The Business of Independent Service Provider Contracting

The original blog post, Ten Predictions for FedEx Contracting under Network 2.0, sparked meaningful discussions and provided a forward-looking perspective on how Network 2.0 could reshape FedEx contracting. Since its publication, new developments and insights have emerged, warranting a closer look at how these predictions are evolving. This updated post dives deeper into the most significant changes and trends, offering fresh analysis to help contractors and stakeholders stay ahead of the curve in a rapidly changing landscape. As the mystery of how Network 2.0 will be implemented begins to unravel, we'll look at each prediction and see if it is coming true or not.  

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Here we are, finally  on the eve of what will promise to be the really big visible push into Network 2.0 for CSPs.

Many things, mostly unseen, have been underway for years now. Some things, like the transition to the current ISP operating agreement, from the old legacy contract, have been going on for 8 or more years. By the way, make no mistake, it was this transition to the ISP agreement, which forced the relinquishment of proprietary interest in contractor work areas, that paved the way for Network 2.0 to become a reality.

So it could be said that the transition to Network 2.0 has really been in the works for more than 10 years now.

Let’s take a shot at predicting some of what promises to be many significant changes that Network 2.0 will bestow on CSPs as they adapt and survive into the new era:

Most people reading this know that we have a long track record of accurately calling them as we see them. While some of what you are about to read may not come to fruition, we think the better part of them will.

So let's take a look under the hood:

1.The financial situation of contractors will change…for the better

Yes, it will happen. It has to. It will not be an immediate windfall, but financial conditions are forcing some changes, in both FDX AND CSP thinking & execution.  

• Operational changes will force greater CSP resource utilization, which will be good for contractor profit margins
• FDX will have to consider increasing gross settlement to battle inflation, even with increased density, in the interest of protecting the brand
• The logistics of time definite stops require more resources. They just do. This will have to be addressed.

(There is a very interesting phenomenon happening here. On the one hand, there are new charges and increased density that propel some service providers to new levels of profitability. On the other hand, there are service providers whose business cultures are resistant to change. To put it bluntly, the latter are struggling mightily, and some are exiting the business. The jury is still out on this issue, but it seems those who can manage to adapt benefit the most)

2. Driver turnover will gradually decrease which will lead to better trained, more stable driver staff

Driver turnover, which for a long time has been at the root of CSP struggles, will undoubtedly take a turn for the good.

• The amount of change will subside, which will stabilize the work environment and be welcomed by the driver population
• As CSP margins improve, some of this will work its way to driver compensation in an effort to retain well-trained, high producing drivers
  

(Driver turnover IS on the slow decline, but it may not yet be related to anything Network 2.0 related.)

3. There will be new types of CSAs

This has already been telegraphed slightly, but the need for "Specialty CSPs" appears to be on the horizon.

• Current CSAs will be much more readily susceptible to redefinitions
• Special situations like 8:30s and DGs and more
• In-house contingency?
  • Made up of ex-couriers?

(While this prediction seemed odd at the time, new "courier-only" areas have been developed. Sometimes, these areas are displacing current Service Providers. It has been difficult to figure out any kind of standard criteria that would predict where this will continue to occur)

4. Medals program much more strictly enforced

While the program is already in place, it's likely that much more attention will be turned to it.

• Bronze classified operations on a short leash
• Remember that the program is mostly in place to protect the brand

(We are seeing Service Provider exits (all types) on the increase. It is also now apparent that service "quality" will be paramount as the Express culture imposes its will on the Ground culture. This prediction is safe)  

5. Initially there will be courier-only and hybrid operations, but eventually, the entire network will be powered by contracted operations.

The transition will likely involve several iterations of different models until the time is right to get to the one that saves the most money = contractors.

• Metro areas that remain or switch entirely to Couriers initially will be transitioned to contracted areas as the opportunities arise
• Towards the end of the overall transition, some CSPs could be asked to provide their own DOT operating authority
• Will Freight be far behind?

(Other than the reference to "Freight", this one is still too early to call. At first it appeared there may be a larger courier presence than there currently is. However, based on some technology advances in the works, contractor-based operations will definitely win the day. )

6. Negotiations will change to include CSPs making the first offer to FDX

The current system only provides advantages to FDX, while creating the illusion of value for CSPs. In order to meet the needs of CSPs, a more traditional negotiation process may be adopted.

• More like the rest of the industry
• MESO offers require thorough preparation, which takes time and data that most CSPs do not have, resulting in less than optimal negotiation results for CSPs

(Well, this one hasn't happened...yet)

7. BC role to be reworked to be more of a lead-driver / dispatcher / trainer situation.

The B/C position was never supposed to have been a position that CSPs were entitled to or implied to have by FXG. If it were, it would have been named something else like: CSP Manager or something similar. Larger operations generate enough revenue to support this position, smaller ones do not, which is a significant cause of financial struggle.

• CSPs strongly encouraged to farm out much of their administration and engineering to third parties
• Ultimately, it leads to drastic cost improvement (This is why FEC is utilizes many 3rd-party vendors on its own)

(No question that many Service Providers are rethinking the importance of this role as many of their Standard Operating Procedures evolve to accommodate Express volume. Many Service Providers are also evaluating their B/C's possible negative impact on the company's bottom line.)

8. After a “shock-period”, transportation companies that have a contract to provide transportation services to FDX will become very valuable

Much has been written and said about transportation companies that have contracts to provide services to FDX, as far as buying and selling these businesses goes. On the other side of the transition, we can see that those that own them will do very well.

• Stability increases business values
• Significant increases in revenue will drive values higher as well
• Most CSPs will improve margins, which will also drive values higher

(For every Service Provider that articulates their financial struggles through various social media etc., there is another one who is adapting and growing both their top and bottom lines in various ways. This is what our latest seminar, Capitalizing On Network 2.0 is all about. For those that are seizing the opportunity, their business values are significantly on the rise)

9. As change subsides, and operational familiarity and stability returns, AOs who adopt administrative and operational partners to help them run their businesses will finally be able to become less "hands-on" and more “absentee”.

• While no operation can ever be totally absentee, 3rd party systems and processes will become more commonplace
  • Businesses will become less chaotic and stressful 
    • Which will decrease contractor turnover
• Less CSP turnover will increase business values 

(More Service Providers are becoming comfortable utilizing services like this to free up time and become much more efficient at revenue-producing activities. This allows many of our clients to work less and achieve more!) 

10. FDX’s revenues & margins will catch up to and eventually surpass UPS

• FDX will achieve “low-cost provider” competitive advantage and will use it to win profitable business
• FDX will then be able to dominate the transportation industry
  

The above point must be behind the entire project push. 

It's where FDX wants to go. We think this plan, when completely executed, will get them the result they seek!

(The delays associated with the DRIVE initiative and the implementation of Network 2.0 have been somewhat of a drag on FDX valuation. However, it appears the street still has faith in FedEx, so the jury seems still out on this prediction)