As the feud pitting FedEx Corp. and UPS Inc. against parcel consultant AFMS LLC heads for a May 2013 trial date in a California courtroom, the question raised in the real world of everyday business is how consultants have been affected by the alleged boycott by FedEx and UPS of their businesses.
As with the fallout from any failed relationship, the answer depends on who one talks to.
Portland, Ore.-based AFMS LLC has sued FedEx and UPS, alleging the companies violated federal antitrust laws by colluding to boycott consultants and to intimidate shippers who use these intermediaries with the loss of their rate discounts and the specter of erratic or non-existent service.
FedEx and UPS have argued that their actions reflect perfectly acceptable business practices, that they have not zeroed out consultants but have left it up to their managers' discretion whether to use them, and that they are doing their customers a favor by allowing them to keep the savings they've reaped by negotiating directly with the carriers rather than have those economic gains split with a third party.
Barring an out-of-court settlement, the case will go to trial on May 1, 2013, in federal district court in Los Angeles with Judge Margaret M. Morrow presiding. In the meantime, neither FedEx nor UPS seems anxious to move off their policies or settle the dispute. UPS, in particular, has been very vocal in its position. Privately, the company has vowed to take the matter to the U.S. Supreme Court, if necessary, to defend its argument that it did not engage in deliberate collusion with its chief rival.
Impact on profits debated
Parcel consultants that have agreed to be identified in the AFMS complaint claim they continue to lose millions of dollars in business as nervous shippers avoid them out of concern their freight won't get moved. For its part, AFMS said the actions by FedEx and UPS have cost it about $20 million in lost profits and diminished revenues since the policies were publicly announced in October 2009 and put into practice the following spring.
Insource Spend Management Group, a Hilliard, Ohio-based consultancy, said it had projected total revenue of $35 million between 2010 and 2012. Since the FedEx and UPS policies took effect, Insource has cut its revenue forecasts to $14 million for the same period, according to Brett A. Febus, the company's president. Insource has also halved the size of its staff, he added.
Consulting veterans, virtually all of whom held high-level positions with the carriers before going out on their own, don't view the issue in black-and-white terms, however. Jerry Hempstead, head of an Orlando, Fla.-based consultancy that bears his name, said many consultants have "more work and more income now than ever." Hempstead added that a detailed examination of consultants' financial records would show that, in most cases, "business is brisk."
Hempstead said that although he didn't solicit any business in 2011, "business found me, and I did very well."
Like virtually all consultants, Hempstead works behind the scenes on behalf of clients and does not negotiate directly with the carriers. Those who stay in the background and let shippers bargain face to face with FedEx and UPS stand a better chance of maintaining their relationships with the carriers because they lessen the risk of antagonizing them, consultants say.
But consultants who take this approach—and third parties rarely bargain directly with carriers anymore—may be doing their customers more harm than good because shippers unskilled in the complex art of parcel contract negotiation will often leave thousands of dollars of cost savings at the bargaining table even though they were advised by consultants beforehand on what to ask for, according to Rob Martinez, president and CEO of San Diego-based consultancy Shipware LLC.
"Most shippers can't articulate the message as well as the consultants, and benchmarks can no longer be used effectively since the consultant is in the background. As a result, the savings outcome is negated," said Martinez, who also stays behind the scenes, with very few exceptions.
A change in formula
Martinez said that Shipware is "busier than ever" and that revenue has increased as the company writes more business. However, Shipware's profits have been impacted because the formula it has traditionally relied on to divide the savings yielded from the negotiating process has changed, he said.
Under the standard "gain-sharing" formula in place for years, shippers and consultants would split the savings 50-50 over a three-year period. As a result of the FedEx and UPS policies, shippers are increasingly demanding that consultants accept less than 50 percent of the savings and over a shorter duration, Martinez said.
In a number of cases, consultants are being asked to accept a fixed fee for their services rather than work on the parcel industry version of "contingency." The fixed-fee model, while generating a predictable cash stream for the consultant, is often not as lucrative as the gain-sharing model.
Michael P. Regan, chairman of Elmhurst Village, Ill.-based consultancy TranzAct Technologies Inc., agreed that while consultants remain busy, they are ringing less at the register today than in prior years. That, he said, is due to shippers migrating to fixed-fee quotes and away from gain-sharing.
"Since we have always emphasized the fixed-fee approach, it is not a big deal. But for some of the others, it is huge," he said.
Fear of retribution
With a court date well over a year away, the dispute is turning into a war of attrition that many consultants fear they can't win without some form of legal relief. With combined annual revenues of more than $94 billion and a near duopoly in the business-to-business U.S. parcel market, FedEx and UPS can easily live without consultants. However, the same cannot be said for consultants. In the end, their customers need to have their parcels shipped, and for the most part, only two are able to do it.
But the larger fear for consultants is that shippers will walk away from their relationships if they believe FedEx and UPS will punish them either by removing their discounts or degrading their service levels.
The AFMS complaint raised that concern, arguing that many shippers that have used third parties are refusing to speak publicly about the dispute because they are concerned about "retributive price increases" from the carriers. Martinez of Shipware added that "shippers are skittish of violating confidentially [agreements] or pissing off the carrier. They fear losing discounts or getting 'shut down,'" industry lingo for no pickups.
Martinez said he has spoken to more than a dozen consultants who have told him how much damage the policies have done to their businesses. Some have begun plying their trade with other transport modes, while a few have gone out of business, he said.