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Digital Freight Matching Roundtable: Sky’s the limit

It is no secret that digital freight matching (DFM) technology continues to increase its profile in terms of importance and relevance in the trucking market.

While the economy remains a whirlwind of mixed signals and future indicators, coupled with relatively solid demand for trucking services, the need—and ability—for shippers to quickly secure capacity is something that never goes out of style and is always in high demand.

And that sentiment is fully on display in what could be viewed as a vibrant, dynamic and competitive DFM market, replete with established legacy providers as well as a whole host of new players looking to make their mark. What’s more, as shippers needs and market conditions change, DFM technology is along for the ride, as the segment’s technology and services continue to evolve and become more sophisticated.

Joining LM to help shippers put the DFM market into perspective are Evan Armstrong, president of Armstrong & Associates; Ben Gordon, managing partner of Cambridge Capital and also managing partner of BGSA Holdings; and Lee Klaskow, senior analyst at Bloomberg Intelligence.

Logistics Management (LM): How do you view the current state of the digital freight matching market?

Evan Armstrong: It has come a long way since we coined the term in 2016. The lines between first-moving digital freight brokers (DFBs) such as Convoy and Uber Freight and leading domestic transportation management 3PLs (DTMs) such as C.H. Robinson and Coyote, Echo Logistics, and Worldwide Express have blurred.

Both have built digital freight matching functionality to automatically match carriers to spot market truckload capacity and book loads. For those DTMs without proprietary technology, many have selected to work with Parade which “bolts on” to many different transportation management
systems (TMS).

Innovation and automation are moving at an extremely fast pace, and those 3PLs that don’t adapt aren’t going to meet shippers on-going needs of instant quoting, tender acceptance and quick carrier booking.

DAT and Truckstop are the 800-pound gorillas of the load board space and have built solid carrier networks that interface with 3PLs, off-the-shelf TMS, and multiple applications. We often refer to them as the “public carrier network” and a 3PL’s own carriers as its ‘private network.’ In their neutral role, load boards play a significant role in digitally matching carrier capacity to shipper demand and are used to various extents by virtually every 3PL.

Ben Gordon: Truck brokerage is a $50 billion market. Digital freight matching is essentially a strategy to take share from traditional truck brokers in this arena, and there’s a major opportunity because of the size, growth, and fragmentation in truck brokerage.

But on the other hand, many traditional truck brokers use technology to automate or augment core parts of their business. So, the DFM market is converging with truck brokerage. In the long run, the best DFM companies will be truck brokers—and vice versa.

Lee Klaskow: Evan and Ben are spot-on, and I would add that this market is constantly evolving. There has been considerable investments made in freight matching technologies over the years by a wide range of participants from private equity to legacy transportation companies. We’ve seen non-asset and asset-based transportation companies make large investments.

Large traditional brokers have narrowed the innovation gap with technology-first rivals through investments to gain share and drive productivity gains. Established freight brokers that leverage proprietary software and technology, such as C.H. Robinson, J.B. Hunt and RXO (XPO), have a competitive advantage over traditional peers that rely predominantly on relationships and experience.

We expect these companies to continue to make investments to ensure their competitiveness, win share and remain relevant. The pace of new entrants may begin to slow as the economy moderates and the Federal Reserve’s interest rate hikes impact on the cost of capital.

LM: How far has DFM technology come over the last few years?

Gordon: DFM has made several key advances. Fifteen years ago, you might have called Coyote Logistics a DFM. But in reality, they were an early adopter of technologies like Bazooka, and an avid user of capital to subsidize lower prices.

They were very successful, and ultimately sold to UPS for $1.8 billion. More recently, DFMs like Convoy and LoadSmart have become much more aggressive about investing in AI for load-matching and other capabilities.

Still, the market is relatively green. Many of the DFMs work with overlapping customers, and many of those customers are “tourists” who are trying multiple companies rather than committed partners.

Klaskow: The technology has come out of the back office and has evolved into user-friendly applications that are available on the enterprise level as well as on handheld devices. The utility of DFM platforms has grown over the past few years for shippers, brokers, and truckers. Users are able to make more informed decisions, which can be the difference between making money or not.

While nothing new, the advancements in dynamic pricing has been a real game changer for shippers and truckers alike, especially given its accessibility. Now an owner-operator can make informed business decisions from their truck.

Freight brokers that have embraced these DFM technologies are able to be more productive while simultaneously providing high service levels to shippers because they’re able to focus on exceptions. They also can manage transactions with capacity providers more seamlessly. More importantly, they’re increasing the use of artificial intelligence to make better pricing decisions.

Adoption of these platforms by the market is catching on, even though we’re in the early innings. For example, loads booked digitally by carriers on Robinson’s Navisphere jumped 234% in the second quarter of 2022. This kind of growth is driving scale and increasing the value of these networks.

Armstrong: Within the last three years we’ve gone from having under 5% of spot truckloads being automatically booked by most 3PLs with the best technology, to a point where Convoy is booking 90% of loads digitally. Leading 3PLs are booking about 25% to 30% of loads digitally, and the most advanced Parade users are booking up to 40% of truckloads digitally.

Huge, interconnected networks between 3PLs and carriers have been developed, which shippers with a TMS and an application such as AVRL can tap into for spot market truckload capacity as easily as working with a contract carrier. With this, we have seen an uptick in spot truckload market growth and increased interest with shippers in “playing” the spot market to secure capacity.

LM: What are some of the most pertinent trends you’re seeing evolve within the DFM space?

Klaskow: Because we analyze companies and markets, the most interesting thing to us is the evolution of freight transportation markets. We’re seeing a blurring of the lines between DFM providers. Interestingly, some of the technology-first brokers, such as Uber Freight, have been expanding their physical footprint and hiring more brokers to help with exceptions and provide better user experiences.

Over time, we believe it will be harder to tell the progressive traditional freight brokers from the technology-first companies as they morph into hybrids.

Also, the movement of many asset-based trucking companies into the space is a testament to the overall market’s growth prospects. We expect asset-based carriers will continue to make investments in DFM technologies to generate earnings growth with limited investors relative to more asset-intensive businesses. More traditional truckload carriers are starting brokerage businesses, and the most successful have embraced technology.

Freight brokers should continue to account for a larger share of the freight markets. More asset-based trucking companies are focused on growing their dedicated, owner-operator fleet and brokerage businesses are pouring more capital into company fleets.

Armstrong: In order to fully take advantage of digital freight matching functionality in a 3PL’s tech stack, the 3PL also needs to automate upfront quoting with shippers using proprietary tech or an application such as Greenscreens.ai.

Shippers no longer have the patience to sit around for an hour to get pricing on a load from a 3PL. The process from 3PL quoting to shipper tender is now being done in milliseconds with large shippers and leading 3PLs.

Gordon: The biggest trend I see is the converge of DFM with traditional truck brokerage. In a world where C.H. Robinson is spending $1 billion on technology over the course of five years, how do you differentiate them from a Convoy, Transfix, or LoadSmart? Both sides are investing heavily in technology. And both sides still employ a large labor force for operations. So, convergence is very real.

On a related front, I also see convergence of traditional truck brokers with advanced technology. Smart truck brokers are investing in outstanding technology to bring automation to their business. This enables them to compete against the giants in DFM.

LM: Given the proliferation of entrants into this market, what will separate the long-term, successful players from the ones that don’t take off?

Armstrong: With great technology at our fingertips, 3PLs need to ensure that they don’t forget that ours is a relationship business. As DFM and other tech reduces the need for 3PL employees to manually transact shipments, 3PLs need to refocus efforts on account and carrier management to truly work with shippers and carriers to continually improve service performance, meet each party’s needs, and build loyalty. If you aren’t talking to your best customers and carriers frequently, something is wrong, and no technology will overcome poor account and carrier management.

Gordon: In my view, the biggest winners will be the companies that can truly automate a transaction from start to finish. This is the holy grail. If any DFM were doing this today, you would see the proof in their headcount. A truly automated DFM would not need the majority of their staff to be in operations, service, tracking, or other labor-intensive arenas. Nobody is there yet.

Klaskow: Size matters. It’s really about building a platform with the most loads and capacity providers. To paraphrase Metcalfe’s Law, the value of a network increases with the number of connected users. Therefore, the first movers are in a better position given they have a head start on building scale. I expect to see increased merger and acquisition activity in the space as platforms look to build scale and capital becomes harder to come by for younger companies.

LM: What types of stakeholders are making the move into this segment and why?

Gordon: In the first wave, we saw massive levels of venture capital pour into the sector. Convoy, for instance, raised $1 billion. Early investors were angels. Their 2019 round was led by Al Gore and Generation Investment Management, and their most recent financing was headed by T. Rowe Price and Baillie Gifford. So, in those three tranches, we see an evolution from individuals to green-focused funds to pre-IPO institutions.

Today, I believe the key investors are more focused on the path to profitability. At Cambridge Capital, for instance, we invested in GreenScreens.ai, which uses AI to provide predictive pricing for truck brokerage. GreenScreens.ai gives truck brokers the tools to provide much more accurate real-time pricing.

As a result, they can push decision-making to the front lines, book more loads more profitably, and enable their reps to generate much higher volumes of transactions. As a result, these truck brokers gain a major profit boost. Meanwhile, because GreenScreens.ai is focused on doing one thing extremely well, they’re already approaching profitability.
This is a true win-win.

Armstrong: Since 2011, private equity and venture capital have invested $4.6 billion in DFM companies through July of 2022. Uber Freight, Flexport, and Convoy have received the top funding, and 2021-2022 current investments in U.S. DFM companies are significant, at over $2.3 billion through July of 2022. Investors see transportation management as a function that can be automated and produce above average returns on invested capital.

LM: Who are the biggest—or most important—players in this space and what makes them stand out?

Klaskow: That’s a great question. From what I’ve seen, the platforms like Truckstop and DAT are democratizing data for owner-operators to make more informed decisions, while at the same time empowering brokers and shippers. Both of their technologies have become more sophisticated from their beginnings as load boards.

Of the legacy transportation companies, Robinson’s Navisphere and Hunt’s 360 platforms come to mind as well. Their platforms will drive their organizations earnings in the foreseeable future. And it goes without saying that the scale at some technology first platforms like Uber Freight and Convoy has been impressive. Their long-term success will be driven by a better balance between growth and profitability. Because eventually you need to generate a return.

Gordon: There are three types of players in DFM. First, there are the OGs, firms like Convoy, LoadSmart and Transfix that started early and have a head start. Second, there are the incumbents fighting back. Companies like C.H. Robinson, Echo and Everest Transportation (another Cambridge Capital company) are traditional truck brokers who are investing heavily in technology.

And third, there are the arms merchants. Companies like Parade.ai and GreenScreens.ai are selling powerful tools to the truck brokers to give mid-sized companies the ability to compete with the giants. All three, as I see it, have an opportunity to succeed.

LM: Where do you see the DFM market in the next three years to five years?

Armstrong: I see greater and greater automation with the almost seamless ability to digitally tap truckload carrier capacity coming down the pike. Leading 3PLs will be further up the curve than late adaptors, but many using applications such as Parade and Greenscreens.ai can fill the gap and “democratize” tech for mid-market 3PLs without huge development staffs. In the end, I see DFM in conjunction with other technologies positioning 3PLs with a very strong offering to meet shippers needs.

Klaskow: DFMs will continue to win a bigger share of transportation budgets and outpace the growth of traditional freight brokerage. They will be crucial for continued productivity gains as they reduce friction between capacity providers, shippers and brokers. We would also expect to see some consolidation given the current economic backdrop and higher cost of capital.

Gordon: Those are great points by Evan and Lee. In the future, we won’t be talking about DFM. In the same way that we don’t call trains ‘steam engine trains’ anymore, we won’t call DFMs by that name. We will just call them truck brokers, because that’s what they will be—the convergence of digital and traditional brokers.

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