Digitalizing Interline Settlements

Written by Rajeev Kak, Vice President Marketing and Industry Solutions, CloudMoyo
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RAILWAY AGE, SEPTEMBER 2020 ISSUE: The average freight railroad conducts thousands of interline settlements representing a significant portion of business revenue. Yet, the push to drive down working capital requirements, reduce outstanding and overdue claims mired in lengthy dispute resolution cycles and accelerate revenue recognition faces headwinds related to limitations of legacy interline settlements in most Class I, II and III railroads.

The State of ISS

For decades, all railroads engaging in the settlement process with another railroad have been required to transact settlements through Railinc’s Central Interline Settlement System (CISS). Railinc provides a marketplace framework to help complete the transactions, which require Electronic Data Interchange (EDI) messages to be exchanged among partner railroads. Railinc also serves as a central clearinghouse, and funds are transferred through the Railroad Clearing House (RCH) after the back and forth transactions result in concurrence.

In case of disputes, Railinc serves to mediate, but disputes can drag on for months, resulting in delayed cashflows for railroads. Short lines face limitations in resources to invest in the expensive EDI infrastructure needed for executing ISS transactions directly against their own railroad reporting mark and often rely on their Class I partners to participate in the ISS (Interline Settlement System) and handle car movements and produce waybills in line with interchange agreements.

Railinc’s Rate EDI Network (REN) streamlines existing best practices and helps improve accuracy and timing of settlements. With REN, an interline railroad or a local carrier can broker, negotiate and publish its own freight rates. However, disputes may arise due to varying interpretations by the participating railroads, resulting in unpaid invoices or delayed settlements. If railroads can stay compliant with Railinc’s Front Matter and the Railway Accounting Rules, they have an avenue for mitigating disputes with partner railroads.

1960s Legacy Infrastructure

In 1968, a group of railroads concerned about the quality of inter-company communication and exchange of transportation data created a consortium to find a solution. This organization, the TDCC (Transportation Data Coordinating Committee), led to early standards that paved the way to ANSI X12 and finally, modern EDI standards. EDI has become very popular in the haulage and transportation industry, since it makes communication easy for all partners in the supply chain of delivering goods from origin to destination. The downside is that it requires expensive VAN (Value Added Network) infrastructure and dedicated servers to exchange EDI messages, limiting the ability of less affluent transportation chain partners like short lines to participate independently.

Latency Adopting Digital

There are newer digital technologies enabling data exchange using XML (eXtensible Markup Language) messages that require no more than an internet connection and a regular desktop or a laptop computer. However, without an industry-wide digitalization initiative to adopt newer messaging technologies, railroads cannot make the transition from the 1960s technology still in place.

The latest Blockchain technology disintermediates the marketplace players and enables a low-cost framework for all railroads and transportation partners to exchange information seamlessly. BiTA (Blockchain in Transport Alliance) is a more recent initiative that holds promise in terms of creating transparency in the supply chain, and it is encouraging to see most of the Class I railroads and Railinc as members, even though interline settlements have not been considered so far.

In a late-2019 CloudMoyo survey, we documented several challenges cited by railroads. Most railroad executives attributed these challenges to legacy infrastructure, lack of analytics, manual workarounds for concurrence and lack of flexibility in dispute resolution capabilities.

The average settlement can take a minimum of 60 days and up to one year to complete. Overcharge claims are on the rise. Dispute resolution management requires a great deal of manual effort for retrieving pricing details or revenue waybill parameters. Due to limited or no automation, a great deal of time is spent on accounting audits. There is minimal access to the data required for dispute resolution, creating a huge dependency on other departments to provide information that, when available, is often found to be in disparate formats and lacking easy report interpretation.

Railroads are not leveraging today’s technologies or don’t have resources to provide the required technical support. Use of older mainframe-based technologies creates frequent down time, and few possess the expertise to service these older systems.

There is limited expertise for ISS Front Matter and Railway Accounting Rules. IT skill sets related to older technologies (mainframes, AS400 systems) are scarce, and lack of IT support adds to the delays from dependency on them. With almost no automation, most railroads are reduced to time-consuming, manual data entry. Docket IDs are generated manually, which leads to duplication in efforts when railroads need to create similar pricing dockets.

A Next-Gen ISS

The current legacy systems have proved inflexible. Simply, digitalization of the ISS process will transform an almost 80% manual process today to an automated one where concurrences can be as high as 97%. How does a digital, cloud-based ISS change the game?

Centralized cloud-based data and software: The move toward adoption of cloud-based software integrated with existing legacy and business systems is increasing. This is largely on account of a centralized data repository that is accessible anytime, anywhere and can be configured with the right role-based user experience designed to deliver immediate productivity boosts and operational efficiencies for railroads. This is true for interline settlements as well. Enabling centralized data access and avoiding dependencies on multiple other departments to collate the information to process the settlement accelerates the settlement process and reduces the revenue recognition cycle by as much as 50%, in full compliance with Railinc requirements.

Configurable role-based user experience: An intuitive user interface, easy role-based information access and seamless workflows designed to streamline the ISS process are key to ensuring fast adoption of the next- generation solution, but also contribute to a 30-35% productivity increase, since all relevant information is available in the context of the business process and the decision flow. The admin can assign worklists or tasks to different personnel with eligible access levels and even assign priorities if immediate action is warranted.

Automation of concurrences: A large percentage of the deviations in rated waybills and associated settlement claims among partner railroads are not significant enough to merit the back-and-forth process of resolution. Establishing tolerances and automating clearance of such deltas in interpretations within the tolerance limits saves manual effort and reduces huge delays of about 25-30 days down to resolution and settlement within one day. Manual effort for dispute resolution is only required where the deviations exceed tolerance limits.

Smart workflows for dispute resolution: Productivity tools for root cause analysis such as one-click comparisons among rated waybills from partner railroads help identify the causal factors for the disputed amounts. With the right settlement analysis, the dispute resolution cycle reduces by as much as 60-80%. Seamless workflows with the ability to keep track of document versions, redlines and communication logs with partner railroads facilitate faster reconciliations and easy audits to rationalize the settlement decisions. Intelligent notifications and aging reports are additional capabilities that can help railroads determine trade-offs and resolve disputes.

Interactive intelligent dashboards and predictive analytics: ISS applications data can be leveraged through embedded visualization tools that create additional insights to strategically evaluate the health of revenue settlement cycles—analyzing dispute incidences by partner or by dispute types. With a better understanding of the operational areas where the rating interpretations by different railroads may be responsible for the higher frequency of disputes, railroads can take appropriate actions to clarify the negotiated charges or calculations to ultimately quell disputes.

Simply combining time-value-of-money calculations with historical regression analysis or utilizing machine learning-based predictive values for expected dispute resolution time by partners can help railroads optimize the concurrence tolerances at a granular level—by partners, by dispute codes and by locations/stations.

The opportunities to accelerate cash flows by leveraging intelligent settlement processing efficiencies can eventually accelerate revenue cycles, reduce outstanding and overdue receivables, and consequently reduce working capital for railroad operations.

Rajeev Kak is Vice President of Marketing and Industry Solutions at CloudMoyo. He has more than 20 years of experience in enterprise solutions for supply chain and transportation management. CloudMoyo’s vision is to provide the leading railroad transportation management platform and is building out a portfolio including Crew Management, Operations Testing, On-the-Job Training for CFR 243, Rail Operations, Empty Car Management and ISS.

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