Why do some purchasing card programs take off and soar while others remain on permanent pilot? Because after kicking off a program, many companies fail to monitor and manage its progress.
| Steve Kopp, a consultant with Gunn Partners, a Boston-based consulting firm, contends that companies need to adhere to the following steps for a successful p-card program: |
A lot of corporate purchasing card (p-card) programs get started, but only a few live up to expectations. After the enthusiasm of the launch and a spurt of early growth, they hit plateaus and get stuck there. Some programs level off at such low volumes that they are said to be running as "perpetual pilots."
"The card can be an unabashed success," observes Richard Palmer, a University of Tennessee professor who surveyed 187 p-card program managers in 1998, "The winners are winning big, but most programs are not working very well."
Only a handful of the programs that started with high hopes are being well-managed and achieving a high level of success, agrees Stephanie King, president of CPR Consulting Inc., Livermore, Calif. The highfliers, she says, target supplier categories where the largest number of small-dollar purchases occur. Once preferred vendors are identified, introduced to cardholders and signed up to accept the card, successful p-card sponsors often close the door to off-card buying. "They adopt a policy that purchasing will no longer process requisitions for less than $500 or $1,000 or whatever for categories that have been designated for p-card buying," she explains.
How can losing programs be turned into winners? Consider the experience of Ford Motor Co., Dearborn, Mich., which first jumped on the p-card bandwagon back in 1988. Nine years later, in 1997, its auto sales were accelerating sharply, but its p-card program was running like a Yugo with two bad spark plugs. Total card charges for a month rarely topped $2.5 million, big money for most programs but disappointing on Fords scale.
So Ford shook things up. It rebid its program, this time turbocharging the program with conspicuous management support and stripping it down to simple rules and procedures, explains Dan Fortunato, director of industrial materials purchasing. It worked. Ford employees now ring up $14 million a month in card charges a 560 percent gain in two years. The number of transactions has climbed to 40,000 a month, with an average transaction amount of $350.
Even more impressive, between 60 and 65 percent of all expense transactions under $2,500 in the United States are now card transactions, where Fords program is semi-mature. Its still much lower in other countries, where general roll-out is just getting started, Fortunato says. The biggest reason for the surge in Fords reborn program: "management commitment," Fortunato declares.
So far, success has come without a firm mandate. "We know and our employees know they have other options, but we strongly encourage them to use the card" for expense items under $2,500, Fortunato says. (Capital items under the tax code are not charged to the card.) Merchant acceptance no longer holds back card use; virtually all of Fords vendors for nonproduction expense items now take the card, Fortunato says.
Making the card easy to use also contributed substantially to program growth, he adds. Ford now throws all card purchases into one general purpose account, which streamlines accounting and frees cardholders from having to remember codes and apply charges to specific accounts. At $14 million a month and rising, that represents a lot of unassigned purchases. Cardholders get just one card each, so they arent asked to juggle different cards for different accounting categories.
"They still have to do a monthly statement reconcilement, but thats a small task for most cardholders," Fortunato says. And even that has become easier. "With the old system, you had to log in a receipt. Now theres a file on your desktop and you just have to check it off," he explains.
Ford plans to introduce more accounting precision without inconveniencing cardholders by setting up an automatic mapping program based on merchants Standard Industrial Classification (SIC) codes. "Most suppliers are linked to a particular commodity," Fortunato observes. "One vendor is in the cutting tool business; another is in the pizza business. We can tell from the merchant code whether we are buying cutting tools or pizza. Once we link our chart of accounts to a code-based mapping routine, we can direct charges to different accounts based on the commodity purchased. This will give us better information about our purchasing."
Card use is getting a temporary boost from Fords early forays into electronic procurement, Fortunato adds. Ford and a few key vendors of nonproduction goods and services are setting up electronic catalogs where Ford employees will be able to navigate with Web browsers, point and click on what they need, then send an order electronically through a preset approval chain. All electronic catalog purchases initially will be charged to the p-card to streamline the implementation, but that could change later. "Eventually, we might not need the card" for e-catalog purchases. "We could move to electronic funds transfer [EFT] through the banking system," Fortunato explains.
The result could be a two-tiered approach electronic catalogs and EFT settlement with a core group of primary nonproduction suppliers, and p-card settlement for a much larger group of secondary suppliers where business volume doesnt justify a customized e-catalog setup, Fortunato explains. "We are pursuing e-business where it can add efficiency, but we know we wont have electronic catalogs for every vendor; there will always be a big role for p-cards," he concludes.
The Haves and the Have Nots
Palmers survey brought to light a startling manifestation of the 80/20 rule: He discovered that of the 56 large corporate respondents (annual sales of more than $2 billion), 89.9 percent of the total card spending for the group was conducted by 26 companies; the other 30 big companies contributed a miserable 11.1 percent. Clearly, if program volume is a measure of success, there are winners and losers.
The winners did not have significantly higher sales volume than the losers. But they did have 5.6 times more cardholders, 7.8 times more transactions and 9.2 times higher average monthly card spending, and they saved 6.5 times more manpower (reductions or redeployment of purchasing and accounts payable staff).
The primary reason some programs grow and others dont is simple, Palmer says. High-volume programs distribute cards liberally to employees who initiate low-dollar purchases; low-volume programs issue far fewer cards. "The easiest way to control card use is to not give them out," he says.
Controls seem to dampen card usage. Palmers highfliers asked for less in the way of cardholder-maintained spending logs and manual collection of sales tax data, imposed less restrictive spending limits, and did less to block groups of merchants by SIC codes. Companies with small programs audit them twice as often as companies with large programs, Palmer reports. Companies with robust programs rely more on communication, ongoing training sessions and internal user meetings, and a p-card Web page on the company intranet, he notes.
Visa also studied best practices for p-card programs and compiled them into a how-to book that its member banks pass out. There is a positive correlation between controls and program stagnation, reports Michael Burns, Visa USAs senior product manager for commercial cards, San Francisco. "We have seen programs stagger because of excessive controls, and when those controls were loosened in an educated way, we have seen these programs expand successfully," he notes.
P-card programs also benefit from being in step with new technology particularly the move from disjointed accounting systems and databases to centralized enterprise resource planning (ERP) systems and the advent of front-end desktop procurement systems, he says.
Carrot and Stick Approach
The critical importance of senior management support became clear in the state of Wisconsin last year. "We were stuck, not seeing the growth we wanted," reports Gabrielle Cooke, deputy director of commodities and financial services in the State Bureau of Procurement and de facto administrator of the states p-card program, which is part of a series of procurement reforms.
"The deputy secretary of the Department of Administration called me to discuss where the p-card program was going and the problems we were having. We were running into resistance from middle managers. He asked to see data on each agencys low-dollar purchases. Then he picked up the phone and called his counterparts at many of the agencies and essentially told them to get with the program. After that, we began to see tremendous growth. It took a kick, and it had to come from someone higher up," she explains.
Wisconsin is now seeing its monthly charges approach $2.4 million from 12,000 transactions on about 7,000 cards, Cooke reports. Last year, the state spent $65 million on purchases under $1,500. This year, Cooke projects that about 41.5 percent ($27 million) of the under-$1,500 purchases will be card charges.
Wisconsins success has been built on more than just a timely kick. "We went in knowing that we needed to keep it simple and that we wouldnt push the card as an all-purpose solution." Because capturing and reporting the required 1099 data for minority- and women-owned businesses would have been a complication, Wisconsin simply decided that no services would be charged to the card. And for accounting simplicity, "all p-card charges go into one bucket," she explains. After the bank has been paid, agency heads can go into the accounting system and use journal entries to split charges among up to 10 funding sources, a concession to keep agency managers happy, she adds.
Like many programs, Wisconsin started with some merchant blocking by SIC codes but removed most blocks when they led to confusion and frustration. Still banned: funeral homes, escort services, massage parlors and bail bondsmen.
Wisconsin uses the carrot as well as the stick. Starting in July, the state raised the p-card transaction limit from $1,500 to $5,000 and made purchases under the cap immune from competitive bidding but only for agencies that use the p-card, Cooke explains. (The transaction itself doesnt have to be charged to avoid competitive bidding, she adds.) The few agencies that held out in the face of earlier p-card blandishments now are scrambling to get on board, she reports.
Wisconsin also backs the program with continuous training. "You cant train cardholders and site coordinators once and then sit back and let it roll," Cooke says. Wisconsin brings together the coordinators for its 35 sites for regular meetings, which bank representatives also attend. The bank hosts its own user conference and uses e-mail to pass along updates and good ideas between meetings, Cooke adds. Moreover, the state makes a practice of picking the best and the brightest people at the agencies to coordinate the program, making it a plum assignment that tends to rejuvenate people and raise morale, she reports.
Five Honorable Mentions
St. Louis-based Monsanto Co. went after purchases under $500 and now has moved two-thirds of them to its two-year-old Visa p-cards, reports Steve Pennington, manager of site procurement and SAP purchasing support. That added up to $20 million and 175,000 transactions last year (monthly averages of $1.67 million and 14,583).
The big boost to Monsantos program came with the installation of SAP ERP software. "Cardholders used to have to prepare and submit paper logs for their managers to inspect monthly. Now managers can just go to the ERP software, drill down and see each transaction by cardholder for their financial center," Pennington explains. "With the click of a mouse, they can see current month or year-to-date spending identified by cardholder name, merchant name, dollar amount and date of each transaction." The information gets into the Monsanto software from an automatic feed from U.S. Bank, Minneapolis, Monsantos issuer.
Some Monsanto managers gasped at the proposed $2,500 transaction cap for unauthorized spending, so Pennington let them set lower transaction and monthly caps. Now those same managers are raising the cap so they can use the cards for more charges, he reports.
Monsanto is piloting cardless "ghost" accounts with a few vendors. The account is assigned to the vendor, not the buyers, and as orders come in, the vendor charges them to the ghost account and gets paid in a few days. When Monsanto gets the statement, it shows all activity with that vendor, not with individual cardholders. Early returns look very good, Pennington reports.
The p-card program at Denver-based TCI Inc. (recently acquired by AT&T) gets an eye-catching 25,000 transactions a month on its 4,000 MasterCards issued by GE Capital, which adds up to $3.5 million in monthly spending, even with a modest $140 average transaction size and a $1,000 transaction cap for most cardholders, reports J.J. Adams, p-card administrator.
Yet the program still has plenty of room for improvement. The company wants all charges less than $100 put on the card. In fact, it recently issued a mandate to that effect. But currently only about 28 percent of those under-$100 buys are handled by card. Acquisitions where the card has yet to be rolled out and merchants who dont take cards contribute to the shortfall, Adams says.
Cards are used so often at TCI because of their convenience, she notes no requisitions or invoices to get approved. To keep the accounting simple for cardholders, TCI maps by merchant codes. Some department heads squawk because the charges dont always match their budget lines, but that, Adams says, "is their problem. They could go in and see how the charges are applied before they make out their budgets."
Cardholders at Lexmark International, Lexington, Ky., use American Express p-cards about 6,000 times a month for a rather high average transaction size of $649, reports Claire Warford, p-card administrator. Rather than lose accounting precision, Lexmark insists that its vendors capture and report "level 3" data, the most complete level of data capture, which includes line-item detail. Cardholders supply codes to identify department, commodity and tax status, and the merchant keys those codes into the special field provided for card member reference data. The reports from American Express carry all the information needed for accounting application, which happens automatically, Warford explains. Checks and edits built into the program catch nearly all keying errors, she adds.
Cardholders dont mind supplying the codes, which are listed on the Lexmark intranet, she reports. "They love the process. They have less work to do, and they get what they order quicker." Lexmark uses the card to pay the two core suppliers with which it has online electronic catalogs Boise Cascade and VWR Scientific Products.
The Lincoln, Neb., manufacturing unit of Novartis Consumer Health Inc., Summit, N.J., is not a large operation and does not have astronomical numbers $290,000 in monthly spending on 518 cards across the corporation. But it is a success story none-theless because it targeted transactions under $500 (which make up 83 percent of the companys purchases) and, since it rolled out its program in May 1998, has moved 72 percent of those purchases made at the Lincoln site to the card, reports Bob Hellem, associate director of purchasing.
The key to Novartis success was putting a large but complex spare-parts operation on the card from the very beginning, even though the issuer of its Visa cards, Minneapolis-based U.S. Bank, recommended leaving that challenging unit for later implementation. Parts buyers use over 2,000 suppliers, some of which do not accept Visa. "We knew that group would be our toughest sell, but they also had the most transactions and had a lot of influence with other card users. We needed them as our champion," Hellem explains.
Momentum and high-level executive support helped the St. Louis-based Kellwood Co. get its p-card program off to a fast start in early 1997. "It was the first of four initiatives under our Vision 2000 program. The vice chairman was our sponsor. The timing and momentum helped me get my foot in a lot of doors," recalls Ted Williams, project manager for process improvement. Kellwood now spends about $1 million a month on more than 500 Visa cards issued by Chase Manhattan bank but is only a bit over halfway to reaching its goal of putting 30 percent of all transactions under $1,000 on the card.
Kellwoods program is neither radically simplified nor highly automated. Cardholders must keep a log of their card purchases, something Williams says "we hope to eliminate." To keep the accounting clean, some cardholders are issued multiple cards, one for each account they might buy for. Thats another complication Williams plans to scrap.
Both the logs and the multiple cards were expedients used to disarm potential critics who otherwise would have fussed about loose controls. "We had to make some concessions to get a lot of cards in the hands of people who would use them. We sold the program to skeptical managers on the grounds that we would have detailed records for them to review and approve. That made them comfortable with the program and allowed us to forge ahead."
Why is Kellwood shooting for just 30 percent of its under-$1,000 transactions on the card? "Frankly, the card is not the best device for all transactions. Weve heard of negative consequences at some companies that were very aggressive and went after all sorts of transactions at all dollar levels," Williams says. "We arent trying to set records; were using p-cards as one of several tools to help us reduce the cost of paying our vendors."
In the end, it all comes down to psychology. Cards only work when people use them. If you want a big program, you have to make it rewarding for people in your company to use the cards or make it disagreeable for them to use anything else.