Trends in 3PL Land
Highlights from Armstrong 3PL Summit - brokers, tech, warehousing, and more
“Technology investment should be for tools, not toys.” - 3PL executive
“Freight tech is only in the second inning.” - Freight tech executive
“Customers pick us because of our proposal; they stay with us, because we help improve their business.” - 3PL executive
“Right now, we’re pushing our shipping customers to 100% adoption of paper bills of lading.” - 3PL executive (joking)
“AB-5 will be a disaster.” - 3PL executive
“2021 saw record M&A activity in transportation & logistics.” - Evan Armstrong
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The above quotes were just some of the highlights from the two-day Armstrong & Associates 3PL Summit in Chicago last week, and I’ll elaborate on each below. Overall, trends in logistics remain favorable long-term, but after such a strong past year in rates and volumes, expect double-digit declines in 3PL (third-party logistics) revenues in 2023. Specifically, Evan Armstrong is forecasting a 13% drop in N. American 3PL revenue in 2023 to $328bn, led by declines in International Transportation Management (air/ocean freight forwarding). And I believe the ocean freight box rate collapse we’ve seen since the summer will likely show these forecasts to be too optimistic. Time will tell. Rates for most modes should be lower next year, and general freight volume is currently muted (and pointing down). Of course, fuel prices (via surcharge levels) will also play a role in where the industry revenue y/y comp ends up, but let’s go back to the trends discussed.
“Technology investment should be for tools, not toys.”
This idea was discussed in much more detail recently in Tech’s Importance in Communication. With a lot of money floating around the tech space and new start-ups emerging every day with potentially new tweaks and features, it is hard to separate the truly useful from the all-flash-no-substance. The phrase “app fatigue” was mentioned by one of the panelists. This exhaustion and sense of confusion is felt not only by truck drivers not wanting to download a 9th broker’s app, but for shippers, carriers, and 3PLs as well. It’s gotten so bad that many organizations simply have a “no new tech” policy - or at least a “temporary restraining order” until they get their arms around working with and integrating with all their existing systems.
When bringing in new tech, especially if it’s changing job functions or replacing formally manual tasks, messaging to your people is important, specifically that the new investments are for them - tools to help them do their job faster, better, and make it more interesting by eliminating some of the mundane, repetitive tasks.
The use case is also important - some say customers want more data and analytics, but does it ever get used? How? What is practical? What is used to make them better? If it’s not being used, it’s not worth the investment.
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“Freight tech is only in the second inning.”
This was obviously the sentiment of a freight tech exec. In theory, the game is never-ending, so it really doesn’t matter what inning it’s in. His point, though, is that he sees plenty of opportunity for new technology innovation ahead in the logistics world. While no clue was given as to what his vision for the later innings may look like, in the near-term, there continues to be a focus on freight brokerage automation. The two main pieces being a) digital freight matching (i.e, where the tech matches an available load with an available carrier without human intervention) and b) upfront pricing (i.e., click a button, get a price, and book the shipment at that quoted price).
Panelists also weighed in on what can and can’t be automated.
Most likely to be automated - spot bidding, appointment scheduling, tender acceptance, and benchmarking (vs spot) at time of bidding.
Most difficult to automate - carrier sales - largely due to high driver turnover and app fatigue.
Other 3PL challenges mentioned that are begging for some tech help - billing and claims. The process is “busted,” according to one panelist.
In the quest for more and better automation, though, the goal is not to find the “one solution” but to have a more flexible solution that integrates across systems and platforms to accomplish the objective. One freight tech exec mentioned layers of “microservices” that would communicate the workflow to the TMS, which seemed intriguing. The transportation industry remains (and should remain) highly fragmented from a carrier, a shipper, and a software perspective. “One size fits all” does not fit all. “One size fits all” eliminates flexibility, change, and growth.
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“Customers pick us because of our proposal; they stay with us, because we help improve their business.”
3PLs can and do add tremendous value. And it’s not just price. Often, they can replace an in-house department or personnel, offer technology unavailable to most shippers for better decision-making, and use their industry knowledge to quickly and effectively solve problems that naturally arise. But like picking any partner, there needs to be a fit for it to work. Communication is key (see extensive blog on that subject here). Therefore, it’s important that 3PL investments in people and technology should go towards improving the quality, consistency, and reliability of communication.
One exec mentioned they choose shippers as much as shippers choose them, because they want to work with partners with aligned values and a similar goal-oriented mindset. You could say the same about carrier partners.
And because a 3PL doesn’t own the trucks or the freight, they actually have two important customers - the shipper and the carrier. They need both to add value, so they need to add value to both. Successful 3PLs figure out how to best communicate consistently and clearly with their carrier network and shippers to earn the trust necessary for reliable execution and long-term relationships.
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“Right now, we’re pushing our shipping customers to 100% adoption of paper bills of lading.”
This was the funniest quote of the conference. Only the GVP.
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“AB-5 will be a disaster.”
As one panelist put it, the impact of this new CA law (which may metastasize from there) is that
a company is now buying trucks and trailers that it doesn’t want to
a business owner loses his business and is forced to be an employee
trucking operating costs increase
driver supply goes down, driving capacity down and transportation costs up
so, basically MORE inflation, LESS freedom of choice, and LOWER supply chain reliability —> disaster
Remember, neither independent contractors (owner-operators), nor trucking companies support this legislation. AB-5 is a classic law passed by out-of-touch politicians with no basis in reality. Oddly, or maybe not, an exception (exemption/carve-out) was made for Uber and Lyft (ride-share companies) in CA, even as they exercise more and more control over their so-called “independent contractors.” So, this bad law is not even applied fairly today across all independent contractor driving jobs.
The proposed PRO Act at the federal level is potentially much worse, disguised as a “pro labor” bill, but it’s one that labor doesn’t want. One potential implication, if made national, is that exemptions would cease, and ride-share costs (among others) would soar. And it’s not just truckers and Uber drivers, it’s all independent contractors, which make up ~9% of the U.S. workforce (and maybe more now - that’s just the stat I remember Fred Smith using years ago when talking about this subject).
“Only a handful of people asked the department to change the rule, and most of them weren’t even independent contractors,” according to Fight For Freelancers cofounder, Jen Singer. “They were union organizers or union members who wouldn’t be affected by any rule change.”
More reading - here and here and here.
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“2021 saw record M&A activity in transportation & logistics.”
Both in # of deals and $ value of deals, 2021 was a record for the industry, but financial sponsors, bankers, and strategics have seen it cool a bit (while remaining fairly healthy) in 2022. At least one private equity firm told a company it “took the summer off” due to market volatility.
This is not surprising after such a crazy 2021. Last year was not only crisis-mode in logistics, which meant carrier pricing was high and profits were up at both carriers and 3PLs, giving strategics money to spend, but financial sponsors also had plenty of money, interest rates were low, and markets were favorable for investing. It was “deal heaven” last year with plenty of bidders for any property available.
2022 is a very different story. As rates and earnings are coming down, both strategic and financial buyers have taken a pause, careful to focus on what “normal” revenue and margin levels should look like. This has caused a pullback in demand for deals, even if supply is available. However, once we get more clarity on the shape of this cycle, you should expect both financial and strategic buyers to become active again. Logistics has become a “hot” space with billions in funding now from the VC world over the past five years that will make its way into PE deals, IPOs, and strategic M&A. 2023 should provide for good deals done at fair prices. Maybe not as many deals, but a higher percentage of quality transactions are expected next year.
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At well over $300bn in N. America alone, third-party logistics remains a large and growing industry. It’s built around connecting all the fragmented pieces that make up the supply chain to improve efficiency. Since this is unlikely to change, the role of 3PLs remains quite valuable. Of course, not any 3PL is valuable, and not all 3PLs will hit their growth or profit targets. Through the ups and downs, it’s important to focus on what works over what’s hot, tools over toys, solutions over systems, and better over more.
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In Case You Missed It
Beyond Logistics post #1 re: Trucking 101 —> here
Beyond Logistics post #2 re: Life —> here
Beyond Logistics post #3 re: Pricing —> here
Beyond Logistics post #4 re: Communication —> here
Beyond Logistics post #5 re: Technology —> here
About the author: Dave Ross currently serves as Chief Strategy Officer at Ascent Global Logistics and EVP at Roadrunner. He is also a Director of Global Crossing Airlines. Prior to his current roles, he was Managing Director and Group Head of Stifel’s Transportation & Logistics Equity Research practice. Based in Miami, FL, he’s also an artist, investor, proud dog dad, and serves on a few select non-profit boards (related to Africa, Animals, and Art).
** All opinions in this piece are solely those of the author and not intended to represent those of Ascent Global Logistics or Roadrunner or other affiliated entities.
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