DC Velocity - June 2013

BY CLIFFORD F. LYNCH

fastlane

Investigate, analyze, and verify

FOR OVER 50 YEARS, SHIPPERS HAVE OUTSOURCED THE AUDIT and payment of transportation freight bills. And it’s still a popular practice today. While it might not be at the top of the list of most commonly outsourced supply chain-related functions, nearly a third of the North American respondents to the 2013 Third Party Logistics Study conducted by Capgemini and others reported that they outsourced this task.

There are significant advantages to outsourcing freight bill auditing and payment (FBAP), but because of the amount of money that flows through the process, it’s important to exercise extreme care when doing so. Ten years ago, the industry suffered a blow when two large freight bill payment companies left clients with over $25 million in unpaid freight bills. Now, it’s happened again, with two companies recently accused of leaving their clients liable for millions of dollars in unpaid invoices. One of these situations was at least partially a result of embezzlement.

Fortunately, these are the exception, not the rule. Most of the players in this industry are financially sound, well-managed businesses, and we don’t want to throw the baby out with the bath water.

Nonetheless, the general business climate—as well as common sense—dictates that prospective outsourcers conduct thorough financial due diligence in selecting a provider. Remember, if the provider doesn’t pay the carriers, you as a client are liable for the charges, even if you have already advanced the funds. Also keep in mind that the FBAP industry is not regulated, making it even more critical to investigate, analyze, and verify.

While nothing can be outsourced without some risk, I believe there are 14 steps that, if taken, can minimize the financial risk to the outsourcer. They are as follows:

1. Insist on inspecting audited financial statements—even if the firm is privately held. Don’t settle for banking information, which may be helpful but is not always a reliable indicator of financial health. If the FBAP firm is financially healthy, responsible, and capable of handling the business, it will find a way of demonstrating its stability.

2. Investigate the reputation of the auditing firm used by the provider. Things are not always what they seem.

3. Make sure the financial statements and other documents are examined by qualified financial specialists. If the task is left to a supply chain manager with no background in finance, there’s a risk he or she will overlook clues to financial problems.

4. Check out the reputation of the senior management of the FBAP firm. Keep in mind that regardless of how good the established controls

may be, they can always be overridden by senior management.

5. Ask for assurances that the firm’s financial controls are tested at least annually by an independent auditor. While privately held firms are not required to be Sarbanes-Oxley compliant,

some FBAP firms have become so voluntarily. They are then subject to various tests for operational effectiveness and reporting requirements. These annual reports will be an excellent source of information about the firm and its processes and controls.

6. Be sure that your company’s funds are not commingled with those of the provider. The typical FBAP firm’s business model requires that clients advance it the funds for freight payments, usually on a weekly basis. It then holds these funds while bills are being further processed and verified, and checks prepared.

All funds for freight charges should be held in a separate account—preferably, at a separate bank. Or if you want to be extra cautious, you can insist that the provider maintain a separate account just for your funds.

7. Understand the float. During the delay that occurs between the time the provider receives the funds from the client and the carriers cash their checks (or receive a wire transfer), the advanced funds are considered to be “floating.” Often, a provider will make short-term investments with these funds before it pays the carriers. This can be particularly advantageous when the float amount is significant and interest rates are high, and there is nothing inherently wrong with this practice. However, it’s important that the client be aware that this is part of the process and that it has a right to know how its funds are being used.