Investment in optimization systems drives widening revenue gap between truck brokers.
By Eric Johnson
Brad Jacobs knows a high-growth industry when he sees one.
The chief executive officer of XPO Logistics, an expanding truck brokerage that also provides third party logistics services, Jacobs invested in the firm after a track record of taking companies in burgeoning markets to new heights.
“I liked the truck brokerage business because it’s large, fragmented, and growing,” he said. “Those are three attractive qualities for an industry to create value in.”
Underlying the market’s attractiveness is a hard-to-deny dynamic: technology is widening the gap between North America’s largest truck brokerages and the thousands of midsized and small brokers.
The ability for large brokers to invest in robust IT systems and then expeditiously employ that technology to grow their revenue is what’s widening the gap.
Since Jacobs took over XPO in the fall of 2011 with an initial investment of $150 million, it has quickly moved up the chain into the top 15 or so brokerages in terms of revenue, thanks to a mix of acquisitions, cold starts, and targeted employee growth.
The company has also recently unveiled a beta version of an internal freight optimization system that Jacobs said will put XPO in a heavyweight group of brokers able to process voluminous amounts of rate and lane data that smaller brokers just can’t manage.
“We see the industry evolving to this,” he said. “Larger brokers will have better recruiting and training techniques, and most importantly, technology. That divide will increase. You’ll see the haves and have-nots.”
XPO’s optimization system essentially speeds the bare bones function of truck brokerage — quoting rates quickly and accurately.
“Our software takes information from external and internal sources, and factors how pricing trends are emerging in specific lanes and suggests a price to our sales people,” he said. “It’s letting technology do the hard work. It’s helpful on a specific transaction and helpful on (requests for proposal) as well.
“The second piece is finding the right trucks. What we’ve developed is a way to optimize the freight. The system looks at all the data. We do business with 20,000 carriers (in the United States and Canada) through 56 offices. Without technology, how do you deal with that? You’ve got to figure out a way to sort that list. Maybe someone has a headhaul in a location where we have a backhaul. Who are the right carriers to go to for that load? It helps with margin, because a carrier who has a truck right there where the load is picked up is willing to take that for a lower rate than someone who has to travel to that area.”
Leading the development are Chief Information Officer Mario Harik, an MIT grad, and Chief Technology Officer Dave Rowe, previously of competitor Echo Global Logistics.
“The algorithms they’ve based our primary technology on help price the load effectively,” he said. “That helps our sales people. When we got into this industry, we realized freight is priced inefficiently and randomly. In other industries, like hotels or airlines, pricing is done by algorithms.”
By Jacobs’ estimates, only eight or nine other brokers have the type of technology XPO is deploying.
“The other 10,000 brokers use off-the- shelf or have less sophisticated technology,” he said.
That inevitably creates a gap between the heavyweights and everyone else in this $50 billion business.
“Brokerage is growing in double-digit rates, whereas trucking itself is (growing in line with) GDP,” Jacobs said. “It’s about outsourcing. It makes sense for small and medium-sized companies to go to a broker. They don’t have resources for a huge transportation department.”
The smaller brokers recognize this divergence as well.
“Technology tends to help the larger brokers, because it helps them price quicker, and theoretically more accurately,” said Tim Miller, CEO of Texas-based broker Intelligent Logistics. “You’re spreading risk over larger data sets. If you’re a C.H. Robinson, you can look at a huge catalog of historical rates. Say I need to know the average of what I need to cover from L.A. to Chicago. However, there could be a 5 to 10 percent swing in rates. A company like C.H. can look at that and say they have 30,000 examples over time, so they have ever more accurate averages. It gets complicated, but in many ways, that’s why there are so many brokers.”
Intelligent Logistics, Miller said, has a slightly different model to most midsized or small brokers.
“We tend to get really deep with a few customers, so we’re atypical,” he said. “But because so many brokers are small, and they’re handling customers on a transactional basis, it doesn’t lend itself to investment in technology.”
One True Heavyweight. C.H. Robinson is the biggest broker in the industry by some distance, with the rest of the larger brokers falling into other categories based on revenue.
“Within the heavyweights, there are subsets,” Miller said. “Probably $4 to $5 billion of C.H. is truck brokerage. There are some (brokers) at $1 billion, and then you drop off to $400 million. The vast majority of brokers, probably 50 percent, do less than $5 million. I do think there will be fewer brokers over time and technology’s helping that happen.”
A list of the top brokerages in the country, produced this year by Armstrong & Associates for Transport Topics, listed 21 brokers as having revenue of more than $200 million. Only three have $1 billion or more.
One of the companies in the truck brokerage business that has profited greatly from investment in technology is Chicago-based Coyote Logistics. Now a top 10 broker, and with a stated aim of becoming No. 2 to C.H. Robinson, CEO and founder Jeff Silver said the IT robustness required by a broker depends on its size.
“Right from the start with Coyote, we felt that in order to offer great service to our customer base, we needed scale, density, and a full suite of TMS (transportation management system) capabilities,” he said. “Coyote wanted to fill some market gaps. We needed to build out our internal and external capabilities immediately, so IT robustness was huge.
“In order to work with larger shippers that are very service and price sensitive, we needed to able to offer the right capacity at the right price, meaning a very dense network of trucks and loads,” he added. “In order to accomplish all of this, we also had to enable our sales force to work quickly and efficiently, linking with their carriers via all technologies and providing them instant access to the best loads for their trucks.”
Those same demands are not necessarily there for smaller brokers.
“For smaller brokers with only a few employees and working on more niche business, IT may not be quite as important,” he said. “There are a couple of factors here. First, for brokers moving 50 or 100 loads per day, there is neither a big need nor a big return to investing in a robust system. They are typically not offering TMS solutions, nor are they providing multi-modal solutions unless they are using other companies’ platforms.
“The second thing is that building systems like these is not easy. It is especially difficult to have IT people without real, in-depth brokerage experience design and implement brokerage systems. That is a key difference here at Coyote, where I play an integral role in designing our systems,” Silver explained.
Silver has long been an innovator and advocate for technology in the freight brokerage industry, stemming from his time with American Backhaulers, which was sold in the early 2000s to C.H. Robinson and led to the startup of Coyote.
Emerging Differentiator. Silver said he senses a shift in the industry where technology will be as big a differentiator as people, which has been the traditional primary differentiator for brokers.
“To date, it has been more about the people — the hiring, the training, the flow of freight through the network,” he said. “My sense is that our system does everything that we need it to do today. Ours may do it faster or better, and does include some optimization that I believe our competitors don’t have, but so far, it is more about the people.
“Going forward, I think we will see a major shift. Our software is now six years old, which means that it is time for a redo. The world has changed a lot in the last five years — the ubiquity of smart phones and other mobile uses, Web technology, data storage — you name it. So has the emerging desire from smaller shippers for TMS solutions delivered with execution platforms. And so have our users. The (employees) we hire right out of school these days are very high-powered, driven people who never disconnect from the grid, and their counterparts at our customers and carriers are the same way. Our next generation of technology needs to support that.”
Silver said the acquisition model that some brokers use (without naming XPO or any other broker) can be a difficult road to travel, but he added that technology could be a binding force.
“There are some companies in the market today attempting to grow primarily by buying other companies,” he said. “I would say that the jury is still out. It is really hard to buy businesses with no assets, with different cultures, with different histories and employee groups and management and get them to really work together as a cohesive group.
“If the idea is just to put some companies together, not integrate them fully but allow them to use better technology that a larger organization may be able to build, then there may be some value delivered to the bottom line,” he added. “Larger shippers with high service level expectations would be hard to satisfy in this scenario. I do think that there will be interest both from a few of the larger companies trying to grow in this way and from the smaller brokers feeling the pressure of these newer market dynamics to join together — but it’s a hard thing to do.”
Jacobs sees a fragmented market crying out for more efficiency.
“A couple dozen brokerages have $200 million or more of revenue,” he said. “For the rest, the small truck broker, they rely on the load boards. Those are like the Craig’s List of freight. Some shippers post their loads, more so carriers post their capacity there. If you’re a small shipper, you need it. But the top 15 to 20 brokers don’t rely on the load boards because we have our own capacity. We know our carriers’ reliability and safety records, so we don’t need to go to a load board to find capacity.”
Attractive Growth. Jacobs said the high-growth nature of the truck brokerage business is what led him to invest in XPO.
“Prior to XPO, I started and led four companies into million or multi-billion sales,” he said. “I start high-growth companies, I’m a career CEO.”
Jacobs started out as an oil broker (“brokering oil onto VLCCs instead of freight onto trucks,” as he put it), then become an oil trader. In 1989, he started United Waste Systems, took it public in 1992 and sold it to Waste Management in 1997 for $2.5 billion. Then he started United Rentals, the largest equipment rental company in the world, before selling that for $6.6 billion.
“Each one of those four companies had something in common with what we’re doing in XPO,” he said. “We used a similar business strategy in terms of acquisitions and cold starts.”
The latest acquisition for XPO came in October, when it acquired Turbo Logistics, the freight brokerage division of Ozburn-Hessey Logistics.
In early November, the investment bank Stifel Nicolaus visited XPO during the company’s investor day and learned about its new optimization system.
“By centralizing procurement, the idea is to free up the folks in the field offices to be responsive to shippers rather than have to spend much of their time inefficiently sourcing capacity,” John Larkin, managing director of Stifel Nicolaus’ Transportation and Logistics group, told American Shipper. “I believe that Coyote uses a similar strategy and was first to implement the concept.
“XPO doesn’t really have a supply chain optimization group like Echo’s enterprise solutions group. Instead, they are looking ahead with carriers to anticipate where capacity might be available in the future and then are looking to book it in advance,” he said.
Larkin said about 44 percent of XPO’s revenue is currently based on truck brokerage, with 32 percent from expedited transportation and 24 percent from freight forwarding. But he expects the truck brokerage to grow to be a bigger percentage of revenue in the coming years.
“The company has mentioned an interest in entering the intermodal segment in a bigger way, but right now their intermodal is rather small,” he said. “Over the next year, we would expect truck brokerage to dwarf the other two segments as that is where most of the ‘green starts’ are happening and the acquisition program is currently focused.”
That jives with what Jacobs told American Shipper.
“We have three business lines,” he said. “One is truck brokerage, one is expedited freight services, and the third is freight forwarding. We have growth plans for all three, but brokerage is where we are going to be growing the most in the next few years.”
That’s primarily because Jacobs sees truck brokerage as the high-growth model he has sought in businesses the past 30 years.
“When you look at industries outside of transportation, as they mature over time, they consolidate,” he said. “Two or three companies get critical mass and take market share. Usually the top two to three companies have more than half the business. That’s more efficient. Customers gravitate to that.
“That will happen to truck brokerage in the future. This is down the line. You’ll see two or three brokers do billions of dollars of revenue. If you’re a shipper, calling a broker with tens of thousands of carrier relations, you’re more likely to get a cost-effective, time-sensitive solution to your need.”
Silver, of Coyote, agreed.
“Larger shippers definitely seem to be moving more toward working with great networks of larger asset-based carriers handling their more stable freight needs, and one, two, or three large brokers handling their more variable freight, except for those partnering with a large 3PL in an outsourcing arrangement,” he said. “This does pose a challenge for smaller brokers. At the same time, larger brokers can also bring hard-to-find capacity to smaller shippers. In order to do both of these things, some higher level of technology is requisite.”
On the other side, Jacobs said trucking companies can also leverage the benefits of IT-backed major brokerages.
“Trucking is still a mom-and-pop business,” he said. “A small carrier with 20 trucks, if he wants freight, he could hire 100 people to call and get freight for him, or he could go to his rolodex and go to his steady customers, or he could get access to more and better paying freight through a broker. He could go to a small broker and get access to some freight. Or he could go to a large broker, and get access to more sources of freight.
“Both sides are gravitating more and more to the larger brokers. Larger ones will have better recruiting, training, and technology, so the customer experience will be better at the larger broker,” Jacobs said.
Investment in optimization systems drives widening revenue gap between truck brokers.