Flexibility. Cost savings. Expertise. The third-party logistics industry has exploded in the last decade due to an ability to deliver these benefits. And industry pundits confidently project growth rates of 15%-20% over the next several years. In all, a pretty rosy picture. But there’s a sobering side to the story.

A recent Warehousing Education and Research Council (WERC) pamphlet reported that 55% of logistics outsourcing alliances are terminated after 3-5 years. Why? Lots of reasons.

According to Michael F. Corbett, co-founder of The Outsourcing Institute, the number one reason outsourcing deals, in general, do not succeed is a failure to put the appropriate resources in place to manage the provider relationship. In the logistics industry, there are no definitive statistics in this area. Where the third party is not delivering expected or promised results, often it’s because up-front expectations were improperly set.

Failures could be the fault of the provider. Overpromising is bad business, and it’s given the third party industry a bad name. It could be the fault of the shipper. Not all are clear about what they want from a third-party partner. Most often, shipper and provider share responsibility when the relationship, and the project, go south.

But logistics services providers don’t talk about failure. We’re worried that any focus on failures will curb the growing outsourcing trend. That’s a mistake. We need to openly discuss and learn from past mistakes in order to get at the main reason why third party partnerships fail - poor communication and information sharing at the onset of a relationship.

Third Parties Must Bear the Burden of Assuring Smooth Start-ups

Too often, shipper and third party do not treat each other as strategic alliance partners from the start. Third parties get caught up in a selling mode, while shippers look to strike "the best deal." In such a relationship, someone has to be the loser.

Here’s an example. Kuehne + Nagel took over a large contract operation several years ago. We were not allowed to tour the existing facility or speak to upper management and warehouse managers. We relied instead on spreadsheets to tell the story. The client did not want to offer information that might "influence" our proposal or hurt contract negotiations. And there was an assumption that we, as the logistics experts, should have the right answers.

We won the contract but, not surprisingly, this project fell into the 55% failure category within a year. It was the first major failure within the company in close to 30 years, and the fault rested squarely on our shoulders. Our mistake was in not pushing back and insisting that we understand every aspect of the operation. Third parties must bear the burden for making sure the relationship gets off to the best start. In truth, many buyers of our services do not deal with outsourcing and start-up issues as part of their daily routine. It’s up to the logistics services provider to know when we are headed in the wrong direction and be prepared to say "STOP!"

When we as the third party have pushed back, we’ve found that most prospective clients appreciate our effort to get the detailed information needed to maximize the benefits of outsourcing. Over the last several years, Kuehne + Nagel has narrowed our project pool to focus on companies that share our perspective on partnering and want to create a "win-win" relationship. Here’s what we look for in a partner:

• a company that likes communication
• a willingness to share detailed operational information and problems
• a sense that they truly want a partner to help them succeed
• a willingness to share future strategies and direction

A Going Forward Strategy

Logistics trade magazines recently have run articles chastising third-party providers for a lack of initiative. These articles are just partly correct. Sure, at times the industry has been guilty of focusing on blocking and tackling to the exclusion of proactive solutions. But these are the exceptions, not the rule. Where logistics outsourcing partnerships have fallen short of expected results, both third party and shipper need to recognize that it is often due to an up-front failure to share the critical business information necessary to design and implement a solution.

Third parties must accept most of the responsibility for driving this information sharing process. In the past, we’ve allowed ourselves to be trapped into business relationships in which we are treated like, and given the sparse information of, a vendor. But the results expected of us are those of a strategic business unit. Going forward, we need to move away from the "buyer-seller" interaction, in which one party is a loser, toward real operational alliances. To get to that point, we may need to share a "skeleton" or two about past failures in order to define a better way of working. But the end result - more powerful and synergistic partnerships between shippers and third parties - will be well worth it.