The Contracts
This is less a post than musing….I’m working with the team to come up with a Managed Transportation Services RFP construct over the back half of the year. I’m compelled to drop this post as I see a consistent challenge with clients, and often the consultants they employ, in understanding what they want within the construct of Managed Transportation. Chuck loads over the fence to carriers? Great. Contract vs. spot? Super. Measuring KPIs such as on-time percentage and performance to MABD? We got you. Hold the carrier contracts? Absolutely, but do you know what that entails and what it means?
If there is anything one can take away from this post, understand this: THERE IS NO WRONG ANSWER. But too often I work with prospective clients and consultants who don’t seem to grasp what they’re asking for or understand what their organizational strategy is relative to core competencies, bandwidth, or general market awareness. It can be clear as mud, but the below outlines 4 models (one 3PL, three 4PL) which clients should consider when going to market (If someone is trying to sell a 5PL they are likely a graduate student at a foreign university based on my past experience and general LinkedIn readings).
A 3PL will often sell an outsource absent fees/working with other carriers as they are assuming 100% of the risk of claims, accidents, or catastrophic loss….so in a sense one could get Transportation Management without paying for it (*wink, wink*). The challenge is clients are generally outsourcing the risk to the 3PL in exchange for margin on their freight, and it may be managed by an office who has neither the talent, tools, or financial incentive to truly manage the transportation. If you have a $6M transportation spend and outsource it to a 3PL who says they can do it for $5.75M, it’s a win on rates. BUT you may be passing over dollars for dimes if you were to work with an actual TM provider who would charge you $250k in fees, but optimize that same freight at an order to order rate of 5.8M but find 1.2M in optimization savings via modal shift, multi-stop, or modal conversion. Having a 4PL construct which provides visibility and KPI metrics around total performance is a differentiating factor: membership has its privileges.
If a client knows and understands they want to go the 4PL route, the most frequent gray area is “who owns the contracts?” A 4PL holding the carrier contracts generally means you are procuring a 3PL wrapped inside of a 4PL. Clients get underlying visibility to the actual carriers and may have a procurement event to line them up, but the contractual liability generally remains with the 4PL. This means you’ll pay for Transportation Management as a standalone component, and the provider’s brokerage or carrier arm will procure carriers at a rate on the clients behalf. The fees aren’t going to cover the risk, so there is margin on top of the carrier rates. Again: if the client has no procurement arm, doesn’t understand the market, doesn’t have the back of house competencies to execute these services it can be more than a fair tradeoff. We operate with many clients in this model today.
Back when I was part of a team starting a 4PL at the dawn of the industry (p.s. #old), we were paid for and operated a standalone business unit which solely earned our keep on fees and fees alone. The client wanted an absolute, auditable “separation of church and state” between the TM provider and any carriers, including our sister brokerage which could compete and earn business with the client directly. Under no circumstances was our 3PL division to have any idea who the other carriers were or what they were being paid. This is majority of the business our team executes today. Again: this is a fantastic model for clients with actual transportation, procurement and legal departments equipped to play the market amongst multiple carrier providers.
The 3rd path is to have the 4PL/TM provider hold the contracts, but indemnify them from risk which may occur in the process of hauling freight. This model means there may be ancillary bumps in the TM fees for contract maintenance and back of house work, but there isn’t need for traditional margin as the contractual risk is being transferred to the underlying carrier executing the freight. I see less of this in the market, but it is a path to thread the needle for clients that want to shop carriers but don’t have the construct to assume full ownership of everything contracting a carrier provider entails.
As the kids say: “Thank you for coming to my TED talk”. This topic has been top of mind having had to clarify intent across multiple bids for Transportation Management lately. If you find yourself getting ready to go to market for 4PL/TM services, think about what best serves your organization and ensure potential providers understand what they should be pricing accordingly.