In an increasingly commoditized freight audit and payment market, third-party providers are looking to value-added services to differentiate themselves. They’re also looking to overseas markets for growth, especially one in Europe that is just beginning to use third-party freight audit and payment services.
And some European freight payment companies are setting their sights on the U.S.
With a fair amount of commoditization in the payment side of the market, the big differentiator for freight audit and payment companies is the quality of data they provide and how it can be used for transportation savings, said Kevin Zweier, principal, transportation practice for Chainalytics, an Atlanta-based supply chain research, analytics and advisory firm.
“Good providers ferret out opportunities for load swapping, fleet management, procurement, benchmarking, mode switching and so on,” he said.
Many shippers, especially those with extensive international operations, are expressing interest in working with a single global freight payer, although what that means is open to interpretation. Just processing and paying bills from multiple countries, for example, doesn’t necessarily make for an international payment company.
“To be truly international, freight payment companies have to be able to manage automated payments across the globe for all modes and transactions,” Zweier said.
In the U.S., companies that outsource freight payment and audit services fall into two categories: those that just want to avoid the administrative burden of freight payments, and those looking for savings through transactional data, analytics and business intelligence.
Companies such as Lean Logistics and Transplace that offer software-as-a-service transportation management systems provide shippers with another option to third-party payers and freight payment by banks. Lean Logistics and Transplace offer business intelligence, benchmarking and scorecard capabilities for greater visibility into carrier costs and service benchmarks. By doing away with intermediaries, they also can facilitate faster payments. .
Zweier sees two tiers of third-party freight audit and payment providers. The first includes small shops that generally handle domestic freight and are limited to one or two transportation modes. The second includes companies managing freight across all modes and transaction types, and are either globally focused or headed in that direction.
Founded in 2002, Netherlands-based ControlPay entered the U.S. market about two years ago. The company has offices in Woburn, Mass., and Phoenix. It also operates in Kiev, Ukraine; and plans to open offices in Asia and Latin America in 2013.
ControlPay handles freight audit and payment for more than 1,000 carriers in more than 60 countries. Clients include Procter & Gamble, Bridgestone, ABB, Bobcat and Johnson & Johnson.
As a European-based auditor, ControlPay has had to master the complex shipping structures faced by European-based multinational clients. Complexity is the primary challenge when it comes to freight payment across borders in the European Union. As a result, the value of freight audits to European companies is in standardization of processes.
In the U.S., ControlPay perceived a freight payment market with low, aggressive pricing and little if any customer loyalty. It found little differentiation on the audit side and even less on the payment side, which has become a highly commoditized service.
A fundamental problem with the industry is that despite the proliferation of electronic disbursements and online portals, carriers still wait a long time to get paid. That’s because freight payers rely on “float,” which incentivizes them to delay payments to earn interest on funds.
Despite pronouncements that float is dead, the practice is still used widely in the U.S. “The whole business is built around float,” said Nate Endicott, ControlPay’s vice president of global business development. “When money goes into an account and sits for more than five hours, that’s float.”
With interest rates at historic lows, there’s little profit available from floating client funds. To compensate, freight payers have rushed to introduce value-added services such as analytics, business intelligence and data mining, often without the requisite know-how or technology. “The freight payment market is in shambles,” said Pieter Kinds, ControlPay’s director of global business development. “There’s nothing left of it.”
These days the only competitive differentiation is on the audit side, in providing transactional data and the analytics and intelligence needed to make it actionable for transportation savings. Freight payment has become so commoditized that ControlPay has dropped it from its corporate identity. “We are a freight audit innovation company that also makes freight payments,” Endicott said.
The U.S. freight audit and payment industry abandoned float as a revenue model a long time ago and has been focused on transactional data and analytics for more than 20 years, said Harold Friedman, senior vice president of global corporate development for Data2Logistics, a Fort Myers, Fla.-based freight audit and payment company.
Friedman sees the freight audit and payment business as ripe for domestic and international expansion. In the U.S., growth is tied to a company’s ability to provide international services.
Customers led Data2 overseas when they asked the company to help them leverage their transportation spend on a global basis. Data2 has been operating internationally for about eight years, serving clients in the EU from a Rotterdam office. The company also has an office in China and will likely expand to Latin America.
The global third-party freight audit and payment business is immature relative to the U.S. In the EU, shippers are just beginning to consider outsourced services and to recognize the value of transactional information and audits. “Shippers in Europe are learning from their U.S. counterparts that with good information they can negotiate to reduce transportation and logistics expenses,” Friedman said.
Major differences exist between freight payment in the U.S. and the EU. In Europe, there are multiple countries and languages; multiple postcode systems; international carriers instead of domestic carriers; more paper-based transactions and more complexity in rate structures.
One of the biggest differences is the value-added tax that applies in most European nations. In the U.S., if a freight bill has incorrect or excessive charges, shippers can pay the bill minus the disputed amount. In Europe, because of the VAT, carriers first must be notified that the VAT has been improperly stated so it can be reconfigured.
These days, people turn to third-party freight audit and payment firms for information, analysis, support and technological capabilities. Shippers are looking for transactional data down to the smallest detail to negotiate optimal freight rates and minimize transportation costs. They want it sliced, diced and presented in a variety of formats.
Transactional data drives savings. It allows freight auditors to analyze and compare costs for modes such as less-than-truckload and parcel, to shift between modes and to identify optimal weights, routes and modes for various types of shipments. Data can be used to identify non-core carriers that may be more competitive than a customer’s preferred carriers.
Opportunities still abound in the U.S. freight audit and payment market, where a lot of shippers don’t use or don’t know about third-party service providers. There are opportunities on the inbound transportation side for shippers, who are generally more focused on the outbound side. Freight audits can be used to ensure carriers are in compliance with routing guides, whether they’re optimizing modes using the most efficient mix of truckload, LTL and parcel.
“If a carrier is supposed to ship a complete order and makes five partial shipments instead, you can identify those conditions and charge back the difference,” Friedman said.
Shippers can save a lot of money simply by having a routing guide, which is easily created using transactional data provided by freight audits. Not having one and allowing carriers to design routes is asking for trouble, Friedman said.
Data2 invests at least 5 percent of its revenue in new technology. The ultimate goal of freight audits is not to save money on isolated or exceptional transactions but to facilitate shippers and carriers working together to reduce repetitive billing errors. “Getting it right the first time is better for everyone,” Friedman said.
Customers of JDA Software Group, a Scottsdale, Ariz.-based provider of supply chain solutions, are equally divided between outsourcing freight audit and payment and keeping it in-house. In general, there isn’t a hard and fast rule why companies choose one option or the other. The decision is often based on established practices that remain unchanged in the face of more urgent upstream transportation priorities, said Fab Brasca, vice president of global logistics.
Companies too often fail to consider the relative costs of outsourcing freight audit and payment or keeping it in-house, which includes many factors, including scale. “There are hidden values and costs there that organizations should look at,” Brasca said.
JDA’s transportation management software includes capabilities for planning, managing and modeling the full range of transportation activities, including audit and payment.
From a functionality perspective, freight audit and payment is at the tail end of a closed loop, end-to-end transportation cycle that begins with modeling and goes through rate and service negotiations and operational work flows to reconciliation and payment.
The real value of TMS is in upstream planning, where the decision points are. That’s why there’s the strongest need to access metrics and analytics provided by freight audits, which serve as valuable inputs for starting the transportation management cycle all over again, with improvements in place.
“It becomes the entry point for more modeling and part of the loop for continuous improvement,” Brasca said.
JDA freight audit and payment capabilities now include a freight voucher, essentially a proposed bill sent to carriers prior to shipment. The voucher allows the parties to approve or change terms before the freight bill is issued and becomes the transaction of record against which freight bills can be matched, adjusted or paid.
The idea for the voucher originated a few years ago in eastern Europe with some of JDA’s biggest customers. It’s now a generally accepted practice for working with carriers in the region. Although lightly implemented, the customer-driven practice has the potential to save time and money for shippers and carriers.
Contact David Biederman at email@example.com.