Freight Audit and Payment Update: Take what you need

With the complexities revolving around all modes of transportation these days, a good freight audit and payment company has become as essential as a modern transportation management system (TMS) or top enterprise resource planning (ERP) solution that connects all nodes of your operation.

And like so many sectors in logistics today, the freight audit and payment business is booming.

“People say our business is not recession-proof, but it just may be,” says Craig Cameron, vice president of sales and marketing for A3 Freight Payment. “People are always interested in outsourcing and saving money, and today it’s a heavier workload for shippers because carriers are pushing up rates.”

A little history may help shippers understand how freight payment companies are evolving. The freight audit and payment industry was actually formed by a series of banks when transport was heavily regulated prior to 1980. Motor carrier bills had to be paid within seven days, and rail bills needed to be paid within five.

Back then, to meet the five- and seven-day payment requirement, banks, shippers and carriers formed what was called the National Association of Freight Payment Banks. Sole emphasis was on the settlement of carrier bills within the regulated credit parameters. If payment wasn’t made on a timely basis, credit was revoked and the shipper was placed on an all-cash basis for all freight payment moving forward.

Industry veterans say that this was not an idle threat. In fact, several Fortune 500 companies would often have their freight withheld because freight bills were not paid on time and in accordance to the freight payment guidelines established by the since-defunct Interstate Commerce Commission.

Deregulation changed all that. Credit terms could be negotiated between shippers and carriers for more reasonable periods of time. The process has become much more robust now that bills are audited by companies with heavy data analytics as well as keen personnel to spot errors and inefficiencies.

“When I started in this industry four decades ago, it was truly a settlement service,” says Harold Friedman, senior vice president of global corporate development at Data2Logistics. “Today, we’re a company that provides technology to better manage and control transportation costs.”

But what exactly should your freight payment company provide? Sure, freight auditing for errors is a no-brainer, but how many extras are really needed?

Over the next few pages, Logistics Management takes a deep dive into the current state of freight audit and payment and finds an industry that’s thriving in the midst of a tight freight market. And these days, besides those vanilla freight bill auditing services, most companies are doing some sort of advanced information reporting.

In fact, data analytics is a new trend promising much efficiency to shippers, while e-commerce, with its last-mile delivery headaches, offers a whole new market for innovative audit and payment players. We’ll also offer some tips for avoiding the upsell and how to spot red flags as shippers enter into a new arrangement.

Freight bill auditing basics

Of course, the No. 1 need from a freight payment company usually consists of one or more levels of combined services. These may include freight bill audit, information reporting and freight bill payment. Electronic Data Interchange (EDI) is a must, but so is the ability to deal with old-fashioned paper freight bills. Today, a good freight bill payment partner should offer auditing for parcel and all modes of freight, including ocean and airfreight.

A solid freight payment company should also offer a team of professionals working closely with shippers to analyze freight invoices and bills of lading to ensure proper audit and payment processing. This should eliminate the need for extensive—and often inaccurate—internal accounts payable processing, experts say.

Accurate freight payment can improve a shipper’s relationship with carriers by sending out payments in a timely manner. In this current tight freight market, where carriers can afford to be choosy with whom they do business, this is no small factor.

However, freight payment experts believe that the real value comes from actionable information that shippers receive from reports on their freight trends. New and sophisticated reporting tools should give shippers precise calculations on their freight spend with regularly scheduled e-mail reports on a timely basis.

“Validating shipping charges consistent with a shipper’s contract with their carriers is a value-driven service not because carriers are trying to cheat, but because there is so much complexity in billing,” says Satish Jindel, president of shipment analytics platform provider Shipmatrix. “Programming errors can happen, and carriers can’t catch all of them because they have millions of customers.”

Besides offering keen analytical insight into finding freight bill errors, payment companies should possess other attributes. They should have enough financial security to weather any Sarbanes-Oxley audit review as well as maintain at least $1 million in what is known as Employee Dishonesty Bond. A bond of $50 million is even better, experts say. And if there are issues to be resolved, a freight bill payment company should offer client services with a staff committed to maintaining outstanding carrier relations.

Good freight auditing companies should also offer capabilities to track e-commerce shipments with UPS and FedEx as well as the odd rail or airfreight shipment that may come along. What’s the cost of all this? It will vary from shipper to shipper, of course, but industry veterans say outsourcing your freight bill audit and freight payment can recover 3% to 7% percent of your overall freight spend.

Jindel of Shipmatrix says that, generally, freight audit companies should save shippers one-fourth of their annual fees to the auditors. “However, that depends on how manual or automated your processes are, how efficient your data is collected and how many carriers you’re using,” he adds. “When shippers use multiple LTL carries, they’re creating extra work for auditing their charges.”

Analytics next big thing

When you boil it all down, freight payment companies should offer only two services—validating shipper charges consistent with their carrier contracts and analytics. Of the two, the latter may actually be more valuable.

That’s because good freight payment solutions are usually a culmination of best practices gathered from around the industry. Real-time processing models can offer a managed solution that eliminates the pitfalls associated with traditional freight payment solutions—and should be able to spot inefficiencies.

“The value is not in the auditing itself, but in the analytics of what’s predictive,” says Jindel. “The idea is to help customers know in advance what the mistakes are and how to plan for it—not after they happen. Unless you know where the errors are, you can’t fix it.”

Analytics also augments other repeatable project management processes and methodologies that modern freight payment companies can offer shippers to assure best practices. “Analytics is our fastest-growing segment,” says Friedman of Data2Logistics. “In the Great Recession of 2008, many companies cut staff providing internal analytics. They’ve added some back, but they lost a lot of expertise. So they’re looking for people like us to support that process.”

According to Friedman, the simplest analytics improvements involve consolidation of shipments from LTL to full truckload, modal and service shifts and carrier consolidation both domestically and globally. “Our goal is to make our customer the hero,” he says. “We want to give them the information to take to upper management when the CFO says you must reduce transport costs by x percent or y percent. When they hear that, they’re very receptive to engaging people like us.”

Mike Regan, co-founder and chief relationship officer at freight audit and payment solutions provider TranzAct, says that on a scale of 1 to 10, the analytics portion of his business “is probably an 11.”

And, of course, that’s all being driven by the data explosion of the last decade. “If you want me to clean up after the storm, you have to make sense out of what happened in the storm to go forward,” says Regan. “That’s 99% analytics, and that’s where our industry is excelling.”

According to Regan, the challenge for shippers and freight payment companies becomes quality data. “If your focus is paying as little as possible, don’t be surprised if your data is worth as little as possible. If you’re comfortable not being able to analyze a part of your spend, then have at it. However, it’s better to intelligently address a significant portion of what you’re spending.”

Jindel adds that sometimes those savings can be achieved simply by adding a few more doors to a loading dock to increase efficiency by reducing—or better yet, eliminating—a carrier’s waiting time. “If I am one of your favored carriers, I should have a dock door available when I pull up in a truck,” he says.

Red flags

Considering all the auxiliary services freight bill payment companies can offer, experts also say there are some things that freight bill payment companies should not do for their customers. These include never co-mingling a shipper’s funds with their own and not paying carriers directly for transport services.

That latter practice is a holdover from the 1980s when interest rates were high and shippers used freight payment companies as a vehicle for an interest-free “float” while holding onto their payments for as long as possible. However, experts say that it’s risky and unnecessary in the current environment.

“Shippers need to get rid of their freight payment company if that happens today,” Jindel says.

Shippers should also be aware of how many core services they place in the control of one freight audit and payment company. For instance, a shipper might want to change its freight payment company, but can’t because that same company controls its transportation management system (TMS).

“They can be co-mingled,” says Cameron of A3 Freight Payment. “However, if you pull the plug on one service, what does that do to the other?”

Indeed, some companies try to be both a provider and practitioner of freight payment. That can be dangerous, experts say, because it can lead to ever-expanding consulting services that can be costly over time.

“Everybody has his or her own core areas of expertise,” says Cameron. “If I want a freight consultant, I want somebody that understands supply chains and logistics—and that’s usually not the sweet spot of freight payment companies. A lot of companies like to throw that in like floor mats because they think it makes them sound smarter. But the reality is you’re only as good as your data.”

Around the corner?

What’s coming next from the freight audit and payment sector? Besides further analytics and globalization, industry insiders say to look for further consolidation among some major players in the freight payment sector. Some third-party logistics companies might be on the lookout to add freight payment services to their portfolios as well.

“Data analytics will expand and become more robust,” predicts A3 CEO Ross Harris. “We’re excited about data integration and e-commerce because that has a logarithmic effect on how customers manage their transportation spend.”

As for merger and acquisition activity in his industry, Harris has one warning for shippers: “If your freight payment company gets acquired, don’t fall asleep at the wheel. Changes are coming your way.”