Digital-broker model gets smacked around at Chicago transport technology conference

Perhaps it is an understatement that traditional logistics players, including some IT incumbents, are not throwing out the welcome mat for digital brokerage startups seeking to match truck capacity with shipper loads while cutting out the traditional ecosystem of shipper, carrier, and freight broker.

On Tuesday, the CEO of one of the country's largest freight brokers took purveyors of the new-fangled model to task, saying they lack the scale, customer relationships, and robust data sets to execute in the demanding brokerage segment. Then yesterday, the founder and head of technology company Load Delivered Logistics LLC upped the verbal ante, saying venture capitalists pouring money into unproven companies with load-matching apps "don't understand our industry," and are "being lied to" by companies promising unrealistic rates of return on investment to justify their inflated valuations.

The comments by Doug Waggoner, CEO of Chicago-based broker Echo Global Logistics Inc., and Robert Nathan, founder and CEO of Load Delivered Logistics, an IT concern also based in Chicago, underscore the industry's growing irritation with the proliferation of startups. Both spoke at a conference in Chicago held by project44, a Chicago-based firm that is developing application programming interface (API) capabilities, which is being touted as the next generation of shipper-carrier-third-party logistics (3PL) provider communications for the transportation and logistics industry.

The ubiquitous Uber brand has spawned a cottage industry of sorts that's become known as "Uber for Freight," under whose umbrella have emerged various brokerage startups.

Critics of the model said that while it may be effective in providing a platform to support the most basic load-matching services, it falls short in meeting the complex and dynamic needs of shippers and motor carriers, especially in an environment where thousands of loads per day are being booked and hauled across the country. The model's most critical deficiency, some argue, is in the area of "exception management," where cargo doesn't move as booked and the source of the problem needs to be quickly identified and the situation resolved. Waggoner said Echo has a checklist of 28 possible exceptions for each transaction.

With 40,000 truckers in its database, Echo has access to a depth of information that startups can't touch, Waggoner said. The level of data, combined with the years spent building carrier relationships, is of tremendous value to shippers, he said.

"All you have to do is sit next to a broker for 15 minutes and watch him or her work," Waggoner told the crowd. "You would say, 'Wow, that relationship means a lot.'"

Nathan, for his part, criticized startups for pitching a growth story that's unlikely to materialize in what is a highly competitive business. Drawing a rough parallel with the dot-com startups of the mid-to-late 1990s that garnered outsized valuations despite modest revenues and no profits, Nathan said otherwise smart venture capitalists and other investors are being led astray by upstarts pitching scenarios of wholesale disintermediation of the long-standing brokerage model.

Nathan cited as examples Uber Freight and Seattle-based Convoy, a start-up that has landed about $80 million in funding from the likes of Microsoft Corp. co-founder Bill Gates, Amazon.com Inc., founder and CEO Jeff Bezos, and the entertainment magnate Barry Diller. Investors in digital models, Nathan said, may be disappointed to discover that they spent millions of dollars on companies that delivered modest revenues and razor-thin gross revenues (the amount of revenue before the cost of purchased transportation). Convoy CEO Dan Lewis did not return an e-mail request for comment at press time.

All brokers have exposure to what is known as transactional pricing, where they profit on the difference between the cost of capacity and their marked-up price to their shipper customers. However, the emergence of digital players bent on underpricing established players could lead to significant margin compression, especially if the digital-broker model gains significant traction.

Taking a dim view of digital startups doesn't mean that established players are turning their backs on needed IT investment, however. For example, Echo has millions of lines of legacy programming code, some of it extending back to its founding in 2005, according to Waggoner. Echo will invest in updating its systems, Waggoner said. The trick is ensuring that valuable legacy code is effectively integrated with the new technology, he said.