By Thomas Whaley, President, Level One Technologies, Inc.
As the economy emerges from the Covid-19 lockdowns, there are encouraging signs of economic growth, even though some areas of the country remain closed. However, some brokers are already experiencing tight capacity, and it’s causing them to question how bad the shortage will be when the economy is completely open and new manufacturing growth puts even greater pressure on the supply chain.
My name is Tom Whaley, and for the past 15 years, I have served as President of Level One Technologies. During that time, our development team has been focused on building web-based applications to help brokers and carriers become more efficient. These include building management software and communication portals with built-in workflow technology. Our largest and most complex project was building Epay Manager, the transportation industry’s first and most complete electronic invoice presentment and payment system.
Following Epay’s launch, I personally introduced the application to many of the industry’s most successful brokers. But during those interactions, I discovered that many people were reluctant to adopt more carrier-centric rating and settlement practices.
This observation was alarming to me because Level One was founded on the principle that carriers will gravitate to brokers who they see as trusted and reliable business partners. But their indifference created concerns that our core beliefs were not resonating with the audience that Epay was designed to help.
However, those attitudes began to change when the first of two catastrophic events caused many carriers to either go out of business or experience extreme financial hardship. Looking back, I believe it was the fear of being unable to service their customers that caused some brokers to change course and make the necessary changes for carriers to view them as a preferred broker.
The first event, now referred to as the “Great Recession,” occurred in 2009, and it nearly collapsed the U.S. banking system. Among the hardest hit were the small to medium-size truckload carriers, who make up more than 90% of the nation’s truckload fleet. No one knows for sure, but it’s generally accepted that the recession caused more than 1 million trucks to be removed from the nation’s highways.
The second event began earlier this year, when a virus emerged from China and quickly spread into a global pandemic. This caused many countries, including our own, to close their economies. In the U.S., the lockdown has already caused more economic damage than any other event in our history, including the Great Depression. Although it’s too early to tell, some fear that more trucks will be lost because of the pandemic than were lost in the Great Recession.
One reason for their concern is that during the shutdown, small truckload carriers found fewer loads available in the spot market. As a result, the rates paid for these loads often dropped below the carriers’ cost to operate their trucks. This created an even bigger rate gap with larger carriers, who are paid higher rates because they’re able to provide guaranteed coverage of their shippers’ loads.
Their inability to guarantee coverage is the primary reason why small carriers have been confined to the spot market, and as a result, they’ve earned rates that are often less than half of the rates paid to larger carriers. This was an especially difficult position for small carriers because their costs of operation were higher than larger carriers. And because of strong competition for loads in the spot market, they were unable to pass along cost increases, which have ranged from 3 to 7% per year over the last decade.
The roots of this problem can be traced back to the beginning of deregulation, when a large number of new and mostly small carriers entered the industry, creating an over-supply of trucks, which had the effect of putting long-term downward pressure on rates.
Under these constraints, carriers who wished to remain in business needed to find ways to reduce or eliminate existing costs. One way to do this was to identify every internal expense that was associated with a staff member to determine whether the activity could be outsourced to a less expensive outside vendor or replaced with software to accomplish the same task.
However, because the number of substitutions were limited, when carriers ran out of options, they could either raise rates over their shippers’ objections and risk losing a customer, or they could start looking for new customers, preferably those who needed additional carriers to haul loads that their primary carriers couldn’t cover.
Over time, some carriers were successful in lowering costs and aligning themselves with shippers who paid higher rates. But with each passing year, rising costs that were not reimbursable gradually forced smaller carriers out of business to the point where, in 2018, there was no longer an oversupply of trucks. That year marked the end of a 30-plus-year shipper market and the beginning of what is now a carrier market.
While some may think I’m overstating the impact on carriers of rising costs that are not reimbursable, it would be worthwhile to consider the ramifications of a new regulatory expense that may soon be imposed on small truckload carriers if the new highway funding bill that was recently passed by the U.S. House of Representatives is signed into law.
As part of this legislation, small to medium-size truckload carriers who are currently insured for liability insurance at the $750,000 level will be required to increase their coverage to $2,000,000.
If this change is approved, the premiums for this coverage could increase by 300% or more, depending on the carrier’s safety record. But that’s not the only hurdle that must be cleared if this increase becomes a requirement. In addition to paying higher premiums, insurers will require these carriers to make an additional cash deposit to secure this coverage.
With these costs in mind, brokers should consider how many of the affected carriers will be able to pay the additional premiums and fund the required deposit, given their poor financial performance over the last decade.
The solution to these problems must be part of a new long-term understanding that, in order to save these carriers, it will be necessary for brokers and shippers to implement new carrier-friendly policies regarding rates and payment terms. The good news is that these changes may already be taking place, as evidenced by two companies who have recently decided to support paying carriers market rates.
One of these companies is Titanium Transportation Group, a Canada-based carrier that recently announced the opening of its second U.S. brokerage office in Nashville, Tennessee. In an article that appeared in Freightwaves on July 16, Marilyn Daniel, Titanium’s Chief Operating Officer, discussed her company’s desire to develop stronger carrier relationships by paying them current market rates on all loads they haul for her company. She contrasted their policy to the approach taken by other brokers, who offer their carriers sub-standard rates on a daily basis, which is equivalent to “price gouging” in her view.
Another company that supports increasing carrier revenue is Smarthop, a tech startup that was created to help small truckers make better load and rate decisions. According to Guillermo Garcia, the company’s co-founder and CEO, the company supports small truckers, who he says pay “retail rates for fuel and insurance” but earn “sub-standard” revenue from large brokers, whom the carriers depend upon for a significant portion of their work. Each of these companies should be praised for identifying the problem and taking steps to solve it. However, what’s needed is an industry-wide adoption of these policies.
To ensure that many, if not all, of these carriers remain active in the years ahead, it might be time to consider a new way for shippers to hire brokers to manage their loads.
Under the current system, brokers must submit a fixed price for all loads shipped from a given location. This approach works well when the number of loads and trucks in an area are roughly equal. Under these conditions, brokers must offer rates that are competitive with other loads in the area. However, problems can occur when there are too many trucks in an area and carriers are offered lower rates. When this practice is repeated over a long period of time, it can deplete a carrier’s financial resources and jeopardize its ability to remain in business.
One way to prevent this from happening is for shippers to require brokers to pay their carriers market rates, even during severely depressed periods.
This can only be accomplished by changing the way brokers bid on lanes. Instead of submitting a guaranteed fixed rate for each lane that includes the broker’s compensation, shippers should ask brokers to submit two rates—one to compensate the broker and the other to pay the carrier. The broker’s compensation could take several forms. It could be a fixed annual fee, a flat fee per transaction, or one that’s paid as a percentage of the carrier’s rate.
Given the likelihood of future rate volatility, shippers should ask brokers to submit a range of rates they can pre-approve to compensate carriers whenever market conditions change. Regardless of whatever fee structure is agreed upon, separating the broker’s fee from the carrier’s rate will eliminate conflicts over who is entitled to the larger share of the single rate that’s used today.
More importantly, this dual rate proposal will eliminate any potential harm to the broker’s future relationship with its carriers if the FMCSA rules in favor of the Owner-Operator Independent Drivers Association’s petition, and brokers are required to 1) send carriers an electronic copy of each load’s record within 48 hours after the load has been delivered and 2) stop the practice of requiring carriers to waive their rights to receive these records.
While some may view these recommendations as a radical departure from the current approach, there is a growing consensus in the transportation industry that if carriers are to survive in numbers large enough to serve the economy, some kind of change is necessary. That’s why I’ve emphasized the need to pay carriers a sustainable rate on every load they haul, but also provide them with payment terms that allow them to fund their daily operations without having to borrow money or factor every invoice.
Thus far, the changes I’ve recommended have been to encourage shippers to give brokers the greater financial and cash flow flexibility they’ll need to ensure their carriers are available for future use. But in addition to these changes, there are also steps that brokers can take to ensure there are an adequate number of carriers available to haul their shippers’ loads. One of these is for brokers to give selected carriers guaranteed access to a shipper’s loads in exchange for guaranteed access to the carrier’s trucks.
Another step brokers can take is to develop web-based portals that include interactive tools and utilize software intelligence to assist carriers in managing a load’s requirements as it moves through the portal’s workflow. It’s also worth noting that portals can become a powerful carrier attraction and retention tool if they allow carriers to view and manage their invoices during the broker’s audit and payment process.
Based on my experience as a member of Epay Manager’s development, marketing and implementation team, I am confident that there is no better way to build long-term relationships with carriers than to provide them with online settlement procedures that give them visibility to the broker’s audit and payment process, as well as giving them control over when their invoices will be paid.
For those who may be unfamiliar with Epay, the system was designed as an electronic invoice presentment and payment system, using the principles of self-invoicing, to achieve a fully automated and highly accurate replacement for traditional paper-based systems, many of which rely on the U.S. mail to exchange invoices and checks and are still in use today.
To reduce the number of costly and sometimes contentious disputes, Epay begins the invoicing process by importing highly accurate transaction data from the broker’s management software, which it then re-purposes to create and send interactive, audit proof invoices to the broker’s carriers, who must then review and accept them before they can be approved and paid with a direct deposit into the carrier’s account.
Brokers who use Epay find that it reduces the number of billing errors and disputes to an average of 1% of all invoices processed and paid through the system. They also find it reduces the time and cost to process and pay a carrier’s invoice by up to 75% and the time and cost to create and send a customer’s invoice by 99%.
As an added benefit, the system’s early payment module has the ability to turn a broker’s back-office into a profit center. It does this by allowing brokers to create and display pre-approved early payment options that appear on the invoice, each of which is matched to a corresponding discount. Once configured, carriers can select the option that meets their cash flow requirements on that date.
Brokers who use this module find that it reduces their direct carrier spend by up to 1.12%, which in some cases is enough to offset the entire cost to operate their back-offices. Because the module gives carriers control over when their invoices will be paid, with funds deposited directly into their bank accounts, it helps brokers improve their relationships with carriers, as evidenced by the fact that brokers who use Epay are considered by their carriers to be among the industry’s most trusted and reliable brokers.
Conclusion:
Although it’s clear that shippers and brokers must change rate and payment policies to help small truckload carriers survive, it’s also important for carriers to continue making internal changes that will help them achieve and maintain future profitability.
One of these changes is to reduce the number of loads they haul in the spot market by actively seeking preferred relationships with shippers and brokers who use a small number of quality carriers to haul loads that their primary carriers are unable to cover. Although these relationships take time to form, carriers should be eager to pursue them because they pay higher rates than other loads in the spot market.
Another change carriers that should make is to ensure their brokers offer payment policies that give them complete visibility to their audit and payment processes. In addition, they should make certain that brokers offer pre-approved early payment options that are selectable on an invoice-by-invoice basis. These options are essential for carriers to help them maintain adequate cash flow to support their daily operations.
Finally, to achieve and maintain profitability, small carriers must continue to manage their internal costs. One of the best ways to do this is to convert all routine activities performed by staff to automated software applications. They can also lower costs by assigning selected activities to outside vendors who already have more efficient processes in place.
Fortunately, after years of development, there are many software applications available to help brokers and carriers reduce their costs and become more efficient. One of these applications is Epay Manager, an electronic invoicing and payment application that was designed to be of equal benefit to both brokers and carriers.
One of the best examples of this dual benefit is the system’s ability to deposit money into a carrier’s account in as little as one day after the carrier reviews and accepts an invoice. Carriers view the speed of these deposits as an answer to their cash flow problems while brokers see them as a way to lower their cost, as well as attract and retain carriers for future use.
In today’s market, one of the most coveted positions brokers can have is to be viewed by carriers as a trusted and reliable broker. However, to achieve this status, brokers must educate their shippers that in the post-pandemic economy, they will need to be given more rate and payment flexibility than they currently have. Otherwise, they will run the risk of having their carriers lured away by brokers who represent more realistic shippers.
About Thomas Whaley
Thomas Whaley is the President and CEO of Level One Technologies. He has over 30 years of experience in the transportation industry and is committed to helping brokers and carriers form mutually beneficial relationships by using technology to eliminate structural deficiencies in their front office practices and their customer billing and carrier invoicing and payment processes.
About Level One Technologies
Level One Technologies develops web-based software for the transportation industry. Its flagship application, Epay Manager, is a communication portal that combines software intelligence with document imaging capabilities to proactively create, send and manage a broker’s carrier invoices and its customer billings.
The Epay process is unique. It begins by importing A/P and A/R data from a broker’s management software, after which it combines the imported data with the payer’s business rules stored in the system to create interactive, dual-view invoices that the system proactively sends to carriers for their review and acceptance.
To facilitate this exchange, the system allows carriers to attach documentation, select early payment terms and resolve disputes before accepting the invoice. Once an invoice is accepted, the system guides it through the payer’s desired workflow to approve and pay it electronically. When an invoice is approved for payment, the system automatically creates and sends a corresponding invoice with supporting documentation to the customer. It then finalizes the transaction’s record by transferring all documents, dates and updated financial information to the third party’s management software.
