PART THREE:  LOS ANGELES BBB -- ROTTEN TO THE CORE?

This is the third of a ten part investigative report into the standards and practices of the Better Business Bureau of the Southland, Inc., here-in-after referred to as the LA BBB.  This ten part report is the result of months of research, interviews, and information supplied or confirmed by a highly placed LA BBB employee of long standing who has requested confidentiality.

WHY DID THE NATIONAL BBB ADOPT THE LOS ANGELE$ BETTER BUSINE$$ BUREAU $Y$TEM OF LETTER GRADE$?
A LOOK AT THE NUMBERS BEHIND THE GRADES

The Los Angeles Better Business Bureau A-F letter grade system made its debut in late 2004/early 2005.  Four years later, in January of 2009 the Council for Better Business Bureaus launched the A-F letter grading system nationwide.  The reasons given for the switch from the previous Satisfactory/Unsatisfactory grading system were that the new A-F letter grade system better served the consumer with a system that was easier to understand and more comprehensive in its evaluation of a business.

On the face of it, this was a convincing argument.  It had the unfortunate side effect (from the BBB’s point of view) of catching the attention of the media however, and soon there were more questions than answers.  Discrepancies in grades that favored member businesses immensely over non-member businesses were quickly pointed out.  Quietly, the CBBB set about correcting these discrepancies.  (Non-members the LA Times and Disneyland both had “F” grades until pointed out by this reporter, now they have “A” grades.  David Lazarus of the LA Times pointed out that world famous restaurant Spago’s (non member) had a “B-“ grade and correspondent Chris Wolfe pointed out that Canter’s Deli (non-member), a Los Angeles institution since 1931 had a “C” grade.  Both now have “A” grades.) 

With dozens of reporters, both regional and national, questioning the propriety of the new A-F letter grading system, the CBBB refused to back down, or even acknowledge the problem.  Instead, they resorted to dead of night grade changes and have not responded to inquiries by this reporter into the reasons behind these specific grade changes.  Even more perplexing, neither the complaint levels, nor anything else, changed for these businesses, just their grades.  In and of itself, this speaks volumes about the flaws in the new grading system.  The CBBB may have treated the symptoms, but they have yet to treat the disease.   All this hints that there could be another reason for the adoption of, and persistence in clinging to, this obviously flawed grading system. 

This reporter has learned, as usually is the case when something doesn’t make sense, that following the money brought some things into perspective.     Let’s set the scene:  In late 2004/early 2005 the Los Angeles Better Business Bureau rolled out their new marketing strategy which employed an algorithm resulting in a letter grade for a business that could range anywhere between an AAA and a FFF.  When we examine the revenues from member dues, for this period of time, for multiple BBB offices around the country, as well as those of the CBBB (national Council of Better Business Bureaus) and throw in the GDP (Gross Domestic Product) for reference purposes we notice two things immediately.  First, the Los Angeles Better Business Bureau is doing very well.

Second, we see that the growth trends in the majority of Better Business Bureaus are slowing down, but not so at the Los Angeles Better Business Bureau.   The CBBB member dues fees are a percentage of each BBB office’s member dues revenues that are fed into the CBBB coffers.  This means the CBBB member dues are an ideal barometer for all 180 BBB offices.  A look at the revenue increase from member dues between the years 2004 and 2007, shows the majority of BBB offices seem healthy, indeed the CBBB (our barometer) is at a 24% increase, which is even better than the GDP increase of 18%. 

But when we look at the two year period of 2006 and 2007 we see, what for the CBBB must have been an alarming trend.    CBBB revenues, on an overall national basis grew only 1%, with several  BBB offices actually reporting decreases in revenues--all this while the Gross National Product remained steady at a 5% annual increase.  Business was bad at the BBB.  Talk about barometric pressure.   

And then there was Los Angeles.  Since implementing their new Letter Grading System, Los Angeles BBB member dues grew at an outstanding 43%, far outstripping the GDP of gains of 18% for the period 2004-2007.  As the following chart demonstrates, at least $4 million of increased revenues was directly attributable to the LA BBB Letter Grading system for the period.  (Using standard accounting procedures we've projected what member dues revenues for the LA BBB for 2005 through 2008 would have been if all things were equal--i.e. they had not implemented the Letter Grade system.)
 

Even more significant, for the period of 2006 and 2007, at a time when the CBBB was struggling to keep revenues from slipping, the LA BBB grew their member dues revenues by 14%, almost three times the GDP growth rate.    Any doubts about the effectiveness of the LA BBB’s Letter Grading system were now gone.   It was here that the CBBB made a fateful decision and decided to choose the money over credibility.  They spent 2008 polishing the Letter Grade System (AAA through FFF became A+ through F; the algorithm expanded from 10 criteria to 16 among other cosmetic changes) before rolling out their new Letter Grading system nationwide on New Year’s Day, 2009.

There is nothing inherently wrong with making money; but it does matter how you make it.  Just ask Bernie Madoff.  In this case, we feel the CBBB has erred by embracing a flawed system: one which is ripe for abuse (see part one in this series) by overly aggressive telemarketers using tactics that the BBB warns the public against when used by others; and based on an algorithm whose accuracy is questionable.  (More on this later in the series.)  It's the classic GIGO scenario....garbage in/garbage out.

So, now the CBBB finds itself in a Faustian bargain.  The Letter Grade system has been demonstrated to be effective, at least revenue wise, by the LA BBB.  The question that should have been asked before implementing it was how much of the increased revenues were generated because businesses embraced the new Letter Grade concept and how much were generated because the Letter Grade system created numerous telemarketing opportunities?  

Suddenly a non-member business who previously had a Satisfactory grade could find themselves the recipient of a C or D grade and were easy prey for a telemarketer informing them that joining the BBB would improve their grade.   As previously reported, telemarketers account for almost 40% of the LA BBB workforce and 90% of the revenues.  Additionally, telemarketers get compensated five times as much for new members as they do for renewal members.  Often times, these are situations where “you have to feed the beast,” or in simple terms:  LA BBB telemarketers found the A-F letter grading system opened up numerous sales opportunities and they made the most of them. 

The result is the CBBB is now stuck in a very bad place: they have chosen to continue to publicly support a grading system that has been demonstrated to be arbitrary, subjective and in many cases flat-out wrong.   And to make the Letter Grade system truly work, they will find they need to adopt the very high pressure, deceptive telemarketing tactics of the LA BBB, the very type of sales tactics they deplore publicly. They have become the captain on a sinking ship that refuses to leave the vessel.   

It would seem that the CBBB is at a crossroads:  they can continue to stonewall the situation and behave like Mark McGwire or Roger Clemens in the face of steroid allegations and meet increasing skepticism and investigation or they can take the high road, like Andy Pettitte and admit their mistake and (hopefully) get back on track.