Railroads Must Adopt Technological Strategies To Stay Relevant

FreightWaves recently chatted with Dustin Burke, managing partner and partner with the Boston Consulting Group, on a report that Burke and others wrote on how technology innovation should be the next step for freight railroads after precision scheduled railroading (PSR). 

That report, "Taking the Railroad Playbook Beyond PSR," states that PSR has helped the railroads improve their operating ratios (ORs). However, it also cautions that the railroads must deploy technological strategies in a holistic manner if they want to remain relevant and even grow long-term. Some of the technological strategies the report recommends include using artificial intelligence and technology to optimize asset life cycles.

FreightWaves: How did the study come about?

Burke: It started halfway through 2019. We decided that there are so many opportunities in front of Class I railroads as there are in front of other companies in transportation and logistics to think about digital technologies and tools. How do you change the organization and upscale your team to be able to leverage those technologies in a different way, etc. 

However, just about every Class I railroad out there has been saying… that our agenda is the PSR agenda, and anything that does not fit into the PSR agenda is not important to us. That is hard to argue when you look at the results of the OR improvements and the share price, at least until relatively recently… 

Our perspective was, while that [PSR] is good, it's insufficient or not long-term enough in orientation. So, we decided to put our thoughts on paper and argue why the Class I railroads need to look beyond traditional levers of PSR and start to think about how the PSR agenda will need to evolve and incorporate things that haven't been traditionally prominent there. 

FreightWaves: Has the industry discussion of PSR evolved?

Burke: PSR has meant different things to different railroads because they have made different decisions about how to implement it: how quickly; the degree to which they'll take a unilateral approach towards scheduled changes; or whether they'll be more collaborative with shippers. I think those are the main differences. 

What is pretty consistent across each of them is no matter how it has been implemented, it is intended to – and arguably does – improve the product so that shippers can use rail in the long-term. If speed improves, if reliability improves, it should be a better product. 

That said, the growth that would be expected by improving the product has not demonstrably come through, including for a railroad that implemented PSR decades ago. And, we thought it was important to emphasize that and say not only is that disappointing, but if we are going to be in an environment – and this was before COVID-19 – where longer-term growth is challenged, the railroads may need to strike a better balance between efficiency orientation and growth orientation.  

FreightWaves: The digital strategies that the study mentions don't just address operations and safety, but they also encompass other divisions within a company, such as attracting talent and managing asset lifecycles. How easy or hard would it be for a Class I railroad to implement some of the study's suggestions?

Burke: I think it's not hard for Class I railroads to start to implement recommendations, in that many have already started to add new types of talent to their organizations. Several of the railroads now talk about how many data scientists they employ. Many of them have begun to get experience in building applications that address specific problems. 

But I think the hard part is driving holistic programs that incorporate not only operational efficiencies but also commercial processes – are we willing to actually quote prices faster to customers than we have in the past? How do we make our decisions more holistically and also commercially so that we're driving culture change and getting value out of digital investments? 

And then the final part I'd say is not just the culture change but attracting and retaining the best talent to this space. In a pre-COVID thinking world, almost any old-fashioned industrial economy has struggled a little bit, but the questions they ask are: How do I get the best and brightest to work for me? How do I learn to manage them in a way that they partner with people who are veterans in my industry and understand how it works? How do we collaborate together to generate value for my digital investments? Those are all new challenges.

FreightWaves: Do you see that happening at the Class I railroads now, or is that an issue that's on the horizon? 

Burke: That's a good question. I'm hesitant to speak for a whole bunch of companies when we know a little bit about some and less about others. But I think it's pretty safe to say that most and certainly some of the largest Class I railroads have started to make investments. They are piloting applications that vendors give them. They are hiring data scientists. They're learning how to build digital tools. But I think it's pretty safe to say that we have not yet seen those translate to a financial impact that is big enough for any of them to begin to disclose.

And I think we have not yet seen very new behaviors, new offerings, new ways of interacting with customers, that are close to what we're seeing in other transportation and logistics sectors, where ocean carriers are now doing real-time quotes, and there are freight brokerages out there for truckload capacity and there are gig economy applications for sourcing warehouse workers. We have all of these changes across transportation and logistics but so far fewer in rail than in what we see other modes.

FreightWaves: What do you think has to happen for the railroads to make that transition?

Burke: I think it will take a committed management team to decide that this is the most important thing for them to begin to work on. That's what it took for PSR. And while railroads are competitive with other transportation modes, in North America, they're only so competitive with each other. It did not necessarily take the competitive pressure that you see in other industries, but shareholder pressure to push the PSR agenda. Once that shareholder pressure built to a critical mass, management began to act quite quickly. And lo and behold, many of them have actually seen huge benefit from doing it. So, we're forecasting the same here. 

We think there is competitive pressure with other modes long-term. You think about autonomous commercial vehicles for example. We think, why would you not have shareholder pressure here as we did with PSR, to find ways to continue to expand or at least sustain operating ratios? It would take a management team to say, we succeeded with PSR but how do we evolve our approach, given that we can't keep going back to the same levers and getting more value infinitely from those levers? The new environment may be more growth challenged than what we experienced over the past several years. 

FreightWaves: Who is the report geared to besides the Class I railroads?

Burke: It has implications arguably for short line operators. I don't see why they couldn't also invest in some of the same capabilities. They are in a different position in terms of their size, in terms of how much they can take on at a given point in time. 

And then I think it's also important for other participants in the ecosystem, like IMCs [intermodal marketing companies] – so, the intermodal world. I had a conversation with one of these IMCs recently. We discussed if we are encouraging Class I railroads to be more growth oriented, to think about product innovation, to think about serving customers better, then if IMCs want to continue to be as important as they are today, then they need to think about how to help their rail partners do that. Somebody needs to do that, and I think IMCs can be part of the solution, as can the Class I railroads.

FreightWaves: Would shippers see any differences if the railroads implemented these recommendations?

Burke: The change that shippers have experienced thus far with PSR depends on two things. It depends on which railroad they work with primarily, because some implemented PSR in a way where they dramatically cut service to certain markets. It matters whether you were a target of that cutting or not. If you were in an area where service was retained and nothing was particularly changed or maybe just a schedule was tweaked, you wouldn't notice a huge change. But if you were in an area where the railroad said, this lane doesn't have critical volume so please call your intermodal partners, or, we may have a short line that will take up the business, I'm sure you'll tell the difference. 

So, in terms of how this would impact shippers if we talk about beyond PSR, it depends on which levers we're recommending would be implemented.

Some of these things we're talking about should help shippers with their supply chain objectives as well. The ongoing and classic pain point in logistics is, "where is my stuff and when is it going to get there." And while the ability to communicate that has gotten better in rail, it hasn't improved as dramatically as other modes. And we're talking about new ways of collecting and transmitting information and doing it real-time, which would be really shipper-friendly and help Class I railroads – or any railroad – to better cement their customer relationship. 

At the same time, we're talking about other ways to identify and take out waste in the system, and those could have potential negative impacts on a shipper depending on how they're implemented. But we also think that this is a win-win for shippers and for railroads when they work on real-time visibility and when they work on the commercial orientation to be more growth-oriented and customer friendly. 

FreightWaves: Is there anything else that you'd like to add?

Burke: I think the key message we want to bring across is that PSR has been really successful in North American rail, but we haven't yet seen the ability to sustain better than 60% ORs for a long time period and across the freight cycle leveraging traditional PSR. We're trying to say, if you don't want to backslide too much on progress, this is where you go next. 

We think that's going to be important anytime, but particularly if volume growth is lower for a sustained time period. I think that is the key message we want to make sure we get across, and that most of the capabilities needed to implement these things are new to rail and largely are not in place.