Logistics Q&A: Echo Global Logistics’ CEO Waggoner talks strategy, challenges, and trends

As the economy slowly gains traction and freight volumes rise, there is a lot to be aware of for shippers and providers of freight transportation and logistics services. That is particularly true for the people in the middle that serve as brokers or intermediaries. LM Group News Editor Jeff Berman recently spoke with Doug Waggoner, CEO of Echo Global Logistics, a publicly-traded non-asset based freight brokerage company, about market trends and conditions.

Since its IPO late last year, Echo has been growing steadily, as evidenced by an 82 percent year-over-year revenue increase in the first quarter of this year, due to what Waggoner attributed to expanding market share in both our transactional and enterprise client bases as it began to realize returns on our investments for growth.  Below is an edited transcript of the conversation between Berman and Waggoner, covering various market trends, issues, and challenges.

LM: What is your strategy in a very competitive market and competing head to head with industry players like C.H. Robinson Worldwide, Transplace and others in the non-asset based/freight brokerage market? What are you doing to differentiate yourself to win market share?

Waggoner: It is competitive for sure, but it is also a very, very large market. It is very fragmented in terms of the number of transportation suppliers and trucking companies versus the number of buyers. You can almost think about the efficiency of any market, whether it is the stock market or freight market; there is always ways to improve transaction efficiencies. We come about it from that angle and use technology to enable our clients to manage multimodal transportation, using tens or hundreds or even thousands of vendors depending on what their needs are. We aggregate massive amounts of data and tariffs and pricing, and we have great market intelligence on what the right prices should be. And we have great execution that our clients can use or that we can implement for them with our inter-price clients where we do contractual freight management and give them dedicated teams. The value proposition is really in various forms of soft or hard cost savings. It is dedicated service teams, taking service to a high level and providing access to our technology, visibility, analytics, and data.

LM-What is the Echo’s approach to expanding its service footprint and product offerings? Are acquisitions part of your plan?
Waggoner-We have told Wall Street we would probably look at three-to-four small, tuck-in acquisitions per year and that we have an active pipeline. It is part of our strategy and something we actively look at.

LM-Looking at the non-asset based market, what are you seeing in terms of the biggest benefits of being non-asset based at a time when a lot of carriers have a lot of equipment on the sidelines and are also affected by credit and financing limitations? And what are the more challenging parts of being non-asset based as well?
Waggoner-One benefit is we don’t have the headaches of managing physical assets and capacity and the ebbs and flows of capacity utilization and what that does to your fixed costs. Asset-based transportation companies have a lot of money and capital invested in their rolling stock brick and mortar. In soft economic times, it can be difficult to have enough revenue to turn on the lights every day. And then you are forced into this kind of downward spiral having to lower prices to attract business. That is a difficult tightrope to walk as an asset-based carrier.

LM-So what are the advantages for a company like Echo?
Waggoner-We get to “float” more with the market a little bit. And some people may say we are a middle man, which is true, but if we add enough value to the shipper, there is room for the middle man. The other side of it is we add value for the carrier. And this is one of the things that make it difficult for us as a non-asset carrier provider. We recognize we really have two constituents. One being shippers that we add value for— and we think we add more than an asset-based carrier can, because they are limited by the constraints of their network and they have limited technology that does not encompass their competitors and other modes of transportation. That is the advantage we have there. The disadvantage is we are between them and their customer, and it is a delicate relationship you have to manage. And you have to make sure you are adding value to both sides of the equation.

LM: What is your take regarding fuel? The Energy Information Administration said diesel per gallon will average more than $3 in 2010. What is your take on fuel and oil prices and the subsequent impact on trucking and supply chain operations?
Waggoner-We don’t focus a lot on fuel prices, because we look at it as a pass through. We take the fuel surcharge we get from carriers and pass it on to customers and try to keep it out of the pricing equation and explain to customers that it is a commodity price our providers have to deal with, and it floats with the market in real time. For the asset-based carriers, it can be a lot more difficult. If you are a truckload carrier, there is always a lag. A lot of truckload rates get quoted as a net price for the trip with the fuel baked in. So if your fuel is going up and your customer is used to paying a flat price now you have to raise rates on them. Whereas for an LTL carrier fuel surcharges are generally more visible and more accepted. When fuel prices are rising, truckload carriers can get squeezed a bit for a period of time until the rates adjust just as they do with capacity. The LTL carriers tend to benefit from rising fuel prices just because their fuel surcharges tend to more than compensate their increase in fuel costs.

LM-What are your thoughts on the capacity situation. Many experts are calling for a slow rest of 2010 and a better 2011. Are you seeing any type of slack and are demand and supply are starting to even out?
Waggoner-We are getting to the part of the cycle that is showing economic improvement. I think in the truckload segment, carriers have retired equipment in the last two years through a normal retirement cycle and so through retiring and parking equipment they have taken capacity out of the market. The question is as demand picks up they will bring their equipment back online that has been parked against a fence? That will provide some capacity. But there will come a point where there is not enough capacity and that will create upward price pressure and make it hard to find trucks and reestablish the driver shortage, which is not something that has been discussed much in the last few years. But as the economy picks up it will be back. So the question is what kind of discipline do the truckload carriers have in adding back capacity? There are also new equipment issues like EPA 2010 that I don’t think the truckload industry are entirely comfortable with. If there was year in which truckload carriers would hold off on buying equipment, I would say it is 2010. That might make capacity tight, and at some point they will have to buy equipment and then the question is: are they getting the kind of yields they need to be healthy and make their capital investments?

LM-What are you hearing from shippers in terms of pain points? What are they telling you and asking you to help them with in terms of their biggest concerns?
Waggoner-Of course everyone talks about wanting to save money and the economy and coming out of this recession saving money is even more important. But when you get beyond that I think mid-sized companies are waking up to what the large size companies are working on a long time: really “getting” supply chain management operations and recognizing there is more than just the related transportation costs. There is also warehousing, embedded transport costs upstream and downstream and people don’t really know how to get their arms around it and don’t have the data and the tools in the system to execute and the benchmarking…so for the ones that are enlightened to the fact that they ought to be managing their supply chain better than they are, they are looking for the help to do that. And our technology is what most often perks their interest when we pitch our story to clients.

LM-Regarding the IT components of your service menu, are any more dominant than others. For example, are you focusing more on rate negotiation through IT more so than ERP integration? What are the biggest components of your IT platform in your service menu?
Waggoner-It is somewhat of a SaaS model. We are not selling software-as-a-service, but we deploy it as a service. So, for instance, we only run one instance of our system and do not install it separately for clients. That way, we don’t have the headaches of version control and things getting out of sync with each other. Instead, we run an industrial strength, bulletproof “instance” of our system that is massively configurable. So for each client, we configure their experience and what modes they see, what pricing they see, which carriers they see and what kind of optimization and algorithms they have access to and reporting and data. The experience is customized for customers and tied to a log-in. The main function is really around sourcing a carrier on a shipment and the execution of that shipment. The other piece that seems to get a lot of value from customers is the data warehouse reporting and analytics. A lot of mid-sized companies don’t even have a good feel for their transportation spend, because their systems don’t track it. So one of the things customers find a lot of value in from Echo is when they have a lot of freight running through their system, they suddenly have access to that data and can slice and dice it and bring it back into their system. And part of our implementation process is that we will integrate with our client’s ERP system. If a customer is running an SAP order management system and picking orders out of a warehouse, those orders can be piped into our system and flow through our workflow.