Goldman Sachs & Incentive "Rip-offs"

Not too long ago, I did a post on the lessons to be learned from Amazon’s exit from the incentive fulfillment business. Many others commented on Amazon’s departure as well.

For the most part, these commentaries were even handed and balanced but some were very self-serving. One recognition company opined that one of the primary reasons Amazon exited the business was because it was concerned about its brand image… apparently customers were complaining of feeling ripped off by the prices they were paying to their incentive reward provider partners. The writer then went on to denounce the “massive markup rip-offs on merchandise reward items”.

Talk about the pot calling the kettle black!

This is coming from a recognition company whose only redemption vehicle are “award vouchers” that can be exchanged for gift certificates. Don’t ask them for instant awards with a company logo or for symbolic awards that can be used in service awards or for your prestigious President’s award… they simply don’t have the supply chain that can deliver these types of rewards.

Any recognition company that says there is only one type of reward redemption system doesn’t know what they are talking about. Period! They are being totally self-serving and are not looking out for the interests of their clients. Make sure when you pick a supplier to work with that they don’t operate under a "One Size Fits All” redemption model.

But let me go even further…

Mid April the SEC charged Goldman Sachs with civil fraud. It alleges that Goldman helped a hedge fund client create a financial derivative based on US sub-prime mortgages. The hedge fund bet against the derivative… i.e. they hoped it would fail. The suit alleges that Goldman knew this and then went out and marketed the derivative to investors without disclosing the hedge fund’s side bet that the investment would fail.

I think there are a lot of similarities at the charges leveled against Goldman Sachs and companies who provide award voucher recognition programs to clients when the award voucher has an expiation date.

Let me explain…

In these type of programs, when an employee is recognized by the employer the recognition provider sends the employee an award voucher. This award voucher can be exchanged for a variety of gift certificates in different countries. The recognition provider charges the client when the award voucher is sent to the employee. The catch is when the award vouchers have an expiry date on them. If they are not exchanged before they expire, the recognition provider gets to keep the revenue. This is called breakage. In essence, the recognition provider is betting AGAINST recipients exchanging the award vouchers before they expire. Often the clients are not even aware of the breakage.

Lovely! The client recognizes its employees and the recognition providers hopes they never hear from them again!

Talk about a “massive rip-off”!

Every time we come across these award voucher type of programs clients all complain about the same thing… lack of reporting. No wonder! The reality is that they are doing exactly what Goldman is alleged to have done. We are not talking about insignificant sums of money. The Consumers' Association of Canada estimates that one in every four gift cards goes unredeemed. I imagine the same breakage percentages would apply to award vouchers.

All recognition providers are entitled to make a reasonable profit, including those who provide award vouchers. But it is incumbent upon all providers to provide totally transparent pricing.

It is also important to call out those few who tarnish our industry.

Lessons Learned from Amazon

A few of years ago Amazon announced with great fanfare that it was going to go into the incentive and rewards fulfillment business. Companies would be able to take advantage of Amazon’s volume purchasing and free shipping. Recipients would have access to millions of reward items! Companies could become incentive suppliers without having to invest in the requisite supplier and distribution network.

WOW… too good to be true!

I admit Rideau explored the Amazon option. We even went to the considerable expense of integrating directly with Amazon (most companies went through third party integrators).
But we never flipped the switch on for any of our clients. We just weren’t comfortable with Amazon’s extremely short cancellation clause. It just didn’t make any sense. Logic said Amazon should try to lock us in for a longterm contract but they didn’t want that. We questioned their longterm commitment to our marketplace and the possible implications for our clients' employees.

We laid all this out to our clients in an open and transparent fashion. Fortunately, our clients agreed!

Last week Incentive Magazine reported that Amazon is exiting the Incentive fulfillment market and leaving many incentive companies hanging. Amazon’s departure has huge ramifications for our industry. Amazon made it easy for a lot of companies to jump into our business and become quasi competitors. These companies will either be forced out of business or have to invest a significant amount of time and money building their channel partner and distribution networks. More importantly, it will have a very negative effect on the companies and the employees they serviced.

I find it very amusing to see all the companies who so readily embraced this solution as the be all and end all, trying to distance themselves from Amazon.

As John F. Kennedy said, “success has a thousand fathers and failure is an orphan”!

BTW... I love Amazon. I was one of their very first customers when they opened their website. I bought their Kindle when it first came out and to this day believe that they are an amazing company that has forever changed the nature of the way we do business.