By Clifford F. Lynch
DC Velocity, March, 2011
SHOW ME THE MONEY
With the unprecedented bankruptcies and fiscal irresponsibility of some U.S.
firms, as well as the economic recession in general, companies contemplating
outsourcing have become more concerned about the financial health of logistics
service providers. Many of todayís outsourcing contracts are quite large and
some firms have found out the hard way that some providers simply to not have
adequate financial resources. While most LSPís are financially sound,
well-managed businesses, the general business climate suggests a need to, and
the importance of thorough financial diligence in selecting a provider.
This can be a relatively straightforward matter if you need to investigate a
provider that is publicly held. Readily available financial statements will
reveal any concerns. On the other hand, many providers are privately held and
there is reluctance, if not absolute refusal, on the part of many owners to
reveal financial information.
The cost of an outsourcing startup can be quite high, and the value of the
products being held often is high as well. An undercapitalized provider can find
itself in trouble very quickly.
It is absolutely critical that the outsourcing firm satisfy itself of the
providerís financial stability before a contract is signed. Some providers
will furnish serious prospects with audited financial statements before the
final agreement, and every year thereafter. Others provide banking information
which sometimes can be helpful, but not always an indicator of financial health.
Many times the bank will reveal only vague details, none of which guarantee a
sound financial base.
While there will always be some risk in outsourcing, there are a number of
steps that can be taken to minimize an outsourcing firmís financial exposure.
- Insist on inspecting audited financial statements. Examine profit and
loss statements and balance sheets for such things as net income, net
worth, debt load, etc.
- Make sure the statements are examined by qualified financial personnel.
Sometimes a well-meaning logistics manager will overlook important clues.
- Investigate the reputation of the auditing firm used by the provider.
- If funds are to be advanced, such as in the freight payment business, be
sure that funds are not co-mingled. Also find out what types of
investments are made (with your money) by the provider. Failure of the
provider to pay a carrier for example, can lead to the client paying the
invoice even though the funds have been advanced to the provider.
- Determine if bond coverage is available. If so, make sure that bonds
adequately cover the risks. Some coverage, for instance, applies only in
the case of theft or conversion.
- Explore the possibility of establishing minimum limits on financial
assets. In other words, an outsourcing firm may decide it will not enter
into a relationship with a provider that does not meet a certain net worth
- Consider the possibility of awarding contracts only if the total value
of the contract is below a certain percentage of the providerís total
revenue. An LSP should not be too reliant on one or two clients.
Some of this information will be provided reluctantly, but the prospective
client must persist until satisfied. If a provider is financially healthy,
responsible, and capable of handling the business, it will find a satisfactory
method of demonstrating this.
Whatever methods are used, thorough financial due diligence must be at the
top of the list when qualifying potential providers. Financial stability must be
confirmed and regular audits conducted. References should be checked carefully.
Supply chain initiatives are complex and expensive and should be considered with
the same care as any other large financial transaction of the firm.