The death of the 3PL or freight brokerage company is overstated
Large scale 3PLs like CH Robinson, Echo, and Coyote are not going anywhere. In fact, in a world of digitization, thse companies have an enormous opportunity to become victors. They have super smart people, access to some of the best engineers in the entire industry, strong balance sheets, customer relationships, and an understanding on how to apply technology to their businesses.
The outlook for some of the people that are employed by these companies is not as bullish. The individuals that find trucks or secure quotes are dead men (or women) walking. They are the voice brokers and will be replaced with technology in the next decade.
In time, we will see "voice brokers" replaced with "digital brokers."
Voice brokers are individuals that solely rely on people and relationships to intermediate capacity. They are common in most brokerages and 3PLs across the industry. The process is time consuming, expensive, and inefficient. Their value in questionable. All they really have to offer clients can be found in their personal relationships. There is no moat around their knowledge or experiences and nothing that keeps them from moving from job to job. Non competes have become a norm in the industry, because this is all about all an employer has in terms of leverage to keep the voice broker from jumping from job to job.
Digital brokerage is a totally different animal. The speed at which they are able to discover both price and capacity enables them to win the game and capture the client. The moat around their business models can be found in the 1s and 0s and their access to data, integrations, and UX- all of which are about speed. Their ability to react and plan against market changes gives them a distinct advantage over the voice broker.
If 70-85% of the transactions are held within the contract committed market and the providers are interchangable when looking at equipment type, then these transactions can be digitized. The balance will be much more difficult to make electronic, since they require project based or require cooridination of a lot of moving parts. For some time, voice brokers will still play a key role in these processes.
When a company like a 3PL provider does not own hard-assets, what they really own is information and the ability to clear and settlement payment between parties.
Lets break down all of the elements of a typical freight brokerage function:
- capacity discovery
- settlement and clearing
All of those functions can be digitized.
We recently did a story about how trucking fleets are least likely to benefit from the driverless truck. The larger 3PLs and digital brokers will be among the likely victors in a driverless world. We stand behind this argument, as unpopular as it might be.
Over $1B dollars has been invested in the "Uber" of trucking business models. Out of the 80+ companies we track, we find only a few that have differentiated their offerings using technology, speed, and automation to develop faster decisions. Most could be described as brokers with a mobile app, still using voice brokers for capacity procurement and tendering.
Uber and Convoy are a different ilk. They are actually building machine learning and trying to create an efficient network. Convoy has been so successful in managing some of its client's domestic freight, they are being asked to expand globally. Uber is doing the same, but is also investing in developing UX processes that improve the driver's quality of life. Anyone that watched their driver video would be inspired to go out and get a CDL.
When we think about the future of intermediaries, we should look no further than financial services. The process by which brokers and intermediaries are being displaced by digitization in financial services will happen in our sector as well. Predictions that Wall Street brokerage firms would go under was misplaced, but the view that individuals that traded stocks on your behalf (i.e. stock brokers) would be out of a job was dead-on.
Another technology that holds promise is blockchain. We are excited about this technology because it holds the promise to democratise the process of freight management and create a ton of value for the fleets and shippers alike. The processes that voice brokers use today could easily be replaced with this framework.
Alex Tapscott, the author of Blockchain Revolution, talks about how blockchain will eat the world. In his discussion he highlights the power of the technology and its impact to society. His focus is on financial services, which makes sense because 40% of global IT spending is in financial services. It is also incumbent upon companies in this space to constantly invest in technology that speeds up the transfer of information and payment clearing, since they are always under attack from new market entrants. Plus, in capital markets, the company that has the fastest information and can act on it, has a huge advantage over slower ones in arbitrating information.
As a large percent of the volume on the stock exchanges are done by machine and not be people. Consumers can buy and sell stocks without ever talking to a person. Freight will go this way and the companies that provide these services enable faster price and capacity discovery will be the victors.
Alex Tapscott presented at TEDx last year and discussed how blockchain technology is eating Wall Street. It doesn't take much of an imagination to see the same opportunity in freight. See below:
In a digital world, the companies that can facilitate capacity, price discovery, and payment settlement more efficiently end up become enormous victors. Blockchain technology has an enormous opportunity to change the way the industry operates and could enable those companies that exploit this technology to win the speed and accuracy race in the digital freight world.
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