Role of third-party consultants for parcel shippers subject of DOJ investigation

Parcel shippers that turn to third-party consultants (3PCs) to help them navigate myriad facets of pricing and rate structures from industry bellwethers FedEx and UPS may eventually find themselves having to fend for themselves when talking dollars and cents with these companies if a Department of Justice (DOJ) investigation finds that FedEx and UPS are colluding to adopt a policy of declining to negotiate with 3PCs acting on behalf of shippers.

That is the contention made in an August 2010 lawsuit filed by AFMS, a parcel consultancy. AFMS alleges that in April 2009 FedEx and UPS conspired to jointly adopt a policy to declining to deal with 3PCs that act on behalf of shippers for price and rate negotiations.

Shippers say that 3PCs provide a valuable service, due to the enormously complicated rate and billing structures used by FedEx and UPS. What’s more, a common refrain heard from 3PCs and shippers is that these services are badly needed, considering that it can be difficult for even shippers with large logistics groups to accurately analyze rates and determine what the best deal is for them, coupled with how the rates they are getting matches up with shippers in other industries.

An industry source whom declined to be identified explained that more often than not large shippers tend to get very good discounts from FedEx and UPS, and sometimes there are several differences in rates offered to different shippers, with smaller shippers tending to get more modest discounts than large shippers.

“Carriers will tell you they price by characteristics like density, average weight and cube, residential or rural address,” said the source. “There are hundreds of factors that go into their cost-based pricing models, and every carrier uses one. These measure hundreds of metrics to arrive at their pricing, and it is something that is very difficult for shippers to figure out.”

This is where 3PCs come in.

In its filing AFMS explained that parcel consultants gather and analyze data, including shippers’ past transactions, to develop a strategy to save money for shippers, and the 3PC then implements that strategy by helping shippers negotiate with FedEx and UPS to achieve maximum savings for shippers. AFMS said this is done by highlighting the hard and soft issues inherent in a very complex contractual and rating environment.

“Many [3PCs] operate on a basis where their revenue from shippers depends, at least in material part of the savings achieved,” said AFMS. “Consultants, are, therefore, highly motivated to produce additional discounts and hence savings for shippers.”

But it is clear carriers have a different take on the role a 3PC plays in rate negotiations, according to UPS spokesman Norman Black.

Black told LM that UPS strongly denies the allegation made by AFMS that UPS and FedEx jointly adopted a policy of declining to deal with 3PCs.

“It is ludicrous on its face to claim that we were conspiring with FedEx, as we noted there could not be two stronger competitors in this industry and unilaterally rejected the idea that there is any type of collusion or anything else going on between the companies,” said Black. “The basic issue is that this lawsuit is trying to punish us for dealing directly with our own customers and that from our perspective the idea that we might be required to deal with our own customers through an intermediary is silly and would only add to the ultimate cost of shipping for our customers.”

Black said that UPS is glad to fully cooperate in the DOJ investigation. FedEx officials did not respond to requests for comments made by LM at press time.

The practice of shippers using 3PCs to get better rates and save money is nothing new. A 2007 Morgan Stanley report in the AFMS filing noted that more than 11 percent of all shippers use a consultant, with 12 percent of all shippers surveyed in the report saying that switched carriers demonstrated that savings can be achieved by negotiation and switching. And 49 percent of all shippers using 3PCs received a discount of 15-to-30 percent, compared to shippers not using consultants. AFMS said in its filing that the actual and potential effect of 3PCs on revenues and profits of UPS and FedEx is substantial and would at least be in the low billions per year.

That estimate was supported by Rob Martinez, president & CEO, Shipware Systems Corp, a San Diego-based parcel consultancy.

“My firm and the other top half a dozen parcel consultants have collectively reduced carriers’ profits by $250 million per year,” said Martinez. “That is a quarterly earnings report for FedEx or UPS. This is all about dollars and cents. If these companies make it hard for shippers to deal with us, they, in essence, help their effort on the margin piece. What FedEx and UPS did last year was announce internally to their sales organizations that their policy has always been a strong preference to negotiate directly with customers and to take a selective approach as to what consultants they would work with, if any.”

And even though FedEx and UPS both communicated this message to their sales teams on April 23, 2010, Martinez said it is extremely unlikely the DOJ will find any collusive behavior, given their positions as intense competitors and the fact that they have the same rate structure, accessorial charges and policies for many products and services.

The challenge for carriers, explained Martinez, is that when negotiating with a 3PC who asks for a specific program, concession or discount based on a previous deal, there is no improper disclosure of information. Shippers cannot ask carriers for a higher discount based on how carriers dealt with other customers, because they have no way of knowing that information. But a 3PC brings the ability to benchmark and provide historical precedents, which can get carriers to quickly move on pricing.

And in some carriers’ minds he said that there is some improper disclosure of confidential information done by 3PCs, which he said is a legitimate complaint. As an example, he cited how a 3PC can take a program offered to a shipper by UPS and ask FedEx to beat it by 10 percent. Then if FedEx makes a better counter offer and the 3PC can tell UPS that FedEx came to it unsolicited, asking if it can beat the offer and get the business.

Martinez called this practice “silly and unethical” and said this is what UPS and FedEx tells the market what is happening, saying they won’t work with 3PCs as a policy and do so to protect shippers from using their confidential information improperly.

A trial date for this lawsuit has not been made, and Martinez said the DOJ is still in the process of researching information and data and collecting witnesses, which likely pushes the trial date to sometime in 2012 at the earliest.

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