The Business of Independent Service Provider Contracting

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.

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
  

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?

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

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?

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

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 large cause of financial struggle.

• CSPs strongly encouraged to farm out much of the administration and engineering to third parties
• Ultimately leads to drastic cost improvement (This is why FDX is utilizes many 3rd-party vendors now)

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

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 

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!