The IT Dilemma for 3PLs

I recently spoke with a logistics service provider that was at a crossroad: do they continue to develop their own IT systems in-house or should they implement third-party solutions instead?

A decade ago, deciding which direction to take was relatively easy because there were few third-party solutions available that met the needs of the 3PL market. The only real option was to take the in-house route. But today there are many more third-party solutions available, and the move by software vendors away from proprietary platforms to more open, standards-based architectures (along with the emergence of software-as-a-service solutions) has opened up new possibilities.

For 3PLs that continue to develop their own solutions, the decision is primarily driven by two key factors that are inherently linked:

  1. IT as a Competitive Differentiator: Having the ability to offer customers different and more targeted and enhanced functionality than their competitors, such as better visibility and business intelligence tools. Here is how one 3PL put it to me: If we and most of our competitors were using the same vendor’s TMS, then how can we differentiate if we’re all basically offering the same capabilities to customers?
  2. Faster, More Responsive Innovation: Having full control of the innovation cycle versus being at the mercy of a software vendor’s release schedule. Simply put, when new functionally is required, either by a customer or an internal request, 3PLs want to enable it as quickly as possible. In many cases, developing the functionality in-house is faster than submitting a new feature request to a third-party vendor and keeping your fingers crossed that it gets included in the next release, which could take six months or more.

These points are echoed in what the IT Manager at the service provider I spoke with communicated to me:

We built our system because we believe it is vitally important to align our software around our processes and not the other way around. Being able to cater to changes in business direction and develop our software with future business direction in mind is paramount to how effective our systems are today.

But should developing and maintaining software be a core competency for 3PLs? Are they in the software business or the logistics services business? The answer to these questions is what drives other 3PLs to take the third-party solutions route. Simply put, they make the strategic decision that investing time, money, and resources in developing and maintaining IT systems is less important than investing in other areas of their business.

In short, there are many valid reasons for 3PLs to continue down the in-house development path, and equally valid reasons for taking the third-party solutions route. There are pros and cons to each. But unlike a decade ago, where closed and proprietary IT platforms ruled the day, 3PLs have another option today: they can take both roads.

In other words, they can implement third-party solutions, which are now being developed on open and standards-based platforms, to satisfy their basic functional requirements, while also leveraging the same development tools and platforms as their vendors to develop their own intellectual property that they can plug in (via web services, for example) to their third-party solutions.

In my opinion, this relatively new road that has opened up is an option that all 3PLs should consider when they are standing at that IT crossroad.

What do you think? Post a comment and share your viewpoint.


  1. For most 3PLs there will be some unique aspect of their business not addressed by commercial software. However, to say that they can innovate faster by doing themselves, is not necessarily true. They may spend 3-5 years reinventing the basics before getting to the truly innovative points. Most software projects go well over initial estimates in time and funding required. In addition, purpose built software is exactly that – one dimensional. Many companies have developed unique software but had to abandon it because their business changed, because the software was not built for change. Not that commercial software is absolutely flexible, but because it is used by many companies it is designed to cover more business scenarios.

    There are two points to consider before embarking on custom development. 1) Can I find a commercial software provider that is close and pay for priority to get the enhancements I require? 2) Is this something that I can realistically custom develop and deploy in 18 months? Otherwise you run the risk of having software that no longer meets evolving business requirements or is shortly obsoleted.

  2. Great topic. I’ve spent most of my career on the proprietary side of logistics software, but I have to admit that now and then you have to wonder what kind of competitive advantage can be gained by creating certain “baseline” systems that you need to run a logistics company. Is your freight audit process really unique? Is the way you plan shipments giving you a proprietary advantage? If your process is really so different from what a commercial system would support, is there a good reason for that? Really?

    On the other hand, if you can create something that’s well tailored to the industry vertical that you’re targeting, or that lets you execute your exact business processes more efficiently than you could do with an off-the-shelf system, then investing in proprietary systems can make sense. Some of the commercial systems out there are so complex, since they are designed for the super-set of requirements in the marketplace, that they are overkill for many 3PLs. So the 3PL may be better off creating something streamlined to their exact business requirements, rather than implementing something that’s much bigger than they need. I think that these days few logistics companies create everything from scratch. For example, if you’re going to build a system that rates LTL shipments there’s a good chance you’ll buy the rating engine and weave it into your proprietary system. As another example, most 3PLs will buy a commercial financials system for their general ledger, but many will still use a proprietary billing engine.

    I might add one more variable: what do you have now, in terms of functioning systems, and how much pain would it take to switch to an off-the-shelf system. If you, as a 3PL CIO, have a functioning “backbone”, you’ll be asked every year or two “why do we build our own systems?” You can tell them about competitive advantage, blah blah blah, but perhaps even more important is the corporate root canal that would be required to cut over to an off-the-shelf system. It would be a long, expensive and torturous project, and would leave a lot of casualties. So the question becomes, “what do you get for undergoing that root canal? Are your teeth better off at the end, or do you just end up with a different set of choppers that is not much better than what you had before?”

  3. I believe the niche market for software solutions for 3PL’s is probably quite good when you look at smaller to medium sized operations. The reason being one related to cost and having to concentrate on core competencies within limited budgets.

    Well established and truly multinational 3PL’s with greater or more flexible budgets can certainly profit from having their own IT developments, looking for special developments tailored to their own needs and customers.

    The more complex the services you provide and the more assets you control should in principle mean that your own developments for the customer coupled with your own network and administration, make it worthwhile having a nice budget for in-house IT.

  4. I certainly agree that there are new roads for IT solutions for 3PL’s and others. who do not consider IT a core competency of their business. Is IT a core competncy for 3PL’s? I would suggest that it is not and just as shippers / clients of 3PL’s are looking for logistics competencies beyond thier four walls, 3PL’s should be asking themsleves the same question with regard to IT developement and soltuions for themsleves. Is there an answer beyond our four walls?

    3PL clients look for value add and I suspect would care very little if IT is in-house, in the cloud (SaaS) or through a outsourced managed services arrangment. They just want quality results for their dollars inveseted. I am just suggesting, as Adrian, there are options and no one size fits all.

    The sotuion may lie in a “business trilogy” of companies – client / 3PL execution / IT solutions

  5. Although I like when people/compenies believe that they are soooo unique that no outsourced IT system could reflect their uniqueness, it is very rarely the case.

    Considering that the subject is a logistics company, which, in the end of the day, deals with getting goods from point A to point B and unless one of the points is in space of deep sea, the situation is definitely NOT unique.

    What I mean is that one would still have 70-90% of data structures, needs for IT and software, including software development similar to their competitors.

    What I would suggest is to find (or hire someone competent to find) an open platform or service that can take care of all your basic needs and you are 70% closer to the target. Then hire software development company to EXTEND (not reproduce existing) the functionality.

    No-one should pay to sofware development house for doing yet another interface for “users”… and then “orders”… and then “resources”…..

    It might be far easier to extend something that already exists. And while going this way, you will learn so much about how you should do things so that once you really start developing your own IT solution, you know EXACTLY what you want and the cost of development is significantly smaller than with just plain sight of “us being so very unique” in mind…