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IT’S WORSE THAN I THOUGHT

By Thomas Whaley, President, Level One Technologies, Inc

In an editorial that was published in Freightwaves on the 1st of February, titled “SURVIVING STAGFLATION – THE ECONOMIC TSUNAMI THAT LIES AHEAD”, I presented statistical evidence that in the fourth quarter of last year, our economy entered into a period of “stagflation”, which I defined as an economy that is simultaneously burdened by high inflation, low economic growth, and high unemployment. 

In the article, I made recommendations to freight brokers, on how to protect their businesses during this period. I based the advice on changes I made as a business owner, to protect my general contracting business in the 1980s, when we experienced an earlier period of stagflation. 

After the article was published, I started to consider new topics for my next editorial. But that effort was interrupted by a new report, that showed wholesale inflation, as measured by the Producer’s Price Index, had increased to 10% in January, which was the highest one month increase in the history of the Index. 

Because this increase will accelerate inflation at the consumer level, and deepen the economic problems we’re experiencing, I decided to postpone my search for a new topic and write a second editorial on stagflation and its negative effects on freight brokers. 

As a long-term service provider, with a vested interest in the health of the transportation industry, I’m compelled to issue another warning to freight brokers, that unless they make some immediate changes to the way they do business, they could become a victim of what’s shaping up to be the most dangerous economic period in our nation’s history. 

The only positive aspect of the advice I’m going to give, is that freight brokerage is not a complicated business. And because of that, the changes brokers need to make are also not complicated, as evidenced by the basic changes I made in the 1980s, that I credit with saving my company.  

The first change took place, after I realized that competitive forces in a stagnant economy, would make it nearly impossible for me to increase my top line revenue. Even more damaging was the fact that inflationary pressures would cause prices to rise, and those increases would narrow my operating margins. 

Because the problems I was facing were originating at the “macro” economic level,” I knew their solutions were beyond my control. That realization caused me to take the only viable option I had to reduce my operational risk, which was to go into “protective” mode and lower my fixed costs. 

As you can imagine, that was not an easy thing to do. That’s because I was in a service business, and those costs were almost entirely staff related. For the layoffs to make a difference, I had to let go as many staff members as possible, but still remain operational. I also knew that once the separations occurred, I needed to replace the work performed by the missing employees, which I accomplished by significantly increasing my own work hours, and by hiring temporary employees, who were readily available for hire, due to the many other layoffs that were occurring in the economy. 

The second change took place, when I realized the sub-contractors, I relied on to service my customers, were facing the same risks of going out of business that I was facing. With that realization, I decided it was best to limit my exposure, by narrowing the number of sub-contractors I worked with to a manageable level. After that, I worked to improve my relationships with each member of that selected group. 

One change I made, was to stop requiring them to be low bidders on every project they were awarded.  I made that decision when it occurred to me, that if I wanted them to remain in business, they each needed to be profitable companies. 

I believe the changes I made were nothing more than common sense solutions, which helped me survive in an economy where many other businesses failed. Frankly, my success in remaining operational during a period of stagflation, is the reason I’m motivated to encourage every freight broker to emulate the approach I took, which as I previously described, began by making a concerted effort to lower my fixed costs. 

Based on my experience in the freight brokerage industry, I believe the only way to reduce these costs, is for brokers to reduce the number of people who work in their back offices. But before these cuts are made, brokers must first decide how they intend to replace the work these employees perform. 

One common approach is to require the remaining employees to “pick up the slack” and perform the missing work. This approach can work well, when the reasons for reducing the staff are fully explained to the remaining employees, and the explanation resonates with them.  However, when the explanations are omitted, or done half-heartedly, problems can occur. One of the worst outcomes is when each remaining staff member asks for additional compensation to perform the missing work.  

A second approach is to rely on offshore service providers, to supply employees who are capable of performing the missing work. Generally speaking, these providers charge significantly reduced rates, and aside from cultural differences that may affect the quality of their work, many of them are capable of doing an excellent job. 

In last month’s article, I discussed a third option that’s available to brokers. This option involves leasing specialized software that’s capable of performing the missing tasks.  However, so there is no misunderstanding of what this software is capable of doing, many brokers currently use it to automate all of their carrier invoicing and customer billing activities. 

For the record, I have a vested interest in this application, due to my long-term affiliation with Level One Technologies, a software development company that designed and built it. The application is named Epay Manager, and it’s promoted as the transportation industry’s first, comprehensive invoice presentment and payment system.  

To give you a sense of the system’s ability to reduce fixed costs, brokers who use the application, are able to reduce the time and cost needed, to process and pay their carriers’ invoices, by as much as 75%. In addition, brokers who use the system to create and send their customers’ bills, have experienced time and cost savings of up to 95%. 

Another way to express these savings, is to quantify the actual number of dollars saved, by brokers who use the system. To do that, I’ll cite the experience of one mid-sized Epay broker, who last year used Epay, to complete all of the A/P, A/R and Document Imaging activities required to settle 2,000 weekly carrier invoices and create and send a corresponding number of customer bills. 

Some may be surprised to learn, that this broker was able to complete all of these weekly tasks, with only three employees, instead of the ten employees that were originally required, when the broker used traditional processing methods. 

Assuming this broker paid each employee $700 per week, and incurred the additional cost of a benefit package that added 20%, or $140 to each employee’s cost, by operating with seven fewer employees, this broker was able to achieve a weekly savings of $5,800, which over the course of a year became an annual savings of $311,600. 

In addition to reducing fixed costs, Epay is also capable of reducing a broker’s direct carrier spend. It does this by allowing brokers to pre-approve early payment options and make them selectable by their carriers, on an invoice-by-invoice basis, in exchange for a discount. 

Selectable options are possible in Epay, because the application was designed to allow brokers and carriers to interact in a dual view system, in a variety of ways. 

These include giving carriers the ability to send and attach delivery documents to specific transactions in the system, after which the broker is notified that new documents are available and can be viewed for approval.  

The interactive design also allows carriers to “Accept” invoices, sent to them by their broker, whenever the proposed payment amount is satisfactory. Alternatively, the interactive design allows carriers to dispute invoices, whenever they believe they’re due a higher amount. When carriers use this functionality, the system notifies their broker of their payment request. Once a broker receives the request, the system allows both parties to engage in a two-way dialogue, that’s recorded in the transaction’s audit trail, until the dispute is resolved. 

Finally, the interaction includes the use of Epay’s internal messaging system, by billing contacts of the broker and carrier, to discuss specific transaction issues, such as the reason a transaction was “Rejected” by a broker, that was previously “Accepted” by a carrier.     

Although these interactive features produce many efficiencies that contribute to process cost savings, many brokers who use the system say that Epay’s most important feature is its unique early payment module.  

One of the reasons they say this, is the module’s ability to help them improve their carrier relationships, because it gives carriers the payment flexibility they need, to manage their cash flow, which they say is an essential service they must provide, because it improves their ability to retain and attract carriers.   

In addition, they credit the module with helping them improve their profitability, by giving them a way to reduce their direct carrier costs, which they say happens every time a carrier exchanges a discount for an early payment option.  

To demonstrate the impact these savings can have on a broker’s profitability, last year one mid-sized Epay broker, who processed more than 98,000 carrier invoices in the system, earned discounts in excess of $320,000. 

In my experience, there are few instances in life, where a product or service that’s provided by one party and used by another, is considered to be so valuable that it improves the relationship between the parties who use it. 

I make this point, because after watching millions of transactions flow through Epay in the most transparent and efficient manner possible; and knowing that each successful outcome was achieved by a system that created a custom workflow for that transaction, to apply specific business rules that would honor each commitment the broker made to the carrier, including the broker’s most important agreement, which is to directly deposit the net invoice amount, into the carrier’s account, on the date selected by the carrier, it’s easy for me to see why, carriers view brokers who use Epay, as being among the most trusted and reliable brokers in the industry. 

Finally, at the risk of being criticized for making a self-serving software recommendation to brokers, who must find ways to reduce their fixed costs, and secure access to enough qualified carriers to meet their customer’s future requirements, I can think of no better way to achieve these objectives, than to use one application like Epay Manager, to simultaneously solve both problems. 

Conclusion:

In the ten-year period that followed the Great Recession, financial losses caused by low rates and a lack of work, forced many carriers out of business. Additional losses occurred, when some of the remaining carriers left the industry, following the Covid-19 lockdowns. And now that the economy is entering into a period of stagflation, this trend is almost certain to continue. 

Given the strong head winds they’re about to face, brokers should urgently consider making changes, to the way they’re conducting business. They should begin by reducing their financial risk, by eliminating as much of their fixed costs as possible. However, what’s equally important is the need for brokers to modify their carrier policies, to make them more attractive to carriers, in what is about to become the most competitive market for carriers in memory. 

Unfortunately, with inflation rising at an accelerated rate, there is less time than I previously thought, for brokers to make these recommended changes.

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