The Automated Broker

In the recycling industry, distinguishing your brokerage firm from your competition and achieving financial success typically equates to offering better pricing and customer service. Like any industry that is based on trading a commodity, obtaining that competitive advantage is largely a function of being able to expand your business volume without cutting into your margins and simultaneously improving your business workflow and organization to better serve your customers.

Although brokers may recognize the potential benefits of leveraging information technology to achieve these goals, they also tend to see their business models as unique and not easily adapted to any IT solution.

The business processes associated with brokerage operations can vary significantly based on a number of factors, such as shipping method, customer location, border crossing requirements, ultimate market, customs, banking documentation and foreign currency transactions. As a result, many brokers may believe the only cost-effective “solution” to managing their businesses is to track information in spreadsheets, double-enter transactions into an inexpensive, off-the-shelf accounting software and to hire more workers as demand increases. While this approach may seem sensible, especially for a start-up or small operation, it can often lead to numerous unforeseen problems and costs.

OFF THE SHELF
The most obvious side effect of an off-the-shelf approach is the additional work necessary to process each brokered load. Since off-the-shelf accounting software is not going to track recycling industry specific information, such as pricing agreements, logistics, bookings, releases and received weights, it would all have to be manually recorded into spreadsheets. Some of that information would also need to be re-entered several more times for posting accounting transactions and creating manual shipping or billing documentation, which increases the risk of billing or documentation errors and can ultimately affect customer relations and future opportunities.

In addition, because spreadsheets are not easily shared, unless you have one person doing all of the manual tracking, either different staff members who have divided up accounts would have to maintain multiple files or users would have to share a single spreadsheet, taking turns accessing the file. This further erodes productivity and could create an increasing reliance on the skills of specific individuals, making training new staff more difficult.

Probably one of the biggest problems faced by brokers is trying to track profitability. Brokers typically need to have their margins expressed by shipment or by order to manage gross profit and, in some cases, to determine commissions. To do this, each vendor invoice must be matched up to a corresponding sale. Many operations working off of spreadsheets can find this process too cumbersome and instead opt to go back at month end to do so. Putting this task off may ease the daily workload, but it also can eliminate any measure of control, such as catching overbilling, and can create an accumulated workload that can take many hours or days to complete.

The common thread that ties all of these issues together is the lack of an integrated operations and accounting platform. Only by leveraging the efficiencies of a seamless end-to-end software solution can these kinds of problems be effectively addressed and the bottom line improved.

Joe Merante is one of the founding partners of T&M Trading and a broker based in Hazlet, N.J. T&M started out using an off-the-shelf accounting system. But after the first few months, Merante says he began to notice the consequences of having his accounting system disconnected from his operation. “Since QuickBooks couldn’t produce the documentation we needed to move loads, our staff had to manually prepare them in Word and double enter the billing information back into the accounting system,” he says. “With our loads tracked in spreadsheets, it became increasingly difficult to access information and time consuming to manually compile reports.” Merante adds, “While we may have initially saved some money getting the business up and running, the lack of integration and all of the subsequent work-arounds quickly became a real problem.”

BUILDING OUT
For business managers who recognize the importance of integration, the instinctual response may be to upgrade to a mid-market accounting system, such as Great Plains Dynamics, Solomon or MAS90, and to try to “build out” a customized solution. While this may help achieve some measure of integration and alleviate some problems, it can also be risky and expensive.

Customized accounting solutions are typically developed by one or more consultants who work for a local reseller. Since they are unlikely to have any experience with the recycling industry, time and effort will be needed to “educate” them about your business needs. Their inexperience also may mean that they cannot recommend best practices or discuss other recycling-specific IT trends, effectively putting the business owner in the role of systems analyst.

The accounting software and the customizations also must be periodically upgraded to maintain a support contract and to keep pace with changes in technology, which can be one of the biggest pitfalls of using a customized accounting solution. Each time a major software version is released, the module customizations also need to be revised. Depending on the scope of the programming and the compatibility of the new version, this can become a major undertaking that can cost nearly as much as or more than the original customization project.

Several years ago, Canusa Corp., Baltimore, was faced with many of these issues after having built out its mid-market accounting system. Sean Smith, Canusa project manager, says, “Maintaining the custom accounting system turned out to be major headache. By far the most frustrating part was dealing with consultants constantly coming and going and having to re-explain our business model to new people. We also repeatedly suffered through a significant amount of downtime as changes or enhancements often rendered the system inoperable for days at a time. But in the end the major issue that forced us to reconsider our entire strategy was the significant costs and the risks involved with being forced to upgrade the system.”

FROM SCRATCH
Many brokers have tried creating custom database applications with Microsoft Access or Filemaker Pro, the idea being that managing load information in a central database will eliminate some limitations of sharing spreadsheets and simplify creating reports.

Although this may appear to be a relatively practical and less expensive proposition, it can ignore many of the key factors that can lead to poor business performance. Since custom applications rarely provide a means of accounting integration, many of the problems discussed earlier, such as the double entry of data or the difficulties of tracking profitability, can continue to burden the operation.

Custom programming applications are typically developed by independent consultants who, unlike accounting software resellers, often have no support network behind them. In addition, changes to a custom application will require programming work by a trained developer. This results in a greater dependence on the consultant’s reliability and commitment to provide ongoing support. Eventually an upgrade will be necessary in light of the problems of maintaining an outdated technology. When this occurs, it could result in rewriting the entire solution, potentially with a new consultant.

Jeff Klein, vice president with The Boston Group and a broker based in Tustin, Calif., recalls his previous experience working with custom software: “Support and reliability were the biggest issues, We ran our whole business on the system, and when it went down, our whole business was down.”  

GETTING SPECIFIC
Unlike the other strategies we have examined, industry specific software can offer the most effective means of leveraging IT to improve business competitiveness by providing a fully integrated, out-of-the-box solution without the risks of customization.

Unlike spreadsheets, these systems naturally organize financials and logistics in one logical database, providing easy access to business information for everyone in the company. They automatically match brokerage sales with expenses to determine profitability and simplify month-end closing procedures, provide automatic checks to avoid common mistakes, offer seamless integration with accounts receivable and accounts payable modules to eliminate double entry and produce specialized reports and documents brokers need.

Despite the perception that industry-specific software is not cost-effective for small firms, it can provide significant value to businesses of all sizes and is competitive with using spreadsheets once the costs of lost productivity and diminishing margins are considered.

Recycling industry software solutions are also typically backed up by support staff who offer firsthand knowledge of the problems recyclers commonly face. These support professionals can recommend best practices to help improve productivity and can offer practical solutions based on their experience. They also can help brokers take advantage of trends or new technologies that can provide additional value, such as using self-service Web portals, electronic filing of shipping manifests, Shipper’s Export Declaration (SED) filings and Electronic Data Interchange (EDI) integration.

Jonathan Sloan, president of Canusa-Hershman Recycling, offers the following observation: “Working with a technology partner that is invested in the recycling industry and that understands the processing intricacies and trading practices is vital to making sure we can meet the needs of our customers.”

Some business owners may question the value or the return on investment of using information technology to help manage and control their businesses. From a short-term perspective, this is understandable; however, the many hidden costs and the loss of productivity that can result from diminishing margins may ultimately limit their ability to grow and to compete in today’s recycling markets.    

The author is the president of cieTrade Systems Inc., Stamford, Conn. He can be contacted at inquire@
cietrade.com.