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Issue Date: Vol. 45, No. 4, April 2005, Posted On: 4/21/2005


THE BEST AND THE BRIGHTEST: Honesty Is The Best Policy: Slow Dimes Beat Fast Nickels


Allan Z. Gilbert

In discussing topics for these articles, the editors and I always take into account present concerns of our readers. For example, a bulk vendor got in touch with us to air a grievance that dates back to the supposed glory days of vending, and unfortunately, still is very much with us. Simply put, it is: how do you bid against a liar and a cheat?

This operator was totally frustrated. He had just lost a bid for a new chain store account to a competitor who offered impossibly high commissions. The operator was convinced that the competitor would have to cheat in order to survive at the quoted commission rate. He would pay the artificially high commission rate, but he surely would pay it on less than the full amount of sales.

The root of the frustration is that there seems to be no appropriate response to such a competitor's actions. He knew that if he went to the client and told him that the competitor would be forced to cheat at those rates, it would open a can of worms. The client would likely say, "How do I know you won't cheat?" Or, "All vendors can cheat; I'm going to accept the bid of the cheater offering the highest commission." Or, "I have to defend my decision to my boss; how do I justify not choosing the operator who offers the highest commission?"

To be sure, the honest operator could simply refuse to bid against this kind of competitor, but doing so would deprive him of much-needed growth. Our correspondent pointed out that the only other alternative he could think of would be to hold his nose and become a cheat, just like his competitor.

It's easy to understand why honest vendors so often feel frustrated. Unfortunately, all it takes is one ethically challenged vending operator to pollute a marketplace. If one operator does it, he forces all of the others in the marketplace to make the same "Hobson's choice" as this bulk vending operator.

And, as we all know, the problem isn't confined to bulk vending. It's endemic in full line vending as well. It seems that too many operators are willing to suspend their sense of right and wrong when a profitable piece of business is available, or at risk. And those operators who choose to cheat often defend their actions by saying that they really don't have a choice if they want to grow.

In my opinion, they are dead wrong. You always have choices. In addition to not passing the "sniff test," cheating doesn't pass the "risk/reward" test, either. There are better ways to compete with a cheater than stooping to his level. Before getting into those options, let's look at that risk/reward ratio. It's easy to calculate how much you can save by cheating, (the reward); let's try to quantify the risks.

THE RISK / REWARD RATIO

In order to cheat in this way, the operator must report fictitious lower sales to the client. Therefore, the actual sales record must be altered somewhere in the collection, counting, data-entry or commission calculation process.

Unless the company is a one-man business in which the owner/operator performs all of these functions, it is impossible to cook those records without other people in the organization being aware of what's going on. At the very least, somebody has to tell the office manager how to respond if a client calls with a question about a commission statement; the routeperson will know the actual sales (particularly if he is being paid on a commission basis); and, unless he's stupid, the salesman who originally bid the account will also be aware of the scam.

If the operator is comfortable with this and is only concerned that the client not find out, I think he is being short-sighted. If we examine some history, I think you will agree with me.

History credits Hammurabi, the King of Babylonia around 1780 BC, with handing down the first written code of laws to his people. It was altruistically promoted to the people as a social contract, designed to protect the weak from being preyed upon by the strong, and to protect the personal and property rights of the individual.

Most legal scholars agree that Hammurabi must have been one smart dude, and also that he wasn't being entirely altruistic. After all, nobody has more property rights to protect than the king, and if there are no laws, he's the one with the most to lose. The king was essentially saying, I will play fair (I will not steal), and I expect you to do the same (you will not steal from me.) That very same social contract is implicit in virtually every body of law and every moral or ethical system developed since then, from the Ten Commandments to the Golden Rule.

So how does the history of ethics relate to our errant operator?

Establishing and maintaining cash and inventory controls in a vending business is no easy task. Almost every employee in the company handles cash, or products that can be easily converted into cash, every day. Realistically, there are only two things that prevent people from stealing - fear of getting caught, and their own personal sense of morality. The best control systems in the world will not do the job unless the employee has some level of integrity.

And the measure of integrity in a person is a function of how deeply that person is invested in the social contract I described above. If the employee learns that the boss is willing to violate the social contract by stealing from the client, what right does the boss have to expect the employee not to steal?

The misguided operator who is prepared to cheat on commissions thinks the client is his biggest problem. In truth, the client is the least of his worries. If account management finds out it is being scammed, it's likely that the operator will lose the location, and maybe even face a lawsuit to recover lost commissions. In the grand scheme of things, it would be an expensive but manageable loss.

What he really needs to worry about is the disintegration of internal morale. On the day that the employees become aware that their boss is dishonest, he loses the ability to effectively manage the company.

Employee theft will only be one of the problems he creates. A bigger problem is the fact that he can no longer lead by example, nor demand or inspire exemplary performance from his employees. Simply stated, they will not follow a leader they can't respect. They may continue to show up for work every day, because they need the job. But it's not likely they will excel in the performance of their jobs, ever again. And when that happens, the company is well on its way to oblivion.

OTHER RISKS

Another major problem lies in the future. When you decide to retire and sell the company, the fact that you have cheated your clients will cost you a lot of money. A reputable buyer will not be willing to continue the scam, and will recalculate your bottom line based upon paying honest commissions. And since the purchase price is typically based upon a multiple of earnings, the purchase price will be reduced by a multiple of the amount you saved annually by cheating. The total cost may well be higher than the amount the money you saved by cheating.

Another risk you face, if you choose to cheat, is the possibility of blackmail. Many years ago, I represented an operator in the sale of his company who found himself between a rock and a hard place. When his star salesman learned about the upcoming sale, he threatened to expose the operator to the clients that were being cheated, unless the operator paid him off. Since the loss of a bunch of major clients would have put the sale in jeopardy, the operator had no choice but to pay. I guarantee you that the six-figure payment the salesman was able to extort was greater than the total amount the operator ever stole from his clients.

The fact is, you can't even discipline or fire an employee who knows you are cheating. He can blow the whistle on you, or he can go to work for the competition and bury you.

Finally, when you cheat, you face a very real market risk. Every operator loses clients occasionally, for reasons that have nothing to do with commissions. If you lose a location in which you have been under-reporting sales and a reputable operator takes it over, the sales at the location will appear to increase exponentially. I assure you, both the reputable operator and the client are sophisticated enough to figure out what has been going on.

With this knowledge, either or both of them can cause serious trouble. When the reputable operator calls on another one of your locations, he can point out that he was able to significantly increase sales at the location you lost, because he does a much better job. And the client contact at the old location will verify his claim. Also, client contacts, such as personnel managers and facilities managers, talk to each other and belong to trade associations where common problems are addressed. No operating company can afford this kind of reputation. You will continue to lose clients.

There is no question in my mind that the risks involved in cheating are far greater than any potential rewards. You only have to get caught once, and you have too much to lose if you do.

King Hammurabi had the right idea. If you have something to protect, and you hope to be a great leader, you can't afford to give up the moral high ground. Most professional managers agree that their behavior must be above reproach, in all things. Not only because it's the right thing to do, but because they have learned it's the only course of action that works.

COMPETING AGAINST A CHEATER

When you have to compete against a cheater, I strongly suggest you avoid calling him a thief in the presence of the client, even though you are convinced you are correct. If you do so, you run the risk of giving the entire industry a black eye, and you will be tarred by the same brush.

Frankly, it's much easier to demonstrate that he is incompetent as a vending operator than it is to prove he is a thief. And, based upon the nature of his scam, he is vulnerable to this kind of attack. In order to make the scam work, he must report sales to the client that are lower than the actual sales.

You have to convince the client that the only true measure of total quality in a vending service is the level of patronage by the customer base. Simply stated, the customers vote with their wallets. The operator who provides the appropriate number of sparkling, clean machines, always stocked with products that the customers want to buy, and makes sure that those machines are rarely out of order, is going to do the most business. Whoever can do the most business is doing the best job of meeting the client's vending needs.

At this point the client typically says, "Every operator claims he's the best. We will never know, unless I award the contract to you." At this point, you offer to prove to the client that you can demonstrate how much better you really are.

Simply ask the client to reduce his current "reported sales" to a per capita number, by dividing total sales over a period by the average number of employees. This will give you the average sales, per employee, for that period. Then offer to compare your actual per capita sales in locations that are similar to the client's location.

This works particularly well if you are bidding a location where the thief is the current operator. He has to suffer by comparison. It works even better if you can point to another location you have taken from the cheater, where the sales "increased dramatically" after you took over. You can add some icing to the cake if you can produce a letter from the incumbent's former client contact attesting to the facts.

When the conversation gets around to commission rates, as it always does, and the client asks you how he can justify accepting your much lower quote when the incumbent is currently paying 25%, I urge you to resist the temptation to ask, "25% of what?" Instead, I would attempt to educate the client about the economics of vending.

The annual Operating Ratio Reports published by the National Automatic Merchandising Association are a wonderful tool for doing this. Simply point out that in order to show a profit, the incumbent has to recover the amount that he is overpaying in commission through reduced expenses in other areas. Maybe he is using older, smaller capacity equipment; or selling lower-cost or substandard, out-of-code products; or using older vehicles; or relying on poorly paid, badly trained employees; or underservicing the machines. Any or all of those deficiencies could explain why the sales are lower), and none of them are good for the client.

And if none of the above is true, then the incumbent is obviously losing money in this location, and is too incompetent to realize it. So the client would be doing him a favor by putting him out of his misery by awarding the contract to you.

If after all of the above, the client still isn't ready to capitulate, there is one last ploy you can attempt. If you assume the cheater was in fact showing a profit in the location, suggest to the client that you are so confident you can increase sales at this location, that you are willing to take the account, at the commission rate you proposed, with a minimum annual guarantee equal to the total commissions paid by the incumbent for the past twelve months. If that doesn't get his attention, you're probably wasting your time.

Whenever I had to compete with a cheater for a new piece of business, I always suggested to the client that he ask the bidders to submit a pro-forma P & L Statement as part of their proposal for the new account. No cheater wants to go on record stating he is only capable of generating sub-standard sales. And he is forced to demonstrate how he is going to show a profit. They tend to get religion when they have to do this.

In addition, I volunteered as a speaker for local chapters of personnel management and facilities management professional associations, and I put together a presentation on how to evaluate a vending or foodservice proposal. I was able to get the message out without ever using the word "cheat" or "thief," and I made some great contacts for future business.

I understand how difficult it is to get a potential client to even sit down with you, much less sit still for a lesson in vending economics. However, if you don't make the attempt, you leave the field to the cheaters. Some clients will listen, and that's all you can hope for.

In any event, I think the days of cheaters in vending are numbered, in full-line vending at least. Technology has progressed to the point where today it's possible for the client, or a third party employed by the client, to gain access to actual vending sales in real time, over the Internet. That ought to scare the Hell out of a cheater. Admittedly, that technology isn't yet available in bulk operations, but there have been some promising developments.

You don't have to beat them every time, and it's not your job to put them out of business. Frankly, they will put themselves out of business. For all of the reasons I cited in the risk/reward section of this article, corrupt organizations tend to collapse under the weight of their own transgressions. Look what happened to Enron and WorldCom. It's only important that you to be true to yourself, your company and your industry by not stooping to their level.

History credits Hammurabi, the King of Babylonia around 1780 BC, with handing down the first written code of laws to his people. It was altruistically promoted to the people as a social contract, designed to protect the weak from being preyed upon by the strong, and to protect the personal and property rights of the individual.

Most legal scholars agree that Hammurabi must have been one smart dude, and also that he wasn't being entirely altruistic. After all, nobody has more property rights to protect than the king, and if there are no laws, he's the one with the most to lose. The king was essentially saying, I will play fair (I will not steal), and I expect you to do the same (you will not steal from me). That very same social contract is implicit in virtually every body of law and every moral or ethical system developed since then, from the Ten Commandments to the Golden Rule.

So how does the history of ethics relate to our errant operator?

Establishing and maintaining cash and inventory controls in a vending business is no easy task. Almost every employee in the company handles cash, or products that can be easily converted into cash, every day. Realistically, there are only two things that prevent people from stealing , fear of getting caught, and their own personal sense of morality. The best control systems in the world will not do the job unless the employee has some level of integrity.

And the measure of integrity in a person is a function of how deeply that person is invested in the social contract I described above. If the employee learns that the boss is willing to violate the social contract by stealing from the client, what right does the boss have to expect the employee not to steal?

The misguided operator who is prepared to cheat on commissions thinks the client is his biggest problem. In truth, the client is the least of his worries. If account management finds out it is being scammed, it's likely that the operator will lose the location, and maybe even face a lawsuit to recover lost commissions. In the grand scheme of things, it would be an expensive but manageable loss.

What he really needs to worry about is the disintegration of internal morale. On the day that employees become aware that their boss is dishonest, he loses the ability to effectively manage the company.

Employee theft will only be one of the problems he creates. A bigger problem is the fact that he can no longer lead by example, nor demand or inspire exemplary performance from his employees. Simply stated, they will not follow a leader they can't respect. They may continue to show up for work every day, because they need the job. But it's not likely they will excel in the performance of their jobs, ever again. And when that happens, the company is well on its way to oblivion.

OTHER RISKS

Another major problem lies in the future. When you decide to retire and sell the company, the fact that you have cheated your clients will cost you a lot of money. A reputable buyer will not be willing to continue the scam, and will recalculate your bottom line based upon paying honest commissions. And since the purchase price is typically based upon a multiple of earnings, the purchase price will be reduced by a multiple of the amount you saved annually by cheating. The total cost may well be higher than the amount of money you saved by cheating.

Another risk you face, if you choose to cheat, is the possibility of blackmail. Many years ago, I represented an operator in the sale of his company who found himself between a rock and a hard place. When his star salesman learned about the upcoming sale, he threatened to expose the operator to the clients that were being cheated, unless the operator paid him off. Since the loss of a bunch of major clients would have put the sale in jeopardy, the operator had no choice but to pay. I guarantee you that the six-figure payment the salesman was able to extort was greater than the total amount the operator ever stole from his clients.

The fact is, you can't even discipline or fire an employee who knows you are cheating. He can blow the whistle on you, or he can go to work for the competition and bury you.

Finally, when you cheat, you face a very real market risk. Every operator loses clients occasionally, for reasons that have nothing to do with commissions. If you lose a location in which you have been under-reporting sales and a reputable operator takes it over, the sales at the location will appear to increase exponentially. I assure you, both the reputable operator and the client are sophisticated enough to figure out what has been going on.

With this knowledge, either or both of them can cause serious trouble. When the reputable operator calls on another one of your locations, he can point out that he was able to significantly increase sales at the location you lost, because he does a much better job. And the client contact at the old location will verify his claim. Also, client contacts, such as personnel managers and facilities managers, talk to each other and belong to trade associations where common problems are addressed. No operating company can afford this kind of reputation. You will continue to lose clients.

There is no question in my mind that the risks involved in cheating are far greater than any potential rewards. You only have to get caught once, and you have too much to lose if you do.

King Hammurabi had the right idea. If you have something to protect, and you hope to be a great leader, you can't afford to give up the moral high ground. Most professional managers agree that their behavior must be above reproach, in all things. Not only because it's the right thing to do, but because they have learned it's the only course of action that works.

COMPETING AGAINST A CHEATER

When you have to compete against a cheater, I strongly suggest you avoid calling him a thief in the presence of the client, even though you are convinced you are correct. If you do so, you run the risk of giving the entire industry a black eye, and you will be tarred by the same brush.

Frankly, it's much easier to demonstrate that he is incompetent as a vending operator than it is to prove he is a thief. And, based upon the nature of his scam, he is vulnerable to this kind of attack. In order to make the scam work, he must report sales to the client that are lower than the actual sales.

You have to convince the client that the only true measure of total quality in a vending service is the level of patronage by the customer base. Simply stated, the customers vote with their wallets. The operator who provides the appropriate number of sparkling, clean machines, always stocked with products that the customers want to buy, and makes sure that those machines are rarely out of order, is going to do the most business. Whoever can do the most business is doing the best job of meeting the client's vending needs.

At this point the client typically says, "Every operator claims he's the best. We will never know, unless I award the contract to you." At this point, you offer to prove to the client that you can demonstrate how much better you really are.

Simply ask the client to reduce his current "reported sales" to a per capita number, by dividing total sales over a period by the average number of employees. This will give you the average sales, per employee, for that period. Then offer to compare your actual per capita sales in locations that are similar to the client's location.

This works particularly well if you are bidding a location where the thief is the current operator. He has to suffer by comparison. It works even better if you can point to another location you have taken from the cheater, where the sales "increased dramatically" after you took over. You can add some icing to the cake if you can produce a letter from the inc


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