Today, the third-party logistics (3PL) industry has become a proven resource for companies seeking to implement successful supply chain strategies. But in 1991, when I conducted my first study among Fortune 500 users of 3PL services, the industry was in its formative years. Three years after that initial study, I began annual surveys not only of the users of 3PL services but also of the CEOs of the largest 3PL service providers in the United States.

Those annual surveys have continued to this time, providing considerable insight into the industry's development from both the provider and user perspectives. Over that period, much has changed in the industry, while a few things have remained the same. This ten-year anniversary of the research seems to be an appropriate time not only to reflect on what has occurred but also to consider its implications for both providers and users of 3PL services. (It's also a good time to thank all the users and providers who have participated in the surveys, the companies that have sponsored the research, and the individuals who have worked with me on the surveys.)

This article will focus on the U.S. 3PL industry as it is seen by the CEOs of the largest service providers over the past ten years. Each year the research targeted 20 to 25 CEOs. In the 2004 study, for example, 23 CEOs participated, representing companies with more than $17 billion in annual operating revenues. Participation was similarly high in earlier years. Without the willingness of the chief executives to share their views on the industry this stream of research would not have been possible.

In the ten years of the CEO survey, the industry has undergone great change in many aspects. The changes have been especially significant in such areas as industry size and makeup, services offered, geographical reach, and IT support provided. Certain other aspects of the business have not changed that much over the past decade—for example, the CEOs' perceptions of the dynamics driving the industry and the market opportunities. The following discussion outlines major developments in the 3PL industry over the past decade.

The industry has seen its share of shakeout and consolidation over the past 10 years. As shown in Exhibit 1, eight of the 21 companies that participated in the initial survey are gone as a result of acquisitions, mergers, and company failures. Similarly, other companies that participated in later annual surveys—companies like Fritz Companies, Mark VII Logistics, Tibbett and Britten, and Skyway—are also gone. This is not surprising, but rather reflects normal industrial evolution. The 3PL industry in the United States was still in an early stage of development in 1994. Many of the companies participating in the first survey had entered the industry in the preceding five years. Nearly all had come into being as subsidiaries of established transportation and warehousing companies searching for ways to broaden their services offerings to an increasingly price-conscious customer base.

Virtually all of the major players in the industry have been involved in merger and acquisition (M/A) activity in the 10-year period. Generally, the acquisitions have sought to broaden the service portfolio of the acquiring companies and/or broaden their geographical coverage while fostering revenue growth. In some instances, the 3PL unit itself made the acquisition. In other cases, the parent organization did the acquiring. In just about all cases, the acquisitions effectively broadened the range of services offered.

The acquisitions have come in waves, with activity tending to increase during periods of strong economic growth. During such periods, it was not uncommon for an individual 3PL to generate more than a quarter of their year-to-year growth through acquisitions. Another pattern was the "leader-follower" behavior taking place. For example, one company's acquisition of a freight-forwarding or customs-brokerage capability would typically trigger like acquisitions by its major competitors. Similarly, one company's acquisition in a strategically targeted geography would typically trigger a competitor's acquisition in the same geography.

This flurry of acquisition activity has not been without its costs. Over and above the price of the acquisition itself, the companies have faced the typical merger-related problems around systems integration, corporate cultures, redundant employees, and customer concerns.

As an alternative to acquisitions, many 3PL providers in the United States have developed alliance agreements to broaden their service portfolio and/or area served. In some instances, alliances have been formed with other 3PL service providers. In other cases, they have involved a broad range of companies including transportation carriers, freight forwarders, warehousing companies, software vendors, and financial service companies.

The major challenge in pursuing this strategic option has been to find competent partners. Based upon data we have generated in our annual CEO surveys, the most important considerations in making such relationship work effectively are a c-level commitment, a shared vision, similar corporate cultures, and a shared commitment to delivering high-quality logistics services.

It should be noted that such alliances by 3PL providers are not a new development. Sixteen of the 21 companies involved in the 1994 survey indicated that they had at least one alliance partner at that time. Today, nearly all of the major 3PL service providers have multiple alliance partners.

The Big Have Gotten Bigger

As the industry structure has changed over the ten-year period, the revenue base of the remaining companies has increased dramatically. On average, the companies involved in the 1994 CEO survey reported annual revenues of approximately $200 million that year, with only one company generating more than $1 billion. By contrast, the average annual revenue reported by participants in the 2004 survey was $894 million. Five of those companies generated in excess of $1 billion that year, and four more projected exceeding that figure the following year.

It's interesting that in some instances, the growth of 3PL service providers has been restricted by their corporate parents. For example, for a number of years the logistics unit of Federal Express was directed to limit its service offerings to customers that would also generate air cargo for FedEx. Similarly, the CEO of Panalpina, a significant player in the European 3PL industry, once reported that its logistics unit would only consider potential customers that would generate additional forwarding revenues for the parent.

Another corporate restriction was the mandated use of services supplied by other operating units of the 3PL's corporate family. To illustrate, if a customer requires trucking services in a particular geograph, and an operating unit of the 3PL's parent company provides those services in that market, it is "strongly recommended" that the family member be used over a competitor. Such artificial restrictions, however, raise concerns in the user community about whose needs are being served in such situations.

Since 1994, 3PL service offerings have broadened dramatically in response to the users' desire for one-stop shopping. The service expansion has been accomplished in several ways. A 3PL may initiate new services on its own, acquire a company that provides those services, or develop operating alliances with companies having the desired capabilities. Most 3PLs have relied upon hybrid strategies to expand their service offerings, making their decisions based on the particular services needed, the capital available, and what is available in the marketplace.

In recent years, the industry has emphasized providing value-added "end-of-supply chain services" such as kitting, installation of equipment, and repair services. At the same time, a number of the 3PLs have added nontraditional functions such as financial services, contract manufacturing, and procurement support to their service menu. While these services may be important from the standpoint of having a full product line, they have generated relatively little revenue within the industry to date. (Transportation and warehousing revenues still dominate in most 3PL companies.) Of greater significance is the movement of 3PLs into support services to facilitate international movements. Specifically, freight forwarding and customs brokerage are becoming increasingly important revenue sources for many 3PL providers.

In the early days of the 3PL industry in the United States, many companies struggled to determine the right customer mix. Pressures from their boards to grow revenues as quickly as possible led to the perception that any potential customer was a good one. Consequently, some providers attempted to be everything to everyone—clearly an unworkable strategy. Most of the major companies providing 3PL services have since abandoned that approach, and now tend to focus on a limited number of industry verticals. The most targeted industries in the United States, according to our recent annual surveys, are retailing, automotive, electronics, high technology, consumer goods manufacturing, and health care. Many 3PLs have developed industry-specific expertise as a means of differentiating themselves from the competition.

As supply chain integration becomes a higher priority in many organizations, it's not surprising that the big 3PLs are also targeting the supply chain partners of their major customers. Nineteen of the 23 CEOs in our latest survey said that their companies now had strategies in place to sell along the supply chains of their biggest clients. In some cases, the effort has focused on the suppliers to the client; in other cases, it's been on the client's customers. Still other 3PL are seeking to sell both upstream and downstream along the supply chain.

The 3PL industry in the United States has become increasingly global in several respects. For one, ownership of the companies in a number of cases now extends beyond the United States. In fact, eight of the 23 companies that participated in our 2004 CEO survey are owned by European and Asian entities. The services offered today are far more global in nature, too. In our initial CEO survey 10 years ago, only three of the 25 companies were generating revenues outside North America. By contrast, nearly all of the companies involved in our most recent surveys have established significant operations in Europe and Asia.

In some instances, the geographic expansion was driven by major customers that were themselves expanding overseas and needed logistics support for those operations. So the 3PLs followed—not only because of the promise of new business in other countries but also out of fear that if they didn't expand, they would lose the customer's U.S. business.

In the majority of cases, the global expansion efforts of the 3PLs have followed a mixed-market entry strategy. In some instances, the companies have initiated their own operations in foreign countries; in others, they have acquired existing providers in those countries; and in still others, they have formed alliances with other 3PLs already serving those markets.

Over the past ten years, the customers for 3PL services have gotten bigger and have given a greater share of their logistics operating budget to the providers through larger contracts. The percentage of the logistics operating budgets of Fortune 500 manufacturers given to 3PL service providers has increased steadily to 40 percent in 2004—and is projected to grow to 46 percent within three years. In fact, the size of some of the individual 3PL contracts now being awarded dwarfs the annual operating revenues of some of the participants in our 1994 CEO survey.

In addition, the percentage of Fortune 500 manufacturers using 3PL services has increased from 38 percent to more than 80 percent. In some instances, that switch requires the formation of alliances between multiple service providers in order to handle the scope of the work in such contracts. Ultimately, this may lead to the increased use of fourth-party logistics (4PL) services.

As the 3PL industry in the United States has evolved, the major service providers have become more "customer selective." All of the CEOs in our recent surveys report that their companies have become much more selective about who they do business with. In line with this, the 3PLs have typically targeted companies of certain sizes in certain industries that are interested in developing collaborative working relationships. Their focus also has become longer-term in nature, which is reflected in their sales and marketing efforts as well as in a tendency to reply to fewer requests for quotation (RFQs). The net effect of this customer selectivity, according to CEOs involved in the recent surveys, has been higher margins and yields.

While greater customer selectivity has benefited the large 3PL providers and customers, many small to medium-size companies may have fewer alternatives for 3PL services. The reason: They have become less attractive customers. And while some of the larger 3PLs may continue to solicit such business through dedicated subsidiaries, most have shown little direct interest in such accounts.

The role of technology in 3PL service offerings has changed dramatically since our 1994 survey. Back then, the focus was mainly on selling and supporting transportation and warehousing services. So a number of 3PLs began looking at adding information technology (IT) support as a way to differentiate themselves in the marketplace. They started making substantial investments in technology in anticipation of substantial returns on that investment. Unfortunately, those returns have not materialized in most cases. The CEOs we've interviewed over the years have often bemoaned the high cost and low returns associated with IT investments. Many customers, however, now consider IT support to be a standard component of the basic 3PL service package. As such, they typically are reluctant to pay the full cost of the IT customization that they say is required.

That reluctance is likely to persist in connection with a new, rapidly emerging type of technology—radio-frequency identification (RFID). The 3PL CEOs now are looking at various options for developing RFID capabilities such as working with software providers, partnering on pilot programs with large customers, and developing their own RIFD middleware.

In each annual survey, we have asked the CEOs about their perceptions of the key industry dynamics, the top market opportunities, and the most pressing problems facing their industry. Interestingly, their perceptions on each of these issues has remained fairly constant over the past decade.

Industry Dynamics. In each survey, we have asked the CEOs to identify and rank the three most important factors driving the 3PL market in the United States. The CEOs' responses have been remarkably consistent over the past 10 years. One of those dynamics, "growing customer interest in outsourcing a broader range of logistics services," was ranked in the top three every year. Another, "continued downward pressure on prices," was ranked in the top three in eight of the last nine surveys and as the most significant dynamic in four of the last five surveys. "Increased customer desire for one-stop shopping" ranked in the top three for six consecutive years between 1995 and 2000 but has not made a top three appearance since. The CEOs cited "increased pressure to globalize company service offerings" as one of the top three industry dynamics in three of the last four surveys.

Market Opportunities. The CEOs named "further integration of supply chain activities" as one of the top three market opportunities in every year of the survey except one. The same held true for "further IT systems integration." Another dynamic ranked at or near the top year after year was "further globalization of company service offerings." It is interesting to note that "e-commerce" was identified as the most significant opportunity in both the 1999 and 2000 surveys but then was never mentioned again. That's not surprising in that several CEOs subsequently reported that every e-commerce start-up served by their companies had been liquidated.

Industry Problems. Somewhat surprisingly, the CEOs' responses to the most important problems facing the industry in the United States remained quite constant between 1994 and 2004 as well. "Finding and keeping qualified management talent" ranked as one of the top three problems in all of the surveys and was ranked as the most important problem in five of the first six annual surveys. "Continued downward pressure on prices" was identified as one of the three most important problems in ten of the eleven surveys and was ranked as the most important problem in each of the last four annual surveys. The CEOs also ranked "high cost and low return on IT investments" as one of the three most important problems in eight of the past surveys. During the study period, the only other problem that appeared in the top three more than once (three times) was "difficulties meeting customer expectations."

Finally, each annual survey asked the executives to provide one- and three-year projections for revenue growth for both for their own company and for the industry overall. The figures show that one-year company projections have declined over the past ten years from an average of 49 percent in 1995 to 12 percent in 2004. Similarly, the average three-year company projection declined from 44 percent to 14 percent per year over that same time frame. The pattern is similar with regard to growth projections for the industry. Between 1995 and 2004, the CEOs' one-year projections declined from an average of 26 percent to 9 percent. Similarly, their average three-year industry projections fell from 22 percent per year to 10 percent. (Exhibit 2 charts the one-year revenue projections over the survey time frame.)

This ten-year retrospective of our surveys of 3PL chief executives—coupled with the related studies we have conducted among the user community—yield some instructive insights into the longer term implications for both providers and users. (For a summary of the lessons learned, see the accompanying sidebar.) First and foremost, the 3PL industry in the United States seems well positioned to register solid revenue gains and improved profit margins over the next several years. The industry's revenue base should continue to grow, absent any major contraction of economic activity, but at a considerably slower rate than in the 1990s. Industry consolidation will continue, not only reducing the number of major players but also providing market opportunities for niche competitors to serve smaller customers that may no longer be attractive to the big 3PLs. At the same time, the 3PLs that have broadened their service offerings and market coverage through mergers and acquisitions will continue to struggle with integration challenges.

As the major logistics service providers become increasingly selective about their customers, their yields should further improve. As this happens, they will become increasingly likely at contract renewal time either to walk away from accounts yielding marginal returns or to aggressively seek price increases.

From a service offering standpoint, 3PLs are expected to place greater emphasis on servicing import/export activities as business continues to go global. This will be particularly evident among providers that have seen major accounts move their manufacturing activities offshore. The 3PLs that already have added freight-forwarding and customs-brokerage capabilities will be best positioned for this transition.

From a technology standpoint, the high cost and low return on IT investments will remain a chronic industry problem—one that is not likely to change any time soon. This problem can be traced to a combination of rapidly changing technology, user demands for systems customization, and user unwillingness to pay the true costs of these applications. There seem to be relatively few options available for 3PLs to deal with these issues. They must either be willing to live with the lower margins associated with such accounts and attempt to cross-subsidize them with higher margins on other service offerings or aggressively attempt to raise prices for such services. If the latter strategy puts an existing relationship at risk, the provider must then weigh the cost of losing clients against living with lower or nonexistent IT margins.

Other provider strategies might involve unbundling their service offerings and charging separately for IT support. Alternatively, they may rely more extensively upon software alliance partners to provide such support. Those 3PLs that succeed in selling services to other companies along the customer's supply chains might be able to market common IT solutions along those chains. In addition to providing some relief from customization pressures, this strategy would spread development and implementation costs across a broader customer base.

Finally, staffing issues will continue to trouble the industry as the competition for management talent only intensifies. This will necessitate more extensive recruitment efforts, expanded internal training programs, and ongoing management development programs.

The developments for the providers discussed above also have important implications to the 3PL-user community in the United States. For one thing, customers will have fewer (and larger) logistics service providers in the marketplace to consider. But those that remain will offer much broader service portfolios and geographic coverage. The oft-cited desire among some segments of the user community for one-stop logistics service shopping may finally become a reality.

If 3PLs consider an existing or potential user an attractive account, the user should have little trouble finding the services required. However, for companies that are not seen as "attractive" the options will likely diminish. Similarly, small- to medium-sized companies that no longer reach the business threshold of the larger service providers will likely have to look to smaller niche players for logistics support. The formation of collective user organizations to broker larger volumes with 3PL service providers could be one viable strategy to increase service options for these smaller companies.

Customers in the United States should also expect more pressure from their 3PLs to raise contract rates, particularly with respect to the technology support being provided. Clearly, the user community must allow the 3PLs to generate reasonable returns on their IT investments. If not, the relationships can't be sustained. Programs that place greater emphasis on sharing cost savings and risk appear likely going forward.

The desire among many 3PLs to establish deeper, longer-term relationships with fewer customers presents a real opportunity for users to do more than just talk about the value of supply chain collaboration. As customers work more collaboratively with their service providers—and as the 3PL strategy of selling along the supply chain takes hold—the promise of true supply chain integration becomes closer to reality.

Author's note: I would like to acknowledge the support of Accenture, which has sponsored the annual 3PL surveys for the past six years. Also, my thanks to Brooks Bentz, associate partner with Accenture, who has worked with me on the surveys for the past three years.