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When freight brokerage revenues plateau and what to do about it

(Photo: FreightWaves)

Freight brokerage in the United States is mostly made up of small companies that have trouble scaling their businesses beyond certain revenue thresholds due to unstructured processes, under-utilization of technology, and ad-hoc recruiting and training. Highly concentrated customer bases and revenue-generating employees wasting their time on administrative tasks eventually become constraints on growth.

At a larger scale – around $150 million in revenue – custom-built technology, automated carrier management, ongoing manager-level training, and leveraging a clear career progression path to drive recruiting become necessary to maintain rapid growth.

Although there are more than 15,000 registered freight brokerages in the United States, only about 80 of those companies posted gross revenues of $100 million or more in 2018, according to Transport Topics. FreightWaves wanted to understand how small brokerage operations are launched, and at which points organizational transformation becomes necessary to continue scaling.

FreightWaves spoke to Peter Rentschler, chief executive officer at CarrierDirect, a Chicago-based management and technology services firm that advises transportation providers including trucking, rail, brokerages and third-party logistics providers (3PLs). CarrierDirect was founded in 2011; Rentschler became CEO in late 2015. Now, CarrierDirect employs more than 35 consultants and works with companies ranging from those generating $10 million in revenue to FedEx, BlueGrace Logistics, J.B. Hunt, Werner Enterprises, Worldwide Express and GE Transportation.

Rentschler said that in his experience, small brokerages hit a wall around $50 million in annual gross revenues and mid-sized brokerages typically plateau around $150 million in annual gross revenues.

The $50 million revenue threshold

Freight brokerages are typically launched by experienced carrier or customer salespeople who gained their experience at an enterprise brokerage like C.H. Robinson (NASDAQ: CHRW) or Echo Global Logistics (NASDAQ: ECHO) and want to start their own shop. Founders have an entrepreneurial spirit and may bring their own book of business to get things started.

“Small brokerages grow through brute force,” Rentschler said. “Then one day the founder looks up and sees 50 brokers and realizes he has a business.”

Early on, founders tend to hire experienced salespeople – friends and former colleagues – whom they trust to sell the way they already know how. Those sales reps come in with their own sales strategies and as they find traction, add people to their teams.

“They tend to hire experienced people because the business isn’t profitable enough yet to afford the overhead of hiring a new person and the six months of cost before they start making good money,” Rentschler explained.

Relatively early on, though, a problem arises – the company has no standardized sales process or structured training program. Those issues constrain the speed at which the brokerage can bring new hires onboard and limits the effectiveness of new salespeople, because their processes and strategies depend on their manager rather than on scalable, repeatable processes.

Back-office processes and operating and financial analysis are also typical weak points for brokerages at the $50 million revenue threshold. Small companies can be tight-fisted when it comes to hiring $15 per hour administrative workers because they aren’t correctly measuring the cost of having, for example, a mid-tier salesperson who could be a rainmaker waste three hours a day on non-revenue-generating tasks like emailing a customer updates on where its loads are.

“I have yet to walk into a $50 million brokerage that can hand me really clean monthly financials right away,” Rentschler said, “which makes it impossible for leadership to understand how, where and how much to invest in the business of any given moment.”

Small brokerages typically buy an off-the-shelf transportation management system (TMS) to get started, but often do not spend enough time fully implementing the TMS or thoroughly training employees on it. Rather than building their own technology or upgrading to a more expensive, robust piece of software, brokerages stuck at the $50 million mark usually just need to better take advantage of what they already have.

“There’s so much value in having someone actually look at the system and figure out where you’re under-utilizing it,” Rentschler said. “Someone might complain about how it takes them 12 clicks to add a carrier to a load, but there was a button they didn’t know about and they could do it in seven clicks. Bring your vendor in, make sure you’re using the system to its full capabilities, build training, and spend the time to retrain the entire organization on the technology.”

Rentschler estimated that a full retraining takes one or two days per employee, but the bonus is that the brokerage now has a full two-day software training program for new hires.

The $150 million revenue threshold

Brokerages that reach $150 million in revenue have a different set of problems and a different set of decisions to make if they want to maintain high growth. Companies at this size are often owned by families that are taking cash out of the business rather than reinvesting it. At this stage – and really all stages of a business – owners should be thinking about their exit strategy.

“A $150 million brokerage should be throwing off decent cash,” Rentschler said. “Are you going to make a bet on the business, double down and buckle up for growth to try to hit $300 million, $500 million, $750 million-plus, or are you going to carry on, take cash out of it and be happy with it being a lifestyle business?”

CarrierDirect consulted with one brokerage that hit a plateau at $150 million, Rentschler recounted, and after looking at the numbers, the owners decided to sell the business rather than putting more money into it.

One big area that a $150 million brokerage should consider investing in is technology strategy, of which TMS is only a part. At that size, the business has likely gained all the efficiencies it can from its off-the-shelf TMS and other systems and is starting to hit a wall. Customer expectations of the business’s technological sophistication have increased, and while a technology strategy is important at every state of the business, it is a hard stop at $150 million. The brokerage has probably expanded into a mode or service offering that its current software is not suited to support, requiring convoluted work-arounds. Because the current system is not being used optimally, the rapid growth gained from increased efficiency has slowed, and revenue growth has fallen back into a linear relationship with headcount. When customizations are purchased, brokerages are likely over-paying for them and in the meantime are over-resourcing people to account for deficient processes.

Brokerages may want to introduce novel compensation structures, new payment terms, or get creative about how different employees touch a load during the shipment life cycle, and their off-the-shelf TMS stands in the way. A manager may place a rule on a certain lane for a certain customer that loads should not be covered for lower than an 18 percent margin – if he is forced to enter that rule into the notes field in the TMS, he’ll have to manually enforce it. A brokerage looking to double or triple in size from $150 million in revenue, though, will need automated, systematic enforcement of those kinds of constraints.

“Our position is that once you hit $150 million you should start building your own technology or paying someone to do it for you; the cost-benefit analysis of the products currently on the market is not worth it relative to building something yourself,” Rentschler said. “You’re already paying too much to prop up weak technology.”

Another large investment that needs to be made at this stage is in carrier management.

“How are you covering freight? People will grow to $50 million covering off load boards and grow to $150 million from public load boards and carrier relationships,” Rentschler said. “We have yet to see someone break through that while still covering more than half of their freight from public load boards.”

As a brokerage grows its carrier base and collects more data on its carriers’ equipment, expertise, and lane preferences, it becomes exponentially easier to cover loads. Brokerages at $150 million in revenue need to treat their carriers like their shipper customers, and implement carrier-facing customer relationship management (CRM) systems to drive engagement and reduce the cost and time it takes to cover a load. Relying on public load boards to find trucks may mean using lower-tier, lower-quality carriers, which becomes risky for mid-sized brokerages. Automating the carrier on-boarding process is also a must at this stage, and eventually a brokerage will want to start managing out its unreliable carriers.

Additional opportunities that a mid-sized brokerage has to unlock high growth are in standardizing and streamlining the sales process and creating a hierarchy of brokers, for example Carrier Reps 1, 2 and 3, each position with increasing autonomy. That hierarchy allows job candidates to see a career progression and gives the brokerage a more reliable way to build its own talent.

These aren’t hard and fast numbers, Rentschler said: “if you’re at $30 million or $100 million, these problems likely apply to you.”

“The overarching theme here is intention,” Rentschler said. “Owners and leaders have a responsibility to their customers, carriers and most importantly team members to really think about what they want from the business and act on that. Indecision is still a decision, and inaction will leave you lagging behind your competitors.”

John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.