When Computrex Inc., a large freight-bill audit and payment firm located in Nicholasville, Ky., folded in December, it left shippers liable for as much as $25 million in unpaid freight bills. In many cases, the shippers had already paid Computrex, but they will still have to pay some bills a second time. Because freight-payment companies are agents of the shipper, the shipper's payment obligation is met only when the carriers actually receive the funds.

For some shippers, the damage will be considerable. A spokesman for Lockheed Martin says the aerospace giant is seeking $2 million from Computrex or a related company, Computrex Logistics, in federal district court in Frankfort, Ky. Budd Co., an automotive industry supplier based in Detroit, is also party to the suit. Budd is looking for a payment of about $1 million.

Clearly, caution is the byword when shippers outsource the freight- payment function. William Augello, a Logistics columnist, transportation attorney and executive director of the Transportation Consumer Protection Council, says shippers should always evaluate their third-party providers carefully. "I've been preaching for years that when you deal with a third party, you put yourself at risk. If there's anybody in the middle," he warns, "you have to protect yourself."

The need for such vigilance may be greater now than it has been in the past. Many of the freight-payment and audit companies make part of their profits from the "float"—the investment income that is earned between the time the shipper transfers funds to the payment firm and the time the funds that the firm submits to the carrier actually clear. Although it's not certain that reliance on income from the float played a role in Computrex's collapse, it's clear that the sharp decline in interest rates over the last year has made dependence on that sort of investment riskier.

"The problem [third parties] are having," says Michael Regan, CEO of Elmhurst, Ill.-based Tranzact Technologies, "is that there has been about a 475-basis point [4.75-percent] drop in interest rates." To maintain a given level of income in the face of such a sharp drop, he explains, companies that rely on float income would either have to increase their transaction fees or hold clients' money longer. Regan, who sold Tranzact's freight-bill audit and payment subsidiary to Schneider Logistics in March 2000, is no longer directly involved in the freight-payment business, but he follows it closely. One of the services his current company offers is performing audits of freight-payment firms on behalf of shippers.

Freight-payment companies' reliance on the float is widely known. "It's no secret that companies make a portion of their income from the float," says David Nelson, president of AIMS Logistics, a Tennessee-based freight-bill audit and payment firm that manages about $2 billion a year in freight payments. "What you have to understand is how they make that money—what their investment policy is," he adds.

The adoption of electronic funds transfer, which compresses the time the float is available for investment and sharply reduces transaction fees, has also been troublesome for some payment companies. "Transaction revenue is cratering," Regan says.

The fallout from Computrex's collapse makes at least one thing clear: The risks for shippers that fail to verify the viability of their freight-payment companies can be substantial. "There's the financial risk—that the money might not get where it belongs," says Ross Harris, AIMS' vice president for finance. "There are also operational risks," he says. "Implementing a [relationship with a] freight-payment company is like a marriage. You're extraordinarily integrated. If the company comes to a dead stop, even if it pays your carriers, the costs to switch are significant and distracting."

What can shippers do to protect themselves from this type of failure?

"The first thing you want to do is deal with a company with strong financials that can prove it through an audit," advises Regan.

In addition, shippers should not hesitate to have their own auditors periodically visit the company to examine its books. David Nelson says he urges customers to do that at least every other year.

Shippers should also know their payment company's investment policy and whether that company is taking undue risks with customers' funds. Says Harris: "It's inappropriate to risk these funds. It's other people's money."

Augello advises shippers to insist that intermediaries like freight-payment companies place funds received from their companies in escrow. Shippers should then monitor the freight-payment company to ensure that happens, he warns.

Complaints by carriers about late payments could be the first warning sign that a freight-bill payment company is in trouble. "Non-payment is the tip-off, if the time is excessive," says Regan. "If your carriers are telling you there's a delay in payments, you know [the payment company] is sitting on the funds."

But don't wait for the carriers to call. Says Robert Delaney, vice president of Cass Information Systems, "We tell people, 'Check your carriers for our performance.'" Cass is the largest freight-payment business in the nation, handling about $9 billion a year in freight bills and managing about 100,000 freight bills daily.

Bob Charest of Trans-Analysis, a freight-bill payment firm based in Massachusetts, makes the same point. Carriers, which receive payments from multiple payment companies, will know which ones are slower to pay than others. "Our agreement with clients is that we'll send checks no later than 48 hours after their payment clears our account," he says. "We don't age bills here."

Freight-payment companies carry bonds against employees' dishonesty, which offer some protection to shippers. But David Nelson suggests that shippers take the extra step of contacting their payment company's bond issuer to see if the bond has any exclusions that may create additional risk.

Shippers should also beware of extraordinarily low fees, warns E.J. Nelson, CEO of AIMS. "If the rates are very low," he says, "the company may be operating off the freight funds."

Delaney of Cass Logistics agrees. Selecting a freight-payment service based on cost alone is false economy, he argues. "If you pay peanuts," he says, "you'll get monkeys."