With historical low-interest rates and commoditized prices in most areas in the Freight Audit market a dangerous although hidden business model has replaced the traditional Freight Payment model. For a long time I thought pure Freight Audit was going to be the model that would be driving the Freight Audit & Payment industry, having good visibility and great deep logistics audit. And although that may still be the case for some providers, there are providers out there who have chosen a different path. Freight Audit & Payment is doing audit together with payment. Wow, actually think about it, do you have other auditors working with your company that handle your payment? Should those functions be together in one company? In a market that is not regulated? Yes, the Freight Audit & Payment industry is not regulated whatsoever. That already by itself creates great concern and a high-risk environment for funds to be paid to the carriers.
Traditional Freight Payment was based on doing a high-level check or audit on the invoices next to the main focus: Payment. With the payment the money was made by receiving it earlier than the invoice was due and thus the provider could earn interest on the float. As Freight Payment traditionally comes out of the banking world, this was not a strange model. It ceased to be a viable business model however as interests in the past years have been record low and bring virtually nothing on revenues. Not even for the largest providers. So where does that leave the mid-size or smaller Freight Audit & Payment providers? Several options are available. Some may have chosen for a better focus at the audit and have started asking higher pricing for their services as they offer more value and others have focused at still trying to make money on the float and keep prices low as before.
Float nowadays needs to be treated differently than before if you want to make money on it. Instead of earning off the interest a company may structurally delay payments to carriers in order to build a buffer of cash. Let’s take a look at the following example to make it more clear. A customer pays its Freight Payment provider a weekly advance of 2 million USD to pay its carriers. The carriers should be paid on a weekly basis but instead the provider skips 1 week of payment effectively delaying the payments with 5-7 days. By doing so the provider can take 2 million USD out of the money flow without the customer necessarily noticing this. As payment delays do occur and there can be many reasons for this. These reasons can also be made up of course, but it is hard to check as payment delays could be pooled around different carriers so that no structural patterns are found. It becomes even more difficult if this practice is carried out over different customers. So over the years the amounts that go missing tend to grow as the customer base grows.
This practice is illegal, criminal and against everything that SOX compliance stands for, yet this still occurs today.
Effectively this is a Ponzi scheme, as long as nobody puts a tight control on the money flow or stops being a customer this model can last for a very long time. Customers typically don’t change easily from provider so these schemes do not get uncovered easily. However in 2013 we had two of the biggest scandals ever in this industry. Trendset and Transvantage both saw their Ponzi schemes fall apart and after the dust settled, a combined and astounishing amount of over 100 million USD had disappeared.
These schemes had been deeply embedded in the companies’ structure and organization and took years to build and went unnoticed for years as well. Business was good and nobody bothered to check. Would real checks have been in place or just simple normal practice, this would have been unraveled already many years ago.
But as customers seem to still believe just whatever the Freight Payment provider tells them either in the RFP stage or during the relationship without doing a proper check there will be more victims.
I believe potential customers and customers of Freight Payment providers should always have the following:
· 24/7 full insight of payment flow: the what and the when
· clear relationship with funds paid and payments carried out
· clear reporting of any anomaly in the invoice process that leads to delays
· good relationship with carriers to understand quickly if they are being paid late
· a financial audit of the payment set up of the provider, how are the accounts set up, is it mingled with other customers or not, etc
If you don’t have full insight on the payment flows: alarm bells should go off.
You never should:
· fund just lump sum payments based on a period or accrual
· send funds to the provider before invoice approval
Freight Audit has a lot of value to offer in the logistics industry but the misuse of funds is no way of making money and will sooner or later lead to the collapse of those providers and will result in even more distrust in this industry.
About the Author
Pieter Kinds (40) is Director at ControlPay, a global Freight Audit provider and the CEO of TenderTool, a cloud-based logistics sourcing platform. Active for over 14 years, Pieter is eager to share insights, thoughts and experiences via his blogs.Follow ControlPay on Twitter More Content by Pieter Kinds