Executive Briefings

How Well Can Providers Weather The Economic Storm?

There are a lot of parallels between the logistics software industry and the logistics service provider industry. For example, both have undergone a lot of mergers and acquisitions over the past five years, and companies in both industries are looking to further penetrate the small and mid-sized market. And it's also true that the business models of software vendors and LSPs are converging. But an important distinction still remains between these two industries: one primarily sells "products" and the other primarily sells "services." When times get tough, companies tend to outsource more and spend less, which is why LSPs have historically performed better than software vendors during economic slowdowns. Does this mean that LSPs can breathe easy in 2009? Not exactly.

It's important to remember that the terms "logistics service provider" and "third-party logistics" refer to a very broad range of companies, with origins ranging from trucking firms to industrial manufacturers. A lot of the trade publications publish "Top 25 3PLs" lists that are basically meaningless, because they rank service providers solely by revenues, with no consideration given to the specific services and industries these 3PLs serve. It's the classic "comparing apples with oranges" problem. (A quick aside: ARC started to address this problem a few years ago when we developed our Logistics Service Provider Maturity and Performance Model, a framework for manufacturers and retailers to use when evaluating service providers, and we plan to do more work in this area in '09).

Therefore, it's difficult to offer a blanket statement of how the industry will fare as a whole this year, because LSPs fall into different categories. But there's one thing that's clear to me: the more diversified the LSP, in terms of the services they provide, the industries they serve, and the geographies they cover, the better positioned they'll be to weather the storm in 2009.

For example, if you're an LSP that derives most of its business from the automotive industry, you have reason to worry this year (regardless of a bailout). Similarly, if you only provide freight forwarding services, you also have reason to worry.  According to IATA, air cargo volume dropped 7.7 percent in September compared to the previous year (the worst decline since 2001), and year-to-date growth  slowed to 0.1 percent, with almost all regions reporting negative results. It's the same story for ocean cargo. According to the monthly Port Tracker report published by the National Retail Federation and IHS Global Insight, cargo volume at the nation's major retail container ports was expected to decline more than 7 percent in 2008 to 15.3 million twenty-foot-equivalent units, the lowest total since 2004.

In contrast, LSPs that offer "contract logistics" services, like transportation management and warehousing, will probably do okay in 2009, especially those with clients in food and beverage (people still eat in a down economy), pharmaceuticals (people still get sick), and energy/utilities (people still expect their lights to turn on).

The Outlook

M&A activity will probably slow down this year, as the era of "easy money" disappears. But will LSPs continue to invest in IT? This is a question many software vendors are asking themselves today. I've argued in the past that LSPs are at the IT tipping point, helping to drive the growth of the TMS market, for example. But the LSP industry is a low-margin business, and if their customers are inclined to freeze IT spending next year, there's no reason why LSPs won't do the same.

"If you have to forecast, forecast often." These words of wisdom come from economist Edgar R. Fiedler, and they're good words to live by these days.

It's important to remember that the terms "logistics service provider" and "third-party logistics" refer to a very broad range of companies, with origins ranging from trucking firms to industrial manufacturers. A lot of the trade publications publish "Top 25 3PLs" lists that are basically meaningless, because they rank service providers solely by revenues, with no consideration given to the specific services and industries these 3PLs serve. It's the classic "comparing apples with oranges" problem. (A quick aside: ARC started to address this problem a few years ago when we developed our Logistics Service Provider Maturity and Performance Model, a framework for manufacturers and retailers to use when evaluating service providers, and we plan to do more work in this area in '09).

Therefore, it's difficult to offer a blanket statement of how the industry will fare as a whole this year, because LSPs fall into different categories. But there's one thing that's clear to me: the more diversified the LSP, in terms of the services they provide, the industries they serve, and the geographies they cover, the better positioned they'll be to weather the storm in 2009.

For example, if you're an LSP that derives most of its business from the automotive industry, you have reason to worry this year (regardless of a bailout). Similarly, if you only provide freight forwarding services, you also have reason to worry.  According to IATA, air cargo volume dropped 7.7 percent in September compared to the previous year (the worst decline since 2001), and year-to-date growth  slowed to 0.1 percent, with almost all regions reporting negative results. It's the same story for ocean cargo. According to the monthly Port Tracker report published by the National Retail Federation and IHS Global Insight, cargo volume at the nation's major retail container ports was expected to decline more than 7 percent in 2008 to 15.3 million twenty-foot-equivalent units, the lowest total since 2004.

In contrast, LSPs that offer "contract logistics" services, like transportation management and warehousing, will probably do okay in 2009, especially those with clients in food and beverage (people still eat in a down economy), pharmaceuticals (people still get sick), and energy/utilities (people still expect their lights to turn on).

The Outlook

M&A activity will probably slow down this year, as the era of "easy money" disappears. But will LSPs continue to invest in IT? This is a question many software vendors are asking themselves today. I've argued in the past that LSPs are at the IT tipping point, helping to drive the growth of the TMS market, for example. But the LSP industry is a low-margin business, and if their customers are inclined to freeze IT spending next year, there's no reason why LSPs won't do the same.

"If you have to forecast, forecast often." These words of wisdom come from economist Edgar R. Fiedler, and they're good words to live by these days.