3PL uses technology, acquisitions to leverage position as top five freight broker.
As with many companies nominally dubbed freight brokerages, Chicago-based Echo Global Logistics is as much a third-party logistics and technology provider as it is a pure freight broker.
The brokerage market is coagulating at the top, with the big getting bigger based on key acquisitions that fill holes in their geographic networks or service portfolios. Echo is no different. It has combined steady organic growth with frequent acquisitions over its eight-year history to build a sizable business in the domestic brokerage and managed transportation markets.
Underlying it all is technology, and that’s by design, Chief Executive Officer Doug Waggoner told American Shipper in a recent interview at the company’s headquarters in downtown Chicago.
“We think IT is a differentiator,” Waggoner said. “We spend a lot on IT for a company of our size. We have 110 software engineers and we’ve written 30 million lines of code.”
Echo is already a top five freight brokerage in terms of revenue, is on track to surpass the $1 billion revenue plateau in 2014, and has designs on hitting $2 billion in revenue by 2017. But it’s facing some intense competition from other acquisitive brokers—namely XPO Logistics and Coyote Logistics—not to mention the big player in the space, C.H. Robinson.
Echo tends to focus on small and midsized shippers, a tactic that’s helped it achieve solid growth based on the technology it can provide companies that have a hard time developing or funding that technology themselves.
“At most companies, the transportation people are wearing multiple hats,” Waggoner said. “We believe that if you build scale, provide good technology, access to capacity, and make this less complicated, that’s an attractive proposition in the market. The company was founded on the idea that transportation is complicated and that we can help small and medium enterprises with that complexity.”
Waggoner expounded on the idea at the eyefortransport 3PL Summit in Chicago in June.
“We typically target small and midsized companies that we believe would generally lack (transportation management system) technology and also the human resources to manage the function as well as it can be managed,” he said. “And if you think about the complexity of a multi-modal operation it really helps to have a third party come in with technology, with resources, with know-how, data, with algorithms. So that’s been our initial strategy on going to market.”
At the summit, Waggoner also talked about how technology is impacting the brokerage business.
“It’s just as competitive now as it was before,” Waggoner said. “It’s just that the competitors are better. They are using more technology. And I think technology is the price of admission. So if you want to be bigger it takes technology to scale, but at the end of the day it’s also still a people business. It’s competitive, but it’s manageable. It takes capital to build technology. And I think size and scale matter in the world we’re in today.”
Thirty percent of Echo’s business comes from its so-called enterprise business—that is, freight that Echo manages on behalf of its clients.
“The solutions group will meet with the client and design a solution for that client,” he said. “This is 100 percent dedicated and outsourced on site or offsite. It could be six Echo people or half a person managing that freight.”
Most of Echo’s 230 enterprise clients sign contracts for between three and five years, and Waggoner pointed to a renewal rate of more than 95 percent.
“You have to execute on the sales side, and we’re aggressive there,” Waggoner said. “You have to execute on the operations side (where Echo handles 8,000 shipments per day) and you have to execute on the technical side. The execution side is so important, because every day we’re using other people’s assets.”
Echo’s transportation management services are designed for clients that realistically aren’t in a position to manage the complexities of their transportation network.
“These are companies that are conscious of the fact that transportation is hard to manage, and that they lack staff or technology in that area,” he said. “It can feel like a risky move to hand it over to another company, but when we give them a demo, they realize we can do it better for them.”
Waggoner said part of Echo’s growth has been its ability to grow services with individual clients. And part of that is from those clients realizing technology and outsourced services don’t equate to reduced headcount.
“We might get introduced at the C-level, but the C-level doesn’t manage transportation,” Waggoner said. “When that transportation manager realizes that they’re not going to be replaced by what we do, that the transportation staff is usually underfunded anyway, they realize we can help them optimize and get visibility.
“They might know their transportation costs, but they don’t have a system to track it. We can update them on spend, carrier performance, costs savings. After a year, they come back and say, ‘can you do more?’”
That might mean having Echo manage international transportation in addition to domestic, or less-than-truckload (LTL) and truckload.
“We typically grow with these accounts as we prove ourselves,” Waggoner said.
“What we find is as our capabilities improve, we are able to go up market to larger shippers, but they’re less likely to want to single source,” he said at the 3PL summit. “So the solution to a larger shipper won’t be a single-sourced outsourced transportation management solution, it may be one where they give us a piece of the pie – maybe it’s returned goods or something they don’t want to mess with.
“Or it might be technology as a service, where they’ve got deep relationships with asset-based carriers, and they don’t want to lose those relationships, they’ve got good pricing negotiated, but they don’t have the execution capability that they’d like to have and they don’t have the capital budget to go out and buy an expensive TMS and integrate it with their ERP system. So, in that case, we’ll use technology as a service. We’ll license that technology, charge them fees for the use of that technology and try to get our fair share of the freight,” he said.
That type of situation falls squarely in the organic growth category, but Echo has made a point of making key acquisitions throughout its history to expand its regional footprint and capabilities.
Waggoner said while around 85 percent of Echo’s growth is organic, the company has targeted small, successful brokers in areas of the country where it needs a presence.
“Geographic presence matters in this industry,” he said. “Buying a broker gives you presence as well as relationships with that broker’s shippers and carriers. There are a lot of small brokers that have been successful, but small brokers don’t have a lot of working capital, and to gain scale, you need capital.
“These brokers typically don’t have robust IT and they’re usually strong in a single mode. If you want to go up market to bigger shippers, you need more technology. These smaller brokers realize size matters, and that the big are getting bigger,” he added.
Echo’s acquisition model is largely built on retaining the management of companies it acquires. Of Echo’s 18 deals, all but three of the owners of the acquired firms now work for Echo.
“We look for owners that want to continue,” Waggoner said. “We’re not in the business of buying revenue. Our growth has occurred because we bought talent and gave them a bigger platform to play.”
Aside from bringing in talent through acquisition, Echo focuses on youth—86 percent of its workforce is under 30 years old and the company brings in 20 to 40 people each month.
Of course, Echo is founded on brokerage, and in 2013 that represented nearly 70 percent of revenue. Total revenue grew 16.7 percent last year to $884 million. The company maintains 30,000 carriers in its database, though Waggoner said the company regularly uses about 7,500, with the others available as needed.
“Those 30,000 are qualified and set up in our system,” he said. “It gives us a lot of room to grow and scale.”
The transportation and logistics group of investment bank Stifel lauded Echo’s purchase in 2013 of Open Mile, which significantly expanded its presence and technology capabilities in the truckload segment.
“The company plans to continue growing revenue organically at 13 to 15 percent,” Stifel wrote in an investor note after attending Echo’s investor day in June. “The plan calls for $340 million in revenue to be acquired during the years 2014, 2015, 2016, and 2017. Given that the company has already conducted three acquisitions in the first half of 2014 (totaling $100 million of incremental revenue), the company appears to be well ahead of its stated pace for acquisitions.
“The company does not anticipate selling equity to finance the organic growth of the business or acquisitions residing in its traditional tuck-in/bolt-on comfort zone. We would not rule out a transformative, larger scale deal for Echo as we suspect that not all large scale 3PLs will want to be acquired by XPO Logistics or Coyote Logistics.”
Stifel, however, said Echo’s organic growth may start to level off.
“Our sense is that Echo has more market share than it suggests as much of [its] target market is not currently outsourced and much of that non-outsourced segment of the market is not ultimately capable of being outsourced,” Stifel said. “In addition, given all the meteoric growth of competitor 3PLs, it is hard to believe that the industry isn’t getting more competitive, especially in light of the litany of incremental federal regulations that will be implemented over the next few years. These regulations will further disadvantage the small carriers that brokers like Echo traditionally have relied on for truckload capacity, in particular.”
At the 3PL summit, Waggoner said the undulations of the market are nothing new, and he should know since he’s been in the transportation business for three decades.
“I tend to think brokerage is cyclical,” he said at the 3PL summit. “Supply and demand work. Sometimes it’s volatile. And this cycle is elongated because this recovery had been much longer than most recoveries. If you think about supply and demand over the last three years you have this very slowly increasing demand because the economy is getting slightly better, while supply is slowly tightening as truckers don’t replace their retired equipment and as they try to maintain pricing power and not add capacity. And why not? They can’t find drivers anyway.
“So the supply and demand curves have been slowly converging and pushing prices up, but it has been in such a non-volatile way that it has created margin pressure on brokers. I think what you did see in Q1 when it hit the tipping point and there was a crunch for capacity, I think brokers showed their value. When shippers can’t find capacity on their own with their own relationships, they turn to brokers who have a bigger Rolodex,” he said. “I think we’re heading into a cycle of higher prices, but I think brokers will get a fair margin, and truckers will get a fair price for their capacity.”
In the interview with American Shipper, Waggoner also pointed to the balance Echo strives to maintain in terms of technology and people. It’s an intersection where integrating its small brokerage acquisitions proves mutually beneficial. Small brokers provide deep relationships in new regions, while Echo supplies the technology to empower them in new ways.
“This is a business where size and scale matter,” he said. “The more data you have going through the algorithms, the more relationships you have, the better. But it is still a relationship business. You know intimate details about your clients. And you have long-term relationships with carriers. This is where small brokers do well. That’s never going to go away. It’s just whether they can get big enough to get scale.”
Waggoner also said the action at the top of the brokerage market will be a positive for shippers.
“Consolidation is good for shippers,” he said. “They get bigger, stronger companies and better competition. I don’t think we’ll ever get down to just four or five, because the barriers to entry are not high enough for that.”
Meanwhile, Echo is seeing some small, but incremental growth in managing international shipments.
“We do international as a 4PL, not as a forwarder or customs broker,” Waggoner said. “Our technology can handle it, but it grows without us ever trying to do it. Consequently, it’s less than 5 percent of our revenue. Some day, we’ll acquire a forwarder, but we’re hesitant to do that right now because there’s still so much room in the domestic market to grow. We don’t want to take our eye off the ball.”
–Eric Kulisch contributed to this report.
This article was published in the August 2014 issue of American Shipper.