Many purchasing card programs are limited to transactions worth less than $1,000, so p-card vendors are looking for ways to better support higher-dollar deals.

P-card growth is strong. In this difficult economy, corporate executives see purchasing cards as a means of cutting costs and turning more revenue into profits. Savings by users of p-cards already approach a whopping $23 billion, estimates Richard Palmer, a business professor at Eastern Illinois University, Charleston. He gets this figure by multiplying the 335 million p-card transactions made in 2002 by an estimated savings of $69 each, citing consensus estimates of almost $90 for buying under paper purchase orders and around $15 forp-card transactions. "It's like getting a 29 percent discount on every transaction," Palmer says. "Even if the supplier tacks on 2 percent to offset its discount, companies still are saving a lot of money by using the cards."

At the same time, the weak economy has made merchants more receptive to being paid by card, reports Gary Schneider, global business manager of commercial cards business for Citigroup in Stamford, Conn. "Everybody wants liquidity. They want to get their money quickly, and p-cards do that."

Palmer and Washington University professor Mahendra Gupta compiled the 2003 Purchasing Card Benchmark Survey Results, based on a study of 579 p-card program managers. Palmer and Gupta report that spending charged to p-cards has doubled since 2001 -- from $40 billion to $80 billion -- largely because executives at Fortune 500 companies are channeling more spending to their companies' cards. In five years, according to survey respondents' spending predictions, that number will double again to $160 billion.

However, the survey report also reveals that most p-card purchases are for small-ticket maintenance, repair and operations (MRO) expenses. P-cards were introduced with much fanfare in the mid-'90s, but the "revolution" that once aimed at capturing large-dollar transactions has stalled at the $1,000 level, give or take a few hundred dollars. P-cards' recent growth stems primarily from large companies herding small purchases into the card corral and midmarket companies starting up card programs.

"P-cards are really best for small-dollar, one-off transactions with suppliers that are not worth the effort of setting up in an e-procurement system," says Steve Kopp, president and founder of The CFO Advisory Group in Midlothian, Va. "The migration of high-ticket items to p-card settlement is not happening."

Palmer and Gupta calculated, based on their survey results, that transactions worth between $2,000 and $10,000 account for $271 billion in corporate spending, of which only 1.7 percent currently goes on p-cards. "That's the sweet spot for future p-card program growth -- fewer transactions but a lot of money," Palmer says.

Plenty of sweetness remains untapped in the small-dollar range, as well. P-cards have captured only about 30 percent of under-$1,000 transactions, Kopp says. The reason: P-card programs are "typically managed at a low level that is off the radar of top executives, who focus on broader purchasing solutions." Kopp adds, "When we point out that p-cards will save them money, senior executives are interested, but it's not something that gets their attention on its own."

ICI Americas Inc., a specialty chemicals provider in Boston, charges $120 million annually in 530,000 transactions to 4,300 American Express p-cards, reports Lee Ann Murphy, director of global procurement. ICI's strategy is to split transactions and drive high-volume, low-value purchases to the p-card while it negotiates settlement terms with the suppliers of infrequent, high-value purchases.

Data that American Express captures and reports about the company's p-card spending helps ICI negotiate price breaks with preferred suppliers, she adds. The goal for 2003 is to drive the full $120 million of card spending to preferred suppliers to maximize the value of those discounts.

P-cards Go "E"

ICI has linked its p-card program to an e-procurement portal that contains catalogs of preferred (but anonymous) suppliers of key commodities like office supplies. All orders placed through the e-procurement portal are settled on the p-card. Last year, the company switched office supply providers and saved 10 percent across the board. Swapping out catalogs on the e-procurement portal took just one weekend, so end users never noticed the change, and compliance was 100 percent from day one, Murphy reports.

Most market leaders have embraced both p-cards and e-procurement, but many of those companies limit the transactions they place on the card. Some embed rules that ensure the e-procurement system settles small transactions by card but reverts to paper for large, complex supplier relationships, says Mac Schuessler, vice president for global corporate purchasing solutions at American Express Co. in Atlanta.

"In one sense, e-procurement and p-cards are friends," Palmer observes. "P-cards prosper at companies that have e-procurement. But in another sense, companies with e-procurement settle much fewer of their $2,000 to $10,000 transactions with the card. E-procurement creates more p-card settlements, but in the lower price ranges." On average, companies with both systems pay for 27 percent of e-procurement purchases by p-card, while they pay for 43 percent with paper checks and 22 percent with ACH transactions, Palmer says.

The University of Pennsylvania, in Philadelphia, uses e-procurement and p-cards separately to reduce purchasing costs, reports Ralph Maier, associate director of purchasing services. The school's 10-year-old p-card program funnels $20 million a year to more than 1,400 MasterCards issued by Bank One. Those are respectable numbers, but they're no match for the $700 million Penn spends through the procurement module of its Oracle Financials system, transactions it settles by ACH. The e-procurement portal, which Penn calls Marketplace, has saved the school $65 million over the past seven years, Maier says.

He emphasizes that the approach combining e-procurement and p-cards is what counts. "We have two approved tools, and they complement each other," he says. "Oracle is used for the large commodities, where we can leverage our spending and negotiate better prices. The p-card is used for smaller commodities, where we don't have that opportunity. It lets us delegate spending for small purchases to the point of demand, which is one reason we can now spend 80 to 90 percent of our time on professional activities."

Alternatives Emerge

P-cards were touted seven or eight years ago as a quick fix to a conspicuous problem -- the excessive overhead connected with small-dollar corporate purchases. The card associations quickly recognized that inflexible settlement terms and the high cost to suppliers would keep most large transactions off of p-cards. Now vendors are introducing alternatives designed for big purchases.

Business-to-business settlement network Visa Commerce was crafted for transactions that don't fit the p-card very well, says Dave Costa, vice president for business solutions at Visa USA in Foster City, Calif. Visa Commerce was built to integrate with e-procurement and ERP systems and accommodate delayed settlement. A few big Visa-issuing banks, including U.S. Bank and Citibank, are testing this new service, and Visa has run a few transactions with two of its own suppliers through the new system, Costa reports.

"The industry still needs to make it more tenable for suppliers to accept the card for high-dollar transactions," Schuessler of American Express admits. "We're testing a possible solution now, but we're not ready to talk about it yet."

Big banks are also pursuing alternatives. U.S. Bank has the world's largest p-card portfolio, but it also sells a proprietary system called PowerTrack that sometimes works better for large, complex supply-chain relationships, says Chris Pieroth, senior vice president for product and marketing in the corporate payments systems unit of the Minneapolis-based bank. PowerTrack features a lot of the document exchange found in electronic invoice presentment and payment (EIPP) programs; accommodates negotiated payment terms; and generally does not settle by p-card, meaning the supplier doesn't have to pay the discount, Pieroth explains. "It offers better pricing terms to suppliers, but that means no rebates for buyers," he adds. "With the card association interchange rules, there's not much we can do about merchant charges on card transactions unless we also own the merchant relationship."

CFOs see p-cards as addressing a mere 10 percent of their purchasing costs; they want broader solutions, says Philip J. Philliou, vice president, e-business and emerging technologies for MasterCard International in Purchase, N.Y. For its broader solution, MasterCard has linked its p-card to Xign Corp.'s payer-centric EIPP technology, which offers robust data-capture and document-exchange capabilities. One big selling point of the new program, according to Philliou, is that it can help companies comply with the internal control standards required by Sarbanes-Oxley. "That's opening corporate doors," he says.

For years, banks jockeyed to provide the slickest p-card reporting and management software. Now they are scrambling to offer software that links p-cards to e-procurement or EIPP applications. The objective is for systems to exchange documents and capture rich data on the front end. Classic p-card reports sometimes rely on data captured and reported by merchants at the point of sale.

GE Capital's off-card business-to-business electronic settlement platform integrates with A/P and procurement systems, says Michael O'Malley, marketing manager with GE Corporate Payment Services in Salt Lake City. "It's totally paperless. It captures the purchase order or invoice number and automatically appends the accounting data to the settlement record. It's not a card, but it leverages the card infrastructure, and the merchant pays the usual fees."

Citibank also offers an alternative to p-card settlement that works with EIPP and e-procurement systems and reflects negotiated settlement terms. "The card works great for the small transactions, but we needed something more flexible for larger transactions. Very few p-card transactions are for more than $5,000 today," Schneider explains. Connectingp-cards to e-procurement systems solves the problem of needing to get back rich detail that is captured by the supplier at the point of sale, he notes.

These new systems that link p-cards, e-procurement applications and EIPP software are reaping impressive results. After five years with an underperforming p-card program, Chicago-based commercial printer RR Donnelley switched to GE Capital recently. Now the organization spends $86 million annually on 1,100 p-cards and another $40 million charged to travel cards, reports Laith Mirza, procurement and travel card administrator. The new system gives cardholders online access to transaction data, he says. P-card users can edit transaction allocations before they go to accounting, which has led to a dramatic decrease -- from 5,000 to 200 a month -- in the number of exceptions that must be resolved, he says.

Eight preferred providers have ghost accounts, with p-card numbers that are assigned to the merchant, not the buyer. Those merchants collect and report the data Donnelley needs for accounting application. Except for those eight vendors, the company does not try to channel buyers to preferred suppliers and contract prices, Mirza says. He figures the p-card program saves Donnelley about $2.4 million a month on 22,000 transactions.

Overblown Scandals

Flaps about p-card abuse are more noise than substance, Palmer insists. While anecdotal reports of U.S. government employees using p-cards to buy cars or prostitutes' services have created political panic and have led to tightened security and even the elimination of some programs, respondents to the Palmer and Gupta study reported just $270 of p-card misuse for every $1 million of spending. Seventy percent of the misuse was reported by just 4 percent of the respondents -- and some of them define "misuse" as a legitimate purchase from a nonpreferred supplier. "Stories take on a life of their own, but the reality is that misuse is small and isolated," Palmer notes.

When New Focus Inc., a provider of photonics solutions in San Jose, Calif., implemented its p-card program, pushing purchasing responsibility out to employees was actually the goal. New Focus uses a combination travel and purchasing card for its engineer-heavy staff, and employees spend about $750,000 annually on charges to 170 cards, reports Paul Judy, corporate controller. "The goal was to let our engineers go out and buy what they need quickly, without getting bogged down in paperwork," he says.

One sign of a mature p-card program is that buying organizations relax the security constraints around their programs, allowing larger transactions and blocking fewer merchant categories, Pieroth notes. "With merchant blocking, there are always surprises and legitimate transactions that are denied," he says.

The most promising strategy is not cramming as many toes as possible into a good shoe but finding the best fit. What do the best-managed p-card programs do today? "They use a strategic account management process," Pieroth says. "They analyze the data and determine which solution works best with which suppliers."