Your worst nightmare has come true. You’re the national logistics manager of a manufacturing company. The freight audit and payment services firm you use to audit and pay thousands of freight invoices just filed for Chapter 7 bankruptcy. In their filing, the firm listed some $35 million owed to you. That’s your cash—POOF! Gone!—that was supposed to go toward paying your freight carriers for their services.
Now, to ensure your unpaid carriers will still haul your freight, you must pay them directly for the past-due bills. Essentially, you have to pay the invoices twice. Once to the bankrupt freight payment firm, and again directly to the carriers. Your company’s quarterly earnings release subsequently must disclose a “special charge” for unanticipated transportation expense. Your company’s earnings will miss for the quarter and drive the stock down.
It’s a risk that presents a real danger for a company’s financial performance. Not to mention delivering and getting goods to your customers on time while keeping your carriers happy. All because a third party hired to manage the complex process of accurately checking, validating and paying your freight bills, failed. Spectacularly.
The freight pay and audit industry is an anachronism of the past. And it’s time for its antiquated practices to change. Here are three things your freight audit provider is not telling you:
1. Traditional Freight Audit Providers Have No Incentive To Reduce Your Freight Spend
The traditional freight audit process is a highly manual and labor-intensive process. Most shippers don’t have the personnel to conduct internal audits of the freight invoices. Freight Audit and Payment firms exist to reduce a shipper’s overhead in processing logistics invoices. For a nominal fee, the firm will audit freight bills for errors. A typical firm promises 3-5% in cost savings.
To deliver ROI to the shipper, they must maintain low transaction rates. Meanwhile, to remain profitable, they must reduce their processing overhead and reduce the number of invoices to process. Therefore, they institute a rate tolerance that ignores invoices with overages within a pre-defined range.
However, rate tolerances represent real costs. A three or five-dollar rate tolerance adds up in a hurry. For a larger volume shipper, that tolerance multiplied over thousands of invoices in a month translates to millions of dollars every year in wasted freight spend.
Traditional freight audit providers have ZERO incentive to reduce overall spend by truly fixing billing issues. They want—nay, NEED—to find errors. Invoices that are seen as “exceptions” (fail to pass the audit and exceed the rate tolerance) are each addressed as individual problems, instead of identifying a common cause. There are typically three causes for all billing errors: an error in the process, errors made by one party, or a rule not clearly defined. Solving the real problem should correct all future invoices and improve cash flow. However, fixing the root cause justifies the audit firm out of existence!
Furthermore, these firms do not have mechanisms in place to analyze trends. The firm typically works from discount schedules established in the rate agreement and ignores the carrier rate bases. They are therefore unaware of any increases in carrier rates and do not alert the shipper.
Thus, the benefits of auditing for errant invoices are limited. A shipper’s costs may continue to increase despite 100% of the invoices passing the audit. On top of that, if you’re using the invoice data to forecast annual budgets, you are incorrectly estimating the amount, and must continuously explain monthly disparities to your finance team. It’s a self-fulfilling cycle that keeps you paying more.
2. A Traditional Freight Payment Service Can Increase Your Risk
In addition to the audit, the company may offer outsourced freight payment services. On top of the nominal fee they collect for the audit, they make more money—REAL money—on the float. They’ll establish terms with the shipper and the carrier, with as much time in between as possible. In this way, they can earn interest. The greater the payment volume, the greater the earned interest potential for the audit firm.
The traditional freight payment process typically means payment delays to your carriers. Delays impact your shipping practices. For example, the carrier may lower your service priority to serve a competitor that pays invoices promptly. Naturally, this puts a strain on the relationship with your carriers—and your supply chain.
This practice is extremely under-regulated. Sure, they’ll store your money in a bank. That’s how they earn their interest. But what they do with your money in the interim poses a risk to the shipper. SOC 1 compliance is insufficient to the operational and integrity controls of the money. They’re also not regulated in the same manner as a bank or FDIC insured. All of this means that abuses can go undetected, leaving you with little recourse and a large freight bill if the company becomes insolvent.
3. You Don’t Need An Audit, You Need Invoice Management and Automation
New solutions have emerged, built on flexible, fast-to-implement cloud-based software platforms. It’s not an “audit” play. Rather, these technology providers focus on streamlined data cleansing, matching, and processing. Data-driven business rules and strategies enhance continuous business process improvement.
The new value proposition is all about reducing overall transportation spend. It’s a new approach that provides both a foundational methodology and cultural imperative to look deeply at the entrenched freight audit and pay process, and fundamentally change how it’s done.
Technology providers don’t have a room full of people manually auditing freight bills. Instead, they deploy a handful of data quality and rate analysts, backed by powerful, sophisticated process algorithms, constantly monitoring information flow, flagging and correcting anomalies in real-time. Advanced algorithms improve data accuracy, making carrier selection and sourcing strategies more effective. They also prevent the introduction of freight in the first place.
Technology-driven solutions ensure data is accurate and validated by deploying deep data cleansing and sophisticated matching functions. These systems manage exceptions by finding the root cause, correcting, measuring, and validating to ensure the exceptions do not recur; by addressing process errors, identifying human errors, and clarifying business rules.
By eliminating the vast majority of exceptions, carrier payments can be streamlined. Reducing time-to-payment will naturally improve shipper-carrier relationships, positioning your business to become a preferred “Shipper-of-Choice”.
The resulting dataset empowers operations and logistics managers to create truly strategic transportation decisions. Intimately connected to the TMS, technology delivers additional data to inform their decisions. By connecting all aspects of the freight shipment—weight, cube, description, carrier, transit time, BL, DR, and other items—with real-time financial data enables them to optimize carriers, modes, lanes and more.
Moreover, they provide advanced analytics, augmented KPIs and real-time dashboards to provide detailed business intelligence, including:
- Lost savings: a measure of the added cost a company is paying from making the wrong routing or carrier selection decision, or not following established rules and business criteria.
- Potential savings: an active analysis identifying potential changes to routing and selection strategies that result in immediate savings. This might involve adjusting business rules and process criteria to take advantage of market conditions, changes in freight flow and profile, or changes in carrier networks which make some lanes more attractive, and others less.
- Actual savings: a post-invoice evaluation that shows savings from a newly optimized sourcing strategy, outlining a freight savings comparison against the old.
Because these systems combine expert analytical resources with powerful software tools, legacy practices do not encumber them. Designed to improve payment accuracy, reduce overall spend and prevent errors before becoming costly mistakes, the incentives are better. They are rewriting the script for success in the freight audit and pay game.
The Real Questions You Need To Answer In Your Freight Audit And Pay Strategy
So, what are the three questions you need to answer in your freight audit and pay strategy?
- Risk: How do I reduce and mitigate risk and the impact of ineffective, inaccurate or improper freight tendering, audit and pay practices?
- Relationships: How do I maximize the relationships with my carriers such that my processes and strategies not only achieve my goals but help them operate better?
- Optimization: How do I consistently measure, analyze, and understand to make course or strategy corrections, continually optimize my transportation spend, and proactively identify and correct errors or anomalies BEFORE they appear on a freight bill?
Ultimately, the goal is empowering shippers to take control of their freight spend themselves in a more thoughtful, proactive, and efficient manner than ever before. By leveraging real-time intelligence, insights and KPI’s to ensure every shipment tender is to the right carrier at the correct rate, you won’t waste freight spend. And that’s how to avoid seeing that logistics manager’s worst freight audit and pay nightmare come true.