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Is FedEx Ground looking to zero out 3rd-party influence?

The FedEx Ground model is a low-margin business with little tolerance for spendthrift behavior. Yet for a business so margin-tight, the FedEx Corp. (NYSE: FDX) unit has always been a party to intermediaries touting expensive services such as the buying and selling of delivery routes, driver and driver contractor training, and ancillary consulting.

Now it appears that FedEx Ground wants to stop, or at least curb, the influence of outsiders. It has begun taking out ads (see below) urging prospective pickup and delivery drivers to work directly with FedEx Ground and to avoid the third parties.

Source: FedEx Ground

The push by the company comes days after it unveiled a program designed to grade the performances of about 5,000 companies that contract with FedEx Ground to provide local pickups and deliveries. The grades, given out in the form of Olympic medals, will determine if contractors are given more lucrative work with the company or are winnowed out due to underperformance.

Gold medalists will have access to more lucrative opportunities, as will silver medalists, though to a lesser extent. However, bronze medalists could see their territories bid out to other contractors unless they improve their performance within three months after being classified as bronze performers.

FedEx contractors work exclusively for the company and are responsible for paying all expenses, as well as for hiring, firing and scheduling their drivers. Contractors get paid on a per-stop basis.

According to a person familiar with the situation, FedEx Ground wants to take more control of the end-to-end process with contractors instead of paying “kickbacks and commissions” to route brokers and trainers to do some of the work that could be done directly between the company and contractors.

“If FedEx Ground can improve contractor training processes, increase transparency, improve upon their volume forecasts, and lastly incorporate 360-degree feedback at the station level,  which will hold station management and even package handling to much higher standards, there would be no need for these expensive consulting services,” said the person.

The poster child for the FedEx Ground third-party model is Spencer Patton, who has built a mini-empire that included driving, route consulting where he brokers agreements between route buyers and sellers, training, equipment leasing and tax services. Patton’s businesses continued to thrive even after FedEx Ground in August stripped him of his driving territory. Patton and FedEx Ground were at each other’s throats for most of 2022 after he pushed the company to boost its contractor payouts to offset higher cost inflation pressures.

In an e-mail Friday, Patton said the marketing push is not part of an effort to zero out businesses that connect buyers and sellers. “I think it’s actually targeting a process to allow [the company] to systematically remove the bottom 5-10% of its contractor workforce,” he said.

The new approach runs counter to how FedEx Ground has historically operated, said Patton. In the past, FedEx Ground grew organically with all of its contractors as long as a contractor wasn’t in breach of contract.

Patton likened the changes to the culture adopted at General Electric Co. in the 1980s and ’90s. During that time, Chairman and CEO Jack F. Welch each year routinely terminated underperforming employees, who accounted for about 10% of GE’s workforce. Many inside and outside GE argued that the ranking system, and the workforce reductions stemming from that, were developed and executed arbitrarily.

Patton said the parallels exist today at FedEx Ground. 

“Under the new medals program, FedEx will be able to remove its bottom contractors even if they aren’t failing. It will also be able to say that ‘we aren’t going to allow contractors with XYZ medal status to grow their territory.’”

According to Patton, the parent doesn’t subject its employees to the same aggressive performance criteria as does the Ground unit. FedEx holds the ground unit’s contractors to a “very different standard” than employees elsewhere throughout the organization, he said.