Logistics News and Trends: Due Diligence Really Does Matter
Last week some industry publications published a letter from the CEO of Trendset, a freight payment company located in South Carolina. In this letter the CEO alerted customers to an internal embezzlement by a senior executive. While the amount which has been embezzled is yet to be determined, there is speculation that it could involve many millions of dollars.
This is not the first time this has occurred in the freight payment industry. In fact, it has happened on a few occasions and each time, shippers have lost significant sums of money ranging from thousands to millions of dollars. What is really unfortunate, though, is that none of the shippers had to lose a dime. If they had exercised commonsense and done the requisite level of due diligence, they could have avoided these costly incidents.
The articles which highlighted the Trendset event also included some advice for shippers on how to select a freight payment company. Frankly, we think the journalists missed the boat and made the issue more complicated and complex than necessary. In fact, here is some common sense, straightforward advice for companies that are evaluating freight payment companies.
First, if a proposal appears to good to be true, it is too good to be true. Recently, we talked to a C-Level executive at a company that had been burned by a freight payment company. He acknowledged that when he saw the disparity in fees between the vendor they selected versus the other vendors, he thought, "this is too good to be true." But he went with the team's recommendation to select the lowest cost provider and the company got burned.
We have talked with far too many shippers who regard the freight payment process as a commodity. They view freight payment as a commodity; auditing and paying a freight bill, or capturing accurate data is an easy and straightforward process that any company should be able to do. Since these companies view freight payment as a commodity, all too often, they allow the transaction fees to be the most (or one of the most) important criteria in their ultimate decision.
It never ceases to amaze us that companies who spend millions of dollars on freight, ignore or pay little attention to how valuable and effective thefreight payment process can be in managing and controlling these multimillion dollar transportation budgets. So instead of looking at or emphasizing the value of an effective freight payment process and the need to control millions of dollars in transportation spending, these companies choose to save a couple of thousand dollars by selecting freight payment companies who promise the moon, but deliver bargain-basement quality.
Let's be more specific. If you are soliciting bids for freight payment and you have a company that is offering to process your freight bills for 10 to 30% less than other suppliers, the first question you should be asking is: “What am I missing?”. To the best of our knowledge, there isn’t anyone who has discovered the “secret sauce” in this industry.
Whether you are manually keying a freight bill or receiving electronic transmissions of freight transactions, there is not a 10 to 30% difference in cost (regardless of where those bills are processed). And if there is a big difference, you may also want to ask: Is the freight payment company using a “pre-fund” process that forces the carriers to accept a discount for prompt payment; or is the freight payment company struggling financially and using their customer balances to fund their operations? Or is the freight payment company skimping on services such as not auditing all the freight bills? If so, these companies may severely discount their fees since they may need their customer balances to keep their doors open or will not deliver the promised services.
The second thing you should do is not rely solely on the references which the company provide. Do you honestly think that the company you are considering is going to provide you with bad, or weak references? Of course not! And that is why you should talk to your carriers and ask them about the freight payment companies you are considering in your RFP process. Ask your sales rep for the name and number of the Director/Manager of Accounts Receivable (some carriers call this the Revenue Collections) Department. Ask for their input or recommendations. Ask them if vendors communicate paid information on freight bills yet the actual disbursement is not received until weeks after the published date. This is a red flag!
Since getting the carriers paid is one of the most important things you expect from your freight payment company, you should verify that the freight payment company will allow you to control 100% of the freight balances through the end of the settlement process (a.k.a. when the carriers actually get their money). Under the traditional freight payment model, the freight payment company tells you how much they are going to pay on the shipper’s behalf, the shipper gives them the money and the freight payment company effects settlement.
However, several shippers want to control 100% of their funds. This can easily be done and shippers should closely evaluate this option. If your freight payment provider is receiving funds from you and then disbursing them, do they have a fidelity bond? Or better yet, do they have an annual review of the suitability of the design and operating effectiveness of controls within their freight payment processing system, culminating in a SOC-1 report. Remember, all these "extras" cost money, and if you select the lowest bidder, many of these protections are not available because the low cost providers do not invest in them.
Third, shippers need to validate the proposed deliverables. Over the years we have been retained by law firms and shippers to serve as an expert witness in litigation against freight payment companies. Based on this experience, we have gained first-hand an in-depth knowledge about what is included in a typical freight payment proposal. Periodically, we like to remind folks that not all freight payment companies are created equally! We know that for some shippers, every freight payment company should be able to provide an accurate freight accrual and to magically decipher whatever data is sent to them electronically. Practically speaking, this is not how things work.
So, if you are considering retaining the services of a freight payment company take our advice: look carefully; focus on the big picture; do not choose on price alone; talk to your carriers and others - vet your vendor; validate your deliverables! In the final analysis, heeding this advice will keep you from potentially losing lots of money and costly litigation.