Digital Freight Marketplaces (DFM): The Growth of the Tech-Enabled Carrier Space

Guest Post from David Broering, President, North America Non-Asset

When we last visited the topic of Digital Freight Marketplaces (DFM) in 2017, much of our time was focused on the definition of this service along with some observations surrounding what they are and are not related to within the freight marketplace. As we near the end of 2019, one would be hard pressed to find a person in the transportation industry that, at the very least, is not familiar with these marketplaces and might have even utilized some of these providers.

Thus, the conversations around DFM have transitioned from “what are they” to “who is really doing it and how are people adopting this technology,” as well as the differentiations within the digital marketplaces in the types of services they are providing and the way they go to market. “Freight Tech,” as it’s put, has garnered a massive amount of attention due to the size and immaturity of the market in which they are attacking. With a total attainable market (TAM) north of $400 billion in annual revenues and less than a 20 percent market penetration by 3PLs playing the space, many companies are trying to figure out how to get their share of the pie. Companies have been piling into the space in droves over the past several years with $5.6 billion having been invested into this space by venture capital firms year-to-date, and another $10 billion or so being invested in this space in 2018.

So, who is pushing into this space and why? Names like Convoy, Transfix, and Uber Freight dominate the headlines for their large venture capital investments and consistent high double-digit or triple-digit revenue growth year-over-year. There are also non-DFMs that are focused on the “tech-enabled” side of things getting quite a bit of traction in the market – companies like JB Hunt 360, Coyote, and GlobalTranz are going to market with tech-focused brokerage that have initiatives intended to help the shipper realize a lower total cost for shipping the same goods they might with a more traditional freight broker. In certain cases, many shippers are engaging multiple providers in the space to ensure they understand what it means to work with these companies in the event they “figure it out” and really end up disrupting the space. At the same time, these same shippers will probably enjoy a pretty aggressive price to the market for those services, as many of these companies are focused on market share and are eschewing profitability for revenue growth.

In continuing to look at what has changed or stayed the same with this space, we are going to go point by point through the assertions made in 2017 to see what has stuck or changed.

Disrupting the logistics space is much more complicated than anticipated (and certainly harder than disrupting the taxi industry). – TRUE

Not only does this still ring true, but the big players in the DFM space show this in the form of the operations teams that continue to develop within their walls. Two years ago, there were many that made it seem that shippers would flock to these platforms to manage their own capacity sourcing and execution in exchange for that reduced margin. Today, DFMs like Uber Freight are talking about hiring thousands of operations employees to execute their strategy of low cost / low margin freight brokerage. Similarly, Convoy and Transfix continue down the same path with job postings for operations people in their locations around the U.S. – a strong indication of the shift of strategy to operating to some degree. At the time of this writing, no one DFM provider has figured out to how to truly disrupt the space with their model. There are many that are getting meaningful traction, but it’s not on the fundamentals of truly disrupting this space, more on the way in which they are going to market and the affordability of the revenue focused model they are operating in today.

Many of the DFM providers continue to attack the same Owner Operator driver pool. – Somewhat True.

The app-driven culture that DFMs tend to use as their go-to-market strategy for carrier engagement has been a barrier of entry for carriers that have multiple drivers managed by a dispatcher. While the traction with the Owner Operator driver pool has been somewhat meaningful, true disruption will not come until the core driver base (with small-to-medium carriers) start to really begin using these platforms. For now, the value proposition from the DFM to these carriers has not been so compelling that they are adopting in droves, but there are signs that the providers are really starting to try to break through this barrier and broaden the capacity pool. At the time of this writing, traditional freight brokers still offer these carriers better options than the DFM space does – because they are acting as their sales and operations arms for their “fill” freight and the small and medium business (SMB) carriers do not have the bandwidth to do this work themselves (as would be required by the current DFM platforms generally). This may change in the near future, but for now it is still a competitive advantage for a broker.

Traditional freight brokers add valuable bandwidth to a customer’s supply chain. – TRUE

As the DFM space continues to mature along with the core competencies of the DFM, the value proposition they offer a shipper also changes. As some of these companies start to spend more time operating and hiring more operations staff as a percentage of total headcount, they are signaling what is well-known – brokers are adding a value over-and-above just sourcing capacity for their partners in the form of their relationships. Whether it be scheduling appointments, solving problems, or providing data / transparency to their supply chain, brokers tend to help their customers and carriers have access to bandwidth they need to get their freight out the door each day. While the tools that DFMs are providing are gravitating towards more internal operations and away from purely self-service, there are many shippers that simply do not have the time to spare for that trade-off that has to be made in order to save a few dollars on a shipment. This will continue to be a work in progress for the whole industry, but it seems clear that DFMs are going to continue to find the right balance of tech and operations for the right value proposition for the market. Meanwhile, traditional freight brokers are working to strike that right balance by finding ways to drive out the operational waste that comes with legacy fundamentals that are standard components of a traditional freight brokerage.

Additional Value From the Investments in Freight Tech

There is little doubt that the shape of the landscape for the 3PL community is just starting to form and there is going to continue to be change for all of the companies that are working in this space. This is not only about how DFMs become more like traditional freight logistics brokerages or vice versa, but also about how the peripheral companies that are enabling this innovation are affecting the space as well. Companies like FreightWaves, FourKites, Project44, and HubTran are just a few examples of places where funding has helped to drive innovation into the 3PL marketplace. These “freight tech” companies are paving the way for many traditional freight logistics brokers to get a lot better at what they do by bolting on these services. The ability to understand our market (FreightWaves), track a shipment (FourKites and Project44), or automate your back office (HubTran) have never been easier, and there are many more entrants working to help on this side of the equation as well.

The technological revolution of the transportation marketplace is arriving, and with it are a flurry of companies that are all working to find their way into the space and become relevant. Understanding how each company fits in the space and adds value to your supply chain as a shipper, broker, or carrier is probably the hardest part of all of this. Who is real and will be around five years from now? What technology is worth spending valuable time and money investing in as a partner? How does a company investigate enough of these to make sense of what will work best for them and their supply chain ecosystem? Many shippers, brokers, and carriers in the industry are grappling with these questions each day and are struggling to find the exact right place in their world. One thing is certain: the investment in this space is going to continue and the market is ripe for digitization, it’s just a matter of what and how as it relates to a specific company and their service overall.

Understanding the problem you are looking to solve, such as cost, service, and available capacity, is the key to adopting any of these services and the key behind developing a great partnership with a 3PL. How that 3PL provides you with that service – digitally or otherwise – is still less of the focus for most, but it’s getting closer to being the reason why people engage; we are all watching to see what happens as the market continues to mature towards a more technology enabled future.

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Joining NFI in 2012, David is in charge of NFI’s North American brokerage, transportation management, intermodal, and drayage businesses. David is leading this rapidly expanding division by offering a more robust suite of services to new and existing NFI clients.