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Rebuilding trust with your customers isn't easy following a major crisis. Sadly, relationships that take years to build can be harmed or destroyed entirely practically overnight.

Alibaba, the Chinese business-to-business marketplace that Yahoo owns a substantial chunk of, is the latest company to learn that lesson the hard way.

It may not get as much press attention as it arguably deserves in the West, but Alibaba is arguably one of the most important ecommerce companies on the web. It connects thousands of suppliers, most of which are based in China, with buyers around the world. These buyers range from mom and pop importers to major multinational retailers.

Doing business overseas always comes with risk and poses challenges, and although China has become one of the most attractive places to source goods over the past decade, doing business in China is usually not a walk in the park. Simply finding and negotiating with suppliers can be tricky due to geographic distance, language barriers, etc. But challenge has proven to be opportunity for Alibaba, which has successfully facilitated countless supplier-buyer relationships in China.

One of the ways Alibaba has sought to make buyers more comfortable doing business with Chinese suppliers is a "Gold Supplier" program. Suppliers in this program are supposed to be vetted to ensure that they are who they say they are. Alibaba's website explains:

...all Gold Supplier members have had their identities authenticated and verified by a reputable third-party security service provider. This means that the Gold Supplier member's company registration details have undergone a thorough check to make sure that the entity is real and legitimate.

But Gold Supplier status is only as meaningful as the quality of the supplier screening. And therein lies the source of Alibaba's crisis: Alibaba discovered that some of its own employees had been assisting or allowing fraudsters to set up Gold Supplier accounts to defraud buyers. In a statement, the company admitted:

About 100 sales people, out of a field sales force of about 5,000, as well as a number of supervisors and sales managers, are directly responsible in either intentionally or negligently allowing the fraudsters to evade our company's authentication and verification measures and systematically establish fraudulent storefronts on the international marketplace. The investigation concluded that the pursuit of short-term financial gain at all cost had tainted parts of our sales organisation, risking serious damage to our company's core values.

According to Jack Ma, Alibaba's founder, "We must send a strong message that it is unacceptable to compromise the company’s culture and values." So the company sacked its CEO and COO effective immediately.

According to the company, 2,300 Gold Suppliers who signed up for Alibaba in the past two years committed fraud, and the average fraud claim was valued at less than $1,200.

That's a relatively small portion of the overall number of suppliers doing business on Alibaba, and a relatively small claim size given the volume of business facilitated through the site, but the fact that at least some of the fraudsters were apparently aided by Alibaba employees threatens the company's credibility in a big way. After all, if you can't trust that there's a real difference between a Gold Supplier and a free Alibaba supplier, you really can't trust Alibaba.

The good news is that Alibaba's response -- a management shakeup and painful public admission -- is a good start to restoring trust. Transparency and accountability are important, and the company has sent a strong message that it is serious about its reputation and will hold those at the top accountable for what those below them do. It has apologized and explained, the first two steps in rebuilding trust.

But step three - fully rectifying the situation -- will be tough given the incentives employees, particularly those in sales, have to participate in fraud. Yet Alibaba's ability to do so will be absolutely crucial to the company's future.

Patricio Robles

Published 22 February, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2393 more posts from this author

Comments (4)

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Koji Yanaka

I suppose now companies should get GSE Authorization as it is the most reliable certification worldwide and like they promote theirselves: all companies with GSE Authorization are reliable and they never get such situation, more here: http://www.gseauthorization.eu

over 5 years ago

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Yuli

I agree with Mr. Koji, now every company is moving from alibaba to GSE Authorization, because their keep finger on pulse and approve only best suppliers

over 5 years ago

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Juran

Method is simple, if someone needs to import, should ask about GSE Authorization of the supplier. Will sure import from who.

over 5 years ago

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Inspection China

Maybe inspection is really important before sending your money? You should also ask about certificates - it helps!

over 5 years ago

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