Under the Microscope: Third-Party Freight Payment and Audit Companies (Part II)

Last week we looked at how Third-Party Payment companies work in general. Over the coming weeks, we dive a bit deeper into how these companies operate, how they get paid, and finally – how best to position yourself for efficient (and timely) payment.

The first thing to remember is that these companies are (typically) not there to help the carrier. Their value proposition is that they will reduce transportation costs and increase transparency in the supply chain – for their shipper customer.  In most cases (especially based on feedback from readers last week), the best you can hope for is to make a painful experience – slightly less painful.

Many readers emailed me this week to share their frustrations (as well as satisfaction and success stories) with various Third-Party Payment/Audit companies. In general, for many companies, they are seeing an alarming increase in the number of delayed (or rejected) invoices. Although the specific reasons given for these situations are diverse, they typically fall into the following categories: 1. Incorrect Miles, 2. Incorrect Rate, 3. Plan # in specific location required on invoice (am assuming for OCR purposes), 4. New Account Manager / Employee Turnover, 5. Duplicate freight bills, and 6. Customer Approval required – a big catchall mentioned by eight different companies.

Now at first glance, from the outside looking in, the average person would conclude that these companies are simply fulfilling their commitment to their customer – the shipper. However, what if those lines were not that clear? What if there was a grey area that provided an additional incentive for companies to delay payment to the carrier? What if the benefit of that incentive accrued to the Third-Party Payment company and not the customer (the shipper) or the carrier?

While doing some research, I decided to read the past two annual reports for one of these companies – CASS Information Systems. This company is one of the largest Third-Party Freight Payment/Audit companies in North America, managing $44 Billion of payables for many blue-chip companies. Originally a subsidiary of Cass Commercial Bank, the St. Louis-based financial institution is now a wholly-owned subsidiary of the Cass Information Systems. The company is a sophisticated, and well-known partner in the global supply chain (as well as other industries).

In their 2016 Annual Report, the words “Interest Income” kept popping up. The more I read the report, the more they sounded like an Insurance Company. Instead of using the word “Float” (the insurance industry vehicle that helped build Berkshire Hathaway – and Warren Buffett’s wealth), the report mentioned the word “Balances”. The combination of words “Interest Income” and “Balances” in various locations throughout the report piqued my interest. My interest was piqued further when I read the following two statements on Page 25 of Cass’ 2016 Annual Report:

“In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process

Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed”

The above reinforces two things. First, Cass receives two types of revenue – contractual Fees from their customers, and interest income from the balances generated during the payable cycle. Two, considering the time value of money, there is an inherent incentive for Cass to hold onto the payment for as long as possible to enhance investment income (again, similar to how an insurance company generates a significant portion of their revenue and profits).

Now, the above, may be the ‘norm’ for all Third-Party Freight Payment/Audit companies, but most of the companies that I’ve been made aware of are not publicly-traded, and as a result, there is very little information available about their strategies, operations, practices, workflow etc.

The above example is for information purposes only, to educate our customers on a growing segment of the industry. Knowing, in detail, how your customers and partners operate should significantly influence the internal business practices of every trucking operation.

Next week, we will examine another component to these relationships – the use of factoring (by these same companies) for faster invoice payments (but that ‘bonus’ comes at a cost).

Third-Party Freight Payment Companies: Part I

This week’s post is a first in a series, examining the increased usage of third-party freight payment companies by shippers. The original purpose of these companies were credible, but many trucking companies now feel they are being forced into pseudo-factoring arrangements, despite their strong relationships with the shippers they serve. Some companies (not all) are making the bet that trucking companies do not know their internal cost of capital, and playing freight rate arbitrage between the shipper and the carrier – are they overstepping their role?

Part I  – Third Party Freight Payment Companies Explained

Freight payment and audit is a fairly simple concept that can become increasingly more complex depending on how it is implemented.  Third-party freight auditing and payment is a group of processes that is basically an accounts payable service for transportation invoices.  A freight payment company acts as an intermediary between the shipper and the carrier to receive, process, audit and pay freight bills.  Every freight payment company’s processes and practices will be a little bit different, and this is where things can start to get concerning for the carriers.

The Process

  1. Invoice Receipt and Data Capture – In almost all cases the carriers send their invoices directly to the payment company.  This can be through either paper bills or through EDI.  Upon receipt, the payment company must be able to capture data and information from the invoice, bill of lading and any supplemental documents to create a database of information for both processing and reporting.  This helps shippers more readily evaluate their shipping activity.  Flexibility in data capture and consistency are critical factors.
  2. Freight Bill Auditing – This process ensures that freight invoices are paid exactly as prescribed by the carrier contracts (the freight payment company will have copies of all the carrier contracts that a shipper has entered into).  There are no standardized audit controls in the industry, so this step may vary from company to company.  Ideally the audit controls are developed between the shipper, and the payment company to best balance the shippers needs, and the trucking company’s capacity.  Typically, the controls include duplicates, service failures and rates, with accessorial, fuel surcharge and fine-print references in the contract becoming more common. Ensuring adherence to the contract is one of the cost justifications that the payment companies use to sell their services.  One other feature that many payment companies provide is freight bill validation.  This is the ability to audit and validate each invoice according to an internal shipping policy, and a company routing guide.  The goal of most freight audit processes is to automate most of the steps and only require manual intervention in a small number of cases.  In theory, this is good for the shipper, by ensuring that invoices are accurate, and it is also good for carriers by reducing the time required for invoices to be processed.  However, this is an area that can be a major pain point for the carrier, especially if the auditing software does not accurately capture what is on the carrier invoice.  The payment company will data map each carrier’s invoice to automate the data entry but not every invoice will nicely fit into some of these data models.  Alternatively, carriers that do a lot of specialty work for a shipper, that requires special documentation or notations may find that this process slows down their payments, if a large number of their invoices get pushed to manual acceptance and processing.
  3. Systematic Cost Accounting – Freight payment companies apply a valid general ledger code (or codes) to each invoice based on rules provided by the shipper.  These rules are usually based on the information captured from the invoices or bills of lading.  In most cases the shipper is provided with tools that allows them to handle any exceptions or one-off transactions.
  4. Carrier Funding – After the invoices are received, audited and then processed, the payment company will typically create a consolidated funding request to pay the carriers.  Payment requests and disbursements are typically made weekly.  A payment partner will also generally attempt to implement negotiated terms so as to maximize cash flow for the shipper.  Payments to the carriers are typically made via ACH or manual paper cheques.
  5. Reporting and Business Intelligence – Most payment companies provide reports through their portal to the shippers and more are also starting to provide them to the carriers.  Carriers need to understand that these reports will be aimed at cost reduction.  Many of the reports will be somewhat standardized with the specific cost targets tailored to each individual shipper and their needs.  Some areas that can be focused on include erroneous accessorials, and unauthorized brokering of loads

The freight payment and audit market will be greatly threatened by the use of Blockchain technology.  First of all, this business model does make some assumption on the trustworthiness of the data in the carrier invoices.  Simply put, if the shipper believes that the invoices are accurate, that reduces the need for such as service (keeping in mind that improved data collection may also be a key driver if the shipper’s ERP systems are not capable of the desired level of collection).  By going to blockchain and smart contracts, the transactions are essentially self-auditing as the contract will not release payment until all conditions have been met and all parts to the transaction can see the current status.

An intermediate step has already been adopted by some shippers where they use a service that allows for the temporary GPS tracking of a carrier’s truck and trailer as it is on an active load.  The load tenders are sent by either EDI or through their web portal.  The rates and miles have already been established as well as any additional stop charges.  Once the carrier assigns a driver to that load, the tracking service will temporarily follow that truck and starts reporting to the shipper when the truck enters a geo-fenced zone around the shipping location.  This gives full visibility to both parties with regards to on-time performance and wait time.  The service continues to track the truck until it leaves a geofence around the last delivery.  After that point the truck is no longer tracked.  Within 30 minutes of leaving the last delivery geofence the load details are available on the portal and the carrier has 99 hours to enter the wait time and any additional charges.  Once the two parties agree that the charges are correct the invoice is processed and paid within 7 days by ACH.  Their system has not yet been able to automate the extra charges but this comes close to a smart contract.  One of its advantages is that it eliminated the need for a third party payment company as the contract is close (ase mentioned above) to self-auditing.  Non-contracted lanes are negotiated as mini-contracts with only the per mile rate up for discussion.  All other accessorials fall under the master contract.  The rest of these one-offs are handled the same as awarded lanes.  The carrier wins by getting shorter payment terms and the shipper has the potential of lower rates because of the improved cash flow.  All data is entered and audited by both parties and the data is available for both of them.  There are still improvements that this scheme needs in terms of automation but it provides more of a true partnership between both sides as it assumes a level of trust between carrier and shipper.

Next week, we will examine the payment negotiation process with these companies.

The Driver Shortage – My Dissent, A Contrarian’s Take

This post is a guest post from Steve Hitchcock, Chief Operating Officer with Duncan and Son Lines (a member of the TC04 Best Practice Group)

I’ve been hearing that there is a driver shortage every year over the seven years I’ve been in the trucking industry. I’ve heard that the industry has been saying this for well over 20 years (save about 1-2 years after the housing bubble crash).  If there is such a shortage, why are the  shelves full of food at the grocery stores?  Target and Walmart have full shelves as well.  Home Depot and Lowes both have plenty of lumber, nuts/bolts/screws, conduit, paint, ceiling fans, tile, etc. How  can Amazon ship me my order from their warehouse? How did the goods get to their distribution center if there was a shortage of drivers? How is there always a driver to bring boxes to my house within two days if there is a driver shortage?  I think I know- There is no driver shortage.

In all of my formal education and life experience, I’ve learned that there really aren’t shortages, per se. There are just shortages at particular price levels.  And of course, there are surpluses at other price levels (thanks be to my ECON 101 professor, right?). In my niche trucking market, all of us say we could use 10-20 more drivers.  That’s a shortage, right?  But what would happen if we all got them?  I’d  venture to say that we’d have a surplus.  And if we had a surplus, we would make decisions to haul freight for lower rates than we haul them for today. So we’d work harder and do more for  less money. We should be careful what we wish for.

Every trucking conference (American Trucking Association, Arizona Trucking Association, CO, Truckload Carrier Association, etc.) spends an inordinate amount of time on the driver shortage; ways to advertise for, hire, and retain drivers.  For some reason we see this endeavor  as an opportunity  for group-think. But again, what would happen if we all got our 10-20 drivers? So now we’re going to  innovate together on the subject?  I’m  for  innovating alone on this one.  I want 10-20 drivers, but  I don’t want my competitor to get them. That’s how competition works.  But I also don’t want over-supply. I don’t have that now  and I’m  happy with that.

If there is indeed a “shortage,” isn’t that a good thing? Doesn’t constriction of supply/capacity cause trucking rates to increase? Isn’t that good for a trucker? But we march on to the tune of “The Driver Shortage is the Biggest Threat to the Trucking Industry.” It feels like I’m the one guy in the back of the room quietly dissenting. My dissent doesn’t end with the subject of driver supply, though.

There are all kinds of things that cause a restriction of capacity, which in turn causes trucking rates to rise. There are EPA mandates, hours of service regulations, ELDs, driver age restrictions, weight restrictions, length restrictions, etc. And how do the  people in my industry react?  We react with a “the  sky is falling” theme. Most of this is dogmatic- almost religious. Because we are “against” this government involvement, we’re disgusted and now our world is slowly ending, one government intervention at a time. Again, I’m  alone in the room .  I see every one of those regulations as a reduction in supply and an increase in rates.  While most in our industry have an approach that is dogmatic, I urgemy organization to be pragmatic. I urge us to position ourselves to take advantage of the supply reduction.

I may agree with my colleagues from a philosophical standpoint  when it  comes to  the  role of government. I probably vote like them when electing leaders. But at the end of the day, “don’t hate the player, hate the game.” I’m going to play the  game as well I can with the rules clearly laid out in front of me.  There is an absolute equilibrium between the supply of  drivers and the  demand of drivers.  It’s true. If  it  wasn’t true, you’d see a dramatic  increase  in driver  wages from trucking companies.  But you don’t. If the driver shortage actually caused a constriction of  capacity, shippers would be bidding up freight rates. They aren’t. Just because we keep saying that there is a driver shortage doesn’t make it true. For what our industry and customers are willing to pay, we have the  exact amount of  drivers we  are supposed to have. The invisible hand of Adam Smith works.  There is no driver shortage.

Benchmarking Your Human Capital

Over the past month, we’ve introduced and reviewed three key metrics for trucking companies to focus their attention on. These three measures work in conjunction with each other, and Jack Porter (Lead Facilitator of TCA’s Best Practice Groups) has coined the term “Golden Ratio” to define them. As a reminder, they are: 1) Gross Margin (measuring your results after subtracting your variable expenses from your top line), 2) Admin overhead as a percentage of the above Gross Margin, and 3) Fixed Overhead as a Percentage of Gross Margin. The target (or Golden Ratio) for a healthy trucking company should be 25% : 25% : 25%. If you do the math, reaching these targets (or getting close) provides a very healthy Operating Ratio, while also ensuring that your capital is deployed in the proper proportion. Obviously, there can be dramatic changes to these measures on a monthly basis (seasonality, economic ebbs and flows, year-end bonuses etc), however, over a rolling six or twelve month period, these targets should be achievable, and if they seem out of reach, it provides a compass for where to focus your operational attention.

For this post, we are going to focus our attention on the second of the two measures – Admin overhead as a percentage of gross margin. To start, to properly measure this value, some standardization needs to be applied to your financials. This is helpful internally for reporting purposes, but also externally when benchmarking your performance against other companies. First, let’s define exactly what we mean by “Admin”. Based on years of iteration and feedback, TCA’s Best Practice Groups have defined admin overhead to include the following roles in a trucking enterprise: 1) Owners, Executives, GM, 2) Sales/Marketing, 3) Operations, 4) Safety/Risk & Orientation, 5) Information Services/Technology & 6) Finance/Administration. Noticeably absent from these categories is Shop Personnel (including Shop management). For benchmarking purposes, we include Shop Wages/Benefits in the Maintenance category (so, as a result, if you are including, this will provide an immediate improvement to your admin overhead calculation).  Once you have identified, and segmented these roles into the above categories, the next step is to begin capturing the Salaries/Wages/Benefits for these roles and categories separately – ideally on your monthly P&L (we provide all inGauge users with a template P&L to use in this regard).

Now that the proper roles and categories are defined for admin overhead, it is useful to start calculating various measures to determine if you are in line with both your historical results – and that of the industry. Here are some metrics which you should be able to calculate very quickly:

    1. Driver to Non-Driver Ratio – this one is the easiest for companies to calculate. Simply take the number of active drivers and compare to the count of active admin personnel (as defined above, not including your Shop personnel). For the average Dryvan operator, this measure should be above 4:1, and closer to 5:1. Depending on the operating mode, size, Average Length of Haul, and other business-specific factors, this measure can vary dramatically. This reinforces the value of benchmarking this metric versus companies of similar operating attributes. As an analogy, you expect to generate specific revenue targets per truck per week/month/year. You should expect the same type of production/leverage from your admin personnel.
    2. Non-Driver Wages & Benefits (% of Net and Gross Revenue) – although your Driver to Non-Driver Ratio may be in line with your industry peers, that doesn’t automatically mean you don’t have a problem on Admin Overhead. The next step is to calculate your Admin Overhead (Salaries/Wages/Benefits) as percentage of Net (excluding FSC) and Gross (including FSC) Revenue. Typically this value should be around 8% (net) and 7.5% (gross) as a percentage of revenue. But again, this will vary based on your operating attributes and size.
    3. Admin Turnover – Although turnover on the admin side isn’t a pressing industry issue, calculating your turnover for admin staff is something that should be measured consistently. Similar to Driver Turnover, there are both hard and soft costs associated with recruiting and retaining a high-performing admin team. If your managers and staff are constantly training new people, you are not going to get the same degree of leverage from these people over time – which means your admin overhead will be higher than average. Maybe it is not necessary to calculate every month, but probably good idea to calculate at least once per quarter depending on your size. Also, focus on the Short Term Turnover (Admin Personnel Departed hired in last twelve months divided by the Admin Personnel hired in last twelve months). If this result is high, you could have more than a financial issue, it could point to a culture issue (which can have dramatic long term consequences).

Now that you have calculated these important measures, you need to consistently track in order to drive improvement. If you are attending this year’s addition of Workforce Builders (June 12-14 in Kansas City, Missouri), we will be running an interactive presentation/workshop on workforce benchmarking. Angela Splinter of TruckingHR will be joining us to provide her valuable insights and Best Practices based on her many years of studying the Trucking Industry’s HR trends and opportunities.

Next week, we will focus on the third key measure: Fixed Overhead – making sure you are properly segmenting your fixed expenses, and ways to improve on the final component of the Golden Ratio.

 

 

Strategy: Part 2

“You’ve got to eat while you dream. You’ve got to deliver on short-range commitments, while you develop a long-range strategy and vision and implement it. The success of doing both. Walking and chewing gum if you will. Getting it done in the short-range, and delivering a long-range plan, and executing on that.” – Jack Welch

This post is the second in a series of posts focused on Strategy and Competitive Advantage. By the end of this series, it is our hope that the info we provide will at the very least provide the motivation to look a little harder at your business and the competitive landscape your organization faces.

Last week, I provided a quick overview of an analysis/decision framework called “Porter’s Five Forces Analysis” by Michael Porter. This framework is a powerful tool, that enables its users to quickly understand their market position, threats and opportunities. One of the next steps after analysis is to honestly evaluate your operations, your customers and ways to build real competitive advantages. To build real competitive advantages, by nature they must be things that utilize specialized knowledge, equipment, systems or resources which are difficult or (better yet) impossible to build, duplicate or acquire. Competitive advantages are not necessarily qualitative advantages such as having a strong customer service culture. However, in my opinion, qualitative advantages can eventually turn into massive competitive advantages, but normally only when paired with something tangible as described above.

For trucking, building a competitive advantage requires knowing your customer’s needs (sometimes better than they do), and providing solutions that are mutually beneficial (profitable). A great example of this process was illustrated by the owner of a (then) mid-sized trucking company. For ten years, his company provided truckload services to a client with multiple manufacturing facilities in Ontario. After hearing about an innovative new trailer, this entrepreneur went back to his customer and proposed utilizing this new trailer system to build more of their finished product at one facility before shipping to their other facility to be finished. After carefully reviewing his proposal, they wholeheartedly jumped at the idea. Not only did he convince them to move forward, he also got them to finance the trailers, and guarantee enough freight to cover the financing plus overhead! So, not only did he build a real competitive advantage, he got the customer to finance it! I thought it was brilliant. He was very humble in rationalizing how it all unfolded, but it was very apparent that none of it would have occurred had he not appealed to the customer’s self interest.

The above is a practical example of someone leveraging specialized knowledge, specialized equipment AND a solid customer relationship to build a real competitive advantage. How many solid customer relationships do you have? How often do you visit their facilities? Do you understand their business model? In my opinion this is the first step in translating specialized market knowledge into a functional strategy.

For some comic relief, I leave you with the best marketing campaign I have ever seen, enjoy…