Technology as enabler and divider
I was recently speaking with someone at one of the larger U.S. freight brokerages when he mentioned in passing the size of the company’s IT department in terms of number of employees.
My response: “You’re dangerously close to becoming an IT company.”
Surely, I meant it as a joke, but the reality is that modern brokerages have long been morphing into entities far larger than that limited descriptor.
They now offer third party logistics services, international forwarding, visibility, last-mile options, among other products.
The driving force behind these enhanced offerings is technology. The top brokerages have been investing millions of dollars in their IT platforms, both to deliver accurate rates and capacity instantly, but also to empower these other business units. And then, just as important, tie these business units together for their customers.
The whole concept behind an asset-light business model is to be financially nimble enough to enter a market without the burden of sprawling capital expenses. Brokers can spend their capital on technology, not on trucks or other hard assets.
And yet, in some sense, technology is a double-edged sword. Building a basic system is becoming easier by the day, and with the software-as-a-service deployment model, it’s even easier to attract and bring on board customers.
It’s what makes the truck brokerage market so accessible for asset-light would-be players. That low barrier to entry – again, building an IT platform with scale costs a fraction of building a fleet with large scale – creates a situation where companies can see business opportunities in a relatively short period of time.
The truck brokerage market, in particular, has been very fragmented outside of one or two large players at the top. But it is, in the words of one domestic transportation analyst, “coagulating.”
C.H. Robinson remains the top dog, but XPO Logistics’ drive up the list of the top brokerages has been emboldened by the company’s acquisition of the intermodal provider Pacer. In the past, we’ve chronicled how XPO, as well as other emergent brokers like Coyote Logistics, have laid the foundation for their growth with state-of-the-art, scalable technology.
These companies in the top 10 or so of freight brokerages have a huge head start in terms of technology. So technology creates this two-tiered effect for new entrants. It makes it easier to enter, but harder to catch up, as companies managing more capacity and with larger revenue will inevitably keep investing in their technology to retain competitive advantage.
It’s also important to state the role that acquisitions play in this stratification. XPO is the most noticeable in terms of acquisitiveness, but C.H. Robinson greatly expanded its reach in the forwarding business by acquiring Phoenix International in 2012.
Echo Global Logistics, now firmly in the top-five brokerages by revenue, has used acquisitions of small, like-minded firms to build its more pure brokerage-based business.
Acquisitions can often come with associated IT headaches; for example, mismatched systems, new geographies and business units to incorporate, and different IT cultures. For brokers looking to acquire, the shape and state of the prospective purchase’s IT systems is as important as what that company might bring in terms of market share or new business opportunities.
Again, the ability to invest in IT and acquisitions with suitable systems is what makes it hard for the lower rung brokers to harbor hopes of catching up. The barrier to entry is low, but the barrier to growth is high.
So as I thought back to the broker with the sizable IT headcount, it dawned on me just how far this segment of the market has come. The first, second, and third thing a broker looking to hire would have done in the past is put those hires on phones, securing and selling capacity.
Now, those hires are just as likely to be headed toward the IT department, helping to build complex algorithms that identify where capacity is, what it should be rated, and the customers best suited to buy it. They’re just as likely to be involved in developing systems that branch these companies outside of the realm of pure freight brokers and into the more integrated forwarding and transportation management worlds.
Technology – the great enabler and great divider.