SELECTING A FREIGHT AUDIT VENDOR
White paper titles should be terse, recognizable and reasonably
descriptive of the subject.
This particular subject presents an unusual “title”
challenge because of how freight audit firms have described
themselves since their first appearance in the 1920’s.
Their offerings, the business culture coupled with
the influence of banking and deregulation have also made it
difficult to select a meaningful title.
Freight Payment Vendor was considered, while also recognizable
it is probably as incomplete as the title shown.
Combining the two, Freight Audit and Payment Vendor
would also be inadequate, and not as accurate.
The most appropriate title, “Transportation Cost Control
and Management Information Portal” will become recognizable
and meaningful after this paper is read.
The audit firm seems to have first appeared sometime in the
1920’s. Since its beginning it has continually evolved, most
keeping pace with industry’s needs and some leading the industry
with innovative solutions. During their growth and development they have
had different offerings with relative emphasis on different
features, at different times.
In some cases they called themselves freight audit
firms; by operation they were nothing more than “payment houses”.
At the other extreme, some audit firms performed as
completely outsourced traffic departments. In the late 1950’s one of these firms slogans
was, “full time traffic department at part time cost”.
The description of the firms, their offerings and benefits
has changed over the years.
Unfortunately, the appearance of vendor abuses has
become the most noteworthy
Today, technology, business culture, education and deregulation
have significantly contributed to the complexity of the offerings
and the nature of the business.
Fortunately, the complexity created a far more intelligent
customer; one that understands the motive of the audit firm
and how they make their money.
Unfortunately, it is highly probable that the “intelligent
customer” description only applies to a handful of companies;
those that have been burned by vendors payment failures and
After researching this subject it can be fully appreciated
as to why one of our readers asked the following question,
“are there any white papers that discussed, “procurement and
management of a freight payment and auditing service provider?
This white paper will: define the “need”; present a brief history of the “auditing
business”; how and why it works; the types of vendors and
how to select the type and the services you need that can
best address your requirements.
By also addressing the providers’ perspective, there
should be a sufficient balance, thereby facilitating the selection
process and providing you with the basis for an accurate decision.
Freight Audit Vendor
By definition an audit is,
of records or financial accounts to check their accuracy.
or correction of accounts.
and verified account.
A freight audit vendor is therefore one who examines, adjusts
and verifies freight bills for accuracy.
At the turn of the century most shipments moved by rail, then
wagons beyond the rail head.
The rates and charges assessed were based upon the
rail tariff structures. These structures were highly complex, difficult
to work with and required specially trained people, called
“rate clerks”. They
were charged with the responsibility of accurately assigning
freight charges to waybills and quoting freight rates to customers.
It took years of experience and a great deal of training
before one could achieve the title, rate clerk.
Likewise, shippers required competent traffic department personnel
that were also capable of the same tasks as the rail rate
clerk. Competition for competent personnel in a new
and rapidly growing area may have caused some clever person
to recognize the need and offer a service.
Reducing overhead with a common tariff library coupled
with the concentration of specialists allowed the firms to
be highly competitive with in-house costs.
Perhaps the firm initially offered a post audit service, that
is, audit after payment; as their worth was proven, the business
evolved into both pre-audit and post audit services.
As time went by, more services were offered and at
least one firm claimed to be a “full time traffic department
at part time cost”.
As many of our white papers have indicated, especially, “Logistics, The Beginning
of the New Potential” there is a wealth of information
contained in and associated with the movement of goods.
This information component along with the post and
pre-audit services became the principal services offered.
The early 1980’s seems to be a major turning point when freight
audit firms became a small industry.
One of the motivating reasons may have been the demise
of the freight payment banks.
Many of the newly established firms in the early 80’s
presented themselves as freight audit and payment firms; in
reality all they did was a perfunctory audit at best, but
paid a massive amount of freight bills.
These firms were freight payment houses whose profit
was obtained from the float credit.
Types of Firms
Today there are several categories or types of firms: Freight pre-audit; post audit; pre-audit and
payment; and those offering all of these services plus information
Typically, these firms operate as traditional service bureaus,
whereby carriers freight bills are forwarded to the audit
firm, the bills are audited, accumulated into a batch and
forwarded onto the customer for further handling.
The pre-audit and payment firm operates similarly but
identifies a total payable for all carriers. The shipper then issues the entire payable to
the audit and payment firm.
Payment is supposed to be made to the carriers by the
payment firm within the agreed to time.
The audit, payment and information reporting firm handles
the work as in the other cases but also produces some reports,
mostly lists that have been accumulated from the input of
the freight bill data. The
post audit firm audits the bills after payment and upon discovery
of overpayments files an overcharge claim with the carrier.
The post audit firm’s fee is contingent upon recovery
whereas the other types of firms assess transaction fees.
For the most part, all of the “firm types” described above
are categorized as the “traditional model”.
They utilize computers to some extent, some for entry
and duplicate payment prevention as well as facilitating the
reporting requirement. Nonetheless, this traditional model causes the
customer to continually incur administrative costs due to
the need for constant intervention.
Customer services provided by the traditional model is usually
nothing more than handling carrier inquiry to address the
dunning calls from carriers that are looking for payment.
Issues and Concerns
Over the recent years, there has been a plethora of payment
problems associated with slow and non-payment of carrier freight
bills by the traditional model. Over the last few years several
of the traditional model firms have been forced to close their
doors because of allegations of non-payment of client funds
that were designated as carrier payments.
The most visible type of firm today falls into the category
of freight payment house.
Some of these firms emphasize the importance of developing
highly specialized RFP’s in order to qualify the honesty and
integrity of the vendor. Some demonstrate the importance of requesting
audited financial statements.
This is all necessary and true because of the problems
associated with this type of vendor.
Therefore, if at least one of your requirements includes the
payment of your freight bills, you must be assured of absolute
security and trust. One
of the key elements that should be included in your contract
with a freight payment house is that the funds are to be treated
as “escrow and trust funds”. Absent this phrase, there is
a high probability of exposure to vendor abuse. If your only requirement is the payment of your
freight bills there are other services that specialize in
paying bills that are not presenting themselves as freight
payers. The payment house provides no value in terms
of the freight audit function, therefore if payment is the
objective, your bank is probably better equipped to help you
manage your cash and get the payment job done as a fiduciary.
Excessive and redundant processing fees
Another issue that the customer must address with the traditional
model vendor is excessive costs.
The traditional model typically produces a constant
stream of rejected freight bills because of their inability
to determine either the validity of the bill, its rates and
charges or general ledger codes. The net result of this problem manifests itself
in the firm billing one freight bill for each of its processing’s. In a significant number of cases a single bill
is charged for as many as five (5) times.
The traditional model provider performs the audit based upon
information supplied by the carrier – the very party whose
transactions are being audited!
In addition to this process flying in the face of the
definition of “audit”, logically it makes no sense.
Auditing carrier supplied information other than the
rates supplied in their contract or tariff has no benefit
or value; it is both a waster of time and money.
Batch Cycles / Lack of Visibility
The traditional model firm processes freight bills on their
own schedules to maximize internal processing efficiencies. While this enables these firms to drive down
their internal costs, it estranges users from their data. The talented and highly capable staffs at the
customer locations understand and appreciate the importance
of transportation data. The
value of information decreases with the passage of time; in
order to make timely and accurate decisions, it is imperative
that the data and information be available to the customer
when it is needed and not at the convenience of the provider.
Another area of concern is customer loss of float credit and
the ability to effectively manage their cash.
Dealing with the Concerns
Customers must find an effective selection method so that when
choosing a traditional model vendor they can select one that
they can easily monitor and control.
The better choice is selecting a vendor that they do
not have to control or monitor!
The payment problems referred to above must and can be identified
early. The flag is,
“carriers calling the customer alleging slow or non-payment”. Customers should heed this warning and immediately
investigate the payment flow details. In some cases it will be found that carrier
error caused the flag and in other cases the discovery will
reveal misappropriation or non-payment.
This investigation must be done immediately; keeping
in mind that it is both time consuming and costly. However, not to act immediately may turn out
to be far more costly.
As we have seen from the above, the opportunity for abuse,
excessive cost and estrangement from your data abounds in
the traditional model!
There are traditional model firms that are honest and offer,
at least satisfactory services.
The issue facing the customer is finding them and making
sure that they operate and perform correctly without having
to spend a significant amount of money for the monitoring
and control. After
all, if the justification for engaging a traditional model
audit firm was cost, it would be foolish to have the liability
and the expense; the combination of which would well exceed
the internal costs.
In order to perform a proper and complete audit, a detailed
examination of the entire record must occur.
The first examination of information must look to the
originator of the source information.
Therefore, a proper audit includes the validation (ideally
electronic) of the bill of lading to the freight bill.
This will confirm that the freight bill represents
the correct origin, destination, weight, ship date and commodity
that represent true and correct information. Any audit that does not include “service verification”
is significantly flawed and exposes the customer to high risk.
While the loss of ability to manage your own cash may not be
considered an abuse, the traditional model utilizes customer
freight funds in their own cash management schemes.
Freight Cash Asset Management represents a significant
opportunity for every shipper.
The ASP, application service provider, and BPO, business process
outsourcing have very recently appeared. The ASP provides hosted expert systems on the
Internet in a highly secure fashion.
The BPO performs similarly but also provides selective
labor. This “new model” vendor is characterized as
being a new company with seasoned management that recognizes
highly competent customer staffs.
They also recognize the customer driven need and importance
of giving control back to the customer and allowing all customer
authorized users’ access to their information 24/7. This understanding first occurred in the 1960’s
and has reappeared; it has value and by converging expert
systems with customer capability and customer trained staffs,
the power of two (2) has the strength of history and the benefit
of the combination of resources.
Through a highly secure process, customers and their authorized
users have full and complete access to and control of their
information 24/7. Once
the customer loads all of their tariffs and rates, most of
which can be downloaded or the BPO model will supply the entry
labor, the expert system takes over. It will automatically audit and completely process
through shipper managed payment all of the freight bills received. The data and information are available to the
customer 24/7 so they can have information when and how they
want it as compared with the traditional model having to wait
an inordinate amount of time and pay an additional fee.
The ASP/BPO model features include, but are not limited to:
service verification and pre-rating.
The logical steps in the new model accommodate prepayment
and add routines; effectively satisfy duplicate payment prevention
and offer the most effective audit because they use the Bill
of Lading or other source material as the primary audit control.
An example of the benefit of this last step; the process
eliminates the problem of the 50 pound Bill of Lading becoming
the 500 pound freight bill.
The ASP/BPO model allows each customer the opportunity to manage
their cash. Freight
payment is controlled fully and completely by the customer.
The customer simply lets the system know that
payment is to be made; the system can generate a check at
the customer site or an electronic payable at the customers’
The ASP/BPO philosophy absolutely recognizes the talent and
intelligence at every customer location; it gives the customer
the tools necessary for effective and efficient freight cost
control and availability of management information 24/7 so
that the customer and the ASP combine their resources achieving
As the ASP and BPO models evolve, the industry will have finally
come of age, that is their technology and offerings will be
understood and appreciated; their success will move them from
niche providers to mass providers and costs will be driven
down. Some of these
providers have already begun offering a host of services,
in an incremental fashion so that the customer need only pay
for that which is used. Scalable
solutions are the most cost effective and efficient.
Some of these additional services/features include
online: freight tracing; routing control; Bill of Lading generation.
Load tender, ASN and collaboration. There is a natural and logical expansion of
services that will occur as the evolution continues.
In the Executive Summary, the difficulty in selecting a title
was clear; however it seems very clear now that the title
of the new freight audit and payment firm could be, “Transportation
Cost Control and Management Information Portal”.
It is important for the customer to understand the significant
advantage that the new model, “Transportation Cost Control
and Management Information Portal”, offers:
of administrative costs
hand picked staffs using the expert system
and complete payment control
Another clear advantage of the “Transportation Cost Control
and Management Information Portal” is their ability to stay
in front of the pack; their management is comprised of seasoned
professionals, who have sat in the customers’ seat and at
the carriers table as well. Their management composite typically represents
all facets of the industry.
By spending their time developing highly secure, easy
to use expert systems, it seems like the best choice on balance
is to select a vendor from amongst the new model providers.
For more information about this subject please contact firstname.lastname@example.org
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