Parcel wars: Carriers, consultants headed for a showdown

For the past year, a quiet war has been waged between the two giant parcel carriers, FedEx Corp. and UPS Inc., and a cluster of self-styled parcel consultants whose mission for nearly a quarter of a century has been to help their clients save money when shipping with one or both of the behemoths.

The stakes are high, but they are completely lopsided. It is no secret that FedEx and UPS would rather work directly with shippers than through third-party specialists who have a deep knowledge of how the carriers price their services, and who use that know-how to help their customers save money. Yet if consultants remain in the game, it won't cause the two companies—with more than a combined $80 billion in annual revenue—to wonder where their next meals are coming from.

For consultants, however, the outcome could determine their very existence as an industry.

In August, AFMS LLC, a Portland, Ore.-based parcel consultant considered by many to be the most influential in the industry, filed suit against the two carriers in federal district court in California. The suit alleges that starting about a year ago, FedEx and UPS have colluded to essentially drive it out of business by forcing its customers to work directly with the carriers or face retaliation such as the imposition of higher rates, the loss of applicable discounts, or the refusal by the carriers to bid on requests for carriage.

The suit charges the carriers with violating federal antitrust laws and state statutes, and seeks unspecified monetary damages. It alleges that AFMS, which has worked with FedEx and UPS since 1992, has suffered "lost profit damages" of at least $15 million to $20 million as a result of the giant carriers' refusal to do business with it.

FedEx spokesman Maury Lane said the company believes the AFMS lawsuit is without merit and that it will "vigorously defend itself" in court. Susan Rosenberg, a UPS spokeswoman, said the suit "wants to punish UPS for dealing directly with our own customers. They want to require us to deal with an intermediary, and that only adds to the ultimate cost of shipping for the consumer."

According to court documents, the war's first salvo was fired at an industry conference in October 2009, when FedEx and UPS representatives publicly announced their "no third-party consultant" policies and "did not deny collusion" when questioned about the competitive impact of the edicts. The suit alleges that both companies needed to adopt similar boycotts at the same time to prevent one from having a competitive advantage over the other.

The suit alleges that the carriers no longer want to deal with consultants whose ability to uncover savings for shippers during often-complex rate negotiations costs the companies "in the low billions" of dollars in revenues and profits every year.

On April 23, UPS circulated an internal e-mail in which it outlined a new policy toward working with third-party consultants, according to a consultant with knowledge of the e-mail and its contents.* Two weeks later, FedEx outlined its own policy in the form of a written presentation.

The FedEx policy, a copy of which was obtained by DC Velocity, is similar to that of UPS, according to the parcel consultant. The FedEx edict rules out "direct engagement with consultants" if it is deemed that the relationship's sole value is "price negotiation." The company said it will "negotiate business relationships directly and exclusively with our customers, not through a third-party consultant."

The document advises the company's sales force to emphasize that working directly with FedEx ensures "confidentiality" for both the company and the customer. By contrast, "working with a third party allows information to be shared that may be proprietary," according to the document.

The policy also urges that the sales staff stress that a direct relationship with FedEx will help shippers go beyond basic rate reductions and help them reduce their overall supply chain costs. This strategy "offers a much greater value than just price alone," according to the document.

The policy allows for exceptions when working with a consultant might be an acceptable option. For example, if a district sales manager believes the relationship with a customer might be jeopardized by not working with a consultant, the manager can discuss with his or her supervisor the need for an exception.

In addition, if working with a consultant offers an opportunity to take business from a competitor, the sales executive should determine the amount of revenue that would shift to FedEx and then discuss the situation with supervisors.

But even those exceptions would come with conditions. To begin with, the customer and consultant must sign a three-way non-disclosure agreement with FedEx. Also, the customer and consultant must agree that FedEx will have access to all parties that are relevant to the bidding process; without that access, FedEx will withdraw from the negotiations, according to the document. In addition, FedEx would be given an opportunity to "present our value proposition with our financial offer to the parties making the final decision," according to the document.

Shipper fallout
At this time, it is unclear what impact, if any, the legal wrangling or the company edicts have had on shipper behavior. In an action separate from the AFMS suit, Levetown & Jenkins LLP, a law firm in Washington, D.C., has begun seeking shippers who might be affected by the reduced role of consultants to certify enough members for a class-action suit against FedEx and UPS.

Meanwhile, the consultant industry—which consists of about 50 companies of varying sizes—is attempting to assess the potential fallout. Writing in the October issue of a parcel industry trade journal, Rob Martinez, president and CEO of consultancy Shipware Systems Corp., said some consultants are "scrambling to change their engagement approach," and several have "moved on to specialize in services unrelated to price negotiation."

Consultants differ in their strategies, with some negotiating with the carriers on behalf of their clients, and others preferring to consult in the background and let the customers negotiate on their own. Some consultants charge a flat fee for their services, while others accept a percentage of any negotiated savings and share it with the shipper.

The consensus is that a knowledgeable consultant—many are former high-level executives at FedEx, UPS, and DHL Express—equipped with robust information technology should save a shipper at least 10 percent a year on its parcel spending by identifying areas of potential overspending as well as opportunities to strike better deals for the traffic it tenders. In its suit, AFMS said that from 2007 to 2009, it unearthed $100 million in savings for customers on their parcel spending. In the past five years, consultants have saved their customers about $1 billion in spending, according to consultant industry estimates.

Ironically, the rupture of the relationship between AFMS, FedEx, and UPS came after 17 years of what AFMS itself characterized as "amicable and mutually profitable business dealings" between the consultant and the carriers.

It also comes amid significant changes in the U.S. parcel landscape. In January 2009, DHL Express, the third largest private carrier in the U.S. parcel business, withdrew from the domestic market and today serves the country only as part of an international pickup or delivery. The U.S. Postal Service has made some progress landing high-volume business-to-business accounts, but it is not yet at a stage where it can regularly challenge FedEx and UPS in the demanding parcel segment.

With DHL gone and FedEx and UPS now dominating the U.S. market for letters and packages, one might argue that the timing of their alleged boycott against parcel consultants was designed to sweep the last check against duopolistic pricing behavior off the field.

Speaking to DC Velocity, Martinez of Shipware says he disagrees with that theory. "Yes, FedEx and UPS dominate the market. But from all I see and hear, they continue to compete very vigorously with each other," he said.

*An earlier version of this story stated that the UPS internal e-mail was sent out on April 9. 2010. It was sent on April 23.