Office Depot criticised over contracts



Office Depot criticised over US state contracts


State auditors in California and North Carolina have issued scathing reports on Depot’s performance, but don’t heap the blame totally on the shoulders of the embattled office supplier


It may be starting to sound like a stuck record, but Office Depot’s running of its statewide office supplies contracts has once again been thrust into the spotlight after two state auditors recently published the findings of their audits on the Florida-based supplier’s performance.
First to report was California on 28 August, with the state’s procurement department immediately stating that it was putting the $28 million-a-year contract out for rebid.
"A new procurement process will begin immediately to evaluate solicitations for a new state office supply contract," said the state’s Chief Purchasing Officer Jim Butler in a statement.


"area of significant concern" discovered by the auditors was that Office Depot had been supplying the state an unauthorised category of "non-contract" items – sourced from wholesalers – that did not benefit from the agreed discounts under the terms of the contract. This category accounted for $14.2 million – or 35 percent – of all purchases made by state agencies between September 2006 and February 2008.


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".


Unresolved issue 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 previously agreed product 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.
According to Office Depot, a "disagreement arose between Office Depot and the DGS relating to the interpretation of the contract" and the $2.5 million payment was offered as an "additional discount … in the spirit of cooperation and customer satisfaction".


As well as contract pricing, the audit also looked into the contentious issue of whether the small businesses and disabled veteran business enterprises (DVBEs) that were part of the consortium established for the contract were indeed providing a commercially useful function (CUF). The audit concluded that Office Depot had "acted in a good faith manner in implementing the CUF solution" and stated that the small businesses were performing their duties as per the contract.


However, doubts were raised regarding the effectiveness of the state’s procurement department’s own checks into CUF compliance and the actual involvement of the small businesses in the contract was largely based on anecdotal evidence.
Findings questioned Chris Bates, President of NOPA, questioned the auditor’s findings with regard to compliance with the state’s CUF law. "NOPA calls upon the California Legislature, which recently passed a bill designed to tighten enforcement of CUF violations, to clarify the definition of ‘commercially useful function’," he stated.
Bates also called on the independent dealer community to put pressure on other states where similar sole-source contracts exist (see box). Hardly had the ink dried on the California audit when North Carolina also got in on the act. State Auditor Les Merritt’s report on 10 September concluded that Office Depot had, amongst other things, overcharged the state by more than 10 percent on $2.7 million worth of purchases made between July to December 2007 and suggested that the state should now consider debarring Office Depot from further state contracts.


North Carolina did not go that far, but did announce that it, too, was ending its contract with Office Depot and that a new invitation for bids had been drafted, with a new bid expected sometime in the autumn. The case for the defence While the California and North Carolina audits found fault with Office Depot, they both criticised their respective state’s purchasing departments for failing to adequately oversee the contracts.


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 Les Merritt found fault with many aspects of the Purchase and Contract (P&C) division’s handling of the contract, leading to a war of words between himself and P&C boss Jim Staton (this could possibly be more to do with local politics as Merritt is up for re-election to his job later this year). Office Depot also receives recognition for its prompt action to resolve many of the issues that the audits revealed. The question is, should these issues have existed in the first place?
Hopefully, this will now prove to be a wake-up call for states to tighten up on their control procedures and ensure a more level playing field for state contract business.


As Eric Lamoureux, Media Relations Manager at California’s Department of General Services, told OPI: "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!
NOPA calls for action
Independent dealer organisation NOPA has issued a rallying cry to its members to put pressure on state legislators to eliminate sole-source contracts. Specifically, NOPA is asking its members to:
• Contact their state legislators and senior purchasing officials to make sure they see the NOPA press releases.
• Provide elected officials with copies of or links to state auditor reports from California, Georgia, Nebraska and North Carolina. The reports are now available on the NOPA website in a section that NOPA and industry buying groups have sponsored to increase the visibility of state contracting issues and access to key auditor reports.
• In states where Big Box sole-source contracts are in place, encourage elected representatives to push for similar audits of their state’s office product contracts, where this has not already taken place.