The 12 Traits of Highly Profitable Trucking Companies: Investment in Safety Pays Dividends
KSM Transport Advisors (KSMTA) has worked with over 200 trucking companies since our inception. Our primary service focuses on guiding trucking company leaders in understanding their freight network and determining strategies to improve the density, velocity, and ultimately the profitability in their geographic footprint. In delivering this service, the KSMTA team has observed and documented 12 key traits of highly profitable trucking companies.
This article is part of a series highlighting the key traits and focuses on trait number 10 of 12.
Analyzing Insurance Cost Per Mile and Profitability
From 2014 until 2020, I co-founded and then led the growth of a financial and operational truckload benchmarking service – inGauge. This platform grew to 220 individual fleet profiles of all modes, sizes, and operating models (e.g., OTR, dedicated, local P&D, etc.). inGauge allowed participating clients to compare their performance on various standardized metrics. The integrity of this dataset grew due to a structured method of mapping general ledger accounts to a standard template or model. This method also reduced the potential for users to misrepresent the values imported into the database.
As the number of reporting carriers grew, so did data granularity. Early on, industry stakeholders asked us to draw conclusions and observe potential correlations between metrics. One of the most apparent relationships was insurance cost per mile (CPM) and profitability, as defined by operating ratio (total operating expenses divided by total operating revenue). We constructed performance quartiles from good to bad each quarter on all calculated measures. Those reporting carriers that landed in the top quartile for operating ratios were also – with very few exceptions – the same in the top quartile for insurance CPM and CSA (Compliance, Safety, and Accountability) scores.
It became evident that the disparity of CPM in the insurance category is dramatic. Top performing carriers could inch close to $0.025 per mile, while bottom performers regularly reported CPM of >$0.18 per mile. You don’t need to be a data scientist to compare this CPM delta to average revenue per mile (regardless of mode) in order to grasp its impact on margins within this single variable cost category.
Understanding the Relationship Between Insurance Cost Per Mile and Safety Measures
In order to correctly calculate insurance CPM for trucking companies, one must first understand the inputs. This calculation includes the premium, deductibles, and any self-insured retention (or surplus) related to auto liability, excess/umbrella, physical damage, and cargo insurance coverage. This category also includes any accident damage not reported or covered by insurance – another form of self-insured retention. Note: accident damage must not be included in the maintenance category of your P&L.
The current down cycle is causing many industry participants to revisit their budgets, and vendor list. However, relative to this cycle, carriers should be cautious going backwards on their investment in safety. Doing so could have disastrous downstream effects that may last well beyond the next upturn.
The Evolution of Truckload Pricing
One of the most informative and insightful research papers focused on the truckload (TL) industry was written by Chris Caplice, chief data scientist at DAT and executive director of the MIT Center for Transportation and Logistics. His paper provided a detailed evolution of TL pricing and some likely future pricing models. One interesting section in the paper described an index called the Herfindahl-Hirshman Index (HHI). The U.S. Department of Justice employs the HHI to assess the degree of concentration in markets, and the proclivity for anti-competitive practices by participants in those markets. The index is derived by summing up the squared market shares of all participating firms. Potential HHI scores can range from close to 0, indicating a highly fragmented and competitive market, to 10,000, signaling a monopolized market.
- Dense Market Concentration: HHI > 2500
- Intermediate Market Concentration: 1500 < HHI ≤ 2500
- Sparse Market Concentration: HHI ≤ 1500
In Caplice’s paper, he explained that the TL sector in 2019 displayed an astoundingly low HHI of nearly six. This underscores the sector’s high competitiveness. A key reason for such a dynamic market is the ease with which companies can enter or leave the TL space. This fluidity and the resulting low HHI highlight a marketplace bustling with competition, favorable for both consumers and stakeholders.
Given this context, carriers must recognize that the lack of industry barriers to entry pose a double whammy – oversupply of capacity which causes rates to decline. It also means established and safety-conscious carriers often end up shouldering the insurance risks posed by newcomers who may not prioritize safety or adopt best practices.
Every carrier’s goal should be to distance themselves from these high-risk operators or minimize their exposure to them. Strategies like captive insurance arrangements can help isolate carriers with good safety records from the risky ones. But entering such relationships isn’t straightforward and, once engaged, carriers must ensure that the collective safety standards are upheld.
We’ve observed that highly profitable trucking companies view safety as an investment in higher future margins. Doing so also contributes to the best interests of society and other vehicles on the road.
Safety as Capital and Eventual Dividends
Much like capital infusion, which can bolster an organization’s operational capacity and growth potential, safety – when viewed as an investment – can accrue significant benefits over time. This isn’t a mere allocation of funds toward safety measures but a strategic positioning of safety at the heart of business operations.
The Compound Interest of Safety
Just as the power of compound interest amplifies the growth of an investment over time, the proactive investment in safety yields compounding benefits:
- Reduced Accident Frequency: A direct correlation exists between robust safety measures and reduced accidents. Fewer accidents not only lead to a decrease in immediate costs, such as repairs and medical expenses, but also in the long-term reduction of insurance premiums (risk financing). A common metric used that allows for peer comparison is “accident rate per million miles.”
- Minimized Liabilities: In an industry fraught with potential liabilities – be it from injured parties, property damages, or regulatory fines – effective safety measures act as a shield, deflecting many potential legal and financial pitfalls.
- Fortified Reputation: In the age of information, news of accidents can travel fast, potentially tarnishing a company’s reputation. On the other hand, a stellar safety record can become a unique selling proposition, attracting clientele who prioritize reliability and care. There are an increasing number of carrier safety awards programs at the state and national level. External recognition and validation of your safety investment is a key step in firmly establishing a reputation for safe practices. A strong reputation for safety practices also reduces exposure to common plaintiff attorney tactics.
The High Cost of Complacency
The statement “one accident can steal a decade’s worth of profits” might sound hyperbolic, but it underscores a stark reality. A single severe accident, especially involving fatalities or significant environmental damage, can lead to:
- Exorbitant legal fees and settlements
- Skyrocketing insurance premiums
- Lost contracts or business opportunities, as clients might sever ties fearing reputational damage
- Regulatory fines and potential suspension of operating licenses
- A tarnished brand image, leading to a prolonged period of reduced business inflow
All these repercussions can easily amount to financial losses equivalent to a decade’s worth of profits, especially for smaller to medium-sized operators. Large scale losses can ultimately force an ‘extinction’ event for any carrier.
The Ripple Effect on Strategy
Beyond the immediate financial implications, an accident can create ripples that disturb the strategic trajectory of a company. Tactical plans, be it fleet expansion, route diversification, or venturing into new service lines, can get derailed or indefinitely postponed. The resources, both time and money, required to manage the aftermath of an accident can stall any forward momentum the company might have experienced.
Safety as a Cornerstone for Ongoing Growth
Safety in the trucking landscape isn’t just about compliance – it’s essential for the sustainable growth and long-term profitability of the company. Especially in volatile economic periods, it’s imperative for companies to uphold safety as a guiding principle.
The competitive nature of the TL sector, as highlighted by Caplice’s research, underscores the importance of differentiating oneself through impeccable safety records. Not only is this beneficial for a company’s bottom line, but it also reflects a commitment to the broader societal good. As the industry moves forward, let safety remain the anchor that ensures steady and responsible progress. Double down on safety now, reap the dividends later.
Our next article in The 12 Traits of Highly Profitable Trucking Companies series will highlight the key trait of “Give Before You Receive.”
To learn more or discuss any of the ideas shared above, please contact a KSMTA advisor or complete this form.
We're Looking for
At KSM, you’ll be encouraged to find your purpose, exercise your creativity, and drive innovation forward.