The news about Convoy raising capital at a multi-billion dollar valuation got me thinking again about innovation, technology, and disruption in the freight brokerage market. It also comes on the heels of; “What Are Digital Freight Brokers Worth?”, an extensive research report published by FreightWaves’ proprietary research desk, Freight Intel – the full report is available on FreightWaves’ SONAR platform. Additionally, this story on FreightWaves about Uber Freight moving its global HQ to Chicago raises interesting points about the freight brokerage industry: What Uber Freight’s move to Chicago means.
Articles extolling the disruptive potential of digital freight brokers (DFBs) tend to draw impassioned comments from individual freight brokers who argue that DFBs are merely competing on price using the enormous amounts of capital ignorant VCs have showered on them. In this article I will highlight some of the arguments about why DFBs may find it harder to succeed to the extent that the venture capitalists who have invested in them might expect.
Disruption, supply chain management, supply chain finance, and supply chain logistics are topics I have been studying for some time – from the perspective of an early stage venture capitalist specializing in supply chain; Notes on Strategy; Where Does Disruption Come From? (2015), Industry Study: Freight Trucking (#Startups) (2016), Updates – Industry Study: Freight Trucking (#Startups) (2016), Industry Study: Ocean Freight Shipping (#Startups) (2017), Updates – Industry Study: Ocean Freight Shipping (#Startups) (2017), Where Will Technological Disruption in The Fashion Supply Chain Come From? (2018), and Is disruption finally underway in the freight brokerage industry? (2019).
It is important to differentiate between DFBs and digital freight marketplaces (DFMs). The former operate traditional businesses with a relatively small number of outside partners while the latter seek to build software platforms with a relatively large number of partners and participants. In terms of the value proposition to customers, every digital freight marketplace would also function as a digital freight brokerage but not every digital freight brokerage would be a true marketplace.
The Tyranny of Complexity
Transporting freight is a complex business:
- There are numerous regulations with which carriers and shippers must adhere.
- Often, freight shipments must be transported via different modes of transport between origin and destination – giving rise to a coordination problem between different counterparties.
- Shippers expectations and needs keep evolving.
- Things go wrong all the time when freight is being transported over relatively long distances.
This is why traditional freight brokerages are characterised by a relatively large number of people who understand shippers’ needs, and work as intermediaries between shippers and carriers. Individual freight brokers perform a function that can not yet be replicated entirely with software.
As a result of the inherent complexity of transporting freight, DFBs quickly start to resemble their non-digital counterparts in terms of organizational structure. To put this another way, they operate in almost exactly the same way that their traditional counterparts do with the distinction that;
- Traditional freight brokers invest relatively more money on people and relatively less on developing proprietary software technology to make individual brokers more productive and efficient.
- Digital freight brokers invest relatively more capital in developing proprietary software technology to make their individual brokers more productive relative to their peers at traditional freight brokers.
What is Disruption?
One way to think of disruption is that it happens when a wave of new entrants into a market leads to financial distress for the most dominant incumbent firms causing dramatic shifts in market share and market power. For this to happen, new entrants must function in a way that makes it impossible for incumbents to offer an appropriate response.
In other words, technology-enabled price competition is insufficient; The most powerful incumbents can compete on price. Traditional freight brokerages can invest in productivity-enhancing software if they realize that is the direction in which the market is going.
Digital freight brokers will not disrupt the freight brokerage market until they start doing things in a way that traditional freight brokers can not. This is where digital freight marketplaces could come into the picture. A digital freight marketplace is a platform that largely eliminates the need for human intermediaries between shippers and carriers for load matching, allowing them to transact directly with one another using the magic of software.
The Functions of A Digital Freight Marketplace
To succeed a DFM must build and maintain a multi-sided platform that performs four functions;
- First, it must build a large audience of shippers and carriers who have an interest in transacting with one another on the marketplace.
- Second, as I have already described above, it must successfully match shippers and carriers with one another for the purpose of transporting freight. For carriers, it is critical that such a marketplace also solve the deadheading problem.
- Third, it must provide, or allow other partners to provide complementary tools and services that are important for facilitating and removing friction from the on-going value exchange between shippers and carriers.
- Fourth, it must develop, maintain, and enforce rules of behavior for participants of the platform.
This is why I said every digital freight marketplace is a digital freight broker, but not every digital freight broker is a digital freight marketplace. To succeed, digital freight marketplaces must equal or beat the performance characteristics that shippers have become accustomed to and expect from traditional freight brokers and DFBs. If DFMs can do this at a lower price, while folding other critical services and features into the marketplace, then we may start to see disruption that is repeatable, scalable, and profitable. By itself, load matching is a commodity, and DFMs must offer much more value beyond load-matching.
Moreover, DFMs must eventually be capable of integrated into existing: Transportation Management System (TMSs), Warehouse Management (WMSs) and/or Warehouse Execution Systems (WESs); Demand Planning Systems (DPSs); Materials Planning Systems (MRPs); Distribution Requirements Systems (DRPs); Labor Management Systems (LMSs), Customer Relationship Management Systems (CRMs); Supplier Relationship Management Systems (SRMs); Enterprise Resources Planning Systems (ERPs); or Business Intelligence Systems (BI). Basically, a DFM must be capable of integrating with whatever software and technology systems shippers and carriers use daily to facilitate the movement of freight.
Some Final Questions
Rather than debating if DFBs will disrupt traditional brokers, I find it more productive to ask if any of the current cohort of DFBs will make the transition from being a product- or service-based company to becoming a platform, a digital freight marketplace? A related question is this: Rather than trying to supplant traditional freight brokers should software startups be building a platform of productivity tools for traditional brokers?
I do not think there’s an easy answer to either question, but the answers that entrepreneurs and investors develop to those questions will determine what happens in the freight brokerage industry.
About The Author:
Brian Laung Aoaeh writes about the reinvention of global supply chains, from the perspective of an early-stage technology venture capitalist. He is the co-founder of REFASHIOND Ventures, an early stage venture capital fund that is being built to invest in startups creating innovations to refashion global supply chain networks. He is also the co-founder of The Worldwide Supply Chain Federation (The New York Supply Chain Meetup). His background covers the gamut from scientific research, data and statistical analysis, corporate development and investing for a single-family office, and then building an early stage venture fund from scratch – immediately prior to REFASHIOND. Brian holds an MBA in Financial Instruments and Markets, General Management from NYU’s Stern School of Business. He also holds a Bachelor’s Degree in Mathematics & Physics from Connecticut College. Brian is a charter holding member of the CFA Institute.
