Vested Interests

Vested Interests

Copyright 2002, Traffic World Magazine

In reading the contributions to Traffic World from industry and freight payment executives regarding the recent industry bankruptcies, a quote from an old Frank Herbert book came to mind: "There's nothing so passionate as a vested interest disguised as an intellectual conviction."

The input thus far has focused on better bonding and financial review, retrospectively prescient industry weather prediction, bigger and separate investments and prudent and auditable investment strategies.

The unanswered question for every user of freight payment services is, "How do I prevent this from happening to me?" No clear method to absolutely eliminate legitimate concerns over provider bankruptcy has been advocated. Here are some of the suggestions that have been made, and some of the problems with them:

- Audited financials. These now should be mandatory, but auditing money-handling operations is different and difficult - take Enron, for example.

- Bonding. It would be interesting to see if the Computrex and STI situations would have been covered.

- Big. Which means involved in other businesses that could lose your money, like WorldCom.

- Separate investing accounts. They aren't necessarily safe from bad investments or from shareholder or company loans, as in STI, Computrex and Adelphia.

- Prudent investment strategies. It's not a great investment for your company to borrow money at 7 percent so that you can give it to your provider to float for one to three weeks for a 2 percent credit, no matter how fiscally prudent they are.

Like it or not you are faced with a new awareness of risk and hidden cost that cannot be ignored. You never will find a stronger advocate for freight processing and control outsourcing than I am. It's the right thing to do for most companies. So what's the solution for those who are concerned about financial liability?

Any customer who gives constructive receipt of their freight funds, in advance, to a provider is creating risk. You are transferring your cash to satisfy the liabilities represented by your freight bills into the providers' bank account. You are not transferring the liabilities themselves. Even if the provider's contract says they assume the liability upon receipt of your cash, the contract provides no full protection to you in provider bankruptcy since your carriers never agreed to transfer the liability. This is why the customer creditors (a new term for bankruptcy lawyers) of STI and Computrex had to pay their bills again to the carriers.

Obviously there is less risk with some providers than others. Enron demonstrated that even big, public and audited financials may be a false panacea, so verify - then trust. Forensically auditing a freight payment company is a daunting task. The largest providers have hundreds of millions of transactions, on millions of checks potentially commingled across thousands of clients, voided checks, refunds, lost checks ... you get the point. It would be an expensive operational audit. A normal financial audit should have discovered both Computrex and STI's difficulties.

On a constructive note, any provider can establish a process to do all of the operational things they do now without handling your money. If you look closely at Computrex and Strategic Technologies, some customers are not creditors. Microsoft appears to be an example in the STI case. The reason is simple. They didn't lose any of their freight dollars. Why? Because they never gave their money to the provider in the first place. Two ways this could work are taking a feed from the provider and running it through your own accounts payable system or having the provider write "your" checks on "your" account which "you" fund as "your" checks clear (my favorite solution). Being smart about freight payment could be one of the reasons those folks in Redmond have $25 billion in the bank.

Given the landscape, why haven't more freight payment customers established some form of "floatless zero-liability process" as a standard practice? My opinion is that departmental budgets get in the way of making the best corporate decisions. If the provider's fee is 20 percent to 70 percent lower by giving them your money (float) and operational benefits (co-mingling of funds/cash flow), the budget-holder (typically the traffic/logistics area) at the customer is the beneficiary. However, at a corporate level the true cost of the service, including the borrowing cost of money over the actual float period for your funds, can be higher than your realized fee savings. The reason is straightforward. Your companies borrow funds at a much higher interest rate than your freight payment providers can earn and give you credit for directly or indirectly against your fees. A good example is the interest rate you pay on your mortgage vs. the interest rate the bank pays on your savings accounts today.

Unfortunately, as the recent bankruptcies demonstrate, you are incurring credit risk by, in effect, giving large unsecured loans to your freight payment company. Is the return in reduced fees worth the combination of the cost of funds and risk you are incurring? The obvious answer is to ask your treasury department. If they are really good, they might give you a float credit against your budget.

In the case of freight payment companies, trust them to do all the good operational things that they do. Trust your treasury staff to determine how your money will be handled. Then choose the best provider to meet your requirements. There are lots of good ones out there.

-- Klugman, executive vice president of VigilantMinds, is a 20-year veteran of the freight payment industry and former president of Tranzact Technologies. He is acting as an expert for the trustee in the Computrex Inc. bankruptcy case. He can be reached at David.Klugman@VigilantMinds.com.