By Omar Singh, president and founder, Surge Transportation
Most benchmarking rate tools divide rates into two categories: either shipper-to-carrier contract rates or broker-to-carrier spot rates. There is a third category that nobody really talks about: broker-to-carrier contract. Let me set the stage first. One of the most reliable ways that the tools gather their information is to ask motor carriers and brokers to export their load information to them every night in Excel or some flat file. That information is separated into those two categories based on what type of company is sending the information. If a motor carrier is sending the information, then it is a shipper-to-carrier rate. The assumptions are pretty accurate: There is a contract in place, a large shipper awarded contracted business to this carrier and the rate the carrier is getting paid is shipper-to-carrier contract. If a broker is sending the information, then, it is categorized as a broker-to-carrier spot rate. The assumption is inaccurate: A broker is moving this shipment on the spot market and the rate the carrier is being paid is a broker-to-carrier spot rate.
The entire freight brokerage industry is built around a model in which brokers contract with small and medium-size carriers for repeat business. In large brokerages, the broker’s job is to recruit carriers to work with them and that carrier gets assigned to that broker, again, for repeat business. That broker goes out and gets repeat business from a shipper and then assigns it to that carrier. There is a contract in place — or at least an agreement. This rate distorts what is the true spot rate. The holy grail of freight brokerage, though, is to not have to post your loads at all because you already have a motor carrier assigned to that business via an agreed-upon broker-to-carrier contract rate. Some shippers do not even allow their brokers to post loads to load boards, meaning the only way the loads can move is via broker-to-carrier contract.
At a high level, the procurement strategies to win business are the same between carriers and brokers — there is really not much of a difference. Compete in an RFP, and try to win primary lane awards based on some combination of competitive price and service level. In this example, an award may go out for 156 loads per year from Jacksonville, Florida to Chicago – three loads per week. A motor carrier assigns these loads to its drivers. A broker assigns these loads to at best one motor carrier. In reality, maybe it’s two or three motor carriers — each gets one per week. Not a single load has moved at a spot rate yet.
Once in a while one of the carriers in the above example cannot pick up that week and the load moves in spot. What happens then is that the true spot price paid to the spot carrier is considered to be an outlier. The true valuable data that people need to know is considered to be an inaccurate anomaly and discounted if not thrown away altogether — yes, not counted in the benchmarking tool at all because it is statistically too far off from what is normally paid. So if that lane from Jax to Chicago is moving at $3,000 broker-to-carrier contract, and one day it moves at $4,000 on the spot, the benchmarking tool either throws it away altogether or discounts its reality so severely that it returns info to you indicating something along the lines of: Most of the times it moves for $3k, rarely it moves at $4k, so, in spot you should move it for somewhere between $3k and $3,300 — when in reality the spot price is $4,000 and nobody is telling you that.
So our job as brokers is not just to use the tools, but to know how wrong the tools can be. Is it a true spot, is it a short lead time spot, is it a weekend spot? As a result, sometimes we give quotes and our customers ask why the rate is so high. We tell them that’s what it’s going to take to move it in spot. They say, that’s not what the tool says. Similarly, I even have meetings with the benchmarking tools reps and they say we pay 125% more than market. I say that we’d be out of business if we paid 125% more than market: Think about it. Then they struggle with what to do with that data.
The point of this conversation is that there is a true broker-to-carrier contract rate that reflects the model of our industry. That rate distorts the true spot rate and should account for maybe two-thirds of the rates brokers provide to benchmarking tools. At the very minimum, outliers should have more weightage. However, having said all of this, not all benchmarking tools get their data the same way. Some tools are predictive and get rates from TMS integrations and look at factors other than what happened last week or last month or last year. This is worth noting. Main point: Broker-to-carrier contract — it exists, it’s part of our analytics and deserves to be called out by name in our discussions.
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