Paying the Bills: Choosing The Right Freight Bill Payment Provider
Any firm that ships anything is familiar with freight bills and the process for paying them. Less understood is the industry that has been built around outsourcing these payment activities.
Why outsource freight bill payment services? There are several good reasons; the most popular is the possibility of reduced costs.
It costs a large company about $11 in fully allocated costs to pay one freight bill. If a freight bill payment company pays the same bill, the cost to the shipper is approximately 5 percent to 10 percent of the internal expenses. Add to this another 2 percent to 5 percent saved through the reduction in incorrect and/or duplicate freight bills, and the cost cuts can be significant.
The real value, however, is added through the business intelligence a freight bill payment provider generates. Even before the bill is paid, the freight bill auditor’s experience, combined with the latest technology, ensures that companies pay the correct rate, including accessorial and surcharges.
Post-payment activity can include almost any type of reporting your company wants—for example, routing compliance, expense by mode or carrier, or even product.
Most freight bill payment companies use technology that is more robust, enabling them to manage costs more effectively. Internet tools include report writing, freight bill visibility, and improved data integrity.
Because of a provider’s broad client base, your freight expenses can be benchmarked against those shipping comparable products.
Finally, comprehensive rate information available to each user company enables providers to offer a broad range of consulting services without expensive data collection.
Although outsourcing any logistics function should be accompanied by thorough due diligence, the financial sensitivity of freight bill payment dictates that companies expend extra effort when selecting a payment provider.
Identifying providers is the point in the process where due diligence becomes critical. Before your company can issue a Request for Proposal (RFP) or Request for Information (RFI), it is absolutely vital that you have a clear understanding of the available providers, their reputations, and their suitability for your needs.
Making the Selection
Once you identify potential providers, it is time to begin a careful evaluation and selection process. Each company’s needs will be unique, but there are certain basic criteria against which potential freight bill companies should be measured.
Financial stability. Financial stability has become very important in recent years, particularly for companies paying billions of dollars in freight bills. The potential outsourcer should know how long the provider has been in business, and whether it has the resources to survive economic downturns. Does it pay carriers promptly? What are its investment policies? What type of fiduciary responsibility and protection does it provide?
Business experience. Research the provider carefully to determine its experience in the industry and with other outsourcers. How many bills does it pay annually, and for whom?
Commitment to technology. Providers should have the technology to take advantage of their own critical mass and provide the output you desire. More importantly, providers must be visibly committed to investing in the most current technology for their own operations, and to maintaining systems that can be integrated with yours. Finally, they must have an ongoing ability to serve your company’s unique needs as they change.
Management depth and strength. The provider must have a strong, skilled organization, as well as adequate, qualified management.
“Bench strength” is a problem for some providers in any industry, and it is critical that you clearly understand the management and labor force that will be devoted to your company.
Reputation with other companies. The best substitute for personal experience is the experience of other freight bill payment outsourcers. Potential providers should offer a client list with contact names and telephone numbers.
Contact at least five of these companies to satisfy that the provider can perform in a cross-section of industries. You should be able to choose the references to be contacted; be wary if the provider offers only a limited number of pre-determined references. You also should request the names of former clients.
Often, conversations with companies that no longer work with the provider can be very revealing.
When you talk to other outsourcers, determine if the provider simply does well what it is told to do, or if it is proactive and committed to continuous improvement in performance and customer satisfaction.
Carrier relationships are second only to client relationships for successful freight bill payment companies. Explore at least three carrier references; these should be carriers that have had at least one year of experience working with the provider.
Continuous improvement programs. Progressive freight bill payment providers usually maintain a formal quality or continuous improvement program. Some may be ISO-certified, while others may have lesser, but meaningful, programs in place.
It is absolutely critical that the provider you select is committed to ongoing performance enhancement, and uses an identified procedure to accomplish this. Your RFI should require a detailed description of the improvement programs the provider has in place.
Growth potential. Most companies project ongoing growth through volume increases, new products, or new markets, and it is important for your payment company to be in a position to support that growth.
While excess capacity probably will not be immediately available, your selected provider should be in a position to provide capacity or new services over a short or long term, depending on your requirements.
Security. Most companies have adopted stringent security standards. It is imperative that your freight bill payment provider be in a position to secure facilities, equipment, and information as well as or better than you can.
The provider’s information systems must be fully protected from outsiders, and information technology personnel should ensure that all necessary log-ins, passwords, and firewalls are in place. All data should be backed up and stored off site.
If your company is publicly traded, you are bound by the Sarbanes-Oxley Act (SOX). While freight bill payment providers are technically not bound by the Act unless they are publicly traded, you still want to make sure they are SOX-compliant.
Ask potential outsourcing firms to provide a Statement of Auditing Standards (SAS 70, Type II). This certifies that the provider has adequate, effective financial controls in place.
Cost. While it should not necessarily be last in importance, neither should cost be your first and foremost consideration when choosing a provider. Cost should be a factor only in deciding among providers that meet all your other criteria.
Managers who select a provider solely based on cost commit to an outsourcing strategy that has little chance of success.
Ethics. It is an unfortunate sign of the times that we must check the moral fiber of the people and firms we do business with. Just think Enron, WorldCom, and other former pillars of American business.
Some large freight bill payment providers have formal ethics policies. Smaller providers may not have a formal written policy, but they should at least have some code of ethics for their employees. This does not necessarily have to be a written policy as much as a state of mind.
Preparing Your RFP
Once your outsourcing team agrees on the criteria for selecting a provider, it’s time to put it to use in preparing the Request for Proposal and evaluating the responses.
To facilitate the evaluation, and conduct it in a scientific and quantifiable way, weigh the various criteria according to importance. It is also important that the providers understand the criteria against which they are being measured.
Your Request for Proposal should be as complete as possible. Providers can respond only to what you give them; if the information is incorrect and/or incomplete, their proposal will no doubt be so as well.
While each outsourcing firm has unique requirements, certain informational needs apply to almost every potential relationship. The RFP should be clear and concise, and provide for responses in a pre-determined format. The format should be designed to facilitate the evaluation of the criteria already identified.
At a minimum, your RFP should contain the following nine elements:
1. Background information about your company. This section should describe your company and its basic businesses. It should include a general description of the products you manufacture or distribute, annual revenues, distribution methods, and other helpful information such as mission statements, and number of facilities and employees.
If your company is publicly held, one effective method of providing such information is by including your most recent annual report and highlighting the appropriate information.
2. Purpose. This is simply the reason for the RFP. Describe the process’s objectives, explaining in detail what you hope to accomplish.
3. Scope of work. For the freight bill payment company to submit an informed pricing proposal, it is necessary for you to provide a considerable amount of information about your payment activity. While it may be tempting to guess at the information, remember, the more accurate the input, the more accurate the pricing.
Obviously, each payment provider has its own informational needs and a template for addressing them, but most will ask you for information such as your average annual number of freight bills, total freight spend, current freight bill payment process, desired rates and reporting capabilities, and information about the carriers you use.
As the number of firms operating within a global economy continues to increase, it is becoming necessary for freight bill payment companies to accumulate the experience and resources to handle international invoices.
If you are a global firm, be prepared to answer additional questions about your import and export activity, transportation modes, currencies used in billing, and rates and contract language preferences—will they all be in English?
4. Project schedule. Set forth the outsourcing project’s timetable, including due dates, schedules for notification, and further decisions, including estimated start-up dates.
Companies often allow insufficient time to conduct the outsourcing process efficiently. A reasonable timeline for RFPs and their evaluation is:
- Responses due: 4 weeks.
- Evaluation: 3 weeks.
- Oral presentations and site visits: 3 weeks.
5. Evaluation criteria. List and explain your evaluation criteria clearly, so providers know by what benchmarks they will be evaluated.
6. Response guidelines. This section describes the format for RFP responses. Request hard copies, electronic formats, or both. Present rules for making oral presentations, if required.
7. Respondent qualifications. Keeping in mind the evaluation criteria, this next section requests specific information about the providers. It is difficult to outline a precise list of questions to ask, but the RFP should at least contain the following inquiries:
- Is an audited financial statement available?
- What is the provider’s net worth (financial strength)?
- What types of external (independent) audits will the provider perform on the outsourcing firm? What type of risk coverage does it provide?
- Is the company public or private?
- Is it part of a financial institution?
- What type of fiduciary responsibility and protection does it provide?
- Are individual account representatives assigned to your company?
- Are all inquiries documented?
- Is there a dedicated EDI implementation group?
- Does the freight payment provider offer Internet services/tools specifically targeted to your needs?
- Is the provider knowledgeable about the carrier industry and familiar with logistics best practices?
- How can the provider help your company identify logistics opportunities based on the data it captures from your invoices?
- Can the provider benchmark your current transportation contracts and pricing against industry averages?
- Is the provider using the latest hardware and software technology?
- What are its future plans for handling data processing requirements?
- Can the provider handle all forms of electronic commerce?
- Does it handle all EDI standards, as well as proprietary EDI formats? Does it have a separate EDI implementation staff?
- Can information be accessed via the Internet?
- Are Internet database applications available?
- What size is the information technology support staff?
- Is there a formal disaster recovery plan in place?
- What operating systems are compatible with your software?
- Does the provider offer a transportation management software package?
- How long does the provider keep historical data within the system?
8. Evaluation. Once you receive responses to your RFP, evaluate them according to the established criteria. Using the rating sheets, identify the top three candidates. Notify them, and schedule time for oral presentations, as well as personal visits from your selection team.
Oral presentations often reveal weaknesses and strengths, and provide other impressions not readily identifiable in the written responses.
9. Site visits. Finally, there is no substitute for an in-depth inspection of the finalist providers’ physical facilities and operations. Qualified members of the selection team or other internal or external experts should conduct these inspections.
During these inspections, examine closely the facilities, operations, management, information technology, and other aspects of the provider’s business. Compare the written responses to the visual conclusions.
The Freight Bill Payment Contract
As with any other outsourcing relationship, a contract between the freight bill payment provider and the outsourcing firm should be negotiated. A contract ensures that each party understands its duties and responsibilities as part of the relationship.
Lack of understanding on the part of either the outsourcer or the provider is more often than not the major cause of difficulty and failure in outsourcing relationships.
Freight bill payment service agreements usually are brief compared to those for other outsourced logistics activities, but vary in length and content, depending on the provider and requirements.
While the contract need not be lengthy, it must be very clear on the services to be performed and the compensation.
At a minimum, it should include the following:
* Preliminary statements that define the parties and their intentions, and provide for the freight bill payment firm’s engagement by the outsourcer to perform certain services.
* A clearly defined list of services, including, for example, pre-audit, bill payment, data capture, and reports. The provider should confirm that it has EDI capability. This section of the contract also should describe the Internet services the freight bill payment firm will provide, and clearly define confidentiality requirements for the software and materials.
* The term of the contract, along with any termination privileges.
* A clearly outlined fee schedule, based on a profile provided by the outsourcing company. That profile should be incorporated into the contract so all parties can understand the assumptions on which pricing was based.
* Finally, the agreement should contain a confidentiality clause, as well as provisions for severability, governing law, insolvency, force majeure, and the relationship of parties.
Some contracts contain variations of these provisions because individual companies may have unique requirements. Whatever agreements are executed, the terms should be clear, flexible, and mutually satisfactory.
Both parties must remember that while they are working toward common goals, these goals may change, or each party’s interests may differ from time to time. The contract must allow for these dynamics through reasonable, non-adversarial language.
Case Study: When Outsourcing Doesn’t Compute
In the cost-cutting, margin-tightening world of petrochemicals, outsourcing is a common approach to business. But it’s not always the right fit.
When faced with the decision to outsource its freight payment system, Chevron Phillips Chemical Company LP (Chevron Phillips Chemical) found that the predicted cost savings just didn’t compute.
Multiple third-party freight payment companies contacted Chevron Phillips Chemical with offers of services that could provide greater reporting capabilities and potentially save the company thousands of dollars in processing costs. Each provider touted the cost savings of outsourcing freight payment through detailed cost-benefit analyses.
“If any of the freight payment service companies showed a meaningful outsourcing value proposition, I would have happily given them our business,” says Richard Roberts, support services manager for Chevron Phillips Chemical.
Chevron Phillips Chemical opted to keep the process in-house, and now manages its freight payables via a corporate integrated SAP platform that automates outbound freight invoice accrual and payment.
An accurate and efficient SAP freight rating process allows a staff of six Chevron Phillips Chemical employees to rate and pay incoming invoices. The company also performs an internal post-payment review to identify errant payments so it can issue overpayment claims and make system adjustments.
Third-party freight bill auditing company Audit Techs performs quarterly post-audits to identify and eliminate payment system exceptions and errors.
This system of triple checking enables Roberts’ department to reduce freight bill overpayment amounts to 0.03 percent of the company’s total freight spend.
What About Overhead Costs?
Analyzing the multiple freight bill payment services’ proposals proved that economies of scale were on the side of outsourcing the bill payment process.
Chevron Phillips Chemical’s cost for processing a bill under the outsourcing proposals would be reduced by approximately 40 percent. This savings had the potential to significantly reduce Chevron Phillips Chemical’s total departmental costs.
Chevron Phillips Chemical’s analysis of the outsourcing companies’ various capabilities indicated that the third parties’ strongest skill set was bill processing. The weakest component was the post-payment auditing process.
As a result, the cost benefits of reducing headcount and lowering the per-bill processing figure could not offset the current departmental performance that drives a confirmed 0.03 percent overpayment rate.
The industry norm for freight bill overpayment ranges from 2 percent to 5 percent. With this calculation, Chevron Phillips Chemical concluded that outsourcing its bill payment process for the invoice processing “savings” may put as much as 12 times more in favorable payment accuracy benefits at risk. Even a small increase in error ratio would quickly negate any savings from the outsourcing.
“The outsourcing companies might have provided lower processing costs and enhanced reporting tools, but when we asked them to match our payment accuracy rate they couldn’t do it,” says Roberts.
It’s Up to Them…What Freight Bill Payment Providers Should Offer
Companies looking at outsourcing freight payment services need to understand the capabilities of service providers while not losing sight of the fundamental considerations of selecting a vendor. Here are 10 key issues potential outsourcers should evaluate when looking for a freight bill processing vendor.
1. Financial security. Does the vendor have audited financial statements, an annual SAS 70 Type II review, and at least a $50-million 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 on-screen and e-mail 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?
10. Ethics. Does the vendor have a code of ethics? Does it tell you what’s good about its service rather than denigrating its competition?
It’s Up To You…What Shippers Should Do To Prepare
Freight payment is a niche industry that requires a specialized approach. Many companies struggle to procure services rather than commodities because it is difficult to quantify or substantiate the difference between providers.
These tips will help you find a quality freight payment solution.
1. Thoroughly document/understand existing processes. Many companies try to procure freight payment services without a good understanding of existing processes and business challenges. Without this knowledge, a company is simply not equipped to carry out a successful bid. Documenting the existing process also helps facilitate a quicker implementation with a new provider.
2. ROI analysis/senior management support. One of the first steps companies should take on the way to procuring a freight payment solution is to complete an ROI analysis to justify the project and garner senior management support. Many bids fail when the procurement team presents their findings to senior management only to hear “it’s too expensive.”
3. Establish uniform, quantitative evaluation criteria. The majority of companies that undertake freight payment initiatives fail to establish a robust scorecard to evaluate providers. This is critical for capturing information, comparing providers on uniform criteria, and ensuring the provider can meet your needs.
The freight payment procurement process typically runs more than six months from start to finish. Along the way, your staff might listen to provider presentations, participate in provider site visits, review bid responses, and attend webinars. A formal scorecard allows procurement teams to capture and score information on providers at multiple stages in the buying process.
4. Develop a cross-functional procurement team. Companies should leverage their internal expertise in accounting, finance, IT, and supply chain/logistics by including a member from each department to evaluate a potential provider’s capabilities.
Many companies include staff just from one or two departments, only to find out the bid is stalled due to concerns raised by other departments, or worse, that a provider cannot meet a requirement set forth by another department after the business has been awarded.
5. Dictate pricing criteria. Unfortunately, there is no standard pricing practice among freight payment companies. With this in mind, companies should dictate the pricing structure that all potential providers will use.
Even this practice, however, is still not adequate to ensure equal comparison because some providers will interpret the pricing categories differently. One best practice is to require providers to complete the pricing template with their estimate (what they use in their own cost models) of the number of transactions for each pricing category. This allows your company to ensure that all providers price and classify transactions equally.
6. Develop a detailed scope of work. Many companies provide potential providers with a list of requirements, but fail to specify or stipulate how these requirements play out in a solution.
For example, you might require that bills from your top 10 carriers be processed electronically. Your requirement might state that you expect the provider to be capable of processing electronic billing, but a detailed scope of work would specify which carriers you expect to be processed via EDI. Too often, what a provider reads into the requirement is very different from your expectations.
7. Maintain a closed-loop communication process. Communication is essential throughout the bid process. To ensure fairness, all questions and answers should be communicated not only to all potential providers, but to all internal staff as well. One best practice is to hold an anonymous bidders’ conference, where all potential providers are allowed to communicate directly with the cross-functional procurement team to ensure a complete understanding of expectations.
8. Stipulate payment method and days of float. Freight payment companies derive revenue from one of two methods: a transactional fee applied to each type of transaction, or from “floating” a company’s transportation funds. (In this method, a client’s transportation funds are invested between the time the provider receives the funds and settles payment with the client’s carriers.) The amount of revenue earned depends on the length of the float period.
Many companies don’t consider that their chosen payment method has a significant impact on the amount of float a provider can earn. Providers issuing 100-percent paper check payments, for example, enjoy up to 10 extra days of float than those deploying electronic or EFT funding with immediate settlement. This additional revenue can lead you to believe one provider’s transactional price is better than another due to the lower transactional fee. In reality, the lower transactional pricing may actually cost you more, due to the cost of capital.
A best practice is to mandate settlement time requirements rather than float days. For example, you could mandate 100-percent EFT payment with a settlement time of two days. This means all providers would only have possession of funds—or float—for two days.
9. Perform site visits. Freight payment processing is a service industry and a provider’s staff is critical to its success. A site visit allows you to validate a provider’s capabilities and evaluate the cultural fit between your organizations.
10. Hold post-mortems with each finalist. Holding post-mortem meetings with finalists helps companies gain each provider’s respect and appreciation by sharing with them the specific reasons they were not selected as the provider of choice. A company also can benefit from this practice by learning how to improve its own procurement practices, uncover any miscommunications that might have disqualified a potential provider, and maintain relationships with the finalists.
Excerpted with permission from The Role of Freight Bill Payment and Transportation Management Information in the Supply Chain Industry, by J. Kenneth Hazen with Clifford F. Lynch, CTSI. Free copies of this book are available upon request to Inbound Logistics readers.