Jan 13 2011

The Dirty Little Secret

Published by at 12:40 pm under Uncategorized

I was having a conversation with a buyer on why a certain under performing supplier consistently got additional work. This supplier was neither bad nor good; it just wasn’t a fit for him and his customer.  I suggested there might be something under the table going on.

And then the fight started . . . . . . . . .

THE PROBLEM

Everyone is in business to make a profit.  Part of making a profit is having an edge.  A competitive edge has two components:

The first we all recognize:  being able to exploit whatever technology you use to its fullest extent.  In the molding business it’s building very efficient molds, and processing the plastic in such a way that you get the highest yields.

The second component to a competitive edge is marketing.  It doesn’t matter how good you are if you can’t sell what you do.  Being on the Preferred Vendor list is what every supplier strives for.  One way is to be the low bidder with excellent delivery performance.

Another way is to buy loyalty.  We call them ‘Commission Reps’.  Some shops don’t use Commission Reps but they do pay commissions.  In this case it goes to whoever can influence the decision to become the successful bidder.

While it is still a time honored way of doing business in the rest of the world I had thought these practices had pretty much died out in the USA; until the economy crashed.  When people are scrambling for business to simply keep the doors open, the time-honored practice of ‘gratuities’ comes back in full force.

While you may think this is ‘the way it is’; there is something your company can do about it whether you are a supplier or a customer.

When I first hired into the Automotive Industry many decades ago, I came in on the tail end of my employer cleaning up the practice of shameless corruption.  My employer wasn’t naïve enough to believe they could stop their suppliers tempting a ‘baby’ engineer like myself.  I was in my mid 20’s with the authority to direct several million dollars worth of business to whomever I thought was the right supplier.  They had four simple policies that were a condition of employment for those of us who directed business (and yes, it went all the way to the top of the organization):

The first policy had to do with ‘normal’ gratuities:  If you could eat, drink, smoke, or play with it in one day and worth less than $100; No problem. Don’t ask for it, don’t talk about it.

The second policy was: Gratuities of any material value you could accept with three conditions: (1)  lt had to sit on your desk for all to see for 24 hours – 3 business days – fully identified that it came from some supplier. (2)  Your manager had to be informed (if he/she got jealous, tough).  (3) At the appropriate time in the tax year you would be mailed a “Miscellaneous Income” tax form from whoever gave you the gift for you to declare as additional income for your income taxes.  If the suppliers ignored this policy, they were removed from the supplier list for three years regardless of how good they were.  For the suppliers, it was a simple write off as a cost of doing business.

The third policy was simple:  Any gratuity given privately (such as a Christmas Ham given in the parking lot) was a firing offense.  Period.  No exceptions.

The fourth policy was what scared everybody straight:  As a condition of employment you had to submit a copy of your final Income Tax forms to the company each year for those of us who directed business or spent out company’s money.  It would be kept in confidence.  It may or may not be chosen to be buggered by an outside forensic accountant.  You never knew if it was a random check or if they thought you’d been naughty.

Here was their logic:

No matter how you try to explain it, this ‘marketing cost-gratuity-sales expense’, is ultimately paid for by the customer.  If my employer is paying me, and a supplier is also paying me; the supplier is adding this additional cost to his products sold to my employer.  This means I am taking additional income from my own company (politely stated: stealing).

THE CONSEQUENCES OF GETTING CAUGHT:

Once caught, my employer filed suit for the lost money plus legal expenses and interest.  They would not negotiate restitution quietly nor sign non-disclosure agreements. This meant everything was public record.  Being public record, the company told everybody in a ‘position of trust’ who it was, how much was taken, how much they recovered, as well as the estimate of the embezzler’s out of pocket legal costs.  If a supplier was paying one guy to distribute it up the organization ladder to keep everything quiet, everyone got prosecuted.  If they quit, read the next paragraph.

When the lawsuits were over, they would inform the federal authorities about possible income tax evasion AND follow up on it until the people who took the graft got stomped by the Tax Nazis.  As the last step, they turned to the supplier: They would renegotiate the part prices (and look seriously at who approved them) to reflect future savings on all parts the supplier was producing if it was an isolated case. Or, as stated above, they’d cease to do business with them.

As an employee, if you got questioned on your ‘style of living’, there were no problems with the fact that some employees were rich because of inheritances, successes in the stock market, rich/working spouses, second jobs, etc.

If you didn’t like the job description that required showing your tax forms, you simply transferred out.  Nobody cared.

Once a year the purchasing department and the fraud specialists would put on a seminar on ‘how to steal’.  They’d tell us all the ways people had tried and failed along with what they did to them.  When a current investigation got someone, they’d tell everybody (a public hanging). Once this policy of ‘Public Hangings’ caught on, it was interesting to see the changes.  The first year was brutal, because many believed it was just more HR prattle.  Then they found out how much money the corporation was recovering and who got nailed. Other than the annual ‘seminars’ we rarely heard of anything by the third year.

Does this stop Christmas Gifts and the occasional ‘payment for services rendered’?  Not in the least!  But it has a profound effect on employees who think about taking them.  The fear wasn’t the Corporate Wrath brought down on the employee.  It was the tax people who would go back several years and assess back taxes, fines (big ones), and interest compounded for as many years as they audited on the taxes AND fines.

The B-schools tell us 5% of sales is the marketing budget.  This is tempting when you think of the millions of dollars of tooling and parts being purchased.  If your supplier doesn’t have to budget this expense, it’s a nice cost savings plan.

If you’re a supplier and this is becoming an irritating expense; write a polite note to your customers informing them of the new documentation requirements of name, tax ID number, address etc. and you’ll be sending the appropriate tax forms out to those requiring Finder’s Fees etc.  If you’re a customer, just tell your people you’ll be implementing a policy of ‘open financial disclosure’ with new employment agreements for specific people.  If nobody has a problem with it, it’s no problem.  But it’s kinda fun to watch the people who get nervous.

/ / / / / / / /  * * * * * * * / / / / / / /

I had companies tell me they have a ‘strict no-gratuities’ policy.  This means even with a vendor visit the engineer pays for his own lunch.  While a lofty ideal it only promotes more creative ways to provide gratuities. (“want a lift ticket for your ski vacation?”  “tickets to the game?” “We can make a mortgage payment for you/pay off a credit card/pay for a couple of classes for your kid at college”)  Creativity abounds.

I’ve always believed in never doing anything I can’t afford to get caught at.  This doesn’t mean don’t do anything.  Just have a clear conscious saying what you did, when asked.

It’s your choice.

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