Wednesday, February 29, 2012

What’s the Difference?

Suppose for a moment that you were walking through your local grocery story, and you came upon a product that you buy every week, with a sign saying “Save $400 on Your Favorite Product!” Let us further suppose that you know that your product normally sells for $3.29, and the shelf tag indicates that the current price is $3.09 – a modest 6% discount, but still $399.80 less than the discount promised by the sign. Recovering from your shock, you look around you and discover that the entire store seems to be brimming with such offers; prices at or slightly below the amount you are accustomed to paying, but marked as being 98% (or more) off the “List Price.” Offers so preposterous, in fact, that you can’t help wondering if some television network hasn’t resurrected “Candid Camera” or one of the other old shows that used hidden cameras and pranks to get amusing footage of shoppers. What would you do?

Well before you answer, you might want to check out a story on MSNBC this week about some of the “discount” offers that are turning up on Amazon’s grocery pages lately. One of the examples cited was a box of “Rice A Roni” – Amazon’s price was $1.48, and a local supermarket was selling it for $1.25 on sale, which seems reasonable. But the Amazon listing claimed that the “list price” on the item (e.g. the manufacturer’s suggested retail price) was $141.75. Even more amusing, in its own way, was the case of Kraft Macaroni and Cheese for a “list price” of $791.76, or $32.99 a box – rather more than the three boxes for a dollar I’m used to paying on sale. If you take a quick look around the Amazon Grocery site you can probably find a number of additional examples, unless they get to them before you do. It’s unclear from the article how this could have happened, although I think a more important question is what, if anything, should be done about it…

It’s possible that all of these unfathomable prices were introduced by a bad link, a poorly-designed database, transposition of digits, or even malfeasance (disgruntled employees, hackers showing off, etc.); it’s also possible that someone at Amazon decided to fabricate “list” prices instead of obtaining them from their vendor records, and something went haywire with their algorithms, resulting in discounts of thirty-two dollars instead of thirty-two cents over a projected list. The only reason it would matter is if someone who encountered these price comparisons was actually harmed be them – and specifically, if they were harmed in some way that could constitute fraud (resulting in criminal charges) or financial damages (which could result in civil actions). I can’t comment on the viability of the legal cases – I will, once again, caution my readers (assuming I have readers) about taking legal advice from bloggers without law degrees, but I have to wonder if such a case could get past a jury considering the absurdity of the errors involved…

In a criminal case, the prosecution would have to prove, beyond a reasonable doubt, that Amazon’s actions were intended to fool the public into believing that their prices on macaroni and cheese were more than twenty times cheaper than what you would find in a supermarket – or, alternately, that their local supermarket charges $32.99 for a box of macaroni and cheese. One could plausibly imagine a dishonest merchant inflating the competition’s prices by 10% or even 30% in order to gain more sales, but it seems unlikely that even an extremely gullible consumer would believe that a factor of 2,000% more was even possible. By the same token, it would be difficult to prove that purchasing a box of flavored rice side dish for $1.48 when you could have had it for $1.25 at the market would have caused any serious damage to anyone, even if the promised savings were in fact a deception. If Amazon was using their “list price” information to convince people to buy products at significantly inflated prices that would be fraudulent, and they would be facing both civil and criminal actions, but the prices they were offering were generally competitive – and their claims were positively surreal…

Whether or not these farcical price comparison claims represent ethical misconduct, or are indicators of a corrupt and untrustworthy corporate culture, is a separate issue, of course – but that’s a discussion for another day…

Friday, February 24, 2012

The Game Goes On

A decade or so ago, when I was still a management consultant, a call came in to our office one afternoon from a social service agency we had done some work for in central California. The Executive Director was very excited about the potential for qualifying for grant money under Proposition 10, the California Anti-Smoking initiative. Fund development – and specifically grant writing – was a major part of our practice at the time, and the opportunity to develop a grant application for a client would generally have been a very welcome thing – except that the agency in question didn’t do that. They didn’t run smoking prevention programs, or even help people to stop smoking; they were a teen pregnancy prevention and education agency…

When we told the Executive Director (as gently as possible) that his agency didn’t do anything that could be paid for under Prop 10, and therefore would not be considered for grants under that budget, it didn’t seem to faze him in the slightest. “Oh, that’s all right!” he exclaimed. “We’ll just make something up!”

I’m still not sure what kind of spurious logic they would have come up with to qualify for such a grant (smoking during pregnancy is extremely unhealthy, of course, but the agency was already trying to prevent their clients from becoming pregnant); we managed to explain to the Executive Director that applying for funding that is not appropriate to your agency/program is a waste of time and money, and in this case they’d still have to pay us for writing the application if the grant wasn’t awarded. What makes this story worth repeating is that this specific strategic error (we used to call it “chasing the money” in our practice) is probably the single most common mistake you will see in the nonprofit sector, where agencies all too often waste their time and resources applying for grant funds they have no chance of receiving. Well, that and the fact that half of the States appear to be making the same mistake with the national foreclosure settlement funds…

You can pick up the original story on the Huffington Post Business page if you want to, but the basic idea is that a portion of the settlement reached on the foreclosure crisis is discretionary, meaning that the different states will be sharing $2.7 billion in funds that they don’t, technically, have to spend on foreclosure-related costs. Since this money is arriving at a time when a number of state and local governments are trying to deal with massive budget deficits (and possible bankruptcy), a number of them are considering using these funds for more immediate needs – much as they did with the tobacco company settlement funds a decade or so ago…

Now, I’m not suggesting that the states shouldn’t be given the discretion to spend their discretionary funds however they want. And I’m not claiming to be an expert on public policy, especially state-level fiscal policy. But if history tells us anything about economic crises, it’s that you can’t save your way out of them. Using those funds to help people who are being foreclosed out of their homes (their actual residences, not investment properties or vacation homes) should, in theory, return several times that many dollars into the state’s economy, whereas spending the same amount of money to reduce your budget deficit will get people writing unkind stories about you on news sites and convince your constituents that you don’t care about them – and it won’t fix your state’s economy anyway…

I can’t really fault the governors – or other local officials – for wanting to spend any available discretionary funds on balancing their budgets; in an economic crisis the natural response is to concentrate funds on the immediate expenses. But if two unknown management consultants in a small office in Santa Monica can tell you why this is a bad idea, it’s hard to believe that no one in any of the applicable state capitals has brought this up. Let’s just hope somebody is listening…

Wednesday, February 22, 2012

Idiots in Bliss


I was reading a story on the Consumerist website today about a store that sells DVDs and other electronic media, and the problem they keep having with people demanding that they adhere to the Wal-Mart returns policy – or more accurately, what the people believe Wal-Mart’s policy on returns is (e.g. take back any product whether they sell it or not, without a receipt, without a time limit or any other restriction). This causes problems for their company on two different dimensions: first, since they aren’t part of Wal-Mart, they don’t adhere to Wal-Mart policy; and second, even if Wal-Mart would give you a “refund” for something that you didn’t buy from them and that they do not, in fact, even sell, even Wal-Mart would have you thrown out of the store (or perhaps arrested) if you walked to the middle of the check-out counters and started screaming about racism and fraud. I was immediately transported back to another time, in another place…

I was standing behind the counter at the Manager’s Desk at the drugstore at Third and Fairfax in Los Angeles one afternoon in the fall, many years ago, when a woman in her 60’s came in with a large bag of things she wanted to return for cash. The company’s return policy was a bit loose at the time, with a great deal of discretion given to the general manager of each store; in general corporate headquarters didn’t care what happened at a local level so long as the store made more money each year. Our general manager held to the policy of “do whatever resolves the situation quickly and cheaply” – which generally meant doing returns of anything that could be returned and trying not to upset the other customers. But I could tell from the moment she walked in that this case was going to mean trouble…

Sure enough, our “customer” began by disputing the price that came up when I scanned her first item, insisting that she has paid more for it than the amount listed in the store’s computer. I pulled up the list of pricing on that item (the system store the last dozen or so price levels), showing that while it had never been sold for more than it was just then, it had often been on sale for less. That took some of the wind out of her sails; she tried to rally until I mentioned that corporate policy required me to assume that she had bought the product on sale, and give her the (even lower) price for it – unless she could show me the receipt…

It goes without saying that she didn’t have one, doesn’t it?

The rest of the items went much the same way; I’d scan it, she’d dispute the price, I’d look it up on the price history, and she’d back down from whatever she was claiming the price was. The real problems didn’t start until I found a product that we had never carried; there was no record of that item, or even of the company that had produced it, in the history of our store. The “customer” refused to believe me, and insisted she had purchased the item (and all of the others in her bag) from us that very week…

I turned the product over, revealing the price sticker from “Pick & Save” (the fore-runner of Big Lots) still stuck to the back. “No ma’am,” I replied. “You didn’t get this here.”

“Oh! That one must have fallen into the bag!” she exclaimed. “I had some items to return there, too.”

“That could be difficult,” I said, as kindly as I could. “Since the last Pick & Save in this part of California closed three years ago.” I started pulling out of the rest of her returns, and sure enough, all of them carried price stickers from Pick & Save, the 99 Cents Only store, the 98 Cents Only store (a competitor of the 99 Cents Only people, who where always trying to upstage them), and even cheaper places. Some were so old that the packaging had yellowed, the plastic blister packs were cracked, or the product inside had dried into powder…

Eventually we reached an understanding. I’d “refund” her money on anything we actually carried and had any chance of re-selling; she’d take all of her dollar-store merchandise back to where she got it (assuming that the relevant store still existed), and we’d throw away all of the opened packages and spoiled products before the Board of Health came to arrest both of us. I gave her the money and her remaining returns, and she left, presumably to go try her luck in some other retail store. I still couldn’t get our general manager to start requiring a receipt for refund – at least, not until the baby formula scam started up and we really were facing arrest for receiving stolen (fraudulently obtained) merchandise…

But that’s a story for another day…

Monday, February 20, 2012

The Ethics of Refunds

I saw a note on the MSN News page yesterday talking about how some of the other guests who were staying at the Beverly Hilton hotel on the night Whitney Houston died have been requesting refunds, claiming that security kept demanding to see their key cards and identification, how the fire and rescue people (and the sirens) kept them from sleeping, and so on. So far the hotel is refusing to grant any such requests, on the grounds that they had nothing to do with either the death of Ms. Houston or the management of the emergency response personnel, and there’s no way they could promise you a visit free of such distractions if they wanted to. In this specific case I have to side with the hotel – and the people leaving comments on the story page – and ask the complainers if they don’t have something better to do, but it got me to thinking about the ethical responsibilities a place of lodging has to its customers…

I think that most people would agree that any business – hospitality industry or otherwise – is not responsible for events beyond their control; it’s the reason insurance policies have “acts of God” phrases in them, for example. Certainly, there is no way anyone could promise you a hotel visit where nothing whatsoever would disturb you, and no chance that you would believe them if they did. It would be possible for a company to promise you complete satisfaction or your money back, but even those types of offer generally have conditions and restrictions – and it’s hard to imagine how any company could make money by guaranteeing that there would be no noise, crowds, emergencies or other disturbances in the middle of any big city and end up with enough paying customers leftover to make a living…

On the other side of the issue, any hotel that routinely does business with major celebrities should already be accustomed to dealing with unusual requirements, large numbers of people coming and going at strange times of the day, excessive noise, fuss and activity, security risks and invasion of privacy issues, not to mention outright stalkers, swindlers and thieves. Expecting them to be able to control what the police or crime scene investigators do on the premises would be unfair, but any facility that gets as many A-list and eccentric customers as the Beverly Hilton (for example) routinely does would be disingenuous to say that they have no experience with guests doing unexpected and upsetting things. While a death on the premises is probably beyond their control, you might reasonably expect them to cope with any lesser emergency without disturbing or inconveniencing their guests – assuming they could do so without driving prices beyond what their customers are willing to pay, of course…

As with all other features, quiet, privacy and solitude are entirely dependent on how much one is willing to spend on them. A facility that offered individual cottages, each on its own lot at a considerable distance from each other, and each with its own driveways, parking lot, staff, communications and utilities could guarantee you that any terrestrial disturbance going on will be caused by you and your companions, but the cost would be astronomical, and unless there were enough travelers who were willing to pay that amount, the company would rapidly go under. At the same time, it seems clear that if you are paying for space in which to rest and sleep, the people who are providing it should do the best they can to make things as quiet and restful as they possibly can without bankrupting themselves. So that brings us to an obvious question:

How much responsibility should a business offering lodging have for keeping their guests away from anything that could upset them, inconvenience them, or prevent them from sleeping? While we can agree that taking no effort is unacceptable, and refunding all charges for the slightest disturbance is impossible, at what point between those extremes has the company done all it could be expected to? Or, to put it another way, how bad do things have to get before the company has an ethical responsibility to refund the customer’s money as compensation for the value they have lost due to disturbances, noise, and so on?

It’s worth thinking about…

Friday, February 17, 2012

Like a Business


Earlier this week I read a story in the Los Angeles Times about how as many as 200 small non-profit organizations appear to have been bilked out of some (or all) of their donated funds by an agency they were also using as their fiscal agent. The amounts in question range from $2,000 to nearly $400,000, and the agencies that have been cheated include everything from political and lobby groups to conservation and child welfare groups; collectively, a significant number of the small non-profits that flourish exotically along the coastal regions of California. The question that kept coming up (both in the story and in the comments) was how this could happen to non-profit groups who are innocently trying to make a better world; how could anyone be so heartless and cruel? The question that kept coming up in my mind was how can anyone be so na├»ve? Or, at least, it would have been if I hadn’t seen this kind of thing before…

For those who have never spent time on the non-profit side of the street, a fiscal agent (sometimes called a fiscal sponsor) is an agency that provides administrative services for a non-profit that can’t (or doesn’t want to) take care of such functions on its own. In much the same way that a lot of small companies employ a payroll service (one of the companies I used to work for used ADP, for example), a small non-profit can hire such an agency to accept donations, pay its bills, file necessary paperwork and so on – leaving the people who run the non-profit group with more time to work on their actual cause. This can be much more efficient that hiring full-time office staff, especially if the agency is so small that there would only be a few hours for an office manager to do each month. Unfortunately, this sort of arrangement also means that the agency’s leaders are allowing a third party company to control their finances…

Consider, for a moment, whether you’d allow a private company to access your checking account, write checks on your behalf, pay amounts that it feels are appropriate without telling you – and pay itself out of your funds for doing this. Not a bank, mind you; there was no Federal guarantee of your deposits, no oversight from any level of the government, no insurance on your funds. Just a private company – and a for-profit one, at that – run by people who claim to be honest and trustworthy. As a private citizen you might go along with this – it would depend on how much you hate writing checks and depositing incoming funds – but a business doing this without some serious safety measures would run somewhere between gross incompetence (for a sole proprietorship) and complete fiduciary misconduct (for a corporation). Now, consider that however much they may hate to admit it, all non-profit groups (everyone operating under Section 501c of the tax code, including 501c3 charity groups) are corporations operating under the corporate regulations of the state in which they are registered…

I’m not saying that all fiscal agents are corrupt, or that all such relationships are unwise; I’ve worked with some quite large non-profits that used fiscal agent arrangement to good effect, and prospered as a result. But all of those cases involved using a city government, a state agency, or (in some instances) a larger non-profit foundation as the fiscal agent – and the people running the non-profit still kept a very close eye on their partners. What I am criticizing in this post is an agency handing its funds over to a private company on the basis of the company’s CEO having worked for other fiscal agencies and worked on environmental causes – and then assuming that nothing could possibly go wrong because they are a non-profit agency trying to do good for all mankind…

As I’ve noted before in this space, a non-profit corporation can do anything that a for-profit company can do, except turn a profit. Unfortunately, this includes being bilked by unscrupulous, corrupt, or simply incompetent contractors, and neither will a non-profits good intentions and good works do it any good in court. People in the non-profit sector are always talking about running their agencies “more like a business” – except when that would involve learning about business, learning about running a business, or doing the boring, tedious, and critical parts of running a business (such as depositing donations and paying bills). Until “running the agency like a business” becomes more of a priority and less of a catchphrase, stories like this one are just going to keep happening…

Wednesday, February 15, 2012

Free Markets and Drug Shortages


Earlier today I noticed a news story on the ABC News website about a critical national drug shortage, specifically of one of the drugs used to fight childhood leukemia. I hit the link expecting to see something about insurance companies not covering it or drug companies marking up the price in order to try to recover the R&D costs of inventing the stuff in the first place, but that’s not what I found. At least five different companies have been making the drug in question, and there appear to be generic versions available from other sources as well. The shortages are being blamed on problems in production, limited availability of raw materials, and even high demand, but the truth seems to be that there just isn’t enough of a profit margin on this drug for the companies to bother about making very much of it. The real question is what to do about the situation…

In a free market what usually happens is that as demand for a product rises so does the amount that people are willing to pay for it; eventually the price becomes high enough to make production of the product attractive, and more companies start producing it. This is what will probably happen in the current case, as well – but that will be cold comfort to the children who will die in the interim because there wasn’t enough of the drug available when they needed it. The American Cancer Society, through its Cancer Action Network, is supporting a measure in Congress that will allow the Food and Drug Administration to require advance notice from the drug companies of conditions that might lead to a shortage, but the ACS people admit that this is only the first step in dealing with the problem – and it isn’t clear what the next steps might be…

History indicates that it is possible for the Federal government to require production of specific drugs – in cases where national defense is at stake, for example – without disrupting the free market or putting the pharmaceutical industry out of business. But the government has no means of making drugs on its own, and requiring a company to make products that it can’t sell at a profit isn’t practical in the long run unless the government can make good the difference though the use of public funds. Healthcare providers can’t stockpile every potentially life-saving drug in every facility that might need some, and even if they could the price would be impossible. Patients can’t keep a supply of drugs around; even if they could somehow induce their insurance companies to cover the cost, many of these treatments (including the one in the story) are injection-only, and require professional supervision to use. And non-profit and NGO agencies have all of those issues and more besides…

What strikes me as ironic about the situation is that we normally associate artificial shortages like this one with cases where a single company controls the rights or patents to a specific drug and refuses to make more doses in order to support the price. Generic versions are supposed to combat these crises by increasing supply and lowering demand, but this is the first case I’ve heard about where the ability to create generics has lowered the market price to the point where no one can afford to make it anymore. It is literally the drug industry’s collective argument against generics come to life. I just hope the notification law works, because for years the industry has been claiming that any government attempt to control how much of which products they have to make would be the first step toward nationalizing the industry – and it turns out they were right all along about the generics…

Sunday, February 12, 2012

The Ethics of Window Stickers

In the court cases we considered this week where Honda was being sued by various customers who had purchased hybrid Civic models, only to find that the cars didn’t quite live up to the promised miles per gallon, one of the most surprising facts to come up was that the company had never anticipated being sued at all, let alone by classes of thousands in Superior courts and clever individuals in Small Claims. It turns out that like most auto makers, Honda has just printed the EPA estimates for its car’s average performance on the window sticker without further comment. Since those ratings are sanctioned by the U.S. government, and since there is no law requiring any further elaboration, the company had just reasoned that they had no responsibility to offer anything more…

In the event, neither court saw things that way; it remains to be seen if future court decisions or appeals will concur with Honda’s position. But in reviewing the story, I thought it brought up an interesting question in ethics. The use of EPA ratings as a basis for comparison on car window stickers is accepted as the industry standard, and complies with the relevant Federal laws; most auto makers assume that this makes them bulletproof and that anyone who is harmed by the assumption that those estimates are correct will have to sue the EPA first. But even if that is correct, and even if the company is safe from legal actions (a supposition not supported by the facts of the case), there remains the question of what the company’s ethical responsibility was in this case…

On the one hand, the fact that the hybrid Civic does not actually get 50 miles to the gallon under many common operating conditions (e.g. running the air conditioner, driving in city traffic, playing the radio) could have a serious financial impact on the owner. While it is true that EPA estimates are intended only as a basis for comparison, and all purchasers need to be aware of disclaimers like “your mileage may vary), the fact that the company knew there were major discrepancies (40% less than the window sticker under some conditions) and made no effort to disclose them sounds questionable. This is especially true in cases where the withheld information would have affected the purchasing decision. Since there were many alternative vehicles that could out-perform the hybrid Civic under those conditions (including, we should note, the regular non-hybrid Civic), the withholding of that information could be seen as fraud…

On the other hand, the EPA itself cautions users that its performance numbers are not intended to be absolute measures of any car’s gas efficiency, and should only be used for comparison. If Honda had printed lower fuel efficiency numbers on its window stickers, or even added warnings about efficiency under specific conditions, they would have been accepting a massive disadvantage in marketing their product versus the competition. The company has a responsibility to its stockholders (to make money), to its employees (to maintain their jobs) and even to its vendors and creditors (to maintain their businesses) – and there is no indication that printing such information would help the consumer anyway. All of the other auto makers could continue using the EPA estimate numbers, even if those numbers were just as bad as the ones on the Civic hybrid, and go on making money at their customers’ expense…

So the question appears to be, does the company’s ethical responsibility to provide complete and correct product information to potential buyers outweigh its responsibility to its stockholders to make a profit, or its responsibility to its other stakeholders to stay in business? Especially if doing so would bankrupt the company and damage all of the people who depend on it without giving any benefit to potential buyers, who would probably still be getting incorrect information from all of the surviving car companies? I’m sure that we all agree that honesty is the best policy, and that every company has a duty to provide the most accurate consumer information possible, but what happens when fulfilling that duty will destroy the company and all of the people associated with it and do no good whatsoever?

It’s worth thinking about…

Friday, February 10, 2012

Lawsuits per Gallon


A few weeks ago I recall reading a news story online about a Honda hybrid owner out in California who had decided to opt out of the huge class-action lawsuit against Honda and sue the company in Small Claims court instead. If you’ve been following the larger case in the news you already know that the plaintiffs were successful, and each member of the class stands to receive a $100 to $200 payment and a voucher good for up to $1,000 on their next Honda purchase – which seems absurd when you consider that the lower gas mileage (the hybrid Civic gets significantly lower gas mileage than the manufacturer claims it does) will cost each owner somewhere between $4,140 and $16,560 per year. It could even be argued that this judgment does the defendants more good than the plaintiffs, since it encourages the plaintiffs to purchase additional Honda products in the future. The company is well pleased with itself for the class-action case outcome, as well they should be – but the Small Claims case appears to have them worried…

In a Small Claims action the plaintiffs are limited in the amount of damages they can seek – in California the cap is set at $10,000 – and neither party is allowed to have legal representation, which lowers the costs involved. Most people use these actions to settle personal and small business disputes which would cost far more to litigate than the total amount they’re arguing over, but there is no reason you can’t use such a suit against a giant corporation – especially if the alternative is “winning” a week’s worth of gasoline and a discount coupon for a car from a company you’re probably going to avoid from now on anyway…

Most people don’t bring product lawsuits in Small Claims court because of the low awards cap; if you drive 12,000 miles per year (normal for Los Angeles) and your gas mileage is 30 instead of 50, and gas is $3.45 a gallon, each year you own the car it will cost you $16,560 over what the sticker MPG suggested. That’s $6,560 more than the Small Claims total, just in the first year; if you own the car for 5 years the total will be more like $82,000, or $72,000 more than the total possible in Small Claims court. But while $10,000 doesn’t sound like a good compromise over $82,000 that somebody owes you, it’s only fair to note that this is 50 to 100 times better than you would do as part of the class action lawsuit, assuming that you don’t want to purchase a new Honda in the next year or so…

From the company’s point of view, the problem is that while a single $10,000 settlement is no big deal, and spending $100 to $200 per customer when there’s an excellent chance of getting them to buy another car is practically a loss-leader, a thousand customers filing $10,000 Small Claims actions quickly turns into $10,000,000 in losses – and there are considerably more than 1,000 owners of Honda Civic hybrid models who could conceivably get into the act. Even worse, if the traditional defense of just putting the EPA estimate on the window sticker and then blaming the EPA for any differential between the sticker and your actual mileage is no longer valid – and it wasn’t accepted in this case – there’s no telling how many other customers, hybrid or not, may successfully sue the company using this logic…

My father told me once that the only people who ever get anything out of a class-action lawsuit are the lawyers – and in this case, unless there are more than 50,000 plaintiffs in the class, the $8,500,000 the lawyers are getting out of the settlement is more than all of the actual plaintiffs put together stand to receive. And while the company can use lawyers to appeal the Small Claims case, assuming that they do, this could backfire on them badly in the courts, let alone in public relations terms. I don’t know much about legal strategy, and I don’t even pretend to advise people on legal issues – but unless this issue is much more complicated than it appears, I’d have to suggest that the best business strategy here would be to just change the window stickers…