear that Office Depot was not bluffing when it decided not to bid for the new US Communities contract.
Just a few days before its 15 July announcement, Depot was given a contract award by The Cooperative Purchasing Network (TCPN), a cooperative purchasing organisation similar to US Communities, although details of this award were not released until the end of July.
Texas-based TCPN has 240 contracts and the total annual spend via these is approximately $310 million, around half of what US Communities’ single office and school supplies contract was worth a couple of years ago, so it would certainly appear to have less clout as an organisation than US Communities.
Furthermore, Depot wasted no time contacting its US Communities customers to let them know that it would not be renewing its contract.
For example, Jerry Fuller, Director of Purchasing and Payment Services at the University of Texas at Austin, told his staff that Office Depot had informed him that they would not be re-bidding on the US Communities contract on 16 July, the day after the bidding closed. It seems that Depot’s account managers had already been primed to make customers aware of alternative contract possibilities.
Depot is bullish in its statements on its ability to continue to do business with its current US Communities customers, and states that it is confident that it can keep a large chunk of them by switching them to the TCPN contract or by dealing directly with them.
That remains to be seen, but it is clear that there is going to be a crucial four-month period to woo customers between now and when the contract officially begins on 1 January 2011.
The question is where customers’ loyalties lie. Have they formed relationships with Office Depot account managers that will see them stay Office Depot customers, or will they follow US Communities guidelines to move over to the new contract? Will they be offered any incentives to make a decision one way or the other?
There is also the little matter of Staples hovering like a bird of prey, ready to swoop in and pick off these potential clients. It has landed a new five-year cooperative contract with the National Joint Powers Alliance and has recently said that it will go "aggressively" after current US Communities customers. It definitely sees an opportunity here to take market share and is a formidable opponent.
It looks like being an intriguing battle for business: incumbent Office Depot, in situ with clients but with a somewhat tarnished reputation, new kid on the block is.group with the backing of the US Communities marketing machine, and number one industry player Staples with its own successful cooperative contract and not a hint of overcharging allegations in sight.