Freight Payment Services: Dollars & Sense

Freight payment services have played a vital role in logistics since the market’s beginnings more than a half-century ago, when banks and their business customers began seeking an efficient way to pay motor carriers within federally mandated time frames.

In today’s more loosely regulated shipping environment, freight payment service providers have expanded their portfolios to offer an array of cost, productivity, and efficiency benefits.

“Freight payment services are a necessity for shippers striving to implement lean management practices,” says Charles Popick, founder of Costa Mesa, Calif.-based CPC Consultants, an independent firm that helps large shippers establish and optimize transportation programs.

Freight payment service providers enable businesses to hand over a variety of functions that can be difficult and/or costly to handle in-house, including EDI communication with carriers, automatic general ledger coding of freight transactions, freight bill collection, rate auditing and duplicate bill checking, data merging, freight bill payment, and freight bill inquiries, reports, and analytics.

Cass Information Systems, a freight payment service provider headquartered in Bridgeton, Mo., strives to supply clients with services that extend beyond fast bill payment.

“Our services have a strategic impact,” says Marketing Manager Thomas Zygmunt. “We provide process improvements, management information, cost reductions, and enhanced customer service.”

Cass enables its clients to reduce and control transportation expenses through outsourcing.

“Our goal is not just to duplicate existing systems but to enhance the freight processing system and maximize supply chain efficiency,” Zygmunt says.

While many types of businesses can take advantage of freight payment services, some stand to benefit more than others, according to Allan Miner, president of CT Logistics, a Cleveland-based third-party freight audit and payment company.

“A manufacturer that procures raw materials, ships them to a manufacturing plant, produces a product, then ships it to a distribution center or client accrues more transportation costs than a retailer,” he notes.

CT Logistics expands its market presence horizontally each year by adding services that are either requested by clients or developed internally to meet a perceived marketplace need.

“We continually broaden our footprint in the supply chain arena to address our clients’ needs, both before and after the execution of a shipment,” Miner says.

As a result of its expansion efforts, CT Logistics is now deeply involved in many of its clients’ routine logistics operations.

“Not only do we handle freight audit payments and management reporting, but we also enable clients to choose the right carrier based on cost and service through our Web site and FreitRater software,” Miner says.

With the help of CT Logistics and its technology, clients are able to tender loads to designated carriers through a central Web site, as well as print bills of lading and track and trace shipments.

On Auto Pilot

Freight payment services technology provides substantial and far-reaching benefits. The process eliminates the need for shippers to handle carrier phone calls while providing audited bills, automated general ledger coding, and data collection for both reporting and logistics metrics—all at faster speeds and with less overhead than handling it in-house.

“In some cases, it is a service that pays for itself,” Popick says.

Pre-auditing may be the service with the greatest potential to affect the bottom line. “Pre-auditing can generate savings ranging from three to six percent of the total cost,” Miner says.

Consider a shipper using a parcel delivery service with a “next-day by 10:30 a.m.” delivery guarantee.

“A freight payment services provider can identify the shipments that were not delivered as promised and need to be credited,” Popick says. “In some cases, these service failure claims can equal or surpass the cost of the provider’s service.”

Freight payment services help businesses in terms of both hard and soft dollars. “Hard dollars are identified through the audit process,” Miner notes. “The client pays the carrier only the lowest amount that it’s legally obligated to pay.”

Historically, process complexity, as well as federal and state regulations, made it difficult for businesses to pay the lowest obligated amount. “But freight payment service providers are experts at arranging this,” Miner says.

Businesses can also cut costs by outsourcing routine, time-consuming, productivity-robbing, and cash-burning tasks.

“Customers can save on overhead, administration, back-office operations, bookkeeping, and bank fees,” says Miner.

Many providers also offer to scrutinize a client’s logistics operations for specific processes that can be improved or eliminated.

“Shipment history can be used for data mining and analysis,” Popick says. “Data gives skilled analysts the ability to perform distribution studies and evaluate whether to move or add distribution nodes.”

Data analysis can also be used to benchmark companies to see how the rates being charged compare to the rest of the market.

“Numbers alone don’t tell the whole story,” Popick says. “Data is useless without the tools and expertise to analyze it and make actionable recommendations.”

“While we pre-audit and pay freight bills for clients, we also offer information-based solutions,” says John Mecchella, president of Technical Traffic Consultants, a freight payment services provider located in Congers, N.Y.

“We could be the best auditors in the world, but if we don’t provide accurate, timely, and accessible information, shippers will find another company to do business with.”

Lean times are forcing more businesses to seek outside help. “In these times of ‘right sizing,’ one person does what 15 people used to do,” Mecchella observes.

“As a result, companies rely on outsourced services to provide not just pre-audit payments, but also soft savings from managing and using information to make intelligent decisions.”

Many providers also focus on cost avoidance. Companies can sidestep unnecessarily or unfairly high expenses by asking a freight payment services provider to handle cost rating and routing pre-planning.

Although the transport provider may quote the correct cost for a particular shipment, there may also be less expensive ways to move the freight.

“Shippers won’t know their options until they use a freight payment service provider’s software, services, and Web tools,” Miner says.

A freight payment service provider can also help create a more efficient business environment. Before a company signs on with a provider, freight bills tend to be voluminous and paper-based, creating a business setting ripe for confusion and mistakes.

“Companies usually ‘react’ to paying freight bills and expend a lot of effort to stay ahead of billings and avoid relentless follow-up by the carrier’s accounts receivable department,” Popick notes.

As soon as a company decides to outsource its freight payment services, all bills, phone calls, and other productivity-sapping tasks and interruptions are immediately directed to the provider.

The provider establishes computer-based EDI integration with carriers, enabling all billing information to be exchanged electronically. Additionally, all pertinent data on each freight bill seamlessly transfers into a payment database.

Once that raw data has been stored electronically, the client can use it to develop reports or have the provider develop reports, such as freight spending by carrier or mode, freight bill exceptions, and outstanding balance by carrier.

“With the provider’s help, the client proactively manages its freight program,” Popick observes.

It also helps to have clearly written contracts. “There’s a right way and a wrong way to write a contract,” Mecchella says. “We always make sure to dot the I’s and cross the T’s, and remind clients that they are working in a regulated environment.”

Technical Traffic takes steps to protect clients from contracts that contain surprises or traps.

“We put the intention of the negotiated agreement into contractual form so that it becomes predictable,” he notes. “In any contract, both parties should know their obligations.” An expertly written contract benefits all parties, Mecchella believes.

Global Concerns

Globalization is another trend driving businesses to outsource freight payment services.

“Freight payment companies increasingly process invoices in Europe and Asia,” says Keith Snavely, vice president of North American sales for nVision Global Technology Solutions, an Atlanta-based freight payment services provider.

“We currently process invoices from more than 190 countries and pay transport providers in 45 currencies.”

Increasing regulatory oversight of international transactions is also motivating companies to seek outside payment help. These days, it’s common for companies to deal with invoices and other documents in foreign languages and currencies, making regulatory compliance difficult, perhaps even impossible, without help.

“When the Sarbanes Oxley Act was passed,” Snavely says, “shippers needed providers with global reach and the ability to process documents and transactions in multiple languages.

“Invoices may not always be written in English, may need to be paid in a foreign currency, and sometimes, must be converted to U.S. dollars for reporting purposes,” he adds.

Any business that hooks up with a freight payment services provider must be prepared to commit to the project. A shipper that decides to use freight payment services only for selected shipments is begging for trouble.

“It’s impractical because data comes from disparate sources and auditing rules may not be uniformly applied,” Popick notes. “It is a best practice to have a consolidated program.”

What to Look For

Once a company decides to oursource, it’s time for due diligence. To choose the right freight payment services provider for your company, here are some factors to consider:

The provider’s management background and expertise. “Besides being financially stable and sound, does the provider understand and have expertise in the industry?” Zygmunt asks. “Also evaluate whether it has the depth to handle your account, so you’re not relying on just a few individuals who are running the service.”

Communication channels. Beyond offering a specific set of services, a provider should also be willing to maintain strong and open communication channels.

“Because freight payment services are a critical part of the logistics process, shippers need to reach their providers at all times,” Zygmunt says. “If a key contact goes on vacation or is out sick, customers need a backup.”

Business practice visibility. “Like any industry, there are many ways to do business, both above board and below board,” says Rick Langer, general manager of PowerTrack, a freight payment services provider headquartered in Minneapolis.

“Make sure your prospective provider has a standard electronic interface for EDI transactions with all the major carriers.”

Although a standard EDI interface allows customers to easily monitor and verify the providers’ carrier transactions, it remains a rarity in the freight payment services industry.

“Most providers have multiple, one-off interfaces with each carrier,” Langer says.

Payment strategy. “Negotiate a per-bill rate; don’t agree to a contingency-based contract,” Popick advises.

Freight payment services buyers also need to stay alert for frivolous and unnecessary provider fees.

“Many providers charge transaction fees for secondary bills, so there’s an incentive for them to create exceptions,” Langer says. “The more exceptions you have, the more secondary bills you create; the more secondary bills you create, the more fees the provider can charge.”

Float periods. A long float period can cut costs by effectively delaying payments. “It’s important to know how many days the provider will hold the money before paying the carrier,” Langer says. “Providers should reduce transaction fees and get a significant float.”

Country list. Customers with international transactions should ask providers to supply a list of the countries they support.

“The provider should be able to show—with documentation—that it has been approved by each country’s financial institution regulatory body,” Langer says.

International and local expertise. International transactions can be difficult for a company to figure out on its own, so it’s important to find a provider that not only knows how to handle multiple languages and currencies, but has in-depth knowledge about local tax and tariff mandates.

“The governments within the various countries, for example, often charge a goods and services tax or a value-added tax on each product or service,” Snavely explains. “Many customers rely on us to allocate those taxes across all the products in a shipment.”

Patience. It’s critical to find a provider that will take the time to explain and demonstrate complex freight payment processes.

CT Logistics, for example, will run a company’s sample shipment documents through its system to demonstrate the technology. “We are always willing to do a free analysis for a prospective client,” Miner says. “It’s a way of letting them know how we can meet their needs.”

Cass also works with prospective clients to illustrate the benefits of freight payment services.

“We design an individual solution for each company we work with,” Zygmunt says. “Although we have clients in similar fields, each company has unique accounting needs and shipping methodologies. We design the process based on the client’s needs rather than trying to fit the client into a pre-packaged solution.”

Words of Advice

The freight payment services market will continue to thrive in the years ahead.

“As companies become leaner, they must outsource functions that are not core competencies,” Popick states. “The value proposition is that freight payment is a service that pays for itself again and again.”

In this era of high fuel prices and galloping inflation, businesses are under increasing pressure to slash expenses and boost revenue.

“Companies that have not looked at freight payment services before will feel pressure to examine ways of boosting efficiency and productivity,” Zygmunt says.

Popick’s final words of advice are simple and blunt. “If you do not currently outsource freight bill auditing and payments, do it immediately,” he says.