SELECTING A FREIGHT AUDIT VENDOR

 

 

Executive Summary

White paper titles should be terse, recognizable and reasonably descriptive of the subject.  This particular subject presents an unusual “title” challenge because of how freight audit firms have described themselves since their first appearance in the 1920’s.  Their offerings, the business culture coupled with the influence of banking and deregulation have also made it difficult to select a meaningful title.  Freight Payment Vendor was considered, while also recognizable it is probably as incomplete as the title shown.  Combining the two, Freight Audit and Payment Vendor would also be inadequate, and not as accurate.  The most appropriate title, “Transportation Cost Control and Management Information Portal” will become recognizable and meaningful after this paper is read.

 

The audit firm seems to have first appeared sometime in the 1920’s. Since its beginning it has continually evolved, most keeping pace with industry’s needs and some leading the industry with innovative solutions.  During their growth and development they have had different offerings with relative emphasis on different features, at different times.  In some cases they called themselves freight audit firms; by operation they were nothing more than “payment houses”.   At the other extreme, some audit firms performed as completely outsourced traffic departments.  In the late 1950’s one of these firms slogans was, “full time traffic department at part time cost”.  

 

The description of the firms, their offerings and benefits has changed over the years.  Unfortunately, the appearance of vendor abuses has become the most noteworthy

 

Today, technology, business culture, education and deregulation have significantly contributed to the complexity of the offerings and the nature of the business.  Fortunately, the complexity created a far more intelligent customer; one that understands the motive of the audit firm and how they make their money.  Unfortunately, it is highly probable that the “intelligent customer” description only applies to a handful of companies; those that have been burned by vendors payment failures and process abuse.  

 

After researching this subject it can be fully appreciated as to why one of our readers asked the following question, “are there any white papers that discussed, “procurement and management of a freight payment and auditing service provider?

 

This white paper will: define the “need”; present a brief history of the “auditing business”; how and why it works; the types of vendors and how to select the type and the services you need that can best address your requirements.  By also addressing the providers’ perspective, there should be a sufficient balance, thereby facilitating the selection process and providing you with the basis for an accurate decision.

 

Freight Audit Vendor

By definition an audit is,

·         An examination of records or financial accounts to check their accuracy.

·         An adjustment or correction of accounts.

·         An examined and verified account. ^[1]

A freight audit vendor is therefore one who examines, adjusts and verifies freight bills for accuracy.

 

History

At the turn of the century most shipments moved by rail, then wagons beyond the rail head.  The rates and charges assessed were based upon the rail tariff structures.  These structures were highly complex, difficult to work with and required specially trained people, called “rate clerks”.  They were charged with the responsibility of accurately assigning freight charges to waybills and quoting freight rates to customers.  It took years of experience and a great deal of training before one could achieve the title, rate clerk. 

 

Likewise, shippers required competent traffic department personnel that were also capable of the same tasks as the rail rate clerk.  Competition for competent personnel in a new and rapidly growing area may have caused some clever person to recognize the need and offer a service.  Reducing overhead with a common tariff library coupled with the concentration of specialists allowed the firms to be highly competitive with in-house costs. 

 

Perhaps the firm initially offered a post audit service, that is, audit after payment; as their worth was proven, the business evolved into both pre-audit and post audit services.  As time went by, more services were offered and at least one firm claimed to be a “full time traffic department at part time cost”.

 

As many of our white papers have indicated, especially, “Logistics, The Beginning of the New Potential” there is a wealth of information contained in and associated with the movement of goods.  This information component along with the post and pre-audit services became the principal services offered. 

 

The early 1980’s seems to be a major turning point when freight audit firms became a small industry.  One of the motivating reasons may have been the demise of the freight payment banks.  Many of the newly established firms in the early 80’s presented themselves as freight audit and payment firms; in reality all they did was a perfunctory audit at best, but paid a massive amount of freight bills.  These firms were freight payment houses whose profit was obtained from the float credit. 

 

 

Types of Firms

Today there are several categories or types of firms:  Freight pre-audit; post audit; pre-audit and payment; and those offering all of these services plus information reporting.

 

Typically, these firms operate as traditional service bureaus, whereby carriers freight bills are forwarded to the audit firm, the bills are audited, accumulated into a batch and forwarded onto the customer for further handling.  The pre-audit and payment firm operates similarly but identifies a total payable for all carriers.  The shipper then issues the entire payable to the audit and payment firm.   Payment is supposed to be made to the carriers by the payment firm within the agreed to time.   The audit, payment and information reporting firm handles the work as in the other cases but also produces some reports, mostly lists that have been accumulated from the input of the freight bill data.  The post audit firm audits the bills after payment and upon discovery of overpayments files an overcharge claim with the carrier.  The post audit firm’s fee is contingent upon recovery whereas the other types of firms assess transaction fees. 

 

For the most part, all of the “firm types” described above are categorized as the “traditional model”.  They utilize computers to some extent, some for entry and duplicate payment prevention as well as facilitating the reporting requirement.  Nonetheless, this traditional model causes the customer to continually incur administrative costs due to the need for constant intervention.

 

Customer services provided by the traditional model is usually nothing more than handling carrier inquiry to address the dunning calls from carriers that are looking for payment.

 

Issues and Concerns

Payment

Over the recent years, there has been a plethora of payment problems associated with slow and non-payment of carrier freight bills by the traditional model. Over the last few years several of the traditional model firms have been forced to close their doors because of allegations of non-payment of client funds that were designated as carrier payments. 

 

The most visible type of firm today falls into the category of freight payment house.  Some of these firms emphasize the importance of developing highly specialized RFP’s in order to qualify the honesty and integrity of the vendor.  Some demonstrate the importance of requesting audited financial statements.  This is all necessary and true because of the problems associated with this type of vendor. 

 

Therefore, if at least one of your requirements includes the payment of your freight bills, you must be assured of absolute security and trust.  One of the key elements that should be included in your contract with a freight payment house is that the funds are to be treated as “escrow and trust funds”. Absent this phrase, there is a high probability of exposure to vendor abuse.  If your only requirement is the payment of your freight bills there are other services that specialize in paying bills that are not presenting themselves as freight payers.  The payment house provides no value in terms of the freight audit function, therefore if payment is the objective, your bank is probably better equipped to help you manage your cash and get the payment job done as a fiduciary.

 

Excessive and redundant processing fees

Another issue that the customer must address with the traditional model vendor is excessive costs.  The traditional model typically produces a constant stream of rejected freight bills because of their inability to determine either the validity of the bill, its rates and charges or general ledger codes.   The net result of this problem manifests itself in the firm billing one freight bill for each of its processing’s.  In a significant number of cases a single bill is charged for as many as five (5) times.

 

Source Information

The traditional model provider performs the audit based upon information supplied by the carrier – the very party whose transactions are being audited!  In addition to this process flying in the face of the definition of “audit”, logically it makes no sense.  Auditing carrier supplied information other than the rates supplied in their contract or tariff has no benefit or value; it is both a waster of time and money. 

 

Batch Cycles / Lack of Visibility

The traditional model firm processes freight bills on their own schedules to maximize internal processing efficiencies.  While this enables these firms to drive down their internal costs, it estranges users from their data.  The talented and highly capable staffs at the customer locations understand and appreciate the importance of transportation data.  The value of information decreases with the passage of time; in order to make timely and accurate decisions, it is imperative that the data and information be available to the customer when it is needed and not at the convenience of the provider.

 

Cash Management

Another area of concern is customer loss of float credit and the ability to effectively manage their cash.

 

Dealing with the Concerns

Customers must find an effective selection method so that when choosing a traditional model vendor they can select one that they can easily monitor and control.  The better choice is selecting a vendor that they do not have to control or monitor!

 

The payment problems referred to above must and can be identified early.  The flag is, “carriers calling the customer alleging slow or non-payment”.  Customers should heed this warning and immediately investigate the payment flow details.  In some cases it will be found that carrier error caused the flag and in other cases the discovery will reveal misappropriation or non-payment.  This investigation must be done immediately; keeping in mind that it is both time consuming and costly.  However, not to act immediately may turn out to be far more costly.

 

As we have seen from the above, the opportunity for abuse, excessive cost and estrangement from your data abounds in the traditional model!   

 

There are traditional model firms that are honest and offer, at least satisfactory services.  The issue facing the customer is finding them and making sure that they operate and perform correctly without having to spend a significant amount of money for the monitoring and control.  After all, if the justification for engaging a traditional model audit firm was cost, it would be foolish to have the liability and the expense; the combination of which would well exceed the internal costs.

 

In order to perform a proper and complete audit, a detailed examination of the entire record must occur.  The first examination of information must look to the originator of the source information.  Therefore, a proper audit includes the validation (ideally electronic) of the bill of lading to the freight bill.  This will confirm that the freight bill represents the correct origin, destination, weight, ship date and commodity that represent true and correct information.  Any audit that does not include “service verification” is significantly flawed and exposes the customer to high risk.

 

While the loss of ability to manage your own cash may not be considered an abuse, the traditional model utilizes customer freight funds in their own cash management schemes.  Freight Cash Asset Management represents a significant opportunity for every shipper. 

 

A New Model

The ASP, application service provider, and BPO, business process outsourcing have very recently appeared.  The ASP provides hosted expert systems on the Internet in a highly secure fashion.  The BPO performs similarly but also provides selective labor.  This “new model” vendor is characterized as being a new company with seasoned management that recognizes highly competent customer staffs.  They also recognize the customer driven need and importance of giving control back to the customer and allowing all customer authorized users’ access to their information 24/7.  This understanding first occurred in the 1960’s and has reappeared; it has value and by converging expert systems with customer capability and customer trained staffs, the power of two (2) has the strength of history and the benefit of the combination of resources.

 

Through a highly secure process, customers and their authorized users have full and complete access to and control of their information 24/7.  Once the customer loads all of their tariffs and rates, most of which can be downloaded or the BPO model will supply the entry labor, the expert system takes over.  It will automatically audit and completely process through shipper managed payment all of the freight bills received.  The data and information are available to the customer 24/7 so they can have information when and how they want it as compared with the traditional model having to wait an inordinate amount of time and pay an additional fee.

 

The ASP/BPO model features include, but are not limited to: service verification and pre-rating.  The logical steps in the new model accommodate prepayment and add routines; effectively satisfy duplicate payment prevention and offer the most effective audit because they use the Bill of Lading or other source material as the primary audit control.  An example of the benefit of this last step; the process eliminates the problem of the 50 pound Bill of Lading becoming the 500 pound freight bill.

 

The ASP/BPO model allows each customer the opportunity to manage their cash.   Freight payment is controlled fully and completely by the customer.  The customer simply lets the system know that payment is to be made; the system can generate a check at the customer site or an electronic payable at the customers’ treasury section.   

 

The ASP/BPO philosophy absolutely recognizes the talent and intelligence at every customer location; it gives the customer the tools necessary for effective and efficient freight cost control and availability of management information 24/7 so that the customer and the ASP combine their resources achieving process excellence.

 

As the ASP and BPO models evolve, the industry will have finally come of age, that is their technology and offerings will be understood and appreciated; their success will move them from niche providers to mass providers and costs will be driven down.  Some of these providers have already begun offering a host of services, in an incremental fashion so that the customer need only pay for that which is used.  Scalable solutions are the most cost effective and efficient.  Some of these additional services/features include online: freight tracing; routing control; Bill of Lading generation. Load tender, ASN and collaboration.  There is a natural and logical expansion of services that will occur as the evolution continues. 

 

Conclusion

In the Executive Summary, the difficulty in selecting a title was clear; however it seems very clear now that the title of the new freight audit and payment firm could be, “Transportation Cost Control and Management Information Portal”.

 

It is important for the customer to understand the significant advantage that the new model, “Transportation Cost Control and Management Information Portal”, offers:

 

• Elimination of abuses

• Reduction of administrative costs

• Customers’ hand picked staffs using the expert system

• Full and complete payment control

• Information 24/7

 

Another clear advantage of the “Transportation Cost Control and Management Information Portal” is their ability to stay in front of the pack; their management is comprised of seasoned professionals, who have sat in the customers’ seat and at the carriers table as well.  Their management composite typically represents all facets of the industry.  By spending their time developing highly secure, easy to use expert systems, it seems like the best choice on balance is to select a vendor from amongst the new model providers.

 

For more information about this subject please contact jwest@transportgistics.com

 

About TransportGistics, Inc.

TransportGistics is a global, multi-product and services company that provides market leading, simple, incremental solutions for transportation management and logistics functions within the supply chain.

 

TransportGistics commitment to education is portrayed through its advancement of professional logistics and transportation programs.  Its white paper site presents important and timely transportation and logistics subjects each month, and is regularly visited by more than 22,000 companies, universities and governments, worldwide.

 

Through its question and answer section, TransportGistics and its readers are actively engaged in asking and answering questions.  This activity has allowed us to create the Logistics Forum for the Exchange Ideas and Information. 

 

TransportGistics, Inc. is an active partner at the Center of Excellence in Wireless Internet and Information Technology at the State University of New York-Stony Brook.

 

Continuation

Please consider this white paper as a continuum in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com.

 

Disclaimer

The information presented herein represents the opinion of the author but not necessarily the opinion of TransportGistics, Inc. nor is it presented as a legal position or opinion.

 

 

All content copyright by TransportGistics, Inc. All rights are reserved. The authors of the articles retain the copyright to their articles. No material may be reproduced electronically or in print without the express written permission from the individual authors and/or TransportGistics, Inc. (papers@transportgistics.com)