Paying Bribes: Do Small Suppliers Have Choice?

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When the word bribery is heard, people often assume that the matter must be something related to government officials. With high profile corruption cases in the limelight, this thinking has only gained ground. But Deepak was unprepared when he was asked to a pay bribe to a person working in a private sector organization. Deepak belonged to a family of business people. His father ran a partnership firm with three friends. The firm had an annual turnover of around Rs.100,000,000. It manufactured ready-made low-priced garments on a made-to-order basis for medium and large Indian and multinational firms. The garments they produced were largely office uniforms and therefore not very dependent on fashion or fads. During early 2000, the business experienced rapid growth, with sales turnover reaching about Rs.150,000,000 in that year. However, management of working capital (especially cash) was a challenge. Laborers expected their daily wages to be paid in cash and suppliers also expected the same upon delivery of materials. However, clients paid the firm late, often about 90 days after delivery of goods. Given the situation, the firm required monthly working capital of around Rs. 1,000,000. Deepak, joined his family business in mid-2008. During the time, the industry was experiencing a recession. As a result, clients now paid even later: on average about 150-180 days after orders were delivered. Payment of about Rs. 10,000,000 was still pending. Although clients were called to request immediate settlement, they explained that they were simply unable to pay the bills at

Amit Jain, Visiting Faculty, Praxis Business School, prepared this case with guidance and input from Professor Ranjini Swamy, Goa Institute of Management. This case was inspired by interviews and observations of actual experiences but names and other situational details have been changed for confidentiality and teaching purposes. The case has been prepared as a basis of class discussion rather than to illustrate either effective or ineffective handling of administrative situations.

This material is part of the Giving Voice to Values curriculum collection (www.GivingVoiceToValues.org). The Aspen Institute was founding partner, along with the Yale School of Management, and incubator for Giving Voice to Values (GVV). Now Funded by Babson College. Do not alter or distribute without permission. Mary C. Gentile, 2010

that time. Deepaks firm had only enough cash to meet its requirements for the next six months. New orders could have helped but the firm had not received a new order in the last six months. Deepak was assigned to the Sales and Marketing team with a mandate to obtain the much needed new orders. In the next four months, he contacted many probable clients but was not successful in getting a single order. Most of the existing and potential clients showed interest in working with the firm but explained their inability to place orders given the trying financial circumstances. In December 2008, just when things appeared really bleak, Deepak received a call from the purchasing manager of a small company that wanted T-shirts made for their workers. The order was valued at about Rs. 2,000,000; the company was willing to pay 50% of the amount in advance and the remaining within 30 days of receiving the consignment. If the order came through, it would solve the cash-flow problem of Deepaks firm for at least 3-4 more months. Deepak was excited; he started work on the tender. His company would be competing with four other organizations for this order. All four could match the quality and price of his firm. All four were equally keen on bagging the order as their financial position was similar, if not worse. He knew they would fight tooth and nail to get the order. Deepak spent many hours on the tender and came up with what he thought was a very competitive rate. He was very confident about getting the contract. He submitted the tender and waited keenly for the clients response. Shortly thereafter, he received a call from the purchasing manager of the company. After some general discussion, the purchasing manager broached the topic of the order. He said that if Deepak was keen on bagging the contract, he would have to pay 10% of the order price as commission to him. Deepak was initially speechless; he could not believe that people employed in the private sector could brazenly ask for bribes. He sought and obtained some time to think about it and discuss it with the partners of his firm. Deepak then called his uncle Mr. Ashish, one of the 4 partners in the firm who had worked on getting new orders before Deepak joined up. Mr. Ashish was not surprised or disturbed; he explained to Deepak that it was a normal practice in this business. The order was critical for the continued viability of the firm and so the commission had to be paid. On earlier occasions, when all the partners had refused to provide such payment to get orders, they had lost the orders to competitors. When they had agreed to pay the commission, they had won the orders on some of the occasions. Moreover, the firm considered the cost of such a commission as a part of the

This material is part of the Giving Voice to Values curriculum collection (www.GivingVoiceToValues.org). The Aspen Institute was founding partner, along with the Yale School of Management, and incubator for Giving Voice to Values (GVV). Now Funded by Babson College. Do not alter or distribute without permission. Mary C. Gentile, 2010 2

total cost of the goods and factored it into the price of the orders. So, Mr. Ashish argued, the firm would not incur any loss of revenues on payment of such commission. Deepak shared his desire to follow ethical business practices. While Mr. Ashish appreciated Deepaks concern for ethical business practices, he insisted that survival of the business was more important at this point in time for the partners. He asked Deepak to negotiate with the purchase manager and settle for a commission between 3 to 5%. He argued that there was really no option; if the firm did not pay the bribe, the competitor would do so. The only losers would be Deepaks firm. Deepak remained convinced that paying a commission/ bribe to get orders was not the right thing for his organization. He strongly felt that such a practice could hamper the reputation of the firm in the long run. He decided to discuss the matter with his father and the other two partners. A meeting was arranged with all partners to discuss the issue. As Deepak prepared for the meeting, he wondered how to persuade the partners not to pay the bribe. What could he say, to whom, to achieve his objective? How could he get the partners to realize that paying the bribe might not be good for the firm?

Revised 11/19/2011

This material is part of the Giving Voice to Values curriculum collection (www.GivingVoiceToValues.org). The Aspen Institute was founding partner, along with the Yale School of Management, and incubator for Giving Voice to Values (GVV). Now Funded by Babson College. Do not alter or distribute without permission. Mary C. Gentile, 2010 3