WorldTrade September 2013 : Page 18

3PL/4PL Finessing Convergence & Consolidation What should 3PLs do, and what should customers watch for, as logistics suppliers restructure, merge and expand? BY CHRISTINE VAN ROOSEN I 18 W ORLD TRADE 100 n the ever-evolving 3PL sector, the time is ripe for convergence as some 3PLs are moving to become one-stop shops to receptive shipper customers. And, for other 3PLs seeking to achieve economies of scale and reduce their costs, or buy up and “master” a sector, consolidation is the answer. With all of this activity, it is important for 3PLs to take the right steps and equally important for their customers to be aware of what is best practice — and what are the realities with their 3PLs — during major transitions. Funding Is Available “Lenders today are more willing to fund asset-heavy acquisitions than they have been for the last six years, and private equity firms are more willing to back SEPTEMBER 2013 asset-light acquisitions,” explains Ben Gordon, man-aging partner, BG Strategic Advisors and Cambridge Capital. “These groups are both looking at target companies for debt versus equity, creditworthiness, consistent cash flow, customer concentration, supe-rior management team, asset coverage and healthy, stable growth.” If domestic funding is enough to fuel significant expansion activity, there are more consolidation and convergence trends in store for 2013, in Gordon’s view. International buyers — increasingly from the Middle East, Asia and other emerging markets — are purchas-ing U.S. 3PLs to expand their geographic footprint or acquire targeted project logistics expertise. Some U.S. 3PLs are also in aggressive acquisi-tion and growth mode. XPO Logistics, for instance,

Finessing Convergence & Consolidation

Christine Van Roosen

What should 3PLs do, and what should customers watch for, as logistics suppliers restructure, merge and expand?

In the ever-evolving 3PL sector, the time is ripe for convergence as some 3PLs are moving to become one-stop shops to receptive shipper customers. And, for other 3PLs seeking to achieve economies of scale and reduce their costs, or buy up and “master” a sector, consolidation is the answer.

With all of this activity, it is important for 3PLs to take the right steps and equally important for their customers to be aware of what is best practice — and what are the realities with their 3PLs — during major transitions.

Funding Is Available

“Lenders today are more willing to fund asset-heavy acquisitions than they have been for the last six years, and private equity firms are more willing to back asset-light acquisitions,” explains Ben Gordon, managing partner, BG Strategic Advisors and Cambridge Capital. “These groups are both looking at target companies for debt versus equity, creditworthiness, consistent cash flow, customer concentration, superior management team, asset coverage and healthy, stable growth.”

If domestic funding is enough to fuel significant expansion activity, there are more consolidation and convergence trends in store for 2013, in Gordon’s view. International buyers — increasingly from the Middle East, Asia and other emerging markets — are purchasing U. S. 3PLs to expand their geographic footprint or acquire targeted project logistics expertise.

Some U.S. 3PLs are also in aggressive acquisition and growth mode. XPO Logistics, for instance, plans to absorb more than 30 companies in the next three years to add volume, achieve economies of scale, reduce costs, spread overhead across a bigger network, boost purchasing power with carriers and invest more aggressively in state-of-the-art technology. Other 3PLs are seeking to fill geographic holes, gain specific industry depth, or gain scale and efficiency by procuring 2PL capacity or consolidating their back office.

Succeed With a Strategy

Industry experts advise investors and acquiring firms avoid plunging ahead and viewing 3PL acquisitions as a simple end run, rather than an important part of an overall business and growth plan. It is an industry truism that 3PL businesses are all about relationships, and that is where the fine art of acquisitions comes into play. Successful mergers and acquisitions involve a mix of careful goal setting, planning, realistic assessment, and well-honed and exercised project management and people skills. Done right, the people, processes, relationship and communications components ensure the merger/acquisition flows smoothly.

When experts describe best practice, it comes down to eight important components. For the logistics provider going through convergence or consolidation, they are a roadmap. For customers they are a yardstick to assess the process.

Described from the 3PL perspective, customers can turn each of the eight critical elements into a series of questions to ensure the underlying strategy and execution is in place.

1. Know the Goals, Strategy and What You’re Buying

Whether a 3PL is an acquiring company pursuing consolidation, convergence or a combination of the two, it will need a clear view of what it is buying. “Sometimes companies feel pressure to grow — especially public companies that have share and growth expectations to meet,” Gordon explains. “That’s OK, but it is not a strategy. Successful strategies range from a clear desire to consolidate from a small-to-medium sized firm to a large firm with targeted services or moving beyond a niche specialization into providing customers with a broader set of services.”

2. Know Financial Metrics and Focus on What Moves the Needle

Decide if you’re looking for scale (an impetus for pursuing bigger deals); margin improvement (a good reason to look at high-margin companies); or want to add a new capability or product line, to enable cross-selling into your customer base. Also note that conventional wisdom says buy companies for five to seven times profit. But sometimes the right metrics are radically different. Gordon notes, “CH Robinson’s acquisition of American Backhaulers appeared to be an expensive transaction. But the acquired technology powers CH Robinson’s enterprise and gave them a huge competitive advantage, creating a much larger leap in value creation.”

3. Identify and Empower a “Merger Project Manager”

According to industry experts, a well-organized project manager (PM) has good operational skills; the authority to elevate any unforeseen issues along the way; and can negotiate, cajole and persuade all the stakeholders to remain focused and cohesive. This “quarterback” runs the plays and drives them through the organization — both key to getting to the end game of paying off the investment and the acquisition. The ideal PM has good operational and customer relationship skills, will treat new colleagues as partners and can manage the merger’s many disparate parts.

4. Pre-plan Operations

While operations integration is somewhat formulaic, any two companies will have different people, processes and technology. As an acquiring firm, the choices are to let operations at the acquired company stand alone, providing only support, or to integrate and merge operations with a great deal of care and dedication. With good pre-planning, the acquiring company can make money on the investment — conversely, poor planning will limit ROI.

5. Take Your Medicine

Acquiring companies sometimes assume their technology is “the best” or simply default to using it, award their own people senior jobs, or don’t give a great deal of thought to reporting structures, which can come back to haunt them. But the longer you avoid addressing human resource issues or incompatible technology/operational issues, the more expensive, disruptive and intractable they can become. And elevating the acquiring company’s management team is not always the right decision: The best sales, tech, or operations executives might be from the acquired company. The CEO of the acquiring firm needs to promote the stars from both companies and demonstrate the company is operating with a meritocracy. This will gain a great deal of credibility — not only with employees of both firms but also with suppliers and customers, to the degree it is visible to them.

6. Consider the Cultural Aspects, “What You Say and How You Say It”

Before the integration is complete, signed off and handed to the business, an assessment of intraorganizational communications and relationshipdevelopment requirements is a must. Less-successful mergers are dogged by communication breakdowns where both companies are inadvertently “talking past each other,” lost in the words. This is where the PM can bring his/her good technical and people skills, soft touch and rigor for process to bear, making sure words — and confusing terminology — do not hamper communications. The PM can make the acquired company feel at home and part of the family, supported “from the top” via clear, ongoing executive sponsorship. Customers will also be able to see if the communications are working or not through the performance and attitude of people they work with.

7. Manage a Transparent Customer Integration Program

Customer perception is the ultimate measure of whether the new team is successful or not. With rare exceptions — for example, when the integration is a small portion of an acquisition or a line of business scheduled for divestiture or shut down — being at odds with what your customers want is just a bad idea, especially in a closely observed acquisition scenario. Gordon advises the firm’s customer-savvy people meet the person who owns the relationship at the acquired company; develop an “agreed-upon” story line and pre-set agenda before going to see the customer. Then solicit customer input to learn, “How were we doing prior to the acquisition, what are your thoughts about the acquisition, and is there anything we need to be aware of, to make sure you are taken care of the way you expect?”

Getting that pre-closing voice of the customer and driving it through post-closing — along with underpromising and over-delivering to customers — will be key to managing customer expectations. Customers will value the dialogue or notice its absence, and that, too, can influence the post-acquisition relationship.

8. Include Applicable Training

Employee training requirements will be contingent on the type of acquisition. For example, a domesticonly firm introducing ocean freight forwarding as new product line, may want to consolidate back office billing and invoicing — a frequent point of synergy in most acquisitions. But A/P, A/R and billing and collection processes are markedly different for domestic vs. international firms, as are rules and regulations. Part of the project and communications plans must detail these new processes, and they should be tested and vetted before the merger goes primetime. If a 3PL has made an acquisition for technological value, its personnel will likely need extensive training, too. All of this will help ensure a smooth transition that is hardly noticeable to customers.

Convergence and consolidation are happening. It is just a fact of the growth of the 3PL industry. Users of 3PL services need to keep a careful eye on what their suppliers are doing, and the 3PLs need to execute well in order for both to gain the most benefit from these trends.

Christine Van Roosen is a researcher and writer at SMC³. Her background includes academic, business-to-business and government communications.

For reprints of this article, please contact Cindy Williams at williamsc@bnpmedia.com or 610-436-4220 ext. 8516.

Read the full article at http://digital.bnpmedia.com/article/Finessing+Convergence+%26+Consolidation/1491078/172815/article.html.

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