If it seems that freight brokerage – both digital and traditional services - are popping up on a daily basis, it could be because they are, or it at least it seems that way. Digital freight matchers (DFMs) include familiar names such as J.B. Hunt 360, Convoy, CargoMatic, Haulfox, Transfix, HaulHound and Freight Rover. Most recently, Uber made major headlines as it entered the space.
The reason DFMs have become so popular is market opportunity and technological advances. Plus, there are few barriers to entry with relatively few capital risks – making it an attractive place for entrepreneurs to get their start. When there is over $700 billion worth of an industry pie available (and an estimated $50B in brokerage commissions every year), it’s natural that everyone wants a piece of that pie. Until the last few years, freight brokering was handled by someone sitting in an office manually matching trucks with loads. Technology has changed that. Now, with a few clicks of the mouse or taps of the finger, any trucker or carrier can instantly see available loads along their route. That lowered bar to inclusion has resulted in an explosion in the number of firms entering the business.
While some firms are using advanced technology to affect the matching of trucks to loads – the basics are the same and the basic constructs of the business are identical. So whether you are going off-line or fully digital – you must have the basic constructs.
We can categorize the typical profile of the brokerage startup entrepreneur – someone that has been in the trucking business for sometime and got their start at an established player, or in some cases, a Silicon Valley whiz kid who thinks they have a technology that will disrupt the industry.
In the traditional model, there is a lot of value placed on the relationship side of the business. They start with strong partnerships with customers and employees – recruit some leading brokers – and then supplement their operations with technology over time. This has been a model that has proven to be successful in the past. Companies that scaled and became significant players include Coyote, Lipsey Logistics, Arrive, BlueGrace Logistics, Command, Strive, and Echo Logistics – and these are just a handful. There are an estimated 16,000 total brokers in the US and while most are single operator shops, there are hundreds that have more than 10 brokers. These are started usually with just a couple of employees and very little startup capital.
The new model that has attracted millions in venture capital is digitally enabled DFMs using electronic matching, quick pricing decisions, tracking, and electronic execution. The basics of load execution remain the same, just one places a heavy amount of work on the backs of people, while the other uses technology. As the businesses scale – the processes seem to converge on one another. Voice brokerage services add technology to automate their processes and DFMs use people to supplement the technology. FreightWaves has talked to experts who have been involved with DFMs and compiled the following 11 steps that are critical to success.
1. Start with a low-cost TMS
Sure, that fancy transportation management system the salesperson pitched looks nice, but do you need all its functionality now? Whether you are digital or voice, you will need a backend system for managing loads. If you are going down the traditional route - you should be ready to go out of the box with little more than some small configuration. In fact, you can get started for less than $50 per month, if you are not concerned about advanced functionality. Often, a low-cost cloud-based system, while more limited, is sufficient to build the business. As the money starts to roll in, you can always upgrade to that Cadillac TMS you really want. Cloud TMS providers include AscendTMS and Tailwind TMS.
If you are digital, your investment should be in the user interface and experience (i.e. the app) and not necessarily the backend. Save your investment capital for making the digital product special - not building backend systems from scratch. In fact, most off-the-shelf TMS offer a rich-set of APIs from which to build products. When we spoke with market players - the most common TMS names that were brought up included McLeod, MercuryGate, and TMW Systems.
Exit valuations (which is what attracts the most outside investment) are driven by the distribution of the app that the customer interacts with - and not necessarily the backend pipes. If you want the most attractive business from an investment standpoint, put a lot of emphasis on the customer experience and driving distribution. Don’t spend a ton of capital on building technology that can be bought off the shelf and that isn’t customer value added.
2. How do you count the money?
An often-overlooked system is the accounting system. Make sure you choose a system that can meet your needs, from payroll to accounts payable and receivables. Like the TMS, the accounting system doesn’t have to be top-of-the-line, but it needs to be more than Bob in accounting jotting down notes in a ledger. Quickbooks offers a cloud-based option that can get you started, and there are other options available as well.
3. How will you sustain the company?
Sure, every transaction will bring in some revenue and if the load is priced for margin (the spread between what you sell the service to the shipper and what you pay the carrier) - you will make money on paper. Unfortunately, this won’t turn into cash overnight. Carriers will want to be paid within 20-30 days and shippers will pay in 40-90 days. The faster you grow, the more capital you will consume. That is, unless you set up an accounts receivable financing relationship. While traditional banks offer these lines, they have little experience in freight. We recommend looking for a firm that is familiar with A/R financing in trucking and can fund your working capital. In an earlier article, FreightWaves highlighted two companies, BAM Worldwide and Triumph Business Capital, that handle thousands of freight financing transactions per day. FreightWaves dove into this subject: New twists in invoice factoring
4. Get an MC number
Brokers who are registering for the first time must apply for broker authority with the FMCSA via the Unified Registration System and get assigned an MC number. This identifies carriers who transport regulated commodities for hire in interstate commerce. The longer you have this number, the less risky you will look to carriers, leading to more of the accepting freight from your site. More on the broker registration process can be found at FMCSA’s website: https://www.fmcsa.dot.gov/registration/broker-registration
5. Get proper insurance
This should go without saying, but having proper insurance is a must. A few years ago, DAT provided some basics that insurance should cover. These include property and general liability; vicarious auto liability and umbrella; workers' compensation; contingent cargo; and errors and omissions. You can learn more about this on DAT’s blog site.
6. Subscribe to rate indexes
You are in the freight matching business, and central to that business is understanding rates. Unless you are a rate expert, you need some help in forecasting and tracking of rates. DAT offers several subscription options for rates and is widely recognized as the leader in this area. DAT has been called the “NASDAQ of truckload brokerage.”
7. Develop relationships with trusted carriers
Having relationships with carriers you can count on is critical. The worst thing that can happen to any DFM is if loads are posted and never claimed. Consider using an onboarding platform for carriers, such as DAT’s On Boarding, and utilize tools like Carrier 411 for vetting and monitoring of carriers.
8. Find your niche
You want to broker freight, that’s great. What kind? Are you going to accept any freight? Creating a niche can be a good way to build trust. If you handle only dry van and refrigerated freight, shippers and carriers specializing in these areas will identify easily with your site. If you choose to accept all types of loads, make sure the various types of loads are segmented properly – either through sections or search. A flatbed hauler who has to wade through 1,000 dry van loads to find a single flatbed load won’t be a user of your service for very long. Also make sure location is a searchable function.
9. Provide value-added management services
Simply matching loads to trucks is one thing, but if you want to stand out, develop a strategy for capacity sourcing and become a trusted advisor to carriers and shippers. This can include total cost of ownership data and understanding that freight transportation management isn’t just about price.
10. Join an association
To be involved in any industry requires connections. The Transportation Intermediaries Association is a trade association designed for third-party logistics providers and has plenty of networking opportunities. It also provides educational content and best practices among a multitude of benefits.
11. Remember that business is about people
Organizations are only as strong the people that make up the organization. Transportation is a close-knit community and it won’t take long for stories of mistreatment to make the rounds. To avoid this, remember that your employees – and the carriers and shippers you deal with – are people who want to be treated with respect. Recruit strong people, retain good employees and provide incentives for jobs well done. An employee incentive program can also drive appropriate behavior and keep employees engaged.