The Cost of Broken Trust

by Mark Slatin

What happens when an insatiable drive for profits permeates the culture of an organization?

Eventually you forget whose business you should be taking care of.

Consider Office Depot’s current woes. The number two office products "mega dealer" ascended to their position in large part due to their strategic focus on the education and government markets. Now they have lost favor with those same markets amid questions surrounding "pricing and other irregularities."

Consider the following as reported in the Independent Dealer Magazine’s Depot State Contract Watch:

•    After the state of Georgia raised some red flags, an internal audit revealed rampant overcharges. An industry trade publication estimated the overcharges as much as $1.2 million. As reported last February by the Atlanta Journal Constitution, the state canceled their $40 million per year contract. Georgia is not alone.
•    California: The San Jose Mercury News reported that Office Depot has agreed to repay the state of California $2.5 million for over-payments, state officials said, as they released a state audit concluding that state workers routinely failed to get the best value when buying office supplies the past two years.
•    Southeast Florida: Lee County tallied nearly $60,000 in overcharges, according to a report by that county’s internal audit department as reported by the Palm Beach Post.
•    Southwest Florida: Fox 4 News reported that in Collier County, Florida a "whistle blower" from within the company has been terminated after voicing his concern for overcharging that county’s government (WFTX video).
•    North Carolina: The office of the state auditor in Raleigh, NC announced he found overcharges under an Office Depot contract with the state purchasing agency. That audit examined six months of purchases and identified $294,413 in net overcharges through direct testing of purchase orders.
•    Nebraska: State Auditor Mike Foley has concluded an investigation showing the State of Nebraska is paying too much for office supplies because of serious pricing errors and overcharges. Overcharges ranged from less than 1% to over 400% on various items according to the report.
Office Depot’s stock has plummeted from $46.52 in May of 2006 to $1.82 earlier this week, nearly 97% drop as compared with only a 30% – 40% drop in the major stock indexes over the same time frame.

Is there a connection between their B2B pricing strategy and their poor performance?  Sales and operating margin dropped by nearly half in Q3 08′ for their B2B segment.

Time will tell the depth of Depot’s damage as investigations continue throughout the country.  Despite persistent denials by Office Depot officials, the tide doesn’t seem to be going in their favor.  Are they wrongly accused?  Simply out of alignment with their core values?  Or is this part of a strategic pricing strategy that’s become part of their culture?

Office Depot’s website defines integrity and accountability as follows:

Integrity – "We earn the trust and confidence of associates, customers, suppliers and shareholders by being open, honest and truthful in all that we do".
Accountability – "We are responsible for achieving and sustaining unprecedented results that create extraordinary value to our shareholders…"

Maybe it’s just me, but it seems like their failure to adhere to the former is impacting their realizing the latter.

With ever increasing pressure on corporate earnings, the temptation to slide down the slippery slope of profit margin improvement at the cost of integrity will rise.  If your conscience is telling you "this doesn’t feel right," listen to it.  The pennies saved won’t be worth the risk.

How many years and advertising dollars does it take to create a corporate brand built on trust?  Not only does bad publicity cause buyers to question your pricing, it causes them to re-think inviting you to bid in the first place.

What can you do to avoid the high cost of broken trust?

1. Don’t do anything in the short-term that could potentially come back to bite you in the long-term. Ask yourself, "would the buyer think this is equitable?"

2. If you work in an industry in which customers already question the trustworthiness of sellers (guilt by association), address issues like pricing head on. Don’t let pricing integrity become the "elephant in the room" that takes over the room.  Bring it up first and get it on the table.  Transparency is a precursor to trust.

3. Leadership not only has a responsibility to set the tone, it has a charge to sniff out unethical pricing behavior at all levels. Make sure your team knows that you’re not willing to cross the integrity line, not once. 

Restoring broken trust takes a lot longer than building trust; a reputation can take years to build but only seconds to destroy.
 

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