Tech capabilities of digital forwarders must be matched by operational experience to truly change the industry


Recently, there has been a lot of commentary concerning the rise of so called ‘digital forwarders’ and their mythical abilities against those of established forwarders. It reminds me of the phrase from some years ago “Can you teach elephants to dance?”. At the time this was used by management consultants to describe established businesses that were viewed as being liable to be crushed by the wheels of the technology revolution. The former IBM CEO Lou Gerstner, adapted the phrase for the title of a book he wrote after restoring IBM’s fortunes, “Who Says Elephants Can’t Dance?”. This was done as a retort to the people who said saving IBM was impossible, when he was hired to do just that. Therefore, I think the assumption that established forwarders will be overwhelmed by the new digital entrants to be rather premature.

For multiple reasons, it is very hard for companies to adapt as they become more successful and grow. The initial energy and culture that helped establish the business and set the foundations for future growth becomes difficult to sustain as more things need to be done. Initial objectives such as develop a product or service, find customers, make sales and deliver and support what’s been promised, are the consuming focus of any start up. Once this has been achieved and more customers require more support, this introduces the need for selecting and hiring additional staff, managing communications and scaling operations. etc.etc.etc.

For the nascent business to successfully transition from scrappy start-up to established enterprise requires a very competent, driven and motivated team. During this process, raising money and keeping the cash flowing is the ever-present Damoclean Sword hanging over the business. You either have to be supremely self-confident, or mad, to take on such a mission. But people do and a large number are often very successful.

One key difference with the new market entrants is their ability to attract capital. This of itself is a potential game changer, but just because a start-up can attract large amounts of capital, it doesn’t mean it will be successful. All of the other ingredients previously mentioned are essential, along with a healthy slug of good luck.

When I first entered the freight forwarding world back in 1978, the critical necessities for establishing a forwarding business were a desk, a phone (and preferably a Telex machine) and a small room to serve as an office. This needed to be immediately followed up with a client. It was possible back then to build a substantial business just by servicing clients well, keeping overheads very low and ferocious management of cash flow – sound business principles that are still relevant today. As computerisation began to enter the business and customs and port authorities in the UK started to demand forwarders interconnect, this required considerable direct investment and the game started to change.

Any established business has already invested heavily in technology, as it is impossible to operate both the business itself and relationships between customers and trading partners without it. So it’s not that they have not embraced technology, it’s how they use it and how long it’s been installed that determines the ability to compete. As we all know, technology is relentless in its ability to evolve. This has been accompanied by a collapse in the cost and an increase in capabilities. Systems that required a capital expenditure of several million units of your favourite currency 15 years ago, can now be matched and often exceeded, by a basic PC, mobile devices, a reliable high speed broadband connection and subscriptions to various applications running in the Cloud.

Agility, adaptability and flexibility are critical, and this is where established (aka ‘legacy’) hardware and software implementations are at a disadvantage. Those of us that have experience of working in any large established business, are familiar with the rules and permissions that control access to corporate information services. These have evolved over many years in response to issues of security, legislation and commercial realities. They often unintentionally stifle the ability to respond to a changing market, or customer demands. As a result, staff members devise solutions involving external service providers, to go around the existing IT organisation and satisfy a customer.

But digital forwarders themselves face challenges. Many of the newcomers have looked at the market and focused on what they view as interesting segments of the forwarding process and decided how it could be ‘improved’. But some lack the relevant market experience that comes from a holistic viewpoint, the relationship between each element in the process of managing global trade and freight movements. This often results in impressive functionality in isolation, but fails to attract users as they still have to do the stuff ‘before and after’ the functional piece now done by the start-up. The more successful entrants have understood this and, more significantly, understand the vital role experienced operators play in forwarding. These companies can provide very flexible technology platforms that significantly enhance service levels, particularly in areas such as improved visibility and operational analytics. Depending on their business models they can also be very cost effective.

This is especially true if they are funded by venture capital investors. They may then have access to huge pools of capital to invest in the business as VC’s bet on the investee company growing very fast, generating huge scale, in the process incurring years of losses towards the goal of being a major player in future. We see examples with Amazon, Uber, etc. The mantra being “get big and we can then monetise the customer base later, through subscriptions across a huge customer base”. Their investment strategy is to back several companies, knowing that some will fail and lose all their money, but the ones that are successful, will generate enormous returns exceeding the funds lost on other players.

This approach has worked across numerous industry sectors thanks to the technology revolution and it’s now encroaching into the logistics industry.

So, to summarise, digital forwarders need to combine smart technology and access to capital, alongside informed operational experience, in order to be game changers. They can use technology to enhance their agility and exploit the fact that they don’t have to maintain and operate inflexible legacy systems – although that problem will eventually impact them at some point in the future.

Established forwarders can defend against this threat by appreciating that they need to operate in the same manner as a start-up, but leverage their existing customer relationships, market position and operational expertise. They must also recognise that a huge drawback may be their existing corporate size and culture, which may stifle innovation. However well intentioned, prevailing custom and practice (rules and guidelines) necessary to support the functions of a large established business, are often irrelevant to the needs of an agile and scrappy start-up.

To succeed, innovative business units in established companies need to be truly independent, apart from ownership, and be able to call on the parent for introductions, financial leverage and operational experience. Other than that, support needs to be from the highest levels of the board and then let them operate ‘hands off’ and be judged as if the parent was any other investor. On this topic I speak from some experience.

It is too soon to proclaim that established companies will overwhelm start-ups due to size and scale, just as it is difficult to pick the likely digital winners. But the struggle will be interesting to watch.

Source: Transport Intelligence, August 29, 2018

Author: Ken Lyon

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