Compensating Managed Transportation vs Transactional Brokerage

11 Jun Compensating Managed Transportation vs Transactional Brokerage

One of the most perplexing problems for a 3PL provider is how to deal with different types of accounts from both an organization structure and a compensation perspective.  Many brokers have found themselves radically overpaying for repeat contracted freight, because it evolved that way while the person who landed the account was on a typical transactional brokerage plan.  On the other end of the spectrum, paying a transactional broker the same way a managed transportation logistics coordinator is paid could lead to an inability to hire and retain the right talent, because the upside potential is not adequate for the nature of the role.

Let’s look at Logistics Coordinator (a typical title found in managed transportation services) and Carrier Sales, as these two roles, as I will define them, represent pretty much opposite ends of the spectrum while both striving to accomplish the same task…put freight on a truck.

On the managed transportation side (managed trans, for short), a logistics coordinator (as I’m using the title) works with an account manager to coordinate the movement of freight.  Often managed transportation is very or exclusively LTL focused, so there is a smaller “universe” of potential carriers than on the truckload side.  Rates are fairly well established based on standard pricing tables that factor in weight and increasingly now also dimensions, to account for lighter bulkier shipments, along with distance.  The spoke and hub relay nature of LTL shipping makes it much easier to standardize pretty much everything about the service…from the way LTL carriers pay their drivers (usually by the hour for local drivers (Pick-Up and Delivery) and by the mile for line haul drivers (terminal to terminal)), to how they set their pricing.  These are usually pretty big operations, with lots of capital invested, and lots of analytics and mathematical models behind the pricing structures.  Sales reps in the LTL world do have a bit of leeway in terms of negotiating rates with their customers, but not much.  Everything is reviewed and approved by the pricing department and they have the final say so (much to the sales’ reps chagrin).  There is almost zero that is “one off.”  A logistics coordinator who is dealing with masses of LTL shipments for several customers will have a list of rates already established (by the person who negotiated the current year’s deal with the carrier, and that is a much higher position) and their job is to put the legos together into the best package to (1) meet the customers delivery needs at (2) the lowest possible cost with (3) the least risk of damage or delay.

Logistics Coordinator is about the most dead-on accurate title one could come up with for this role.  It’s a complex task that requires some skill and knowledge of the customers and the carriers, but it is not, generally, a sales role.  There may be times that an unusual load (a “one-off”) does come up and some deal-making will need to be done, or the customer will have a truckload shipment and the Logistics Coordinator will need to find a truckload carrier to move it.  But from what most of my clients tell me, they usually fail miserably at this task when called on to do it.  They are not trained to negotiate and tend to just take the first carrier they can get.

At the other end is the traditional carrier sales role.  This is the role that has to negotiate (usually with truckload carriers) to take a load directly from A to B.  I’ve heard various statistics over the years, but the one that sticks with me is 250,000 so we’ll go with that.  There are (reportedly) 250,000 licensed truckload carriers in the US.  The vast majority of these have 1 or maybe 2 trucks.  It’s often a needle in a haystack kind of job to find the right truck for a load and then to get them to do it at a rate that makes sense.  Find the right one, and you can make a big profit (because that load will enable the driver to get where he wants to go).  Find the wrong one, and you are spending hours arguing to make $5.00 and then probably dealing with a claim on the back end.  Getting the skills and the 6th sense to be able to just “know” who is a good carrier and who isn’t, and then convincing them to take it at the price you want, is truly a sales job.  This is why I much prefer the term “Carrier Sales” for this role than pretty much anything else.

A dispatcher is someone inside a trucking company who, quite literally, dispatches trucks…telling them when and where to go and making sure they are proceeding according to plan.  That is a part of the carrier sales role (or it may be handed to a track and trace role) but calling them a “dispatcher” misses the most critical part of their role in the organization…making money off each and every load.

Now think about how you would pay these two roles and it should be pretty obvious you can’t use the same incentive plan for both, unless it’s a very generic quarterly team incentive.  But if you do this, you are certainly missing out on unleashing some untapped potential in your carrier sales.  It’s a hard job and they are truly motivated by knowing they are making additional money for moving more loads, or negotiating better, or reaching higher and higher goals.

For the Logistics Coordinator, one month is pretty much like the next, other than seasonality in freight or the addition of new customers and learning their particular needs.  This role is usually mostly fixed pay (and often non-exempt, though I’m not about to give advice on THAT subject!), with modest monthly or quarterly bonuses based on team performance.  Freight management operations people are usually grouped in teams, and there is much support and coverage for one another, so it’s very difficult to develop individualized incentive plans.

On the Carrier Sales side, the fixed pay (again, not touching FLSA issues, sorry!), is lower with more pay in the incentive and more upside if they do well.  Interestingly, at the median, both roles are paid about the same ($45k to $55k would be a reasonable range), but there is much greater variation in actual pay on the Carrier Sales side (low end of $35k-ish to high end of $100k+).  Logistics Coordinators tend to increase their pay with time in position and promotions to Account Manager.  Carrier Sales increase their pay by increasing volume and doing a better job negotiating.

Where it gets really messy is in the middle between these two positions…and there is A LOT in the middle.  Contracted lanes, fixed rates with carriers, repeat freight, dedicated freight management.  All of these things serve to make the Carrier Sales job look more like Logistics Coordinator, or even (gasp) a dispatcher.  Be careful about how much you are mixing into the same pot.

When you have the scale to pull it off, you should segment out your customers and your freight to be sure you are putting the right resources on the right things.  Major accounts that give massively high volumes of freight need a Key Account Manager (or Strategic Account Manager) who is not distracted by being told they need to cold call.  This same freight, to the extent that it is predictable, repeat and pre-negotiated needs to be managed by a different group on the carrier side.  This can be a good training ground for new hires to learn about the trucking business, provided they have ample oversight so as not to screw up on your biggest customers.  But you don’t want to bog down your best negotiators moving easy freight (though I’m sure they will LOVE doing this if you are paying them the same commission rate as on the hard stuff).

The final thing to consider is the vastly different economics of the two business models.  Even how they TALK about the money they make is different.  On the managed transportation side, they talk about “cost plus” or “fee per load.”  On the brokerage side, it’s about the spread, the margin, the gain.  Managed transportation profit percentage can be very low (< 10%) whereas most dry van brokerages are shooting for 15%+.  But the big difference becomes evident when looking at the cost of compensation.  On those low margins on managed trans, the cost of compensation might be 5%-10%.  In a brokerage, the goal is to try to get it under 35%.

Paying managed trans staff as if they were brokers would be a surefire way to bankrupt the business.  Paying brokerage staff as if they are dealing with managed trans means they won’t see the upside they could get (and should get) at any other broker rewarding them for the hard negotiation work.

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