The epic Pilot Flying J fraud trial is nearly over. Closing arguments began yesterday and will continue today; the jury will begin its deliberations tomorrow, Wednesday. The jury is not scheduled to work on Thursday or Friday and may return a verdict as early as tomorrow. Regardless of whether defendants Hazelwood, Wombold, Mann, and Jones are found guilty or acquitted of conspiracy and fraud—or if there’s a mixed verdict on the various counts—transportation industry observers can leave the proceedings with some important lessons learned.
One of the things that the Pilot trial’s testimony and filings have brought out into the light of day is the remarkable extent to which the trucking industry has weaponized data. What do we mean by ‘weaponized’? It’s worth recounting, for a moment, exactly what the Pilot executives and administrative workers were accused of. Pilot diesel salesmen offered cost-plus discounts to trucking carriers in exchange for agreements to purchase a certain number of gallons of diesel fuel. The cost-plus discount referred to the wholesale price of diesel fuel plus a few cents as a kind of pumping fee. CP-1 would be the wholesale price plus one cent, a very low rate; CP-8 would be the wholesale price plus eight cents, a much higher rate.
The truck drivers bought the fuel at the pumps to fill their tractors, and periodically their carrier would submit their fuel spend records to Pilot. Pilot then calculated the difference between the retail price paid and the cost-plus discount that was negotiated and returned the money to the carrier in the form of a rebate. Pilot would then manually adjust the rebate—the nickname for this process was ‘Manuel’, because Pilot often stole from Latino-owned carriers—in its favor and pay back less than its customers were owed. The trouble was that it was almost impossible for a supra-regional or regional trucking carrier to know exactly how much money it was owed. Wholesale fuel prices fluctuate daily and a patchwork of state and local fuel taxes complicated retail prices—and thus rebate amounts—even further.
Many medium- and small-sized carriers found it too difficult to replicate Pilot’s math if their rebate came in lower than expected, so they simply trusted in Pilot Flying J’s honesty. Pilot’s direct sales division would experiment with a specific customer by slightly cutting its rebate, and if Pilot heard no protests in return, the truckstop chain squeezed the customer even further, sometimes raising the ‘pumping fee’ to four times what it should have been.
This is what we mean by ‘weaponized data’—Pilot Flying J used its superior data resources to identify holes in its customers’ information and exploit them. “Some of ‘em don’t even know what a spreadsheet is,” as Brian Mosher, Pilot director of national sales, phrased it to a group of sales reps at a training session. The American trucking industry is highly fragmented, meaning that even the top 100 carriers account for only a small fraction of total capacity on the market. The majority of carriers are small, though there are big regional and national players, and consolidation entered a new phase last year with the Knight-Swift mega-merger. Due to trucking’s fragmentation, the adoption of new technologies and the distribution of technological resources, including computing hardware, software licenses, and data professionals, has been very uneven.
One of our mantras at FreightWaves comes from an article that appeared in The Economist: “the world’s most valuable resource is no longer oil, but data,” or in shorthand, “data is the new oil.” And the uneven distribution of data expertise in trucking has translated to a corresponding uneven distribution of power. Insurance companies, freight brokers, factors, fuel providers, and shippers with stronger data operations than the carriers they deal with all have a corresponding advantage in negotiating contracts, and, as in the Pilot fraud case, a corresponding advantage in assessing the other party’s performance in a given contract. Pilot found out that their real advantage wasn’t in using the massive size of their network to squeeze their customers in the negotiation stage—the truckstop chain’s real advantage was in navigating the complex, index-based pricing data after the contract had been signed. Pilot figured out that it didn’t matter what the contract said if the other party didn’t have the data chops to verify Pilot’s performance.
The inability of small outfits to leverage their own data resources means that they have to defer to larger entities, and often this means they have to trust them in order to do business. The Pilot trial revealed that that trust can sometimes be misplaced, and a company with a better data operation will not only use its information to its own advantage, but it will systematically identify your weaknesses and exploit them.
One solution might be blockchain technology. Blockchain-powered fuel payments would be indexed to the day’s wholesale diesel price, with fully automated discount calculations visible to both parties. The fuel contracts would self-execute and would not be vulnerable to the kind of manual rebate manipulation that Pilot Flying J engaged in with its customers. Morgan Stanley has said that the revenue opportunity for blockchain-enabled truck fuel payments alone is $150B. The overall effect would be to level the playing field and allow smaller companies with little data infrastructure to have confidence in their dealings with larger, more sophisticated players, without having to trust them.
All told, the Pilot Flying J fraud trial revealed a lot of sordid details specific to that company—its naked dishonesty, its arrogance toward small customers, and the racism of its executives—but it’s also left us with some important lessons that apply to the entire industry. Data is power; it will be used against you; your lack of data will be identified and exploited. Do something about it.
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