Tips for Transitioning 3PL Services

Gus J. Bourgeois, III

November 18, 2010

Here are a few tips for manufacturers and other consumers of third party logistics (3PL) services to consider when drafting their next 3PL contract, to minimize transition issues, regardless of whether transitioning to another provider or in-house:

  • The transition from your incumbent 3PL to another provider, or from your incumbent 3PL back in-house, is a process – even in relatively basic 3PL arrangements, the transition can often take several months. More importantly, the transition will require the incumbent 3PL to work closely with you and any successor 3PL to ensure that your supply chain is not interrupted. Of course, the incumbent 3PL has its own concerns, such as redeploying employees and equipment in a timely manner, and minimizing “end-of-contract” expenses. It is therefore wise to include a “transition” clause in your 3PL contract, setting forth in reasonable detail those additional duties required of the incumbent 3PL as part of the transition process (including a general duty to act in good faith to assist in such transition), allocating costs related to those additional duties, and most importantly, identifying those critical “end-of-contract” tasks which must be successfully completed before final payments are made.
  • Perhaps the most important service provided by a 3PL relates to information about the flow of goods through your supply chain. Visibility to this data is crucial to your core business, and any gap in that visibility can affect your bottom line. Therefore, one of the most important considerations from the very start of any 3PL relationship is to ensure that you will have unrestricted access to such information during any end-of-term transition period, and that upon termination, such historical data will be provided to you (and to any successor 3PL) in a format that is efficient and economical, in order to facilitate a smooth transition. One key point in this regard is to make certain to include a clause stating that all of your data in the possession of the incumbent 3PL, regardless of the form it may be in or whether the format has been manipulated by such 3PL, remains your sole property.
  • As mentioned, 3PL relationships tend to be long-term, often lasting multiple years and in some cases, more than a decade. As a result, certain key employees of your incumbent 3PL can become so integrated into your supply chain function that losing access to the knowledge base of those employees in any transition would be detrimental to your operations. Of course, 3PL providers recognize this fact and the inherent value of these employees, not only because of the experience and knowledge they bring to the 3PL and its other customers (existing or potential), but because their ability to retain these employees (or, more to the point, to prevent such employees from working directly for you or a successor 3PL for some period of time after any termination) acts as a disincentive to your ending your relationship with such 3PL. As a result, 3PL providers typically include “no-hire” clauses in their customer contracts. You should evaluate these clauses carefully and consider their effect on your future transition plans. At the very least, it is recommended that you include a liquidated damages or “buy-out” clause, so that you have an option to hire any such key persons in-house, in the event that a transition would otherwise involve the loss of the services of such person. It may be easier to negotiate the amount of such liquidated damages or buy-out provisions at the start of the 3PL relationship, when the 3PL is anxious to finalize the contract and start the flow of payments, than to negotiate the deletion of the clause entirely, which will almost certainly be met with stern opposition from even the most eager 3PL.
  • Although an efficient and cost-effective dispute resolution process is critical to any long-term services contract, it is especially important with respect to 3PL contracts in any transition process. You should take care to negotiate a dispute resolution clause that prohibits the 3PL from terminating the contract earlier than the anticipated termination date, suspending services or payments to your suppliers, or otherwise disrupting the flow of goods and information through your supply chain, due to the existence of a pending dispute. While these actions would be detrimental if taken at any time during the term of the contract, they are more likely to occur during a transition, when the incumbent 3PL may feel that it has less to lose in taking such actions (and may also fear that resolving the dispute may have less significance to you once it is no longer the “incumbent” 3PL). It is therefore critical to clearly specify the parameters of the dispute resolution process, and to separate such process from the ongoing provision of services by the incumbent 3PL.