Digital Freight Matching (DFM) Roundtable: Swift momentum amid an uncertain economy

While it’s clear that demand for freight transportation services is down, that, by no means, serves as an indication that the players in the digital freight matching (DFM) market are biding their time waiting for demand to return.

In fact, it’s quite the opposite. The pace of technological advancements in the sector continues to make leaps and bounds, with platforms putting a keen focus on leveraging artificial intelligence (AI), gaining further needed visibility, and improving real-time monitoring for booking loads and tracking shipments.

Put that all together, and it’s easy to see that the DFM space remains attractive for carriers, logistics technology services providers, shippers, and investors alike. Why wouldn’t it? It stands to reason that the trucking market will eventually turn around, and, when that happens, the need to quickly secure capacity will follow suit.

Joining Logistics Management this year 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 freight transportation and logistics analyst at Bloomberg Intelligence.

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

Lee Klaskow: The digital freight matching market has become more sophisticated, allowing buyers and capacity providers to make better business decisions. It has also helped democratize trucking for small independent trucking companies operating in the spot market. Truck drivers just need an app on their phones to ensure that they’re making the returns they need to stay on the road.

Ben Gordon: I’ll add that the digital freight matching market is approaching convergence with the traditional freight brokerage market. Both categories seek to provide shippers with freight brokerage capabilities.

Companies in the DFM arena historically raised capital on a revenue multiple basis, whereas freight brokers were valued off of EBITDA. And companies in the DFM arena also showcased superior technology, but today the differences are much narrower than ever before.

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

Gordon: DFM technology has become much stronger. At the same time, traditional freight brokers have also strengthened their technology capabilities. And powerful tools, like GreenScreens.ai for predictive pricing, help to level the playing field by giving traditional brokers access to market-leading technology.

In the end, technology has become a prerequisite. Any successful broker, whether digital or analog, needs to provide customers with improved capabilities in order to maintain a seat at the table.

Evan Armstrong: It’s come a long way. Digital freight brokerage operations are centered around what we define as ‘intelligent capacity systems.’ At a given moment, millions of information points touch a freight brokerage. Data points such as traffic, weather, historical carrier transactions pricing and performance, third-party capacity markets, and other variables make the task of decision-making complex.

Processing carrier capacity data, making real-time routing decisions, and facilitating digital bookings is creating a new category of systems used to augment TMS.

These intelligent capacity systems use AI and machine learning to perform transportation planning, routing, and carrier selection functions traditionally managed by carrier sales staff in a buy/sell side freight brokerage model.

Digital freight brokers that are on the right side of the paradigm will shift away from rule-based systems to AI and machine learning centric intelligent systems efficiently accounting for multiple data streams, and continuously learning and matching shipments to carrier capacity in the cloud.

Klaskow: As Evan mentions, the technology keeps getting better, and it feels as if we’re nearing a significant jump in capabilities given the investments in AI. As I mentioned earlier, the technology has come a long way to help owner-
operators make better decisions about which loads they accept and also helps brokers maintain appropriate margins.

LM: What are some of the most pertinent trends you see evolving within the DFM space?

Klaskow: It’s all about AI, which will drive the evolution of the DFM market for years to come. I’m excited to see where the technology takes us and how it makes brokers, shippers, and capacity providers more productive.

As you know, there are a lot of inefficiencies inherent to trucking. DFM can help take some of those inefficiencies out, which could result in lower costs, lower rates, and more profitable loads.

Armstrong: Best-in-class digital user experiences are becoming expected by motor carrier partners and shippers. Automated functions such as search, pricing, booking, and payments are now table stakes. Freight broker digital experiences are expected to be on-par with consumer digital experiences, and the digital platforms are exploiting this gap.

Straight-forward, user-friendly digital experiences help build sticky carrier capacity and create more liquidity on a freight broker’s platform, allowing them to transact and execute bookings more easily.

Early adaptors, who build liquidity, will reap rewards in the form of valuable freight platforms with readily available carrier capacity. Every digital freight broker is focused on data-collection to continuously drive improvements in its carrier experience and freight matching.

Gordon: We’re seeing three trends. The first is the convergence of digital and analog brokerage. The second is the reassessment of valuation. DFMs that sell are increasingly being valued on the basis of EBITDA.

It may be heavily-adjusted EBITDA, including synergies based on shared cost and revenue benefits with a strategic buyer on a go-forward basis, but it’s still a shift in the mindset. A third is the increased importance of path to profitability. Most DFMs I know are focused on reducing cost and ensuring they have the staying power for the long term.

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

Armstrong: This demand for improved experiences and more efficient operations has produced the emergence of new digital freight brokerage entrants. To effectively compete for customer freight and carrier capacity in this digital era, freight brokers must strategically plan out a digitalization roadmap to stay competitive in sourcing carrier capacity and in acquiring and retaining customers.

Gordon: The winners will be those that follow the classic Porter strategy. They will either be low-cost producers [using technology to automate more of the workflow]; niche leaders [focused on specialty sectors e.g. drayage, flatbed or healthcare]; or large-scale giants (e.g. using market power]. It’s clear that generic ‘me-too’ companies will struggle.

Klaskow: I think this is a tough question. It’s like buying a new oven. They all can bake a cake at 400 degrees. Some may heat more consistently, some come in different colors and then there’s branding.

So, now that I have made you hungry for cake, I think it may just come down to who can market and brand their platform the best. And as you know, the larger the platform the better the platform for these types of markets. So, size will matter and earlier players to the game will have a head start to new entrants.

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

Gordon: Three years ago, we saw a lot of tourists. Many investors poured into the DFM arena in pursuit of high growth, with or without margins. Today, the investors and acquirers are strategic. We see traditional brokers acquiring DFMs in order to boost their automation, and we see DFMs merging with peers to create superior economies of scale.

Klaskow: I think it’s all across the board. You’re seeing public and private companies getting in. Some of those private companies are seed companies or private equity-backed. Freight brokers and diversified transportation providers also are coming out with their own platform.

The simple reason is that there’s a need, as I mentioned, given the inefficiency of the market. Brokers and transportation companies are in the game to make their employees more efficient. For capacity owners, it goes beyond productivity, as they want to leverage their assets and drive growth in an asset-light or non-asset manner, which carry higher returns on invested capital.

Armstrong: Venture capital and private equity firms have invested over $6 billion in U.S. DFM companies since 2011. Investments in 2022 were significant, at over $1.8 billion. The future of the domestic transportation market (DTM) 3PL segment is becoming centered around creating digital experiences, workflow automation, and optimizing customer and carrier focused service performance.

Freight brokerage is made up of carriers and customers, both who want a mix of the best price, service performance, and user experience.

We’re seeing serious action being taken by approximately half of the Top 50 DTMs/Freight Brokers to build a digital freight brokerage platform. These freight brokers are responding by either building technologies in-house, buying from third-party software vendors, or a mixture of both.

However, of the freight brokers we analyze, very few have developed and implemented a long-term strategy to achieve full digital transformation. One fact is certain, the attractiveness of implementing digital tooling and infrastructure produces a significant return on investment—if done correctly.

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

Klaskow: The biggest names are mostly household names like Amazon Freight, Uber Freight, C.H. Robinson, Redwood Logistics, J.B. Hunt and RXO. It’s really about their platform’s size that helps these players stand out. We’re seeing more traditional brokers getting into the market out of necessity to compete.

Armstrong: Uber Freight and leading tech-enabled legacy freight brokers C.H. Robinson and Coyote Logistics have automated shipment quoting, tendering, and acceptance with shippers. They’re also automatically matching spot market loads to carriers. Most is done within private carrier networks.

In addition, they have ‘book-it-now’ functionality with carriers for automated tendering and acceptance and can real-time track 80% of shipments. Small- to mid-sized 3PLs often do not have these capabilities unless they partner with technology companies such as DTM AI providers Parade for DFM, capacity management, and instant booking, or Greenscreens.ai for upfront pricing.

Gordon: Evan and Lee are both correct, and I will add that the largest DFM companies include Transfix, Loadsmart, NEXT Trucking, and Uber Freight. Interestingly, traditional freight brokers with large technology investments, like C.H. Robinson, Echo, and RXO are increasingly competitive. Our friends at both BG Strategic Advisors and Cambridge Capital predict consolidation both within DFM and across both types of brokerages.

LM: With market conditions different from a year ago, in terms of there now being lower rates and more capacity, how much of an impact has that had on the DFM marketplace?

Armstrong: Due to current market conditions, coupled with the ever-evolving efficiency that comes with a digitalized environment, we’re seeing reductions and reorganizing of staff at some of the major digital freight brokers.

Gordon: For sure, in the last year, we’ve seen freight rates drop over 50%. This market shift is inflicting pain on the entire industry. It contributed to high-profile bankruptcies like Yellow, as well as lower-profile bankruptcies like Surge Transportation.

DFMs are not immune. Yet, as Nietzsche said: ‘That which does not kill me makes me stronger.’ The DFMs and brokers that survive 2023 will emerge stronger and more resilient for the next cycle.

Klaskow: As Ben mentions, we’re seeing less volume and lower spreads, so that will affect everyone in supply chains, and DFM marketplaces are certainly not immune. Volume has normalized from surges in demand that created bloated inventories. It seems that the destocking cycle is coming near an end, which should bode well for volumes in 2024.

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

Gordon: I believe there will be little difference between DFMs and freight brokers. Both will serve shippers with a tech-enabled brokerage solution, and the winners will be increasingly automated, and will be able to profit at a lower gross margin level as a result. Meanwhile, as the brokerage market continues to expand, there will be plenty of opportunity for companies that are either low-cost operators, niche-focused, or large-scale.

Klaskow: I think the speed and productivity improvements will be entering a new era for DFM, given the explosion of AI. I’m not sure where it will take us, but when we look back, I am sure that we’ll be surprised at the gains for truckers, brokers, and shippers, as markets become more efficient.

Armstrong: We anticipate, in the not-so-distant future, a digital freight brokerage where shippers seamlessly tender shipments to brokers at a contractual or an automated spot price via interfaces between their TMS and a broker’s intelligent capacity system. The intelligent capacity system will then select the optimal carrier based upon detailed and data-rich smart carrier profiles, lane history, and multiple other data points.

Using the TMS, an appointment will be scheduled if needed. This will trigger the visibility management system to initiate transit status updates until delivery where back office automated proof of delivery information is uploaded into a TMS and freight bill payment/carrier settlement is triggered.

Transactional freight brokerage is getting closer to the automation levels seen in managed transportation. And in 2025, we estimate that there will be more than 50 truly digitalized digital freight brokers in North America that will account for more than 60% of total DTM segment gross revenues.