The winds of change blow over Freight Audit & Pay

The freight audit and pay market is in a state of flux, with four of the ten biggest global players changing hands over the past couple of years, says Dominic McGough, managing partner of freight audit and customs consultancy, CustomsPlus. Xenetahas been busy raising U$80 million from a group of tech investors, while ControlPayhas been acquired by Transporeon. EnVistawhich, like many other FAP firms is US-based, has sold its global freight audit and payment (FAP) services to Korber.

Meanwhile,a Belgian-based company, EM6 Logistics – a brand of Europe Management SPRL - bought the assets of US-based FAP firm IPS in 2019 after the latter went into Chapter 11.

This flurry of activity shows that people are waking up to the value of freight payment data, says McGough, who has long experience of the FAP industry. He explains: “This changes the dynamics of the FAP industry – people have identified the value of the data that they hold.”

In the past, venture capital companies were attracted to FAP firms because they were looked on as cash cows, says McGough. However, many of them lacked the expertise to actually realise the value of the data they hold, he argues.

This mindset has changed recently, he continues: “People are piling into the market because they see value, not in the processing of the data, but the value of the processed data. It has been vastly under-valued in the past.”

FAP firms’ data is considered particularly valuable because it is accurate and up-to-the minute, McGough believes. Other analysts’ data can be up to sixmonths old and is often based on interpretation rather than hard facts, whereas FAP firms turn round information within a week, or a month at the most.

Thisis particularly important in a fast-changing freight market where ocean rateshave soared over the last couple of years but have now recently moved down again in some major markets. Volumes have dropped in the face of port congestion, to no more than 10% above pre-pandemic levels on the Transpacific routes.

Thisfactor is particularly important for firms that have agreed long-term contracts with shipping lines and who would find the information provided by FAP firms especially valuable. The fact that European companies are buying US-based FAP firms is also interesting, adds McGough, as it raises questions over whether the data they own would be subject to the EU’s strict GDPR regulations which prevent information from being shared or broadcast. The EU regulators can impose very severe penaltiesof up to 4% of global turnover on transgressors.

US law in this area is currently much less stringent, says McGough, although California and other states are moving towards a similar, though less strict regime.

Interestingly though, despite the huge flux in the FAP industry, the number of major players in the sector has not changed significantly, McGough continues. Setting a major FAP operation up from scratch would be a massive undertaking and the cost of acquiring clients would probably make the venture uneconomic. Also, much shipping data is tied up in large companies’ legacy IT systems, often mainframe computers.

One example of a start-up company providing auditing of freight costs is though the company in which McGough is a managing partner, CustomsPlus. It has however, taken a somewhat different approach to traditional FAP, combining freight data with customs costs, VAT or duty to give a true landed cost and prefers to call itself a supply chain auditor, rather than a freight auditor.

It has the advantage of being Cloud-based, says McGough and has been able to embrace the latest technology and is fully scalable. “There are some smaller FAP companies, but you have got to be different and innovative to survive.

“We didn’t come from a historic structure. The majority of FAP software is 20 yearsold or more and it’s been upgraded and ‘bolted on’ to. It’s also been built to specific customer requirements, often on legacy systems, so changing anything is a major challenge.”

So far, no traditional FAP firm has been able to stomach the cost of moving legacy systems to the Cloud, as it would probably involve having to run dual operations while the transition is being made.

However, this ‘ain’t broke, don’t fix it’ approach cannot be pursued indefinitely and legacy systems cannot continue for ever. Indeed, the cost of making the transition to the Cloud may well be behind some of the older established FAP firms’ recent willingness to sell up to new owners.

If you would like to discuss Supply Chain Audit with Dominic, please get in contact or book an appointment here.

Published by Freight Business Journal Issue 7, 2022

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