Commentary: Don’t be lured by freight payment schemes
The IPS Worldwide bankruptcy filing is another critical reminder that shippers need to better manage their accounts payable. We just can’t continue down this same path. Yes, it is terrible to see such bankruptcy again and you would think that shippers have learned from similar failures in the recent past and no longer engage in such extremely high-risk agreements. But the promise of discounted and/or supposedly “free” services appears to be too difficult for many shippers to resist.
It’s amazing to me just how many shippers will turn over endless amounts of money to these third parties without any oversight. What are those shippers’ CFOs and CEOs thinking? The list of the top 20 unsecured creditors in the IPS Worldwide bankruptcy filing reads like a “who’s who” directory list. Some of those companies are publicly traded and thus subject to Sarbanes-Oxley Act (SOX) compliance. Noncompliance like the lack of secure management of the payables to vendors could likely result in SOX violations and even put the CFO and CEO of those companies possibly at personal risk as SOX mandates their involvement.
The combined money owned by IPS Worldwide to those 20 companies exceeds $121 million. That is a huge amount of money and it will be even more by the time everything is tallied for all the other unsecured creditors not listed in the bankruptcy filing. Just think about this: IPS Worldwide claimed to process over $8 billion a year in freight payments and now has less than $50,000 in assets based on its bankruptcy filing. That did not happen by accident or overnight.
Banks, insurance companies and U.S. government-approved sureties that write bonds have regulations and oversight, but these third-party payment companies have zero oversight. How can such a company process more than $8 billion annually (per statement on IPS Worldwide’s website) through its books without any appropriate bonding or oversight? As the company stated, that translates to almost $4 million an hour! Anyone with some common sense should be able to determine that this is not a good idea. It is an open invitation for fraud and an easy setup for a pyramid scheme.
It comes as no surprise that everything in life has its price, and sometimes things are simply too good to be true and shippers need to walk away from the temptation. There are many good freight audit providers (some are also 3PLs) and the best will actually request that shippers pay all vendors directly.
This is not complicated to set up. In fact, it’s a very clean and compliant process. The freight audit provider will perform a prepayment audit and provide the resulting payables file to the customer, who in turn will send it with its payment to the vendor. It’s easy to do and keeps the customer/shipper 100 percent in control of its money, its destiny and when it is paying the provider, including taking advantage of early payment discounts.
Whenever you have a middleman involved, it gets convoluted and payments are always delayed to the party that is owed. Not to mention the risk of bankruptcy, which is the case involving IPS Worldwide. Another option is to conduct a post-payment audit and then request a refund for any overpaid charges. Again, no money flows through the freight audit service provider.
Clearly, the shipping community has a legitimate need to audit their provider invoices, but there is not a one-size-fits-all scenario. Many TMS solutions today have built-in capabilities for freight auditing services and thus outside third-party auditing services may not be required. And if you chose to outsource this function to a third party, there are many excellent providers that are available. But shippers need to truly vet those suppliers and never ever agree to have the actual freight payment go through those freight audit providers.
I sincerely hope that shippers finally wake up and immediately restructure similar deals that they have in place with competitors like IPS Worldwide to ensure that they’re solid and safe. As reported, IPS Worldwide is unfortunately not the first such case involving freight payer bankruptcy. There have been a few big ones in recent years and, if shippers continue their careless approach to freight payment, it will for sure not be the last.
Hopefully, carriers, transportation and warehouse providers, parcel carriers, 3PLs and forwarders also will stand up for what’s right and educate their shippers as well and keep a keen focus on their account receivables and alert shippers the second something falls outside the agreed scope. Yes, this could mean putting a shipper on prepayment/cash, but this is clearly the better option for all.
Dishonest providers will maybe become a thing of the past, if we can all work together proactively. Let us stop writing these blank checks for anyone to use! At least, I have some hope we can get there eventually.
Albert Saphir is principal of Weston, Fla.-based ABS Consulting, which assists shippers, freight forwarders and customs brokers with supply chain, transportation and trade compliance matters. He may be reached by email at firstname.lastname@example.org.