DTC Ombudsman Starts Cleansing Role
July 19, 07Yesterday was "D-day." Some hundred existing Diamond Trading Company (DTC) Sightholders and another 100-or-so applicants filed their Sight allocation contract proposal questionnaires (CPQs) to the Supplier of Choice (SoC) Ombudsman, Dermot Gleeson. At this point, the profiles will go through a thorough cleansing process before they actually get to the DTC.
It may be recalled that in January 2007, the Ombudsman’s role for dispute resolution was expanded to include a cleansing (or filtering) element. This additional role requires the Ombudsman to review all confidential information provided by a Sightholder or applicant to the DTC for the company's allocation decision-making process.
Before the DTC makes any final allocation decisions, there will be a few third-party verification processes (such as forensic auditor checks, etc.). These findings are, in turn, first shown for review to the Ombudsman, before being submitted to the DTC. To be precise: the Sight allocation process for the next three-year contract (which officially commences on April 1, 2008, after a few months of transitional allocations) has now begun.
As we have said before, the Ombudsman has become "Omnipowerful." Details of the Ombudsman’s cleansing process were released to the Sightholders on a piece-by-piece basis.
Just a few days ago, in a final clarification to DTC clients, it was stressed that the Ombudsman would mostly concentrate on deleting names (of customers, etc) and figures. He would then send the profiles with the deleted items back to the applicants. Considerable market know-how is required to be able to know what information should pass or should be "cleansed." Customer names, for example, may be mentioned in the profiles if there is already information about these supplier-customer relationships in the public domain. This begs one to ask: What tools do the Ombudsman and his approximately 20 dedicated staff members have at their disposal to know whether a name is in the public domain?
We wish the Ombudsman much success in this new cleansing role. We also hope that he will bring a lot of wisdom to it. We believe that the wisest thing for Gleeson would have been to not have accepted the expanded responsibilities, which have dramatically changed the nature of his role (even though it turned the DTC into a considerable source of additional revenue to his business.) On one hand, the Ombudsman has become an integral part of the Sight application administrative process (“executive branch”). On the other, he is obliged to investigate the correctness of these very processes when an applicant files a complaint. As “arbitrator” the Ombudsman is part of the “judiciary” process.
Ombudsman: Ostensibly Conflicted
It is my view that through the mixture of all these various roles, the Ombudsman has become the most conflicted entity in the DTC allocation process.
He and his team have become the filter of all the information that gets into the DTC and on which the allocation decisions are being made. If he and his team make mistakes, cross out the wrong things, delete too much, or allow certain prohibited information to pass through the system, to whom can the clients complain? To the Ombudsman?
As already mentioned, the original intent of the Ombudsman was to be an effective mechanism for dispute resolution. As such, it is remarkable that the Ombudsman didn’t take any action after a number of well-publicized cases. In them, he made judgments against the DTC that were ignored by it.
I find it even more puzzling that the Ombudsman subsequently decided to accept the newly created role of cleanser/filter. This will undoubtedly raise questions about the validity and credibility of the Ombudsman's future judgments on whether the DTC has followed proper processes. After all, he, himself, has become an integral part of that very decision-making process. What if the Ombudsman's staff errs? This new role undoubtedly impairs his ability to arbitrate.
De Beers, in its communication to clients, has always indicated that the extended powers to the Ombudsman were in response to a European Commission request. Given how odd this sounds, maybe the time has come for the EC to disclose the basis on which it made this strange amendment to the agreed Ombudsman role.
On such EC decisions the Commission normally follows an extensive consultation process with stakeholders to find out whether this role will actually advance the concerns the EC may have on abuse of monopoly power. It normally also questions the impact such a decision would have on the market. On the decision to expand the Ombudsman role and even to extend his term from ending in 2008 to 2011, the Commission failed to do any market tests, as they did in virtually every other (even less significant) De Beers-related decision.
Recommend Penalties
In the final print of the Ombudsman's expanded powers, it says that not only is he allowed to make a judgment, but under certain circumstances, he is also allowed to “recommend” the penalty to be paid by the DTC (if the complainant asks for it).
For instance, if there is a faulty supply decision that the DTC says it cannot correct, then compensation would be limited to the loss of profit on re-selling the goods that were not allocated. This strikes me as weird, because DTC clients were never supposed to sell boxes in the first place.
Their earnings would come from the more downstream operations after processing and setting the goods in jewelry. It is even more suspect that this very low threshold for penalty payments was included in the EC decision – at about the same time that a London court was asked to consider the issue of damages.
Did the EC simply adhere to a De Beers request or did it, by itself, invent such a threshold? And if so, on what basis? When EC Competition Commissioner Neelie Kroes announced these new rules, she gave no indication as at how she arrived at these specific thresholds. It was not based on any stakeholder consultation.
The EC court decision regarding Alrosa, which we wrote about last week, should have given the Ombudsman some food for thought. The Court of First Instance found the EC faulty in accepting statements by De Beers on face value. The court found further fault in the EC's lack of following due process, which required stakeholder input. Whatever was true in the Alrosa case seems to be far more so in the new cleansing role of the Ombudsman. If nothing else, this recent court judgment should have made Gleeson reconsider accepting this role.
The Ombudsman has, by his own choice, maintained an anonymous face to the industry. He has granted no interviews, released no public statements, and given no explanations to Sightholders. From next week, Sightholders will finally have an opportunity to see what the Ombudsman and his team are bouncing back to them in respect to their profiles.
One might ask, who are we kidding anyway? The DTC Key Account Managers (KAMs) and other executives conduct periodic Business Review Meetings (BRMs) with clients and have constant interaction and dialogue with each other. Not only is that good and proper, it is also the way it should be.
However, the Ombudsman is not present at those BRMs, so he can't censor what has been said. There is no way that can guarantee that some prohibited names, numbers or facts may not have already been registered in the heads of the KAMs and other DTC executives. I am also not aware of whether communications from DTC brokers in respect to clients are filtered through the Ombudsman – but, by the very logic of this illogical system, broker notes need to be cleansed as well.
Even with my occasional reservations about the SoC process and its implementation, I do have faith in the integrity and skills of the current KAMs and sales people. Whatever their shortcomings are, their understanding of their clients' business is undoubtedly far more thorough than that of the Ombudsman and his forensic accounting team.
The scoring system has become subjective because of greater reliance on judgment inputs from real people. It's not perfect, but it's far better than the distorted mechanical process that preceded it – which we now call SoC1. It is hard to conceive what the cleansing mechanism can contribute to the process. Maybe that is something we should ask the EC Competition Commissioner to explain.
The EC established the office of the Ombudsman to act as an effective mechanism for dispute resolution, to be an arbitrator, and to investigate client complaints. The role was created to protect client interests! One may argue whether it has been successful. Some may undoubtedly say that it has not, given De Beers' refusal to accept the Ombudsman's findings. That a court agreed with De Beers is a different matter altogether. One doesn’t need an arbitrator if, later, his decisions need to be argued in court. Successful or not – the arbitrator role of the Ombudsman is here to stay. His cleansing role, however, is a different matter.
Have a nice weekend.