Office Depot Makes Government Work More Profitable by Dropping Co-op Partner
The decision by Office Depot (ODP) to withdraw the company bid on a contract with Los Angeles County isn't in response to any problem with L.A. but with U.S. Communities, an organization it works with to secure government work.
After announcing that it would not pursue the L.A. bid, which is on a contract for office suppliers held since 1996, the company posted a Q&A in its web site's investor relations section explaining the action. The response was complex and vague enough that even the analysts who cover the company registered differing interpretations about the retailer's intentions. Yet, the major consideration was what Office Depot characterized as "onerous" costs associated with the bid. When asked by BNET what was meant by onerous costs, Office Depot responded with a statement that focused particularly on U.S. Communities-imposed administrative fees that the retailer said it and its contract customers were better off without.
The emailed statement began:
Office Depot announced that it has chosen not to submit a bid under the current lead agency Request for Proposal for office supplies through the U.S. Communities Government Purchasing Alliance. The company believes that the RFP contains terms that could not only negatively impact its profitability but also the means to provide cost effective alternatives to public sector customers that buy through the U.S. Communities program. Office Depot intends to seek alternative cooperative partners with terms consistent with the company's long-term value strategy, including lower administrative fees.A nonprofit purchasing cooperative, U.S. Communities assists local and state government agencies, school districts, colleges and nonprofits in pooling their purchasing power to get better deals with companies such as Office Depot. Now, the retailer suggests that it can provide prices to organizations that work through U.S. Communities that are competitive with what's available through the cooperative. Office Depot can make more money matching or even beating a U.S. Communities price by skipping the administrative fees. Rules and regulations may require organizations to go through a bidding process, but Office Depot even is promising to find another presumably less pricey cooperative to allow them to do so:
Office Depot believes it can maintain a large percentage of its customers that currently buy office supplies through the U.S. Communities cooperative by offering full and diverse alternative programs that will focus on choice, flexibility and deep savings. Office Depot intends to provide customers with the option to purchase quality products, services and solutions through other competitively solicited cooperative contracts, or directly outside of a cooperative arrangement.With other deals arranged through U.S. Communities, including two involving Fairfax County, Va., Office Depot said it would keep working with the organization after the L.A. contract expires at year's end. What happens when the Fairfax contracts expire is not mentioned, but it's fair to think that the retailer would look for an alternative way to renew them.
Office Depot has had problems with L.A. and other government contracts in the past, including an overpayment scandal that forced it to pay restitution. Its move to take a new approach without a partner it has characterized as responsible for onerous costs is bold considering that some estimates have the L.A. contract totaling four percent of Office Depot sales. But if it doesn't work, management would have suffered a second setback in its contract business, which isn't a good prospect for the company or the people who run it.