Piedmont Natural Gas has had a purchasing card (p-card) program in place for about eight years. Although the program has always worked well, the Charlotte, N.C.-based natural gas distributor decided to kick it up a notch in late 2005.
The company originally set up the p-card to provide employees with a convenient way to purchase miscellaneous items such as office and cleaning supplies, but they couldn't use it for capital expenditures or travel and entertainment (T&E) expenses, according to Patricia Neal, treasury/finance analyst. In addition, cards were assigned to employees by department. A worker who made purchases for several departments would have at least two cards, Neal reports.
All of that changed last year, when "we came into the new world," reports Neal. To overhaul the program, Neal worked with Concur Technologies, a provider of expense management solutions based in Redmond, Wash.
Employees now have one card that covers all purchases. They can view their transactions online and code them to a specific department, rather than having to use a separate card for each group. Plus, employees' spending limits now vary according to their position; typically, senior employees receive higher limits.
Both T&E and capital expenses are now handled through the card. The goal is to reduce processing costs by placing as many purchases as reasonable on the cards, says Neal. When working with a new merchant, employees are instructed to ask whether the organization takes purchasing cards. If it does, the employee charges the purchase to the card, uses the receipt as the invoice, and then accounts for the transaction within the Concur system. Transaction information automatically flows to the general ledger.
The new system eliminates a number of steps in the payment process -- for example, stamping the invoice to show where the charges go, manually keying the charges into the accounting system, printing and mailing a check, matching the check to the invoice, and scanning both into the accounting system. Piedmont Natural Gas has been able to redeploy one employee as a result of this streamlining.
Along with slashing processing costs, project leaders wanted to boost the total of the incentive rebates the company receives from its card issuer; they usually range up to about 1 percent of the value of purchases. "We use them to offset treasury expenses," Neal says. Over the nine months ending in July 2006, Piedmont Natural Gas completed $29 million in p-card purchases.
The opportunities that Piedmont Natural Gas exploited are beckoning many other companies, too. P-cards have become a mainstay of procurement operations. In an August 2006 survey by Aberdeen Group titled "Corporate Payment Cards: More Value, Higher Savings," two-thirds of respondents reported that their company's p-card program is at least three years old. Businesses that move from a paper-based purchase-order system to a p-card program cut the cost of each trans-action by $8 to $27, says Andrew Bartolini, research director with Aberdeen Group in Boston. They also save between 1.3 percent and 4.2 percent on their purchases because the information they gain from the program enables them to negotiate lower prices.
Today, the challenge for many finance executives is to maximize the benefits from their organization's p-card program. To be sure, p-card use is expanding. According to the 2005 Purchasing Card Benchmark Survey Report, by RPMG Research Corp., annual spending through p-cards grew from $80 billion in 2003 to $110 billion in 2005. But there's still room for improvement. If a company were to place all of its purchases under $2,500 on its p-card, it would increase the dollar volume of transactions flowing through that channel eightfold on average, according to the report.
Moving more purchases to a p-card enables companies to use their cash more efficiently. A case in point is Diamond Z Manufacturing & Rule Steel, a company based in Caldwell, Idaho, that designs and produces industrial tub grinders, structural steel tanks and waste containers.
Diamond Z launched its p-card program, which uses the KeyCard from KeyBank, in the first half of 2006. The program covers T&E expenses and vendor purchases. Previously, T&E expenses were paid through a separate card designed specifically for those outlays.
Vendors have Diamond Z's p-card number on file. When the company places an order, a merchant can process the invoice and receive the payment in as little as two days, says Steve A. Peel, CEO/CFO of Diamond Z. Peel negotiates with the vendors to ensure that they are not planning to add a surcharge to the p-card purchases. He points out that they will receive their funds quickly and won't incur the costs of handling paper checks.
Diamond Z's float has improved substantially. Because the company doesn't have to pay its p-card bill until the middle of the month following the month it receives its statement, it can conserve its cash. In fact, with some purchases, the company captures almost 60 days of float.
And, like Piedmont Natural Gas, Diamond Z is increasing the rebates it receives from the card issuer by placing more items on the p-card. It's too early to quantify the rebate level for which Diamond Z will be eligible at the end of the year, but Peel already is noticing other benefits from the program. One is increased vendor satisfaction. "They see how easy it is," he reports. "They don't have to deal with check processing and making deposits to the bank." Plus, Diamond Z has streamlined its payment processes; transaction information from p-card purchases flows to the company's accounting system electronically.
Seamless integration with accounting systems is crucial for a successful p-card initiative. "Purchasing cards were designed to eliminate paper requisitions and purchase orders," notes Marcie Verdin, group head, commercial payments, with MasterCard Worldwide in Purchase, N.Y. Entering this information manually -- which 47 percent of companies still do, according to RPMG Research -- sharply reduces the possible savings.
It Takes More Than Tech
Installing proper management systems is an indispensable step in any initiative aimed at boosting a p-card program's effectiveness. "Technology in itself doesn't win the day," says Bartolini.
Finance leaders at Industrial Distribution Group Inc. (IDG), a company that contracts with manufacturing businesses to stock and manage their supply rooms and storerooms, are well-aware of that reality. IDG is currently overhauling its p-card program, says KT MacIntosh, vice president of finance with the Atlanta-based organization.
IDG provides the consumable supplies its customers need for their manufacturing processes. It uses a purchase order-and-invoice process for most of those items. However, some IDG employees are stationed at customers' plants, and these workers have p-cards that they can use to meet specific customer requests. For example, a plant operator might want a type of drill that isn't normally stocked; the IDG employee can use the p-card to buy it. "We have a lot of one-off purchases that run through the purchasing card," says MacIntosh.
The flexibility that the p-card program provides comes at a price, though. For starters, these ad-hoc purchases typically aren't eligible for the pricing deals IDG has negotiated with certain vendors.
In addition, some items are inadvertently paid for twice. Here's how: An employee at a customer location pays the balance on the p-card statement when he or she receives it. But sometimes, by mistake, a vendor also sends an invoice to IDG's central A/P processing center. A worker at the center asks the employee at the customer site whether the invoice should be paid. The site-based employee approves the payment, forgetting that he or she already covered the purchase when paying the p-card statement, MacIntosh explains.
What's more, IDG's p-card program is not integrated with its accounting systems, so all of the information has to be entered manually.
The rework of the system is designed to change all that, MacIntosh says. IDG will centralize control over the p-card program, which probably will entail dedicating one employee to manage it. "As you get more decentralized, the rules change by region," MacIntosh says. With one person overseeing the program, consistent application of the rules is more feasible.
Companies often find that a program manager located at headquarters can rein in employees who make errant transactions. On the other hand, if you're a cardholder and your office is just down the hall from the program manager's, it can be all too easy to get approval for an exception to the company's purchasing policy. "They're your buddy," observes MacIntosh.
"Companies should not overlook the importance of the purchasing card professional," notes Lynn Larson, manager of industry information and research with the National Association of Purchasing Card Professionals in Minnetonka, Minn. These specialists are becoming increasingly pivotal as companies ramp up their use of p-cards.
New Varieties of P-Card
As p-cards continue to evolve, new forms of the species are emerging. A "one card," for example, can be used for T&E payments as well as for the kind of items that p-cards traditionally cover -- hence the name. By placing both types of purchase on one system, businesses may qualify for higher rebate levels, as Piedmont Natural Gas has. In addition, these programs provide a comprehensive view of spending across the organization, which may enable purchasing managers to better identify waste and negotiate discounts.
Anecdotally, one-card programs are gaining popularity among small and midsize companies more quickly than among larger firms, says Jeff Cronin, vice president of solutions marketing with Gelco Expense Management, a provider of services on demand in Minneapolis. He theorizes that smaller organizations want to make all of their purchases through a one-card system so they can qualify for "enterprise-level" p-card offerings (that is, products that are geared to larger companies). These usually provide a higher level of reporting and control.
One stumbling block, however, is the question of liability. For the majority of T&E cards, the individual employee covers the charges and then is reimbursed by the employer. In most cases, though, the company is primarily liable for p-card charges, says Chuck Buckner, president and CEO of Interplx Technologies, a Minneapolis-based provider of p-card and T&E expense management services. If an organization moves to a one-card program, its management probably will want individual users to retain liability for the charges they incur. Card issuers, on the other hand, generally want the company to be liable, reasoning that it's less of a risk.
Buckner predicts that companies' desire for individual liability will prevail, given the fierce competition in the p-card market. However, it's too early to predict which way the market will move.
Ghost cards are another emerging option. These are not physical cards; they're essentially an account number that may be assigned to a specific department or vendor. In that first option, all employees in the department use the number when making purchases, says Kurt Albertson, senior business advisor with The Hackett Group in Atlanta. For example, they might use the department's ghost card when placing a phone order for office supplies.
A supplier ghost card works similarly. All employees use one account number when purchasing from a particular supplier. This type of arrangement can make sense when various employees make purchases from one vendor, but no one person generates enough transactions to justify having his or her own p-card.
The downside to ghost cards is that they can make it difficult to determine who made a particular purchase. "As a matter of policy, you should issue a card to a specific person," says Albertson. On the other hand, the fact that employees don't possess a physical card can enhance control, because they can't take the card to a store and use it for personal purchases, points out Theodore Gerbick, product manager, card services global treasury management, with KeyBank in Cleveland.
Some new varieties of p-card cover purchases that are traditionally paid for by check, according to Richard Palmer, Lumpkin distinguished professor of business at Eastern Illinois University in Charleston. "The basic idea is to use the card to settle P.O.-driven transactions, like you would use ACH or check," Palmer says. The company captures the rebates associated with p-card transactions and sidesteps the work that processing check payments involves. Although these cards currently are not in widespread use, their popularity is growing, Palmer says.
Sifting the Options
The next phase in the evolution of payment systems likely will be the development of applications that automatically determine which payment option makes the most sense for a given transaction. At the moment that's a challenging task because many companies run separate applications for their check, ACH and p-card transactions.
Finance professionals need "a composite view of how they're spending their dollars -- and with whom," says Frank Dombroski, vice president of commercial card solutions with JPMorgan Chase in New York City. "Right now, the systems all are on their own tracks." For example, many vendors prefer p-cards for low-dollar purchases because they reduce paper-shuffling. However, as p-card transactions start to hit four or five figures, some suppliers may balk at the interchange fees, which are calculated as a percentage of the transaction value. They may prefer an ACH payment because it's cheaper, says Gerbick.
That's why even as finance executives work to expand their p-card program, their ultimate goal should be to develop a systematic purchasing strategy that uses business rules and logic to automatically identify the best payment option for each transaction.
The Merchant Side
Purchasing cards can be a boon for buyers, but how good is the deal they offer to companies that accept p-card transactions?
Not that great, according to some industry insiders. "There's so much inequity within the industry for the business-to-business market," says Diane Merrigan, director of business-to-business markets with Heartland Payment Systems Inc., a provider of credit card, debit card and payroll services based in Princeton, N.J. That's because processors often impose surcharges, such as ACH fees, without the merchant's knowledge. As a result, the merchant may pay markups ranging from 3 percent to 5 percent.
However, merchants can rein in these costs. For example, if they can provide line-item detail -- what's known as Level III data -- the markup may drop to about 2 percent to 2.5 percent.
When working with a salesperson from a p-card provider or a processing company, merchants should request an explanation of all applicable fees and ask to see a sample statement, Merrigan says. They'll also want to examine the first month's statement to check for any unexpected fees. Even after a merchant has begun accepting p-cards, it should expect its processing company to show some flexibility on fees.
Stoody Industrial Welding & Supply Inc., in San Diego, can attest to that. Between one-half and two-thirds of the company's sales are to the federal government. Most of these transactions are completed by phone or online, so the company's salespeople never see the actual p-card. Typically, sales of this type are considered to be at higher risk of being fraudulent. "We kept having a real high discount rate because we were considered a high-risk class because we don't see the cards," says Robert (Bob) Stoody, founder and president. In fact, though, because these sales are to government buyers, the company's risk of fraud actually is much lower than is typical with consumer transactions of this type.
Merrigan worked with Stoody to ensure that his company provided Level III data and other important information -- for example, the invoice number and customer address -- for all of its transactions. Stoody Industrial Welding & Supply was re-classified to a discount rate that was 0.5 percent to 1 percent lower and close to the rate that would be charged if its salespeople viewed the card during transactions. In the six years since the change, the savings have added up, says Stoody.