In early 2010, Werner Co., a Greenville, Pa.-based manufacturer and distributor of ladders, accessories, and climbing equipment, informed its main parcel carrier, UPS Inc., that it had engaged a third-party consultant, AFMS Inc., to renegotiate a transportation contract between Werner and UPS.
Big Brown struck back. Hard.
In a March 2010 letter to Werner's transportation group, Atlanta-based UPS told its customer that its decision to work with a third party like AFMS would trigger a provision allowing UPS to cancel its contract with Werner after a 30-day notice period. The termination of the current contract, in effect since 2006, would result in the loss of discounts to Werner and require it to pay more for UPS's shipping services.
The letter also put Werner on notice that other benefits obtained through the UPS relationship would go by the boards as well. UPS wrote that it has provided Werner with "many special operating plans" for a number of the shipper's locations across the United States. "If the goal of breaking your current agreement is to realize additional economic benefits, some of the unique value-added services that you have come to rely upon over the years may now be subject to renegotiation as well," the letter stated.
In the letter, UPS expressed surprise that a 25-year customer like Werner had sought out AFMS, particularly since the current agreement with UPS had saved Werner $92,000 in 2009. The UPS letter added that Werner's savings went directly to its bottom line and that the company didn't have to share the gains with any outside sources.
In the end, Werner decided not to pursue a relationship with AFMS. A Werner spokesperson did not return a request for comment.
Legal challenge continues
That wasn't the end of the matter, however. A copy of the UPS letter was included in an amended complaint filed June 24 by attorneys for AFMS, which has sued UPS and FedEx under federal antitrust laws on grounds they leveraged their position as the market's two dominant players to deliberately and illegally freeze out third-party consultants in an effort to keep more of the profits foregone when consultants negotiate discounts for their clients.
Attorneys for the carriers argue that their policy of working directly with customers instead of third parties is nothing more than a competitive and legal business practice. The practices cited in AFMS's complaints "are wholly consistent with lawful independent behavior" by FedEx and UPS as each company, faced with the same market developments and challenges, acted in a parallel fashion that was as expected as it is legal, according to a response filed last November, three months after AFMS filed its initial complaint.
The carriers also contend their policies don't explicitly state they are terminating their relationships with third-party consultants, but that they would continue dealing with the third parties "at the discretion of the individual company's management."
The reply adds that AFMS has no legal standing to bring charges of antitrust violations, noting that federal antitrust laws are applicable only to companies "whose alleged injuries flow from harm" in a restrained market. The law does not apply to consultants who, in the case of AFMS, do not purchase shipping services from either of the parcel giants, according to the carrier reply.
Parcel consultants, many of whom are former FedEx, UPS, and DHL Express executives, have built a cottage industry using their knowledge to guide shipper customers through the often-byzantine world of parcel contract negotiations. For years, FedEx, UPS, and, when it had a U.S. presence, DHL, co-existed with consultants in a reasonably amicable manner. However, the carriers began chafing at the consultants' growing role in negotiating lower rates on their customers' behalf that would impact the carriers' bottom lines.
At an industry conference in late 2009, UPS and FedEx executives went public with their intent to minimize their dealings with consultants. In separate internal policy memos the following spring, they codified that intent, essentially forcing shippers to negotiate directly with them or risk having their contracts canceled and all the pricing benefits associated with the contract eliminated.
Brett A. Febus, founder and president of Insource Spend Management Group, a Hilliard, Ohio-based third-party consultant, said he's been told by a number of customers that they have been afraid to use his company's services even though they acknowledge the benefits they have accrued from doing so.
"They tell me, 'We know you can save us $8, $9, $10 million a year, but I need to move three trailer loads tonight. I can't afford to anger them,'" he said.
The effect has been felt on Insource's top line, according to Febus, who worked at UPS in sales before leaving to start Insource in 1999. Revenue jumped to $5.6 million in 2009 from $1 million in 2007, and in 2010, the company came in 531st on Inc. magazine's list of the 5,000 fastest-growing companies.
However, the company's 2010 revenue was essentially flat over 2009, and Febus forecasts that 2011 revenue will remain essentially unchanged over 2010. He doesn't attribute the static results to soft economic conditions, contending that his company's services are usually in more demand during slow periods.