The Trucking Industry is the lifeblood of the US economy. Over 70% of all freight in the US, and nearly 6% of all the full-time jobs in the country are in the trucking Industry. However, this key economic engine, is struggling in the wake of the COVID-19 pandemic. Massive supply chain disruptions coupled with lower demand due to some parts of the US economy still being shut down has put tremendous downward pressure on trucking companies, already operating on razor thin margins. With leveraged balance sheets and reduced cash flows, these companies are now challenged with making the digital investments needed to survive and grow in this ‘new’ world.

However, against this backdrop, trucking companies do have the opportunity to improve margins while creating funding for new capabilities in digital technologies and integrated supply chains by monetizing their captives and back-office centers

Background

At nearly $800 billion, US Trucking Industry revenues were higher than the GDP of more than 150 nations across the globe in 2018. The Trucking Industry in the US can be broadly divided into 4 major Sectors

  • Full Truckload (FTL) -private fleets
  • Full Truckload (FTL) for-hire fleets
  • Less-than-truckload (LTL)
  • Courier & Parcel

FTL is a type of shipping mode whereby a truck carries one dedicated shipment. There are two types of fleets in this sector: for-hire and Private.

Private fleets are large shippers such as Pepsico, Sysco, Walmart etc. that don’t outsource their logistics for cost and control reasons.

The For-hire truckload segment was ~$700 billion in 2018. The barriers to entry into this segment are very low. As a result, the segment is extremely fragmented.

LTL is a type of shipping mode whereby a truck is available to carry more than one shipment. Since each truck carries shipments destined for many customers, LTL companies typically operate in a hub-and-spoke model. The barriers to entry are very high and, as a result, the industry is extremely concentrated. The LTL Industry was ~$40 billion in 2018, with the top-25 commanding over 90% of the revenues. The combination of long and short-haul shipping is among the reasons that LTL is extremely asset heavy (truck, trailers, terminals etc.).

Courier and Parcel is the transportation of non-palletized and light goods. A ~$60 billion industry in 2018, it is heavily concentrated with the top 3 companies earning more than 50% of the revenues.

Trucking conditions continue to deteriorate industrywide due to the Covid-19 pandemic with some pockets of the US feeling the squeeze more than the others. Assetheavy trucking companies operate with huge fixed costs primarily related to facilities, people and equipment. They need to cover these costs but lack the freight to maintain their revenue. Lower load volumes in an already over capacitated market are resulting in tremendous pricing pressure and lower margins. Cash preservation is extremely crucial to these companies at this juncture. Any strategy that will raise cash needs to be considered very seriously.

Asset Monetization and Path Forward

This period of macroeconomic uncertainty as a result of the COVID-19 crisis is forcing the trucking companies to re-align their business strategies to make the necessary investments in digital transformation to lower costs, streamline business processes and improve customer satisfaction. The challenge is to find the funding for these investments given the current financial situation of most of these companies.

A common strategy to reducing costs structures is to tap business process management companies, and some of the larger trucking companies have done so. However, many continue to operate large, captive shared services centers around the world. These back-office centers support critical business functions such as Finance & Accounting, Freight Billing, Claims, Rating, Customer Service, Collections, Inside Sales, Procurement, HR, Analytics etc., but despite their importance, they are largely viewed as cost centers, rather than as assets that are ripe for divesture.

While individual processes can be outsourced and savings in the range of 20-40% can be realized, aggregating these functions and selling the entire captive outright can often result in greater value

To ensure capital, protect margins and unlock investment funding for digital capabilities, trucking companies should consider Captive/Back-office carve-out and sale. In this model, the assets and employees within the captive are transferred to a BPM service provider. In return, the BPM provider typically makes an upfront payment for the value of the assets and enters into a long-term contract for service delivery.

The major benefits of asset monetization/divesture of captives to trucking companies are

1. Up-front cash payment

BPM providers typically provide an upfront payment for acquisition of assets and employees of a captive operation. This facilitates the capital that trucking companies need to fund investments in capabilities that improve operational resiliency and productivity. These assets are also removed from balance sheets.

2. Variabilized cost structure

During the COVID-19 crisis, some trucking companies experienced a sudden, drastic decline in freight volumes. Unfortunately, operating costs, like those associated with the fixed costs of employees and physical assets of in-house captive centers, did not decline. This further – increased the need to furlough and lay-off resources in key business functions, losing –deep process knowledge and expertise in the bargain. Typically, BPM providers will enter into Transaction-Based Pricing (TBP) and Outcome-Based Pricing (OBP) contracts that shifts risk from the BPM client to the provider, ensuring performance and creating a more variable cost structures.

3. Transformation to improve accuracy and lower costs

Trucking companies will find it challenging to prioritize investments into the digital transformation of captives. These investments typically will be competing with spending needed to run core operations such as trucks, trailers and terminals. A right BPM partner will bring the domain expertise gained from multiple engagements with trucking and shipping companies, as well as applicable best practices lessons from other industries. . Digital Transformation results in improvement in quality and lower cost of operations. BPM providers typically pass a portion of the savings from digital improvements back to the trucking companies resulting in further reduction of ongoing cost of operations over the life of the contract.

Key things to consider while divesting a captive

Trucking companies should consider the following when divesting and monetizing a Captive Shared service center

1. Finding the right BPM partner

There are many providers interested in acquiring mature captives. Finding the right BPM partner is absolutely critical. Trucking companies should look for a partner that has the domain expertise, scale, reputation, global reach and proven transformation capabilities. These Trucking Industry focused BPM partners should not only have a deep understanding of industry processes such as freight billing, rating and cargo claims, but also have the ability to provide contractual quality and service guarantees.

2. Deal Construction and Valuation

There are two primary things trucking companies should focus on: Getting the best possible upfront cash payment and the best possible terms for the duration of the contract, typically 5-7 years.

3. Retention of key resources

Companies should retain key resources in-house for contract management after the deal closes. These resources should have an understanding of the systems and processes related to the captive and have the ability to work with the new partner.

Summary

This is a call to action for all trucking companies that own captive shared service centers. They should very seriously consider divesting and monetizing these centers to generate the much needed cash, variabilize their cost structures, and fund digital transformation initiatives

 

Author:

Sanjay Reddy
Vice President and General Manager,
Transportation & Logistics

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