Freight payment service

Freight Payment Service

The freight payment industry was actually formed by a series of Banks when the transportation marketplace was heavily regulated. Motor carrier bills had to be paid within 7 days and rail bills needed to be paid within 5 days. To meet this requirement the banking community, shippers, and carriers formed what was known as The National Association of Freight Payment Banks. At that time the emphasis was on settlement of carrier bills within the regulated parameters for credit extension. If settlement was not made, the carrier was required by law to place the shipper on a cash basis. This was not an idle threat and large Fortune 500 companies would often have the freight held because bills were not paid on time.

With Deregulation of the transportation industry in 1980 this began to change. Credit terms could be negotiated between shippers and carriers for more reasonable periods of time.

Deregulation also ushered in an era of unprecedented competition among providers of transportation services. The market was open and a free-for-all with carriers (transportation service providers) being able to compete based upon price for the first time. Previously, motor carriers had been compelled to set pricing collectively through rate bureaus. This frenzy of discounting presented an opportunity. Per statute at the time, a shipper could collect on an overcharge from a carrier for up to three (3) years after payment of the invoice on which the overcharge was detected. There arose a cottage industry of “post auditors” who were former pricing specialists for major carriers. They would work on a contingency basis whereby they would collect 40-60% of all overcharges recovered by their auditing the last three (3) years of bills (post audit). If they recovered no overcharges, they were not paid.

Freight payment in Europe does not have a regulatory history and is therefore, less common and not known as a concept. However, there are several German companies who offer Freight Audit services to the German market already since the eighties. The companies that started to use Freight Audit services in Europe were the US companies that were expanding in Europe and that already were using Freight Audit in the US.^[1]

Eventually, this post audit transformed into a pre-audit where the shipper paid a provider a flat fee per bill for checking the bills for overcharges prior to payment. This pre-audit service became a core value-add process upon which the freight payment process was built. As a note, post audit services are still widely utilized by most large shippers today where detailed freight audits are performed after payments are made.

The pre-audit process has become much more robust with several value added services offered. This includes: a verification of freight rates for compliance with the customer's contracts, checks for previous payment, checks for shipper’s liability and other edits and validations to insure the bills meet the shipper’s requirements for payment.

A freight payment service usually consists of one or more levels of combined services. They may include freight audit, information reporting for logistics, and work with a combination of both Electronic Data Interchange, and paper freight bills. Many companies providing freight payment service are now offering audit for both small parcel and small package carriers, such as FedEx, UPS, and DHL Worldwide. Auditing of these integrated carriers often includes on time performance and claiming of refunds for theses service not delivered within the transit times established for each origin and destination pair. In addition, manifested and shipped transactions are identified for shipments that are entered into the customer’s shipping system but are actually never presented to the carrier for pick up.

The model typically consists of your company having your motor carriers redirect the submission of freight invoices to your freight payment provider. Ideally the provider will have the capability of verifying the origin and destination in a variety of ways, including bill of lading matching, and obtaining a signed proof of delivery. Vendor matching is also another excellent technique for validating the freight bill information a freight payment service receives from the freight carrier. In addition, cost application coding, or general ledger codes. By outsourcing to a freight payment service it believed that the correctness of a freight invoice will be assured, because these services audit for freight rate, freight discount, misapplied accessorial charge, and prevent possible duplication of payment.^[2]

The real thrust of the business today is actionable information that shipper receive via the web or create from their vendor’s web site on an ad hoc basis. Sophisticated reporting tools allow Freight Payment Vendors and their customers to easily perform calculations, create graphics, generate pivot tables, and e-mail reports on a scheduled basis to name just a few capabilities.

Many freight payment services now employ web services in their overall strategy to help their customers streamline the way the exchange information, and obtain information reporting.

Most, if not all, freight payment companies require that you issue them a bank wire or an on their schedule for your company's freight payment needs as reported by the freight payment company. This schedule is referred to as a batch. The freight payment service will then turn around and pay your company's freight bills to the carriers.

It is very important to realize that this traditional model has been in place since the 1920s. It is also important to monitor your freight payment service closely, as many freight payment service companies have been known to misappropriate funds.

Selecting a Freight Payment Provider

Freight payment is a highly specialized service that requires a unique approach to procurement of such a service. Traditional procurement strategies and processes that might work well for commodity items do not typically produce the desired results when applied to the world of freight payment.

Some of the most critical steps in procuring a freight payment solution include:^[3]

Thoroughly Document Existing Process Many companies begin the procurement of freight payment services without a good understanding of their existing processes and the business challenges.Without this knowledge, a company is simply not equipped to carry out a successful bid and will find it impossible to calculate an ROI or convince senior management to support the freight payment initiative.

Conduct ROI Analysis Regardless of whether the solution is outsourced today or not, an ROI analysis must be completed to justify the project and garner senior management support. Many initiatives fail when the procurement team presents findings to senior management only to hear “it’s too expensive” or “we have higher priority projects”.^[4]

Establish uniform, quantitative evaluation criteria The majority of companies who undertake freight payment initiatives fail to establish a robust scorecard to utilize in evaluating providers. This is critical for capturing information, comparing vendors on uniform criteria, and to ensure the vendor is capable of meeting your needs.

Dictate Pricing Format In order for a company to accurately compare the cost of ownership among providers, all things must be considered equally. Unfortunately, there is no such thing as a standard pricing practice among freight payment companies. Rather, each company maintains its own pricing template to support their own operational processes or internal cost models used to calculate client pricing.

Develop a detailed scope of work Many companies provide potential vendors with a list of requirements, but fail to specify in detail how these requirements play out in a solution. For example, a company might stipulate a requirement to for a provider to maintain current rates/contracts for auditing purposes. This requirement does not set the expectation for the time required to load new rates. This is a common example and many companies are surprised to find the new provider requires several weeks to load new rates. A detailed scope of work would address these requirements and effectively communicate the expectations for both parties. Too often, what a provider reads into the requirement is very different from the expectation of the company in day-to-day operations.

Features and Functions

Global, Single-Source Freight Payment Solution. Processing and Reporting of International taxes such as VAT and GST. On-demand closings. Document Imaging of all Invoices. Extensive Data Capture (Over 120 data elements). Complex General Ledger Account Allocation. Accurate Accrual Reporting. Allocation of Freight Charges at Product Level. Unsurpassed Financial Stability. Positive Return on Investment. On-line Resolution for Customer and Carrier Exceptions. Multi-Currency Payment Options. Non-commingled Payments.^[5]

Financial Risks and Freight Payment

The selection of a freight payment company involves more than just hiring a service provider. It means selecting a custodian for millions of dollars of a company’s assets. The freight payment company is being called upon to be a “good steward” of assets to which it has no claim. This paper focuses upon the clarification of what a customer should and should not consider when evaluating a freight payment company’s role as a fiduciary, and potential financial risks.^[6]

The unfortunate reality is that the freight payment industry has seen a few noteworthy incidents of fraud in its past. The most remarkable of these was the cash of Strategic Technologies Inc. (STI). In the case of STI, an elaborate process of check kiting allowed them to survive for ten years even though they were insolvent.^[7] The company's owner had used the funds of customers for things such as buying a share in a hockey team and other indulgences.

Shippers should focus on a few key elements of a potential provider to mitigate these financial risks.^[6] They include:

1. A review of the provider's audited financial statements
2. A review of the provider's SOC 1 report prepared pursuant to SSAE 16 (formerly SAS 70). SOC 1 reports (also known as "SSAE 16" reports), primary function is to audit internal controls over financial reporting.^[8]
3. An investigation of the provider's process for handling refunds
4. A bankruptcy remote structure for holding clients' freight funds

Role of a SOC 1 report and a Freight Payment Service

Formerly known as an SAS 70 report, a SOC 1 report is prepared by an independent accounting firm reviewing the internal control structure of a freight payment provider. The accounting firm is guided in its review by the SSAE 16 standard.

The SOC 1 report is of most important to those companies subject to the Section 404 provisions of Sarbanes-Oxley. The report is a critical part of a customer's effort to showing continuing due diligence over internal control even when he outsources certain functions.

When a customer evaluates potential freight payment providers it is important for the customer to know what an SOC 1 report does and does not do for the customer:

What a SOC 1 report does for a freight payment customer:

1. Goes a long way to satisfying internal control requirement of Sarbanes-Oxley
2. If it is a Type 2, it provides assurance that internal controls are operating.
3. Provides a view into the internal control structure at the freight payment company.

What a SOC 1 report does not do for a freight payment customer:

1. It does NOT relieve a customer from making a judgment as to the appropriateness of the controls.
2. It does NOT provide any assurance as to the financial stability of the freight payment company.
3. If it is a Type 1 it provides no assurance that controls have been tested to discover if they are operating.^[9]

Summary

There are 9 key issues potential users of freight payment that users should address when looking for a freight bill processing vendor.

1. Financial security. Does the vendor have audited financial statements, an annual SSAE 16 Type 2 review, and at least am adequate Employee Dishonesty Bond?

2. Customer service. How does the provider track customer service issues to resolution? Does it use a Customer Relationship Management tool? What types of key performance indicators does it maintain?

3. Carrier relations management. Does the vendor have staff committed to maintaining outstanding carrier relations? Do they visit with carriers to communicate, resolve issues, and create efficiencies that benefit all parties? How do your carriers view the vendor; would they recommend the company?

4. Document imaging. Are hard-copy bills scanned, with images made available on the vendor’s Web site, on DVD or CD?

5. Web-based data access. Web is the prevalent method of presenting data today and the vendor’s site should include standard and ad-hoc reports, drill-downs, a graphics capability, mathematical calculations that result in new fields, client-driven report scheduling, and onscreen and email report delivery.

6. Coding, editing, and validation. How comprehensive is the vendor’s ability in this area? Can it derive cost centers from other data elements? Rules should be table-based and event-driven to ensure that updates are made quickly and easily.

7. Freight liability. How does the vendor determine if the bill should be paid? Does it ensure supporting documentation is attached? Can it perform electronic validations to your bill of lading or purchase order file?

8. Web-based bill repair. Can freight bills that need customer approval be repaired from the vendor’s Web site? Can you easily view images of the freight bill and supporting documentation to resolve bills that are being questioned?

9. Parcel shipment capabilities. Does the vendor have the ability to meet the integrated carrier’s requirements to obtain refunds for late delivery shipments that are manifested but not moved? Does it provide address correction and break down all miscellaneous charges?

It is thought that by using a freight payment service a company will:

• Reduce freight spend.^[10]
• Provide better information management.
• Save time, plus cut costs on personnel.

References

1. Freight Audit EMEA insights - ControlPay
2. Freight payment: 10 freight invoice facts everyone should know
3. A3 Freight Payment (2012), 10 Tips for Successful Procurement of Freight Payment Services
4. Outsourcing freight audit & payment: 10 checkpoints
5. Transportation Cost Recovery, "Freight Payment
6. A3 Freight Payment (2012), A Guide to the Financial Risks of Freight Payment Providers
7. Journal of Commerce (2003), STI Insolvent Since '93
8. "SSAE 16 (SOC 1) Overview".
9. A3 Freight Payment (2012), The Role of an SOC 1 report in Freight Payment"
10. How freight audit reduces your freight spend