Outsourcing logistics is a very mature business in the U.S. and around the world. According to a recent survey of Fortune 500 companies conducted by Northeastern University and Accenture, 83 percent of these companies use third-party logistics providers and nearly 60 percent use multiple 3PLs. According to a survey covering Global 1000 companies conducted by the Georgia Institute of Technology and Cap Gemini Ernst & Young, major U.S. companies spend 49 percent of their entire logistics budget on 3PLs. Their large European counterparts devote 65 percent of their logistics budget to 3PLs.

But not all trends in the 3PL point to stability and customer satisfaction. Researchers from various universities, consultancies and trade associations that monitor 3PL trends have recently discovered that major shifts are taking place in logistics outsourcing around the world. Some of these trends are positive and suggest greater opportunities for 3PL usage, but others reveal troubling trends for 3PLs and their users. We have reviewed five major studies of both 3PL users and providers conducted by prestigious universities, leading consultants and research companies (See 3PL Industry Studies sidebar).

While these surveys disagree on many trends that are reshaping logistics outsourcing, they all agreed on one central point: 3PLs and their users have very different views of the state of the industry and the future of their business relationships. What follows is our synthesis of the key findings of these surveys, which we present as eight trends that will change the face of logistics outsourcing.

1. Consolidation: While hardly a new trend, consolidation of the logistics outsourcing industry through mergers and acquisitions has become the primary avenue of growth for many of the very large 3PLs. According to Joel R. Hoiland, president and CEO of the Association for Logistics Outsourcing (which now goes by the initials IWLA), its member companies are under tremendous pressure to grow their business or be acquired.

"There have been more mergers in the past five years than any five-year period leading up to 1998," says Hoiland. He adds that the warehousing-based providers have been a favorite target of international 3PLs rounding out their own service offerings. European 3PLs in particular have been acquiring U.S.-based warehouse logistics companies in order to enhance their distribution capabilities in this country.

Virtually all the studies noted consolidation as an important industry-changing trend. The only disagreement among these studies is where they see the trend heading. The Northeastern studies see consolidation moderating, if only because there has been so much merger and acquisition activity in the past five years. "Considerable industry energy and resources will continue to be consumed by these companies in their efforts to integrate their earlier acquisitions," says Northeastern's Robert C. Lieb, professor of supply-chain management.
The IWLA study reaches a more somber conclusion. "There are only a handful of firms that operate in the mid-sized space of $100m to $400m," according the IWLA. "The mid-sized firms have begun to disappear."

2. Globalization: Another long-standing trend has been customer pressure on their 3PLs to expand to support their business growth in new geographies. The recent surveys just focus this trend on specific parts of the world, especially China. Half of the 3PLs that Northwestern surveyed have operations in China, but these companies admit that scale of those activities is quite limited, as are the related revenues. However, this is likely to change given that half the 3PL users in the Northeastern study manufacture in China and 70 percent sell their products in that country. Logistics providers should especially note that only 39 percent of these manufacturers and retailers use 3PL services to support their Chinese operations, in part because they do not believe the 3PLs can provide the services they need.

"Large American manufacturers and retailers will exert pressure on their 3PLs to support their Chinese operations," says Lieb. He also points to Eastern Europe as a region where big 3PLs have to expand.

"Manufacturing is already moving into Eastern Europe, and as prosperity creates more consumer demand, retailers and CPG companies will be moving in there as well," says Lieb. "3PLs will again have to shift their distribution networks over the next few years."

Analytica is a U.K.-based marketing and business intelligence research firm that has been following the recent expansion of the EU to the East. According to their research, this expansion already is impacting the outsourcing plans of major manufacturers and retailers operating in the EU. Analytica reports that 60.9 percent of large manufacturers and retailers are currently satisfied with a multi-country approach to outsourcing logistics throughout the EU. However, within five years expectations change dramatically. Only 34.8 percent of manufacturers and retailers will be satisfied with 3PLs that just cover parts of the new EU, and 65.2 percent will expect their 3PLs to have pan-European capabilities.

3. Lead logistics versus niche logistics: One third of the 3PLs participating in the IWLA survey are already acting as lead logistics providers or 4PLs, meaning that their role is primarily to manage other 3PLs on behalf of their clients. "Many large 3PLs have identified a need to help companies manage complex supply chains that require multiple providers," says Hoiland. "Who else is better capable to manage other 3PLs and logistics providers than another 3PL?"

The Georgia Tech study also found a need among large manufacturers and retailers to outsource advanced service requirements to 4PLs. "Demand for broad supply-chain expertise and a desire for shared risk-reward arrangements continue to drive the relationships toward a 4PL solution," states the Georgia Tech study. This drive, however, is still limited to sophisticated users and providers because of the "difficulties and complications of migrating toward advance service offerings" from 4PLs.

Not all 3PLs are large enough or sophisticated enough to be 4PLs, so there is a defensive trend among other 3PLs toward finding niches in vertical industries or specific types of services. In fact, the majority of providers participating in either the IWLA or the Northeastern study have decided to specialize in a limited number of industry verticals in which they believe their companies have distinct competitive advantages with retail being the most often vertical mentioned. 3PLs opting for a niche strategy also focus on specific services, especially those they believe are least affected by recession. Warehousing was the most common niche service with direct transportation service as a distant second.

4. Financial pressure: According to CEOs responding to the Northeastern study, financial issues are their central concern. In fact, eight of the 19 companies in the 2003 study failed to meet their revenue growth projections for the past year. The volume offered by many existing customers continued to fall, in some cases dramatically, and buyers have continued to emphasize cost cutting. This has exerted considerable pressure on 3PL profit margins. In stark contrast to these findings, Northeastern's study of 3PL users shows that every single company believes that the 3PL industry is moderately profitable. Lieb believes that this perception encourages these users to focus on pushing down the prices they pay to their providers.

"The burden falls upon the providers to educate the user community about the industry's economic realities," says Lieb. "Customers primarily select 3PL firms based on price, so nothing is going to change unless the providers take action."

The IWLA study confirms this disconnect between providers and their customers on the financial realities of the 3PL industry.

"The customer wants more, but wants to pay less," says IWLA's Hoiland. "The 3PL has to help educate the customer on what it takes to deliver the required services, and that means developing a deeper relationship that goes behind price. If that isn't possible, the 3PL may just have to walk away."

Lieb says that a reality check is close at hand. "Every big 3PL goes through customer profiling to look at how much they earn from each customer," he says. "This exercise usually reveals that 3PLs commit too many resources to accounts that generate good revenue but poor returns on the investments. 3PLs will be walking away from contracts with such accounts."

5. Higher customer expectations: Customers expect their service providers to be able to respond quickly with more services than ever before, but often they are not finding them with a single provider. In fact, the Northeastern study concludes that the reason 58 percent of the Fortune 500 companies in its survey use multiple 3PLs is that these providers do not have a broad enough service offering. So while the users in the study reported that they were especially satisfied with the cost and service benefits of their 3PLs' warehouse management, freight payment and direct transportation services, these positive responses are not the whole story.

As the Georgia Tech study points out, core 3PL product offerings such as warehousing and transportation management are being commoditized. Customers expect their 3PLs to focus on value-added capabilities to differentiate themselves from the competition.

The IWLA study also recognizes this growing demand for more services, but their members see this trend as positive. "Value-added services are substantially more profitable than storage, handling and other basic warehousing services," says Hoiland. "Providers that offer more and broader services are more profitable and have a greater chance of retaining their customers."

6. Changing relationships: While all of the studies found general satisfaction among users with basic services from their 3PLs, the studies also found that the business relationships were not as long lasting as they once were. Clearly, there is a problem somewhere in the relationship.

"The turnover of customers among our members is much more rapid than it was 10 years ago," says Hoiland, who adds that this trend is of great concern among his members. " Finding new customers is expensive and often disruptive to everyone involved."

Lieb believes the problem primarily rests with users that have unrealistic expectations about what 3PLs can do at the prices the user is willing to pay.

"We expect 3PLs to become increasingly customer selective, and focus greater attention on the quality of existing accounts," he says. "The best source of new and profitable business is increasingly with existing customers with whom they have developed a lasting relationship."

According to the Georgia Tech study, finding the elusive "partnership" relationship is essential for both 3PLs and the users. This study finds two aspects of the user-provider relationship must change. First, it suggests that users need to think of their providers as strategists and orchestrators of logistics activities. Now, however, 79 percent of the users view their 3PLs as mere resource providers, not resource managers. Second, users must be willing to participate in innovation and productive deal structures that motivate both parties to achieve desired results.

"Sustainable relationships require equitable deal structures, mutual investments, continual improvements and creative partnering," the Georgia Tech study states. Among the deal structures that the study finds promising are costing sharing and risk/reward sharing. However, the study pointed out the difficulties in measuring and managing these more complex deal structures.

"Companies are inherently bad at baselining their current performance, maintaining ongoing operations and adjusting for supply-chain network changes," says one study participant.

7. Need for integration: One of the more interesting findings to emerge from the Northeastern study is that 49 percent of users have their primary 3PL also serving their major vendors and 57 percent share their 3PL with major customers. More than two-thirds of the users believe the extension of 3PL services to their supply-chain partners by the same provider is important in promoting integration.

"The more that 3PLs serve multiple participants in a supply chain, the greater the likelihood that all parties will benefit from integration," says Lieb. "When 3PLs connect the parties, information is much more likely to be shared. We all hear that competition in the future will be between supply chains, not just companies, and here is a way to make it happen."

One example that Lieb provides is retailers sourcing more from Asian vendors. Right now, China is the hot location, but when even lower cost markets emerge in places like Cambodia, Thailand and India, the retailer will want to move its sourcing there very quickly.

"A retailer with a global 3PL broadly dispersed and well connected to suppliers and carriers will have a decided advantage," says Lieb. "The 3PL will ease the transition as the retailer follows the low-cost curve by maintaining consistent service to customers throughout the world."

8. IT conflicts: Exactly what IT capabilities users expect from their 3PLs, and what the 3PLs are prepared to offer, are among the most contentious issues in all of the studies. The Georgia Tech study looked at these issues in different parts of the world, and found that the answers varied widely by region. In North America, 24 percent expected their 3PLs to be their primary IT solution provider. In Europe, 29 percent of the users are looking to their 3PLs for IT support. In Asia, 32 percent of users reported they depend on their 3PLs for IT support. And even though the vast majority of companies in this study do not actually depend on their 3PLs for primary IT support, the vast majority of users identified leading edge IT capabilities as a major differentiator among 3PLs.

"The fact is that users do not see 3PL providers as leading edge IT suppliers, nor should they," says Lieb. He adds that financial pressures on 3PLs make big, ongoing investments in state-of-the-art IT solutions extremely difficult. "The customer does not want home-grown solutions for their 3PLs. They want solutions that are transferable. If they move to another 3PL, the IT solution moves with them."

Lieb says that successful 3PLs will put together alliances with truly leading edge IT providers. The 3PL will have the expertise to help customers with IT issues and tools, but it cannot be their core business. The technology is changing too rapidly, and the cost of staying on the leading edge is more than any 3PL is able to invest.