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Does it Ma tter Ho w We Get Th ere (Reall y)? A Case of Ethics in Bidding Donald H. Schepers Zicklin School of Business Baruch College, City University of New York Jim Snelling could not believe how tense he had becom e in the last 24 hours. A huge contract had become a huge headache. Just a week ago, Spectro had signed a $100 million contract, and everyone wa s celebratin g. Profits shot up, and Christmas bonuses doubled. Then came the news that Spectro’s employees had the competitor’s price list, and used it to undercut their bid. This morning, he was due at an Ethics Committee meeting to discuss what st eps to take from this point forw ard. As senior strategist for the company, he was concerned not just with the company’s sales and revenue for the three-year duration of the c ontract, but also the company’ s position as a supply chain partner for years to come. The decision today would have long-range consequences both inside and outside Spectro, and he weighed his position carefully. Spectro Electronics Founded in the mid-1960’s, Spectro El ectronics was a supply chain manager and distributor of electronic co mponents to manufacturers. By 1995, Spectro was doing $6 billion in sales, and the demand for its services kept growing. Jim was projecting that Spectro would be doing $10 billion in sales wit hin the next three years. Gross margins ran just over 16% of sales, and net income hovered right above 1% of sales, well within industry norms.

Spectro had a world-wide presence, serving m anufacturers in over 40 countries. The company was organiz ed into a series of regional operations st affs, with each staff handling sales, distribution, and engineering responsibilities for its area. The sales staff would solic it business from manufacturers in t he form of quotes to f ill. A manufacturer would be preparing to make some electroni c component (a motherboard for a computer, for example) and would need a source for the parts for that component. Typically, these manufacturers would prefer to single-source their purchasing, and so would put all the necessary parts onto one quote. This quote would then go to supply channel managers such as Spectro and its competitors. T he engineering staff at Spectro would assist sales in breaking down the quote into its vari ous parts. The distri bution staff would then solic it bids from its suppliers to fil l the quote. Spectro alone had ov er 600 vendors it used to fill its parts orders. Competit ion among the supply channe l companies was fierce, each trying to get the parts cheap enough and the final bid low enough to get some advantage over their rivals.

Typically, these bids would result in mult i-year contracts. An average contract for Spectro ran over a 2 to 3 year period, and re sulted in $1 0-15 millio n in sales. Once a contract was awarded, the specifications pas sed to the regional dist ribution staff to service the contract. This staff provided ju st-in-time parts delivery and service to the © 2005 the Journ al of Beh avioral an d Applied Ma nag ement. All rights re se rved. 93 manufacturer. A t any one time, each regional distribution center was handling multiple existing contracts, as well as seeking new business. There were 150 sales staffs across the 40 countries where Spectro had a presence, and 25 distribution facilities wh ere parts would be housed and shipped. Each sales staff was headed by an operations officer who report ed to the area’s president. These area presidents were corporate officers. Spectr o’s service areas had been broken down into North America, Europe and the Mi d East, Sout h America, and Asia Pacific. In addition to these co rporate pre sidents, other cor porate officers incl uded a CEO, CFO, CIO, a vice-president for Human Resources, and a vice-presid ent for Global Strategy and Operations. Figure 1 shows the or ganizational chart for Spectro. Jim Snelling Jim Snelling had joined Spectro in 1992 as vice-president fo r Global Strategy and Operations. He had both a BBA and an M BA, and had specia lized in operatio ns. Before joining Spectro, he managed global operations for an automotive component company. In his three-plus years at Spectro, t he organization had grown tremendous ly, fueled in large part by the boom in technology services. As computers and other t\ echnology innovations dominated more and more in the workplace and home environments, supply chain management such as Spectr o offered became an essential yet unseen part of the business environment. Each innovation spurred new demands and new contracts from manufacturers, and Spectro wa s working hard to make sure it had its piece of the pie. One part of Spectro’s growth strategy invo lved splitting regional sa les staffs as that unit’s business grew. Each sales staff work ed hard to bring in as much new business as possible, and with the tech boom, Spectr o had seen its share of growth. When a regional staff grew too large for one operations manager to handle, the corporate office stepped in, divided the territory into two, and named a new operations manager for the new territor y. Spectro used acquis itions as a second gr owth strategy. However, Spectro’s competitors were growing faster than Spec tro was, and as a result, the competitors grew faster than Spectro’s ability to buy t hem. Try as it migh t, Spectro’s management could see it was beginning to fall behind. Growth brought new employees into Spec tro, and the corporate office was very concerned with integration of em ployees into the culture of the firm. Within the first three months of their career at S pectro, new employees were brought to headquarters for a week of training. Training included introduction to the industry, as well as introduction to the company, its i nternal proc esses, and its culture, with the better part of one day devoted to ethics training. Employees from acquisitions were not brought in as © 2005 the Journ al of Beh avioral an d Applied Ma nag ement. All rights re se rved. 94 quickly as others, however. Since they “kne w the business” of electronic supply chain management, their trai ning was put off until it was more convenient. The Opportunity and the Problem Jim had been concerned for some time about S pectro’s strategies. While sales were good, they weren’t as strong as he thought they should be, given what he could figure competitors were doing. There w ere a lot of repeat contracts, but nothing really new. The growth strategy w as not working, and he debated what to do to get the company moving again.

In early 1996, Spectro’s acquis ition strategy got a boost from an unusual source. The United States Department of Commerce had entered an anti-tr ust ruling against ElectroSource, one of Spectro’s main compet itors. The ruling forced ElectroSource to divest some of its sales staffs, and Spectro ac quired five of them in key regions where it had wanted to increase its presence. These st affs were merged into Spectro’s existing staffs in those areas. At first, the acquis ition was rough. There were the usual frictions between long-standing and newly acquired employees over salaries , benef its, titles and the like. In addition, the cultures of the two companies didn’t mesh all that well. For one thing, the industry was pretty rough and tumble. It was not unc ommon for buyers to get a boat or some other ‘goodie’ from one of Spectr o’ competitors in return fo r a contract. ElectroSource operated close to the line, and everyone knew it. For its part, Spectro worked hard to run a clean operation. In addition, the El ectroSource employees saw the corporate structure at Spectro as having too much red tape. They perce ived the electronics supply chain management business as rapidl y moving, and they seemed to resent the oversight from Spectro’s corporate offices.

Over the si x months since the acquisition, however, Jim thought the resentment had waned, and the new employees were worki ng out very well. They had brought new energy to the company, and he believ ed that would translate into new sales growth. Spectro needed a shot in the arm, and thes e employees seemed to have brought it. In fact, one of these newly acquired sta ffs in the Southeast US had just signed a remarkable contract, $100 million over 3 years. For Spectro, that w as 6 to 10 times the normal contract size. That sale took Spec tro’s operating profit for the year from $40 million to $56 million. And they had taken the business away from their former employer! When Jim heard the news, he was glad these former ElectroSource employees were now working for Spectro, and not for ElectroSource. They had a real killer instinct, and Spectro needed more of that attitude. It wasn’t long after the good news that so me disturbing s igns began appearing. In reviewing the contract, the sales team manager noticed that the margins wer e a little thinner than usual, and almost dismissed it, thinki ng that it wasn’t so out of line since the contract was so large. Looking at the team that won the bid, he also noticed that it was © 2005 the Journ al of Beh avioral an d Applied Ma nag ement. All rights re se rved. 95 entirely composed of former ElectroSource employees. These employees had not yet been taken through th e training system at co rporate headquarters. He began to ask about the process of building t he quote that won the bid. He was hoping that they had simply remembered enough to be very aggressive, but he knew that was a s\ lim hope with over 20,000 parts in this one bid. O ne of the ElectroSource employees quickly confirmed his worst fears: they had br ought original paperwork with prices and quantities listed. After all, these employees had reasoned, they had already worked up the price list once, and using it again wasn ’t illeg al, so why not? The sales team manager took the situation to the Regional Oper ations Manager, who also served on the Ethics team for Spectro. The Operations manager took thi s to the President for the North American regi on, who then brought it to the CEO. When the CEO received the news yesterday, he quickly dictated a memo outlining the issue and c ircumstances of the bi d, and ca lled an emergency meeting of the Ethics Committee for the following morn ing to discuss the situation and develop an ac tion plan. The Ethics Committee consisted of the CEO, the Vice-President for Strategy (Ji m), the Vice-President for Operations, the President of the business unit involved (in this case, the President of the North American divis ion) , and the regi onal Operations Manager for the particular unit. The team met on bot h an ‘as needed’ basis, and as well a s a quarterly basis, with the quarterly review in cluding reports from the heads of Human Resources, Information, and Finance. T he Ethics Committee influenced behavior in the company both through its decisions related to specific incidents, as well as general ethics campaigns, wit h slogans s uch as “Do the right thi ng, even when no one is watching! ” Jim received the memo shortly after the CE O had dictated it. As he read the memo, his heart sank. Not only were the hopes for a re vitaliz ed strategy pushed aside, now there was all this to deal with. Jim had spent the night puzzling over what he thought about the situation. Now he was in the office early, putti ng his thoughts together in preparation for the meeting later that morning. He would have to speak his mind on the contract, how to deal with the competitor, and what to say to the client. Sure, there was an obligation to the client, but was there any to the competitor? In hi s own mind, he had debated every position he could think of. Spectro could say nothing and let the contract run it s course, hoping that nothing leaked to the competitor or client. That way, S pectro could profit from the contract, and somehow deal with the employees quietly on its own. At the other end, Spectro could admit the whole thing to both client and ElectroSource. Both would have demands on Spectro, and there was no way to know how much the competitor might want in order to be made whole. And at the very least, the client would want everything at Spectro’s original prices. There were also issues inside the company . How should the employees involved be dealt with? What happens to the bonuses that w ould have come from the contract? As © 2005 the Journ al of Beh avioral an d Applied Ma nag ement. All rights re se rved. 96 he sat and looked out the window, he knew he had to make up his mind and\ take a position. Fi gure 1. SPECTRO ELECTRONICS Chief Executi ve Offic era Presi dent, As ia Pac ificb Presi dent, Europ e and South America b Presi dent, North America b Chief Finan cial Offic er Vic e Presi dent, Global Strategy a Vic e Presi dent, Operation sa Senior Vice Presi dent, Gene ral Cou nsel Chief Information Offic er Vic e Presi dent, Global Huma n Regi onal O peration s Manag erc a Permane nt membe r of the Ethics Com mittee. b Each re gion al Presi dent served a s an ad hoc member of the Ethics Co mmittee. Sales c Each Are a Presi dent ha nd led many re gional staffs, e ach orga nized a s the one sho wn here. Thi s person se rve d on the Ethics Co mmittee on a n ad ho c ba sis. Distri bution Enginee ring © 2005 the Journ al of Beh avioral an d Applied Ma nag ement. All rights re se rved. 97