Among the developments: expanded use, virtual cards and integration with e-procurement systems.
Purchasing card programs are mutating and evolving at a rapid clip, and procurement pros are becoming increasingly adept at finding new ways to leverage these highly adaptable tools. MTD Products Inc., a manufacturer of outdoor power equipment and owner of brands that include Cub Cadet, Troy-Bilt and Yard-Man, exemplifies one of the key forces propelling p-cards' ongoing evolution -- the drive to automate. The Cleveland-based organization implemented its p-card program four years ago to boost efficiency and tighten control over purchases of inexpensive items such as office supplies, according to Eddie Rain, manager of indirect materials and corporate services. Now Rain and his colleagues are moving to streamline the program's approval, recording and reconciliation processes. "We've had a big push to automate," he reports.
A large part of that effort has involved tying the p-card system more closely to MTD Products' general ledger. For example, Rain and his colleagues spent some time mapping merchant category codes (MCCs) to the company's G/L account numbers. If an employee uses the p-card at, say, an office supply store, the transaction is automatically coded to MTD Products' office supplies account.
The company currently channels about $1 million and 2,500 transactions through its p-card system each month, Rain says. "Our organization has benefited from reduced invoice processing and a reduced quantity of purchase orders created for small dollar transactions," he reports.
Those results are far from unique. In March, the Aberdeen Group Inc. and the National Association of Purchasing Card Professionals released the Purchasing Card Benchmark Report, a study of 170 companies with p-card programs. Seventy percent of these initiatives are either meeting or exceeding the goals specified in their original program charter, the report notes. Companies with p-cards use them, on average, for 77,000 transactions per year and an annual expenditure of about $6.6 million. The average purchase amount has grown between 15 percent and 21 percent each year for the past five years, according to Jeff Pikulik, Boston-based vice president of Aberdeen Group and author of the report.
At the same time, many of the surveyed program directors reported that their p-card initiative had stalled. "You find a lot of programs that reach premature plateaus," says David Cramer, senior vice president with Visa Commercial Solutions in San Francisco. For example, some organizations that have moved 5 percent of their purchases into their p-card program would like to add another 5 percent or 10 percent but experience difficulty doing so.
Procurement pros may be underestimating the tool's potential for big-ticket purchases. "Originally, p-cards were just an extension of T&E cards," points out Pikulik. "Now purchasing cards are one of the major purchasing vehicles and settlement options and are suitable for every category of purchases in some context." The Aberdeen Group study found that 89 percent of surveyed companies use purchasing cards to pay for office equipment and supplies, but only 19 percent use them to pay for consulting services.
Still, 20 percent of respondents said their organization is planning to add big-ticket expenses to the categories of goods and services that it regularly settles through its p-card. Many p-card managers are looking to take their program to the next level, according to Marcie Verdin, vice president of large market products, corporate payment solutions, with MasterCard International in Purchase, N.Y. "Companies are saying, 'It's time to ask if I'm getting the benefits I want,' " she reports.
Directors of leading-edge p-card programs are implementing virtual p-card capabilities, which enable them to settle transactions using account numbers, eliminating the use of a physical card. They're more tightly linking their p-card system to their e-procurement tool in order to automate the procure-to-pay process as much as possible. And they're reinforcing preferred supplier agreements to more effectively leverage purchasing volume and gain significant discounts.
Virtual p-cards are essentially a set of account numbers embedded in an automated purchasing system. In general, these systems enable a company's suppliers to charge for authorized orders up to a specified dollar amount for a set period of time.
Toyota Motor Insurance Services (TMIS) in Torrance, Calif., has seen good results from a virtual p-card tool it implemented last year. The company, which provides insurance products for Toyota, Lexus and affiliate dealers and their customers, wanted to reduce the time it took to process payments to non-Toyota repair shops that work on cars covered by TMIS service agreements. Before the company installed the virtual p-card, these third-party shops submitted paper invoices for their work. When a shop called to inquire about the status of a payment, TMIS employees had to retrieve the information manually because it resided outside the company's standard claims system, says John Garcia, assistant controller. "Toyota employees had to spend a considerable amount of time investigating the status of payments," he recalls.
In August 2004, TMIS implemented ActivePay, an automated payment system from PNC Bank in Pittsburgh and Works Inc. of Austin, Texas, that provides virtual p-card capabilities. Now when an employee receives a fax of a repair order form from a third-party shop, he or she checks the claims system to verify that the proposed repair falls within the car owner's service agreement. If it does, the employee assigns the shop a unique p-card number that's good up to an exact dollar amount for a specific period.
When the repair is complete, the shop submits details of the transaction electronically to TMIS. The new system automatically compares the information with the approved claim amount and throws out claims that exceed that limit; these are then manually reviewed. If the shop calls to check the status of the payment, TMIS employees can pull up the information on their personal computer.
Thanks to the new system, repair shops receive their money more quickly. What's more, TMIS has slashed the time its employees spend reconciling requests for payment with authorized work orders by 60 percent. That's a significant benefit, given that the company receives up to 2,500 claims each month from nonaffiliated dealerships and repair shops.
Equally important, the initiative has enhanced the company's controls, says Garcia. "This [technology] allows us to catch duplicate or fraudulent charges before they go through the system," he reports.
So are physical p-cards on the way out? Probably not. Troy Baker, senior vice president with PNC Bank, notes that companies will continue to need them for one-off purchases from vendors with which they have not established accounts.
When P-Cards Meet E-Procurement
More and more purchasing managers and finance executives are seeking to link their organization's p-card system to its electronic procurement capabilities, moving closer to the ability to proceed from requisition to payment without generating any paper, says Baker. The goal is to enable employees to initiate a purchase and receive approval electronically and then use a p-card to pay for the order online. MTD Products expects to have such a system in place by early next year.
Cox Enterprises Inc., a privately held media and automotive services company with divisions that include Cox Com-munications Inc. and AutoTrader.com., deployed a p-card program in 1996 and linked it in 2001 to an e-procurement system from Epicor Software Corp. that it rolled out in that year. The Atlanta-based organization operates on a decentralized basis, and its six business units enjoy a fair amount of autonomy, notes Gary Robinson, director of purchasing. Each unit also operates its own financial software.
While management wanted to reduce maverick spending companywide, it understood that forcing a rigid purchasing or payment process on all users would likely backfire, says manager Bob Pelon. The company's approach to implementation was "build it right and they will come," he says. The program's success would be based on its ability to help employees make purchases more easily and efficiently.
Tying the p-card program to the e-procurement system has helped Cox Enterprises accomplish that goal. When an employee initiates a purchase, his or her manager receives an electronic requisition from the e-procurement system. The purchase must be approved electronically before it can proceed, Robinson says. Next, the purchase is assigned an order number that's transmitted to the supplier along with the p-card number. The supplier submits the purchase order number and p-card number to its bank for payment. When Cox Enterprises' employees receive their p-card statement, they can easily reconcile it to the e-procurement system's report.
The company currently funnels thousands of transactions through its p-card program each year, Robinson says, so it can take advantage of volume discounts. Cox Enterprises limits employees' choice of suppliers to a list of approved vendors within the e-procurement system. "We call it 'freedom without choice,' " Pelon remarks.
Companies that integrate their p-card and e-procurement systems may reap a bonus in the form of actionable data. Many program managers are looking for ways to leverage the information that their purchasing systems generate, according to Dana Kirchman, vice president of corporate purchasing solutions and global business-to-business payments with American Express in New York City. "There's a greater focus on reconciliation and mining data," she says. Many of her biggest and most sophisticated clients want to combine various types of payment into an integrated report, she adds.
In the Aberdeen Group study, companies that analyzed at least 75 percent of their p-card expenditures were able to reduce their spending 15 percent on average by negotiating more effectively with suppliers. Even organizations that analyzed less than 25 percent of their p-card expenditures achieved reductions averaging 9.5 percent.
Getting the Word Out
When Cox Enterprises implemented its p-card and e-procurement tools, Pelon spent considerable time spreading the word about the new systems' benefits. "I told [potential users] that they could get products on time, for a good price and with a clear audit trail," he says.
User education is a critical component of p-card initiatives, reports Michael O'Malley, marketing manager with GE Corporate Payments Services, the corporate card unit of GE Consumer Finance in Salt Lake City. He recommends that p-card project leaders spend about the same amount of time communicating the tool's benefits as they spend developing its technical aspects. "It's a 50/50 blend of coming up with the program and process and continually reinforcing the message," he observes.
If project leaders fail to communicate the new system's advantages, employees will likely continue to buy from their usual suppliers, says Stephanie King, managing owner of CPR Consulting Inc., a purchasing card advisory firm based in Livermore, Calif. And that will severely reduce the company's ability to negotiate volume discounts with its preferred suppliers.
According to the Aberdeen Group study, p-card initiatives that have achieved above-average growth share one key characteristic: strong support from senior management. "Purchasing card programs touch many departments, so you need the support of the CFO, treasurer and head of procurement," explains Gary Schneider, managing director and global business manager, Citibank commercial cards, with Citigroup in New York City. "If they don't mandate it, it won't happen."
Securing the support of business-unit heads is critical, too, says Aberdeen Group's Pikulik. These individuals have daily contact with large numbers of employees, and they have a keen interest in their operation's financial performance. When they spread the word about the benefits p-cards provide, such as more efficient purchasing and better controls, the initiative will likely take off.
As they've evolved, purchasing cards have proved their worth. Increasingly, executives at globally distributed organizations are considering expanding these programs beyond North America. "Global capabilities are becoming more important to clients," says American Express' Kirchman. MasterCard International's Verdin has noted that trend, too. "Asia currently appears most promising as an expansion destination," she says. "Australia, Beijing, Hong Kong and Singapore are going crazy."
Procure-to-Pay Best Practices
A 2005 study of 52 companies commissioned by Visa Commercial Solutions and conducted by Deloitte Consulting LLP identified best practices in the procure-to-pay cycle. Among them:
Heading Off Fraud
Before a company expands its purchasing card program, it should ensure that all of the transactions employees are currently channeling through the system are legitimate. Software can help. Vancouver, British Columbia-based ACL Services Ltd., for instance, has developed an application that tests p-card transactions for suspicious uses. For example, the software can compare purchase data with information in a company's employee database to determine whether any vacationing employees are using their cards for personal travel expenses, according to John Verver, ACL Services' vice president of professional services.
These systems aren't cheap; ACL Services' product typically runs about $150,000 for the software and implementation. However, for finance pros and purchasing managers leery of the additional exposure that might accompany an expansion of their p-card program, such tools may be a wise investment.
Another advantage is the deterrent factor -- employees who know their purchases are monitored are less likely to abuse their p-card privileges.