The CEO and founder of digital startup Trucker Tools, Prasad Gollapalli, did not launch his company in 2009 with the mission to disintermediate traditional freight brokers. The Trucker Tools model was developed instead with a goal that some startups might today find counterintuitive: to help the broker.
The Reston, Va.-based company boasts that brokers can use its technology to book truck capacity several days before the next load actually needs to move. The software provides brokers with real-time visibility of loads booked through a transportation management system (TMS) or a Trucker Tools app, the trucks currently hauling their loads, and all the trucks controlled by brokers' preferred carriers but that aren't being used to haul freight for another Trucker Tools customer at that moment.
According to Gollapalli, the technology, called "Smart Capacity," offers several advantages for the broker: First, it expands a broker's universe of carriers. Second, because no one else can see which trucks are moving a broker's load, that broker has first dibs on booking the next load with the same carrier if the circumstances warrant. That is important because brokers aren't generally fond of sharing their carriers, he said.
What's more, the tracking information fed into the brokers' platforms allows them to see days ahead of time when the load will arrive. This gives brokers a jump on their future booking needs, according to Gollapalli. "Predictive capacity" technology, as it has been dubbed, has become a valuable tool in a constrained market where, in some cases, shippers desperate for capacity assurance have resorted to buying a truck's backhaul move even if they have no freight to fill it.
A CHANGE IN ATTITUDE
Gollapalli's model is designed—with apologies to Shakespeare—to "praise the broker, not to bury it." In his view, his company succeeds only if the brokers do. That attitude runs counter to the mantras of many newbies, however. If their external messaging over the past three to four years is taken at face value, they view traditional brokerage as slow-footed, inefficient, and ripe for "disruption" because its markup margins of 15 to 30 percent can be compressed by converting antiquated manual processes like phone calls and faxes to digital technology.
But a funny thing happened on the way to disruption. Digital brokers discovered that shippers wanted more from a relationship than just load-matching services that were the core of the startups' value propositions. Many of the new players thus found themselves becoming the businesses they looked to upend. This put them right in the traditional broker's wheelhouse. Meanwhile, they discovered that the digitalization of transactions was so effective at margin compression that it was squeezing them as well.
One of the more well-known digital brokers, Seattle-based Convoy, has a profit margin of about 2 percent, according to a person familiar with the privately held company's financial situation. (Convoy CEO Dan Lewis was unavailable to comment.) Other startups like New York-based Transfix and San Francisco-based Uber Freight are struggling to gain profitable traction. The companies holding themselves out as "digital marketplaces" have combined annual revenue of $450 million, according to the person. That is a fraction of share in a business estimated by consultancy Armstrong & Associates at $167 billion a year in revenue. "Right now, everyone is making nothing," said the person.
An exception is Greenwich, Conn.-based XPO Logistics Inc., which started life as a broker and could be considered a newbie because it is just seven years old. XPO has been making money hand over fist over the past couple of years, and it invested massive amounts of upfront money in information technology (IT). But all that technology wasn't put in place to disintermediate incumbent brokers, according to Troy Cooper, XPO's president. "The key with digital solutions is to give customers [the] confidence in choosing the company behind the technology," he said in an e-mail.
Gollapalli of Trucker Tools hints that startups may have perceived brokerage as an industry lost in the IT wilderness. "A digital broker is no different than a traditional broker using IT," he said.
TECH HAVES AND HAVE-NOTS
In an industry populated with companies of all sizes, not everyone can afford or feels they need the latest technology. Many brokers still rely heavily on manual processes and thus lack access to real-time data needed to find a qualified and available carrier and to secure capacity quickly.
The large legacy brokers, though, are certainly IT-savvy. J.B. Hunt Transport Services Inc., the Lowell, Ark.-based giant that operates four divisions including brokerage, utilizes a platform known as "J.B. Hunt 360" that is "years ahead of others" in terms of transparency, scale, and the richness and precision of information, according to C. Thomas Barnes, president of project44, a Chicago-based logistics IT provider. Project44 recently signed an agreement to be Hunt's backbone for an application programming interface (API). API integrations allow shippers, carriers, and third-party logistics service providers (3PLs) to exchange data through a format that directly links their databases rather than exchanging information through a neutral format like electronic data interchange (EDI).
Some companies that were IT providers and brokers have since parted ways with their brokerage license. Cargo Chief, a Millbrae, Calif.-based company founded in 2012, relinquished its brokerage license in January 2017 (all brokers must be licensed by the Federal Motor Carrier Safety Administration) to focus on IT services. Kyle Wilson, one of Cargo Chief's co-founders, said it decided to go the IT route after hearing from brokers and 3PLs that its technology was superior to anything they could find elsewhere.
Another factor, Wilson said, was a potential conflict of interest with brokers. "If we remained a broker, our clients would never fully trust or engage with us for fear of us taking their carriers," he said.
A BOON TO THE INDUSTRY?
Abtin Hamidi, a Cargo Chief co-founder and now vice president at Los Angeles-based broker and IT firm Cargomatic Inc., said digital brokers have been a boon to the industry at large because they have introduced tools that help everyone improve their processes and drive out costs. According to Hamidi, the new players have succeeded in identifying the top two or three pain points in moving a load—for example, the human cost of acquiring a customer. Hamidi estimates that it costs, on average, $4,300 for a broker to acquire one customer that promises one load; he arrives at that data point by dividing salesforce wages and benefits by the number of customers. Digital brokers have said they could reduce that expense by 85 percent, on average, he said.
Digital brokers have also been instrumental in aligning the best interests of all stakeholders, according to Hamidi. Large shippers are notorious for "beating up" their brokers by tendering more loads and expecting lower rates, a practice that many big brokers have long resented, he said. A digital broker operating at a lower cost structure is more willing to take that business at the rate the shipper wants, he added. The large broker sheds low-yielding business, and the shipper gets coverage at a better price, he said.
Hamidi said that digital brokers didn't set up shop to steal business from legacy brokers, adding that established players have appreciated their contributions. "We've had a wonderful reaction" from the legacy players to Cargomatic's efforts, he maintained.
Barnes of project44, who worked in the brokerage trenches for years, doesn't buy the kumbaya moment. As he sees it, the startups that focus on digitalization and are also licensed brokers are, in reality, working as brokers that want to capture market share from the established companies. He acknowledged, however, that the new players have served a purpose by calling attention to the industry's digital shortcomings. "They are pushing everyone to be better," he said.
Gollapalli of Trucker Tools echoed that sentiment. "They have created an awareness throughout the industry that the status quo is not great," he said.