The Business of Independent Service Provider Contracting

What A Long, Strange Trip 2022 Has Been - Where Do We Go From Here?

Posted by Jeff Walczak on 12/27/22 8:41 AM

By any measure, it’s been, and continues to be, a challenging time to be running a transportation business. However, as we often see, there are many opportunities that present themselves during challenging times.2023 +

As we look ahead to better times in 2023, it’s important to take a look at where we are currently at and how we got here so that we avoid mistakes of the past.

Our current situation is rooted in the events of 2019. This period introduced the density-stop / ecommerce push from FedEx Ground. As ecommerce deliveries gained traction and increased in number, they fueled the deterioration of contractor per-stop operating margins.

As you know, ecommerce stops are paid at a lower rate and typically include fewer packages per stop vs. commercial stops, resulting in a stealthy revenue per stop decrease across your entire business.

Declining Margins

The reason given by FXG for lower density / ecommerce stop charges was the fact that as service area density increases, operating cost per stop should decrease in proportion to various work area characteristics.

Declining MarginsThus began the slow march to financial instability for many Contracted Service Providers.

Lower overall revenue per stop meant that the only way to keep pace with expenses was to increase productivity (or as we learned later, a new term: “sweat the assets”). 

2019 saw volume slightly increase for some, but it started coming in the form of a higher percentage of ecommerce / density stops. Even though contractor stop margins were decreasing, the additional volume still hid a lot of stumps.

Then, It Happened…

2020 brought with it the pandemic and an accompanying three ring circus of challenges.vid

Of course, none of what happened could have been foreseen. Many things that happened were unique and temporary, but these covid-induced wasteful operational practices sowed the seeds of some problems that are still being dealt with today.  

Pandemic-driven volume increases led many contractors to have contracts negotiated with artificially high density, which led to lower stop charges and worse, even lower operating margins.

The pandemic created a difficult labor market which in turn, spawned poor productivity that was deemed acceptable only in an effort to keep operations afloat. Poor hiring practices seemed like a necessary evil at the time and were made possible through any number of bail-out programs like PPP and other artificial revenue programs.

gift moneyA new general norm evolved where it became acceptable to allow the labor-friendly practice of working less than a regular full day while still enjoying a full day's wages. This practice is still the bane of financially-challenged operations today.

Worse, the “service-at-any-cost” practices that were accepted and implemented had to end abruptly as there was a removal of the artificial revenue punch bowl. This, understandably, drove many contractors to the financial edge of the cliff.

The Peak That Wasn’t

2021 brought more of the same from 2020, so it made sense that

flat earnings

the largest peak season of all time was feared and costly preparations were made.

When the peak that didn’t peak became reality, already financially strapped contractors spent money in anticipation of unprecedented forecasted volume levels.

This became the jet fuel that would make the FXG contractor universe explode when a match was thrown on it in the spring of the following year.

Worst Economy In 40 Years

Just when everyone thought that things really couldn’t get tougher, 2022 brought with it a failing economy complete with the worst inflation not seen for 40+ years, and the secret recession that no one wanted to acknowledge happened. recession-1

Contractors, over the years, had become conditioned on how to deal with volume growth.  Very few had ever seen what happens when the volume goes south. Worse, contracts had been negotiated at higher volume levels, creating low revenue per stop amounts to be in place. So contractors were forced to experience the Dark Side Of Density which led to even more financial difficulty.

At this critically vulnerable time, contractors’ emotions were taken advantage of, leading them to point the finger of blame at FedEx as being the source of everything bad. While it’s true that many contract terms that had been negotiated were exacerbating the economic downturn, sowing false hope and selling snake oil contributed to further contracted service provider peril. This charade has ultimately proved to be counterproductive.

Fortunately, while not a get-out-of-jail free program, something has been clarified, which paves the path forward for those who understand that they are running a business and are NOT employed by FXG.

It was made clear that FXG is not in the bail-out business. This is tough medicine to swallow for many, but, at least it is now known where they stand and where they will be when many things begin to change (we think for the good) yet again in 2023.

So Where Are We? 

The last 4 years have all shaped, in one way or another, the current situation.

Untitled designAs a result of depressed revenue per stop, combined with continued resource under-utilization (ex: drivers on road < 8hrs) we are seeing some of the smallest operating margins we have ever seen for contractors.

Most are starting to see the importance of clear financial tracking and management of resources and there seems to be some stabilization, albeit at less profitable levels.

What We See For 2023

FedEx, in its most recent post-earnings announcement dialogue with the investment community, has promised its shareholders even more significant cost cutting measures in the near future. There will be new cost cutting measures adding up to One Billion which is in addition to the Two Billion telegraphed to the investment community last July when the Network 2.0 initiative was announced.

If it the company is going to remain one of the leading transportation concerns in the world, it must deliver on this, and all of its cost-cutting efforts. future

This should mean that steps will begin to be taken to get the Network 2.0 initiative underway immediately at the beginning of 2023.

There are actually several things that we can point to that are already, and have been in motion, but look for this to really accelerate as the calendar gets deeper into 2023.

As we explain in detail in our Network 2.0 = Contracting 2.0 presentation, one of the results of the plan is to increase contractor volume, albeit at the expense of operating margins. 

In fact, margin compression, and the awareness of it will become as important as knowing and achieving daily ILS. Only the financially aware will be able to manage the increasingly thinner margins. Those that can and do, will meet with above-industry earnings, which is what everyone is looking for.

The silver lining to having gone through the odyssey of the past few years is that It will make handling the challenges of Network 2.0 relatively easy. 

Moving forward, the most successful contractors will be the ones who are willing to rise to the challenges and solve problems for their businesses. In the end, there is  tremendous opportunity for those willing and able to embrace change.

The real ride is about to start! Our experienced team of professionals are ready and willing to provide the services and support you need to run a more successful business in 2023.

Set Up a 1:1 Consultation!

Topics: Business Planning, Bookeeping, Management, Business Metrics, ISP, Business, Money, Cash flow, Inflation, Costs, Financial, Margins

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