The Business Of Independent Service Provider Contracting

New End Of Agreement (EOA) Process Forces A New Business Strategy

Posted by Jeff Walczak on Aug 2, 2020 8:39:53 AM

July 20th, 2020, was the day that FXG announced via MGB that it would make significant changes to the way they will approach your End Of Agreement (EOA) process.

Walking Off Cliff

It is important to understand what’s going on here, as it will impact the way you think about contract renewals with FXG.

At first glance, it appears it’s just FXG flexing its muscles again, and in some respects that’s true.

However, when you study the process, it’s easy to see that it is really an attempt to ...

Force operations who are getting out of control to downsize because of rapid growth.

Growth is here, and more is planned, and staying in control of exponential growth is going to be the new challenge for the foreseeable future.

Is Growth “Bad”?

So, the recent events have caused a few things to happen.

Most CSP’s have experienced rapid volume growth.

rapid growth

That’s great, but as you now know, uncontrolled, growth causes its own challenges:

  • Truck capacity issues
  • Driver shortages
  • Recruiting stress
  • Decreased operating margins
  • Operations planning nightmares
  • The need for access to capital
  • And Much More!

Growth is good, just not a firehose full at once.

FXG’s Response

Although you might think that FXG didn’t see this coming, I can tell you that they have a contingency plan for everything.

If the next shoe to drop is an “Alien Landing” on our planet, they have a plan for that.

When

What’s really happened here is that the plan to transform you into a Transportation Company has now been moved forward by years.

We’ve been trying to communicate for quite some time that at the core of FXG’s business model shift is utilizing independent “Transportation Companies” instead of Contractors to provide transportation services for the actual movement of packages and other things from the various operating units, like Express.

CSP’s in their current state, generally, are struggling to keep up with current exponential growth. When you look ahead to the previously planned growth (Smartpost, Express, Walmart Plus and more) and add what now appears to be an even more violent shift to online eCommerce biz, thanks to the virus scare, you get a perfect growth storm with no end in sight.

If this all comes to pass, and right now it appears certain, then volume growth will surpass most every projection.

That means growth will outrun most CSP’s ability to control their operation.

So, in an effort to try to make growth manageable, say hello to the new 6% or 2,500 stop rule.

CSP’s will now have new rules and increased scrutiny if they control more than 6% of a station’s volume, or, if they average 2,500 stops or more. If they do, there are now multiple ways that FXG will be able to modify a CSP’s CSA so that they will fall under these newly determined “limits”.

What’s The Point?

Smaller operations are easier to manage. By chopping off a part of a CSA, the ability to keep an operation under control becomes greater. Additionally, it can act as a “reset” so that a CSA will be reduced, only to grow back to the limits again. In these cases, a subsequent “re-growth” is very possible with a reduction contemplated again. This cycle could happen any number of times.

Overall, this will allow for more total CSP’s with smaller operations over time, which is arguably an about-face on the strategy of only a few years ago.

prune

 

To be fair, slower growth can be more easily managed, making larger operations possible. But now, with exponential growth, something needed to be done to keep the overall operation under control.

 

So What Does This Mean For Me?

This means that there needs to be a fundamental change in the way growth is thought of, and a change in your business strategy.

Up until July 20th, the goal was to provide good, safe service, monitor and maximize margins, grow the business as needed and desired, and have an exit strategy planned for some appropriate time which suits you in the future.

This was a successful blueprint followed by most.

new wayNow that there is a potential ceiling to individual operation size, there must be another consideration that was not in the old strategy.

As your operation nears scale which will apparently be 6% of total terminal volume (some terminals will certainly have modifications to this percentage) or 2,500 stops, you will need to engineer your own “spinoff plan”. There will be the need to proactively decide what parts of your current CSA you would like to spinoff that would help the terminal form a new CSA, that could then be able to be offered to a new CSP.

You will then need to take your proposed CSA changes to the terminal management for approval. Once proposed CSA changes get approved, it appears that a transfer of the proposed area from your current CSA to a new CSA would also be approved. Presumably, you will then be able to assign part of your current CSA to a new entity, giving you the ability to “sell-off” sections of your current CSA to new participants.

Are ALL Operations In Excess Of 2,500 At Risk?

Well, yes... and no.

Operations that have, or are approaching 2,500 stops /day, are now going to come under more scrutiny than ever.

Scruitiny

There have always been standards and other “rules” surrounding fulfillment of your obligations contained in your operating agreement, but now, the microscope is being focused in even deeper, with the definition of the new ”Scale” EOA process which now includes:

  • A Financial Health Assessment
  • Service Review
  • Current Opportunity To Cure Notifications
  • Safety Review - Safety Results Indicator
  • Contract Performance Indicator - Includes Customer Complaints & Missed Pickups

These items deserve more examination and we’ll do so in subsequent posts.

The big question is whether or not passing this examination is achievable or not. So far, there have been varying opinions of whether or not this can be done. Of course it can, but keep in mind it appears that not doing well in the areas above will likely trigger a reduction in area/stops.

It is our opinion that you should continuously monitor these areas on your own and always have a contingency reduction plan ready for execution.

It is in your best interest to 1) keep your operation running smoothly and in compliance and 2) be ready to act if you meet with some adversity that leads to some speed bumps, as is inevitably the case.

What If I Don’t Proactively Spin Off Areas?

It is clear that FXG is communicating a desire to modify over-scale CSA’s.

However, if you are at or over-scale, you can still achieve First Opportunity to Negotiate (FON), and if you meet or exceed your (New) Key Indicators, you may be offered to negotiate for your current, over-scale CSA.

Intervention

There is mention in the communication that even in this case, FXG may still step in and reconfigure your CSA in order to make it smaller. So even if you achieve FON, it’s not certain it will be for your current CSA as it is configured today.

But let’s say you take no proactive steps toward spinning off your nearly or currently over-scale operation.

In this case, we think FXG is again, clearly trying to communicate that they will then step in and reconfigure your CSA and probably some surrounding CSA’s to form a smaller CSA that they will then put out on MGB.

If they do, you will lose this area and any chance you might have had to “sell-off” this area to a new CSP.

So What’s The Emerging Strategy?

Just as before, you want to achieve safety & service, maximize margins, and grow your business.

But now, you must also look to the future, and project where you might be when it’s time to enter into the evaluation process (5.5 months before your contract expires) and make a determination if engineering a spinoff will be needed.

Road future

 

You must stay out in front of this. If you don’t, you’ll get service area taken from you without any compensation.

So the new strategy or cycle will be;

  1. Provide Service, Maximize Margins
  2. Project Growth
  3. Have A Dynamic Spinoff Plan In Place
  4. When Needed, Propose and Sell Off Part Of Your CSA
  5. Go back to #1

Enough growth is planned that you likely will be running through this cycle several times in the next few years.

So Is This Good Or Bad?

If you had your heart set on a Mega-Operation with hundreds of vans in one location, you’ll possibly now be disappointed.Money Tree

But if volume growth, from all the different possible sources, comes your way, and right now it looks like it is, then profiting from spinning off chunks of your current CSA will make your investment blossom unlike anything else in the transportation industry.

Think of it. You can earn operating margins from operating the business as normal. Then, periodically, you’ll cut off a piece, sell it, grow again, then be right back where you were from an operating standpoint within a reasonable amount of time.

Then do it all over again.

This my friends, is a hell of an investment.

Some Keys To Keeping This Money Train On The Track

  1. Never let FXG “take” area from you, be proactive
  2. Keep your books up to date, you’ll need this data for more than just your taxes
  3. Maintain service & compliance standards
  4. Use capital generated from sales to update your fleet
  5. Be aware of your KI’s and other operating numbers, always
  6. Use late model equipment to facilitate smoother transfers & spinoffs
  7. Maintain single Broker Partner who knows your operation and is able to funnel qualified buyers your way
  8. Never get into a driver-deficit situation - perpetually recruit, even when you don’t need to

 

What If I’m Already Over-Scale?

Although the new policy was announced July 20th, there already have been many CSP’s who have been approached by FXG to downsize. In fact, there are even operations that have been told they are losing area, before they can transfer (sell) to other incoming CSP’s. This indicates that FXG means business in this situation.

Exposed

 

If you think about it, FXG has realized its exposure due to the recent rapid volume growth, and understands that change must begin taking place immediately. The sooner they do, the better it will be, especially approaching what could be the most intense peak ever.

We have already engaged with many operations who are over-scale to engineer spinoff plans that are being presented to FXG. Fortunately, we have been very successful helping folks with this problem this all across the nation.

What Can eTruckBiz Do To Help Me Here?

We have the most complete set of biz tools to fix and maintain this problem/opportunity. Our business & operational monitoring tools cover every aspect of your biz. As you can see from above, it’s never been more important to know where your business stands everyday.

Tools

We’ve recently added expense & bookkeeping services which provide a wealth of expense data that plays into this whole process. It has never been more important to keep your books up to date, and we can now do this for you.

Up to date books give you the reporting information needed for swift spin-off sales, which defends against contracted service area being taken from you because of inaction on your part.

We have the only professional engineering group outside of FXG that can handle figuring out spin-offs that make the most “FXG Sense”. We’ve already seen that they are not going to just let you give up your “bad stuff” in order to make this happen. Spinoff proposals need to be reasonable and we can, and have helped with this many times.

Of course, our relationship with eTruck Acquisition & Exit Consulting can then provide the suite of closing services and needed qualified buyers to easily facilitate and complete the spin-off cycle.

Again, the playing field has changed and we’re here to help you ADAPT and succeed with your operation and investment.

Topics: FedEx, Ground, ISP, FedEx Ground, Business, Contract, Investment, model, Agreement

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