The Business of Independent Service Provider Contracting

By now, it’s easy to see that everyone’s operating margins are being seriously squeezed.

In an effort to force some sort of helpful response, some made a plea to FXG asking for assistance in various areas to solve a worsening financial situation. 

Trust us when we say that FXG is very aware of the plight of CSP & TSP’s.

But now, there is another added challenge that has reared its head. This one, along with inflation not seen for generations, is going to create some unprecedented financial problems that will test even the best operators…

Inflation AND Recession?

On 4/28/22, the government announced that the country’s 1st quarter GDP came in at -1.4%. 

This confirms what many have thought, and what we have seen in the data, for quite some time. Business levels, and associated package volumes are stagnant or falling as a result of a slowing or now worse, shrinking economy.

Most have not seen what happens in this business when the economy slows down.  You are usually managing the challenges of growth, especially in the last couple of years. Fortunately, we here at eTruckBiz have seen several bad markets over the last 30+ years, so we are able to give you some insight as to what to possibly expect.

This time around though, there is a double-whammy. We are now seeing generational inflation along with a receding economy.  

Survival Of The Fittest

Inflation is increasing your costs. Recession is reducing your revenues.

This is a pretty bad combination, but rest assured that FXG or other well established transportation concerns are not going to go out of business. They will be changing and adapting to the current conditions. 

Consider yourself  fortunate that your business is associated with a Fortune 50 company capable of weathering the current storm.

Even so, FXG is probably not going to emerge on the scene with significant financial relief. Without this, it's up to each CSP or TSP  to fashion its own solution. 

In order to survive, small transportation companies will need to understand  how to identify areas of opportunity and then how to execute taking advantage of them. 

Survival in this environment is very possible.  Even if conditions remain adverse for a prolonged period, the lessons learned and adjustments made will be tremendously beneficial and even healthy in the long run. It is just going to take some leadership and hard work.

Information

There are specific actions to take, but the absolute key to running lean and mean is access to timely, accurate data & information.

Your business is unique, and you know your employees and your operation best. Applying that knowledge to key components in your planning and execution can greatly influence how your company weathers the current financial crisis.  Critical information on who did what, when and how (key performance indicators - KPI’s) will provide direction on how to fully utilize resources and not waste revenue generating opportunities. 

When well tracked and communicated, this “scorekeeping” will  help ensure that you are communicating the right information to the right people in a suitable way, at the right time, to maximize your revenue and minimize costs.

 Recommended Actions

You cannot simply increase your prices, like FXG can and has started doing to deal with the crisis. 

As many of you know from attending our weekly business updates, there are several things we recommend doing. All of them are information-based.

Any of these alone, may help your situation, but it will take a combination of them all to really bring your business in line with the current situation.

What About Re-negotiating Your Contract?

As seen above, we think that a contract renegotiation is absolutely worth the time and effort to request. 

Before doing so, we would also recommend taking an objective look at your business to see if a renegotiation is something FXG would consider.

It’s worth exploring the reasons they might NOT grant one.

First, they know that service provider’s drivers work fewer hours on the road than most other drivers in the industry. 

Rightly so, they feel that this is an area of opportunity, and until this under-utilization of resources is addressed, they don’t need to be forthcoming with any type of monetary relief.

Second, they will point to CSP gross revenue growth as a mitigating factor that should be more than offsetting the increase in costs. 

As we shall see, this fact (and we are seeing this in most all analyses) does not in and of itself provide enough to fight off the current sharp rise in costs. It can however, be combined with resource utilization gains, in order to be just what the doctor ordered. 

It’s All About Rates

Leaving resource utilization out of the discussion for the sake of argument, let’s look at something simple yet pretty complex.

The simple part is this: in order to make a very good case for a renegotiation of your contract, we need to compare the difference between the rate at which your revenue is growing and the rate at which your expenses are growing.

Inflation is a decent way to measure the growth in your expenses, but the numbers generated by the government do not accurately reflect what you are actually seeing. This requires a sophisticated analysis of your expenses, which of course, we can do for you.

The rate at which your expenses are growing can then be compared to the rate that your revenue is growing to determine if you have a fundamental business problem and there is real trouble on the horizon.

If you can demonstrate that your rate of expense increase will exceed the rate at which your revenues are increasing, then you definitely have a case for a renegotiation.

Not As Simple As Some Would Lead You To Believe

As you can see, in order to get some help from FXG you're going to need something more than evidence that some of your expenses are going up.

FXG doesn’t care about that. They already know this is happening. They will simply dismiss this with the fact that your revenues are increasing and that you should be able to deal with it because of this.

It’s up to you to show fundamental changes in the assumptions that were used to value your CSA when the contract charges were originally negotiated. Not only will you need to show that, you’ll need to prove that your overall expenses will exceed your revenues based on the rates of change in a timeframe that will ultimately be detrimental to FXG because you will ultimately have to cease operating.

We have seen that most renegotiation requests that cite “increased expenses” will be denied.

Renegotiation requests that are backed by solid data and point out the actual rates of change involved stand a much better chance of being granted. 

Pulling It All Together

Using a solid KPI business tool (like eTruckBiz) is an easy way to help you clarify and track the who, how, what and when of your financial crisis mitigation plan . Having the correct data at your fingertips also enables you to track the things that affect your cashflow all in one place.