For over fifty years, firms have outsourced the audit and payment of transportation freight bills. While not at the top of the list of outsourced functions in the supply chain industry, one third of the North American respondents in the 2018 Third Party Logistics Study indicated that they outsource the activity.
There are significant advantages to outsourcing freight bill audit and payment (FBAP). The auditing and analytical capability of a competent provider can be extremely helpful in managing transportation function. Because of the large amount of funds that flow through the process however, extreme care should be exercised. Several years ago, the industry suffered a blow when two large freight bill payment companies left its clients with over $25 million in unpaid freight bills. One of these situations was at least partially, a result of embezzlement.
Fortunately, most of the firms in the industry today are financially sound, well-managed businesses, and we don’t want to throw the baby out with the bath water. Even so, good risk management techniques, as well as common sense, dictate the importance of thorough financial due diligence in selecting a provider. Remember, if the provider doesn’t pay the carriers, you as a client are liable, even if you have already advanced the funds. Keep in mind also, 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 fifteen considerations that can minimize the financial risk of outsourcing FBAP.
- Insist on inspecting audited financial statements – even if the firm is privately held.
- Investigate the reputation of the auditing firm used by the provider.
- As a client or prospective client, make sure that the statements and other documents are examined by qualified financial personnel.
- Investigate the reputation of the senior management of the FBAP firm.
- Ensure that the firm’s financial controls are tested at least annually by an independent auditor.
- Be sure that the funds of your firm are not comingled with those of the provider.
- Understand the float and its impact.
- The provider should have a fidelity bond which would cover possible embezzlement of client funds by employees.
- Detailed background checks should be made on all new employees, and credit checks should be conducted on all that would have any access to funds and/or cash management.
- There should be a separation of duties in accounting and cash management functions to ensure that a single employee or group of employees cannot manipulate funds or bypass controls.
- Verify carriers.
- Finally, and most important, the client should manage the relationship, not leave it to the provider.
If the client firm is large or if the amount of freight charges involved is particularly significant, there are two other controls that may be considered.
- Explore the possibility of establishing minimum limits on financial assets.
- Consider the practice of awarding contracts only if the value of the contract is below a certain percentage of the provider’s total revenue.
If you still have concerns, you might want to consider the following.
- For maximum protection of your funds, retain the firm to provide only the audit and analytical functions and actually pay the bills yourself. This approach will not be met with enthusiasm by the provider, but can be a safe compromise.
The outsourcing of freight bill audit and payment is an important financial step for an outsourcing firm and should be treated as such. These arrangements often are complex
and can remove significant amounts of client funds from their control. Financial due diligence must be at the top of the list when qualifying potential providers. While no outsourcing arrangement is absolutely risk free, the client should try to ensure that its funds are as safe as they would be under its own management and control.