FedEx Implementing Ranking System for Delivery Contractors

An independent contractor to FedEx Corp. unloads packages
An independent contractor to FedEx Corp. unloads packages from a delivery truck in New York. (Michael Nagle/Bloomberg News)

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FedEx Corp. is rolling out a new system for evaluating its delivery contractors that rank them like Olympic medal winners, and those designated as the lowest-ranked “bronze” will be more likely to lose their service areas, according to a company memo.

The evaluations are based on measures of service, safety and customer experience, FedEx said in an internal memo obtained by Bloomberg News. The so-called “Service Provider Results Summary” will be updated monthly based on an algorithm that crunches the data. A contractor with a bronze rating could face forfeiture of the standard contacts that permit exclusive delivery rights in a given area, the document said.

The contract changes are part of that effort to increase efficiency — and a signal to its army of more than 6,000 independent contractors that the package-volume boom times are over. FedEx didn’t provide details of the program but said it’s in the process of rolling out a data-driven dashboard for evaluating its contractor partners.

“To enhance the quality of ongoing business discussions and negotiations with independent service provider companies, FedEx Ground is launching a new data-driven approach to communicating contract-specific results via an online dashboard,” the company said in a statement. “This approach is part of how FedEx Ground is adapting its business to evolving market dynamics and customer needs, and has been informed by input from many service provider businesses.”

CEO Raj Subramaniam, who took the top job in June and faces pressure from an activist investor, has pledged to cut some $3.7 billion in costs to better align the company with falling demand for its services and boost profit margins. The new evaluation system also comes as FedEx aims to improve its competitiveness with rival UPS Inc., which benefited from its unionized work force’s fixed wages but now faces tough negotiations this year with the Teamsters.

Some of the FedEx’s own contractors sought to organize themselves last year and demand higher payments after two years of elevated package deliveries and aggressive price hikes. But FedEx quickly crushed that revolt — which wasn’t aligned with any trade union — even as it sought ways to cut costs and cope with a rapid drop in package volumes.

A driver for an independent contractor to FedEx

A driver for an independent contractor to FedEx pushes a cart of packages through snow in New York. (Angus Mordant/Bloomberg News)

Contractors rated as “gold” or “silver” also face new challenges to keep their routes. They will only have 14 days to accept an offer from the company to bid on service area renewals. If they don’t reply within that time frame, FedEx reserves the right to have already begun negotiations with other contractors for competing bids to those exclusive delivery service areas. FedEx calls this an Independent Service Provider Agreement.

“If negotiations do not result in a tentative acceptance of the negotiated terms for a new ISPA within the two-week time period, the service provider will forgo the OFA and any outstanding offer or proposal by FedEx Ground will be revoked,” the document said. “FedEx Ground will then extend to other candidates an opportunity to execute an ISPA.”

FedEx also is curbing payments that cover extra expenses such as lodging and meals when contractors are dispatched temporarily to help out on other routes, according to at least three contractors who have been informed of the changes. For some contractors, contingency work was a major source of income. The company is instead allowing local contractors to handle higher volumes themselves, the contractors said, raising FedEx’s exposure to a single contractor but reducing the expense of bringing in crews from afar.

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The contractors say the medals system will make their contracts more volatile, reducing the equity value in their businesses and creating hurdles for financing. The shift away from long-distance contingency work will hurt those contractors that had dedicated contingency teams and were making more money doing that work than servicing their own areas.

The Memphis-based delivery giant struggled with service issues during the pandemic when a tight labor market pushed up wages and made it difficult to find enough worker to operate sorting operations at capacity. The surge on delivery demand also put pressure on its independent contractors, who faced higher costs for drivers, fuel, maintenance and vehicles.

Contractors’ frustration at the company — and its new leadership’s teams promises to cut costs — boiled over in the fall, when some threatened to walk off the job on Black Friday. FedEx resisted demands for increased compensation and the lead organizer of the group was stripped of his delivery contracts with the company, which at one time included 225 routes across 10 states.

CEO Subramaniam, who succeeded founder and current chair Fred Smith, is trying to regain footing at its ground unit, where the operating margin has sunk below 10% in nine of the last 13 quarters. Before that period, the margin had been at 10% or higher going back to 2008 and in some quarters reaching 20%.

FedEx Corp. ranks No. 2 on the Transport Topics Top 100 list of the largest for-hire carriers in North America and the Transport Topics Top 50 list of the largest global freight companies.

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