How to succeed in the most profitable industry in the world

Freight forwarding doesn't get the same attention as fast-changing, glamorous industries such as high technology. It lacks a certain sex appeal—you could almost call its reputation grubby—and thus, it's often overlooked by everyday people, and even by many investors. Yet freight forwarding is the world's most profitable industry, and its top performers are even more profitable than Apple. Think of it as all steak, no sizzle. See Figure 1.

Another way to demonstrate the industry's profit potential is to compare the return on capital employed (ROCE) for the five biggest freight forwarders (Expeditors, Kuehne & Nagel, DSV, CEVA and Panalpina) to the transportation industry as a whole, and also to the information technology and consumer goods industries. See Figure 2. For the past ten years, as the figure shows, freight forwarding is at the top of the heap by far.

Within the industry, two companies stand out: For decades, Swiss-based Kuehne & Nagel and the U.S.-based Expeditors International have boasted profitability levels far above the industry average. What is the secret to their success? We see two primary reasons: a deep understanding of industry revenue and cost levers, and stable, productive business systems.

Deep understanding, industry revenue and cost levers
Top, middle and lower management of both companies consists primarily of people with considerable experience in the industry, a long tenure at their companies and who understand the key revenue and cost levers.

For decades, industry titans presided over both companies: Klaus-Michael Kuehne started working at Kuehne & Nagel in 1958 and became CEO in 1966; Peter Rose co-founded Expeditors in 1979 and became CEO in 1988. Each had a business philosophy that provided a bedrock for his organization's culture and business systems. At Kuehne & Nagel, Kuehne has passed on the CEO and Chairman positions to successors but remains the majority shareholder and honorary chairman. At Expeditors, Rose stepped down as CEO in 2013; his successor Jeffrey S. Musser has worked at the company since 1983.

Keeping experienced people is not a matter of luck but of company policy. For example, Expeditors made no layoffs during the post-2008 recession . It chose long-term employee stability over its short-term balance sheet.

In addition, these companies are run applying sound freight forwarding principles across all major business dimensions including customer mix, trade-lane management, product and service mix, sales model, station operating models and acquisitions.

The result of these long tenures and sound business principles is that management and staff have developed a profound understanding of their customers, their suppliers and their own company. They intuitively know what it takes to convert business into profits. This knowledge is especially important in the logistics and transportation industry, where customer demands are often complex.

Complex demands arise because customers, seeking to improve their supply chains, present freight forwarders with a huge universe of opportunities to design customized services. Customized value-added services can allow freight forwarders to keep high margins, escaping the sad fate of standardized transportation services, which are increasingly commoditized.

But the key to succeeding at those customized services is the ability to engage existing and potential customers intelligently and ask the right questions. The best firms are able to match customers' needs with their own organizational abilities. They know exactly which lever to pull, who to engage and how to execute in order to convert business into profits. Such skills require experience in the industry and company.

Stable, productive business systems
Industry experience and staff tenure, however, are not sufficient to guarantee top industry performance. Converting activity into profit also requires a proven and well-established business system. Both companies have proven business systems that are part of the company culture, that all employees accept without any reservation, and that are constantly improved in an organic fashion.

In this context, business systems have two key components:

• A stable and consistently applied operating framework, i.e. clearly defined organizational structures, processes, and key performance indicators (KPIs). At Kuehne & Nagel and Expeditors, there are no doubts or discussions about how the company is structured, who the key decision makers are, how business is conducted, or how performance and quality are measured. Answers to such questions are built into the DNA of these companies. All employees know and accept them. This does not mean that the organizational structures and processes of these companies are static. They certainly evolve over time—but with consideration for the fundamental laws of the freight forwarding business and the internal company culture. Because these companies have strong cultures and deep industry knowledge, they can better adapt to changing market requirements with intelligent, appropriate evolution of business systems. Indeed, their strengths often allow them to drive change themselves rather than having to react to it.

• Data mastery. Operational excellence, productivity, customer satisfaction, and profit also depend on mastering data. Data mastery should not be confused with the capabilities of an IT system. Neither Kuehne & Nagel nor Expeditors have a superior IT system. Both use an older in-house solution. An industry myth holds that IT capabilities differentiate successful freight forwarding companies. Not true: what matters instead is how well companies use their systems. How well do they maintain their master data? How well do they train their users? How well do they integrate their data and exchange data across different systems? How well do they maintain their databases, paying attention to entry and management of each data element? Freight forwarding is a highly detailed business that consists of many thousands or even millions of individual transactions. The better these are processed and managed, the better a company performs. Many freight forwarding companies fall short in this area.

The area of data mastery in particular is the one with the greatest strategic importance in the freight forwarding industry. Productivity, cost of production, precision of business steering, the quality of service and the ability to offer state of the art customer reporting and information exchange increasingly depend on it. For years most industry players have not focused sufficient attention in this area. Going forward, focusing on it will be a must and the future industry front-runners will be those that become the best in mastering their data.

All steak, no sizzle
Perhaps one reason that the freight forwarding industry lacks sex appeal is that the determinants of success aren't any sexier than the day-to-day activities of its employees. Compared to the flash of high tech or the ubiquity of consumer goods, factors such as experienced management, sound execution of business principles and stable systems rarely make magazine covers. But they work. They generate meaningful profits. Furthermore, they are transferrable. Although other companies can't duplicate the history of the freight forwarding front-runners, they can learn lessons from that history in order to achieve profitability in the future. One key lesson is to invest in core Freight Forwarding capabilities, stable systems and to an increasing degree in data mastery.

About the authors: Oliver Gritz is the CEO of COG Skill Pool GmbH, a company specializing in Freight Forwarding, Brokerage and Logistics Services systems and processes; Jeff Ward, Partner at A.T. Kearney and Transportation Practice Global Lead; and Arsenio Martinez-Simon, Partner at A.T. Kearney and Transportation Practice Senior Member.

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