Market Insight: Q&A with Ocean Audit’s Steve Ferreira – every little million dollars helps in a late cycle

The Loadstar has authorised Ocean Audit to publish this Q&A 48 hours after it was first posted at Loadstar.com. Interview by Alessandro Pasetti

Steve Ferreira, the founder of Connecticut-based Ocean Audit, told me he "has the hardest, yet easiest job in the industry": convincing beneficial cargo owners (BCOs) that they have left significant ocean freight overcharges in the hands of their vendors.

Mr Ferreira uses machine learning to recover top dollars "in ocean freight invoices up to five years old", but he is also adept at pitching executives, solving problems they often underestimate.

What may sound incredibly boring – pre-audits, freight payment audits, post-audits, as well as dealing with internal associates who claim to audit every ocean invoice 100% accurately – is a vital service in a market where counter-party risk heightens daily in a late business cycle, in which working capital strains are building across supply chains globally.

Here is Mr Ferreira's perspective on why errors and overcharges continue to plague the shipping industry and how radical results, in term of efficient use of capital, can be achieved.

Background

"I am a serial entrepreneur, and no stranger to the freight auditing industry. Elbow-deep in it for nearly four decades, I launched my latest endeavor, Ocean Audit, in 1994. I run a company that specializes in locating errors on shipping bills. Over the years, I've perfected the practice, helping clients recover millions of US dollars, often in a matter of hours.

“Ocean freight vendors make a lot of invoice errors. In fact, 20 of 100 NVO invoices and 15 of 100 VOCC invoices contain a correctable overcharge. The problem is, only a fraction of these errors are found via traditional pre or post-auditing. I hit seven figures in revenue in 2017 and 2018, and have already done so this year."

The problem with auditors

"I laughed when I learned that a Fortune 100 client’s ocean freight was being audited by an LCL truckload auditor, whose only experience in freight was running the LCL consolidation of a small domestic trucker in Alabama.

“How the heck was this individual supposed to understand the difference between DHL’s invoicing tool, Maersk’s invoicing algorithm and Hapag’s mixed tariff derivatives? They can’t just cherry pick the $10,000 invoice that should be $1,000 and call it a day, yet they managed to convince more than a few C-level executives that after their review, their invoices are free of defects. Yeah, right”.

Making noise

“Am I a disruptor? I think so. I’m causing change and shining light on the shortfalls of vendor invoicing practices. I can go to any BCO without the need for their data, armed with a refund portfolio for them. By using my big data and machine learning, in many instances I don’t need the client’s data at all. In other words, I can approach a client on day one and by day five have a validated refund in-hand from their vendor.”

No competition

“Honestly, when it comes to competition in ocean audit, there is none. Really, the biggest question is, ‘how come freight auditors don’t understand ocean invoice dispute management?’

"I see clients all the time that have identified some refunds, but because of the third-country effect (for example, Maersk refunds go through India/Philippines, APL refunds go through Costa Rica, and so forth), 90% of those refunds end up abandoned. There are a few freight payment companies and a few EDI pre-auditors that do general cargo and ocean, air, and a huge number of post-auditors that have a pick-up truck, a laptop and a website. But I’ve met zero that have the outlier-type hours in understanding ocean freight big data/AI and dispute management.The fact is, a client can have three auditors – we are the fourth – and we still find seven-figures.”

The (not-so) secret sauce

“Data is king. I have 75% of every invoice from every vessel/voyage over the past 10 years. We created an AI crawler to marry up ocean freight vendor rules tariffs. Believe it or not, there were more than 200 days over the past few years where extremely egregious errors impacted the carrier rules tariffs – their algorithms overrode the vendors’ invoice applications in their service contracts."

Every little million helps

"Resource-free audits – for real? Some can be. My proof-of-concept audits have delivered millions. One automaker received $4m, as did one retailer. Once I deliver any sum to the client – with zero data from them – they are hooked. They then realise the intrinsic value of sending me actual data to multiply the recovery yields.

“It's 1% of a three-year spend cycle. In other words, take your ocean spend for three years against 1% - that’s a good indicator. For Fortune 100 type clients – the day one to day five refund (without any initial client data) can average anywhere from $200,000 to $2m.”

Stewardship

"For carriers, it’s not pleasant but I’m playing by their refund rules. When they make a bona-fide error, they have an obligation to make good on it. BCOs need to know that they aren’t doing business with the Mafia. I’ve had some clients say ‘I’m afraid to get a refund.’ Afraid?!? If you’re at Safeway and you overpaid P&G, do you think Safeway cares about whether P&G will feel offended when asked for a refund or credit? I’m still struggling with why logistics pros are afraid of their vendors’ reaction to a refund. I’d be more afraid that the CFO would not think they are good stewards of their company’s funds.” 

Auditing the auditors

“Put it this way. Only 5% of BCOs find 75% of all available refunds. And 95% find well under 50%. Most BCOs haven’t a clue about invoice control stats and root cause, only what the pre-auditors and freight payment companies sell them. From the logistics side, we don’t expect the logistics pros to be forensically trained in ocean freight invoice controls.

"Company buyers are only plugged into what the freight auditors tell them or sign off on. The post-auditor signs off on $100,000 in refunds they’ve recovered. The BCO accepts this, oblivious to the fact there is another $1m in refunds on the table. In another example, the freight payment company simply tells the automaker they have 99.9% invoice accuracy – and it’s believed. BCOs need to find a better way to address this, up and down their command chain. To start with, job descriptions for logistics team members should not include ‘freight audit’.

"I teach CFOs that their logistics teams, procurement teams and buyers are not analytically attuned to the nuances of vendor invoice algorithm coding. Hundreds of hours of RFP cost-savings never see the light of day due to ocean freight overcharges. The power tilt is palpable in how BCOs tend to allow the fox (vendor), to guard the henhouse (BCO’s invoice control)."

Main causes of VOCC invoice errors

“How much time do you have? Seriously, there are so many factors: offshoring, tariff vs contract algorithm disruptions, timing, amendments, rules (and 42 other reasons that are trade secrets).

"One common thread – only 1-2% of BCOs really understand back office ocean freight invoice flows, they don’t need me. And 0% of freight post-auditors understand back office ocean freight invoice flows, when they convert an error to a refund, it’s partly just throwing darts until one hits."

NVO invoice failure rate – what gives?

“The issue is file profitability. How much mark-up was made on service bought for the BCO and sold to the BCO. In reality, if an NVO forecasts a $700 file profit, but ends up with a $580 profit, 95% of NVOs won’t try to reconcile the difference.

"NVOs would be a lot more profitable if they had a delivery system that could ensure that the file forecasted is the file profit delivered. NVO branch operators - their skill sets and expertise - vary widely. NVOCCs that use my services, on the other hand, get an upside-plus in determining which of their branches are audit-compliant and which ones are not. 

"Imagine a $1m refund if your file profit is $500. That’s 2,000 files of lost profit that nearly every top 50 NVO experiences. Pre-auditor freight pay company IPS lost $100m of their client’s money. Fortune 500 and other importers/exporters lose 10x more through the mishandling of and/or reliance on domestic pre-audit freight pay and domestic freight post-pay audits.

"Even worse, pre-audits using EDI sell the BCO on 97-99% accuracy when they know the ocean freight invoice is a living, breathing organism that does not, unlike a motor freight or UPS/FedEx small parcel, have cradle-to-grave completions.

"We never touch funds as we are not a pre-audit freight pay company.”

Could digital and/or blockchain be the future?

*Sigh* “It sounds good, but throw one complexity or exception at it and you’re back to using Excel. People and companies could get all this stuff for free if they blocked good funds from rolling out after bad invoices. Follow the money is the first and last rule here.”

 A good place to start

“For BCOs looking to improve their own performance and wean off third-party providers, I’d suggest analysing the results of the audit I do for them. I’m not that guy who says I’m not going to show you how. If you follow 50% of my results, based on root cause, you will solve one-third of future errors on your own.

"The problem is the system and its velocity. There is a type of natural selection and that’s going to cause errors. Can you find some on your own? Sure. Will you be leaving a lot on the table? Almost assuredly. That’s where I come in. And since my business model is no cure, no pay, there’s really nothing to lose.”

 #oceanfreight #supplychain #business #commerce #finance

Mr Ferreira can be reached at [email protected]

Other senior industry executives will share their experience with our readers in the upcoming weeks. If you are a market veteran or a disruptor, and want to share your experience and/or relevant market outlook views, please get in touch with me at [email protected] or call me at +44 740 22 555 12.

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Previously, for Market Insight:

·        Ryan Petersen, chief executive of Flexport: "The $1bn salesman"

·        Graham Parker, chief executive and co-founder of Kontainers: "Freight tech is the real deal"

·        Hessel Verhage, president and chief executive officer of STG Logistics: "The forklift operator who went on to run a multi-billion dollar business"

·        Hans Willam, chairman of WCL Worldwide Consultants in Logistics: "Lessons from 45 years' experience in Logistics"

·        Steve Walker, founder of SWG Global: "From Alltransport in the 1970s, to e4PL solutions today"

·        Fauad Shariff, co-founder and chief executive of New York-based CoLoadX: "Digitisation is often a matter of garbage optimisation"

The Loadstar has authorised Ocean Audit to publish this Q&A 48 hours after it was first posted here.