Freight payment vendors have stayed out of trouble lately, but that’s no excuse for shippers to not manage relationships closely and strategically.
In early May, Shirley Sooy was sentenced to more than four years in federal prison. If that name doesn’t ring a bell, perhaps it’s because you never worked with Sooy’s company, the TransVantage Group, a former provider of freight audit and payment solutions.
Sooy admitted to operating her company as a Ponzi scheme from 2010 through 2013. TransVantage collected cash from shipper clients and instead of holding those funds in a trust to pay carriers, Sooy used the money to fund the company and pay for personal expenses, like mortgages, yachts and fancy cars.
It’s certainly not the first instance of a freight audit and payment provider betraying the trust of its customers. Long-time watchers of the industry will remember Computrex, Inc. filing for bankruptcy back in 2001, when the firm defaulted on more than $25 million worth of payments on behalf of its customers.
Every so often, the specter of businesses with bad intentions taking advantage of an unregulated market in which shippers entrust their money to a third party returns.
But the lesson here is not necessarily that a small percentage of the dozens of companies offering freight audit and payment (FAP) services might be unscrupulous. It’s that the passage of time makes it easier to forget these episodes. And that makes it easier for a shipper to take its eye off the ball when managing its relationship with payment providers.
not that a small percentage
of companies offering
FAP services might
It’s that the passage
of time makes it easier
to forget these episodes and
take one’s eye off the ball.
Staying Vigilant. The stories come fast and furious when an unscrupulous FAP vendor is discovered by a customer or authorities. But it’s in the relative quiet times between such episodes that it’s often best to renew one’s focus on such relationships.
It’s also a good opportunity to examine just how FAP vendors have evolved, from offering pure audit and pay services to something more robust and strategic.
“How soon companies forget,” said Cecil Bryan, a freight payment industry veteran and president of the Logistics Alliance Network. “What are the companies doing post-Trendset (another FAP vendor that went under in 2013 due to employee malfeasance)? Cutting their own checks? Going with a bank? What are they doing to prevent it from happening again?”
Bryan said he sees shippers falling into familiar patterns of trust when it comes to managing their FAP arrangements. By industry estimates, 50 percent of users of these services are not fully protected from financial malfeasance. That’s not to say that more than a fraction of those companies are actually at risk, but without scrutinizing those relationships on a regular basis, it’s impossible to know which companies are at risk.
“If you don’t trust and verify, you never know what will happen down the road,” Bryan said. “Shippers are partly to blame if they have their head in the sand.”
He said there are some simple steps shippers can take to protect themselves. “If you’re going to outsource, put in tools to see what’s going on and have someone monitor it on a weekly basis,” Bryan advised. “Paper checks are a red f lag in today’s environment. And pay close attention to your payment cycle lag.”
Bryan gave the example of a 15-day period between when a payment is supposedly made by the FAP vendor and when carriers get paid.
“It takes four to 14 days for checks to clear,” he said. “The bank has that information. It’s the check clear date. The transparency comes in where you need to know if you had it in your contract to make payment in 48 hours.”
A traditional dividing line for many shippers is whether a vendor is bank-backed, but there is also a class of non-bank-affiliated vendors that take steps to provide transparency, keep separate accounts for each shipper, and insure their customers’ cash.
The FAP vendor Data2Logistics, for instance, told American Shipper years ago that it pays for insurance with the Federal Deposit Insurance Corp. (FDIC) in excess of 100 percent of the payments it manages to assure clients they would recoup all of their money in the event of a problem.
The amount of cash a vendor has on hand depends on the volume of payments it’s handling. It’s a linear relationship—the more freight spend a vendor is managing on behalf of its clients, the more money it has in escrow at any given time. But that cash is never enough to cover all the payment commitments to all its customers.
So shippers need to track their own payments, and ensure their FAP vendors have internal controls and insurance in case something bad happens.
Full Disclosure. According to the FAP and data analytics vendor Trax Technologies, visibility into the process should be a natural characteristics of the shipper-vendor relationship, not just for risk control reasons, but for strategic ones as well.
“Transparency means having the visibility into exactly where an invoice is in the process, and the state of that invoice at that time,” said Alan Chute, senior vice president, solution design at Trax. “Providing this visibility requires clean data, effective controls and clear communications.
“A comprehensive audit for logistics services requires all data available for verification to be accessible electronically,” he said. “This includes invoices, shipment and status documents, orders, goods receipts, and master data such as rates and payment terms. We process 97 percent of invoices and 99.5 percent of shipment files electronically. When we receive paper, we digitize all the information on the invoice for verification, and present both the electronic version and the image for online visibility.”
Chute said data normalization is the key to automated auditing.
“It is not enough just to capture the normalized version of source data,” he said. “We capture all data received in its original form as well as the clean version, so shippers and service providers can see what data was changed.
“Every audit condition detected on an invoice, freight bill, or charge line is available electronically showing the audit action applied. If the audit action is the result of manual review, we capture the name of the person who provided the approval. When all source data and audit decisions are available electronically, shippers can easily measure [key performance indicators] that show the status of invoices in the system, cycle times, on-time payments and the percent of transactions requiring manual review. We also measure the quality of data received versus expectations by mode and region.”
Strategic Data. This hints at another area where shippers can take advantage of tighter relationships with FAP vendors. Instead of just seeing these vendors as pass-through entities that take manual labor out of the payment process and increase billing accuracy, FAP providers can be seen as driving strategic value if the relationship is managed systematically.
According to American Shipper’s 2016 Transportation Benchmark Study, nearly 70 percent of shippers using FAP vendors expect those vendors to provide reporting/ business intelligence services, 47 percent expect rate benchmarking and 45 percent expect data cleansing. Only 19 percent said they expect their FAP vendor to merely provide audit and payment services.
“Not every shipper is conditioned to think of their freight audit and payment process as a place to go for data-rich transportation information,” American Shipper noted in an April white paper produced in conjunction with freight payment provider U.S. Bank, The Data-Rich Path Through Transportation Volatility. “It is often thought of as simply the process which closes the loop on a transaction. Freight bills don’t just contain rich data, they contain accurate data. Once the proper business rules, audits and data conditioning have been applied, the information from the invoice is essentially ironclad.”
Or as Chute put it, “More shippers are recognizing that freight audit and payment data is a rich source of business intelligence, revealing opportunities for savings that far exceed the value of the audit. This realization has led clients to view the process as more than simply a cost-effective way of paying freight bills. This is another factor that helps mitigate the risk of complacency.”
Bryan said he understands, to a degree, why complacency sets in, but that it’s no excuse.
“It should be a priority, but there are so many other things to be mindful of,” he said. “The sense of urgency is not there. You need to look at this and do something. Let’s say 60 days from now, your payment company goes bankrupt and you lose $4 million. How will that reflect on you if you’re managing that process?”