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Heavyweight Logistic Providers Match Startups’ Tech Spend

XPO Logistics CEO Brad Jacobs did not mince words when he recently discussed the growing number of startups in the logistic services space and their investments in technology.

 “Just to put things in perspective, if you look at the top 50 startups and aggregate them all, that's still a fraction of what we spend on technology,” Jacobs said in an email response.  “We'll spend over $400 million on technology this year and devote over 1,500 IT professionals to innovating for our customers and carriers. We watch new technology start-ups closely, and we haven't found anything they're doing that we're not doing.”

Photo courtesy: XPO Logistics

Photo courtesy: XPO Logistics

However, the aggregate spend by established players in the sector certainly does not necessarily spawn new and exciting technologies that a startup might otherwise offer. The most lethal threat a startup in any industry can pose to the competition, of course, is to serve as a major disruptor. In the car industry, for example, Elon Musk's Tesla electric sports car launch has caused the entire automobile industry to rethink its electric powertrain and autonomous driving development.

However, when it comes to logistics software, an ultimate disruptor like a Tesla or an Uber has yet to emerge. Established players have thus far largely been able to hold their own in capital spending in technology and largely keep up with the younger competition, Evan Armstrong, an analyst for Armstrong and Associates told EBN.

“Guys like XPO as well as other leading players certainly spend as much compared to money startups get, which they invest in their internal systems, integrating technologies, working with customers on integration, etc.” Armstrong told EBN. “Technology is all about people with ideas and a lot of systems were thought of by entrepreneurial leaders within established companies.”

Logistics software startups, of course, have been able to provide value in many cases. Since 2011, for example, domestic freight matching software alone has attracted just over $180 million in investor venture capital, according to Armstrong and Associates 

“The technology has to come from somewhere,” Armstrong said. “Established players obviously continue to spend significant portions of their expenditure on technology, but startups often have something to offer as well.”

Examples of new logistics companies that offer emerging applications include Convoy and Flexport, Armstrong said. But while they obviously have something that can help customers with their logistics needs that the competition is not necessarily able to match, they also lack critical mass to become major players. “What these companies don't have is a lot of business underneath them. So either they grow or develop a technology that is later acquired by a large company,” Armstrong said. “A lot of these new technologies are coming from startups where there are often breeding grounds for new ideas. They also might pursue riskier paths compared to larger companies.”

XPO and other established logistics service providers have also aggressively used acquisitions to grow their knowhow.  

“Big merger and acquisition deals changed third-party logistics from mid-2014 through 2015. Brad Jacobs and his XPO Logistics team, for example, even helped make 2015 the largest third-party logistics M&A year, with purchases including Con-way and Norbert Dentressangle, for deals over $100 million at 11, since A&A began tracking activity in 1999,” Armstrong said. “The resulting M&A operations integrations have increased concentration on efficiency and profitability. They should add further emphasis on quality and 'lean' process improvement initiatives.”

Industry wide, third party logistics net revenues grew 4.5% in 2015 to $71.9 billion, according to Armstrong and Associates. Overall gross revenues had a muted 2.2% increase, primarily due to reduced fuel prices in 2015 versus 2014 and the resulting reduction in fuel surcharge revenue for non-asset domestic and international transportation managers. 

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