First, a point of clarification: Ghost cards have nothing to do with Casper, or any other apparitions, friendly or not. What's more, they're not actually cards. The term “ghost card” refers to an account number employees can use to charge items they're purchasing for their companies, such as office supplies or cleaning services. Some companies assign an account number to all transactions with a specific supplier, while others have everyone in a department use a specific number.
For several years, the University of Nebraska at Lincoln has had ghost card programs in place with its travel agency, along with its providers of office and scientific supplies, says Kim Phelps, associate vice chancellor, business and finance. When a university employee calls the travel agency to arrange a trip, the cost is charged to the ghost card number residing in the system. The university employee must provide a valid accounting code to indicate that the transaction is legitimate. Moreover, “the card number is never involved in any part of the transaction that the user sees,” says Phelps, so he or she can't use it with other vendors. If the agency were to put through false charges, their actions would quickly be noticed, as all charges run through the system are reviewed either daily or weekly, depending on the vendor, by the university's department of e-commerce.
Previously, faculty members would pay for the trips themselves and file paperwork for reimbursement — a largely manual process. With the help of the ghost cards, the university has been able to reduce by two the number of accounts payable employees, says James Vogel, director of e-commerce. Annual spending on the ghost cards topped $10 million in 2007.
Ghost cards are just one of the ways in which purchasing card programs at many organizations are expanding and changing. The initial catalyst for many purchasing card programs — to provide visibility into and cut the cost of purchasing low-value items — still is important, says Andrew Bartolini, vice president of research with Aberdeen Group. How-ever, financial executives now want to streamline even more purchasing processes, ensure that more purchases take advantage of discounts with preferred suppliers, and boost the rebates their companies earn from the card issuers. Rebates for p-card purchases range from about 1 to 3 percent, says Amit Gupta, research analyst with Aberdeen.
To move more spending to their card programs, purchasing managers are expanding the range of purchases allowed via purchasing cards and raising the cards' dollar limits. “Over the past five or six months, the market has changed dramatically,” says Dennis Bauer, vice president of business-to-business payments with American Express. “Companies want to move purchasing cards up the food chain to larger suppliers.”
As the University of Nebraska has done, companies can boost p-card spending by varying the ways in which they use the cards or account numbers. For instance, one-time-use cards are good for a specific purchase with a specific supplier on a specific day. (In some cases, the cards are good for a set period of time.) The transaction may even have its own invoice number. “It really takes a purchasing card program almost to accounts payable control for timing and amount,” says Marcie Verdin, group head of commercial payments with MasterCard Inc.
To start, the buyer registers the upcoming purchase with its issuing bank, letting the bank know that it will be making a purchase of some amount on a specific date with a specific vendor. The bank generates an account number that's provided to supplier, says Kathleen Nugent, vice president of business development with Paymetric, a Houston-based provider of payment solutions. One-time account numbers can be a way for management to feel comfortable in allowing larger purchases on the cards. If any of the attributes of the proposed transaction don't match the information in the system, the card won't work.
Southern Company, a $14.4 billion energy firm, uses a program similar to one-time cards for its employees who respond to power outages and emergencies, says Becky Holcombe, senior accountant with the Atlanta-based company. When outages occur, the program administrators can log onto the system, including from home, to boost the cards' limits to cover expenses employees are likely to incur, such as hotel and travel costs. The responders can head out the door, ready to get to work. Previously, they would need to access petty cash, which was difficult to do outside of regular business hours. Once their work is done, program administrators bring the spending limits back down.
Another way in which companies can enlarge their purchasing card programs is through using the cards in what's known as an “e-payable” solution, says Nugent. “Companies are using the card networks for payment to have a low-cost, data-rich form of payment.”
Here, the card comes into play at the point of invoicing, rather than the point of purchase, says Frank Dombroski, managing director, commercial card solutions, JPMorgan. In fact, the purchase transaction even may be started the old-fashioned way, via a requisition and purchase order. Once the goods or services change hands, the buyer transmits the dollar amount of the purchase and the recipient, as well as the p-card account number, from its payment file to the bank's system.
While this doesn't change the purchasing process itself, it does move more spending to the p-card program, says Richard Palmer, Lumpkin Professor of Business at Eastern Illinois University in Charleston. “It's a rebate play,” he says. Rather than paying the bank to process checks, the company gets a rebate for spending via its purchasing cards.
However, e-payable arrangements could face a backlash from suppliers if they proliferate, says Nugent. Buyers that wait a long time to authorize payment eliminate one of the benefits to suppliers of accepting purchasing cards: quicker collection of funds. After all, suppliers also must cover the fees charged by the card associations, which typically range from about 0.5 to 4 percent. “Will suppliers be willing to wait 30 days for payment and take a haircut on the interchange fees?” asks Nugent.
SPENDING LIMITS MOVE UP
Of course, one obvious way to boost spending on purchasing cards is by allowing purchases of higher value. Anecdotal evidence shows that a growing number of organizations are increasing the amount of spending through purchasing card programs to $2,500 or even $10,000, says Palmer.
Southern Company employees are encouraged to use purchasing cards for most purchases under $5,000, says Holcombe. Southern Company combines both T&E, as well as typical purchasing card purchases, onto one card. In 2007, nearly 1 million transactions, amounting to about $173 million, were made via purchasing cards. This is up from about $142 million in 2006.
In part, the increase is a result of consolidating several purchasing programs previously run by Southern's subsidiaries. The consolidation is part of a larger, enterprise-wide effort to standardize processes across the company. At the same time, employees are actively encouraged to use the card. They're also discouraged from putting expenses, such as travel charges, onto their personal credit cards and requesting reimbursement. Moving expenses to the p-cards streamlines the accounting process, improves visibility into employee spending, and also helps grow the program.
In fact, between consolidating the subsidiaries' p-card programs and boosting spending, Southern Company's rebate jumped 31 percent in 2007. “These are expenses we have to pay anyway, so having the rebate helps to reduce costs,” says Wendy Kerins, accounts payable supervisor. The company plans to expand purchases made through the cards to include, for example, utilities. These cards would have higher dollar limits, but could only be used for a very restricted number of expense categories.
The use of “one cards” for both purchasing card purchases and T&E expense appears to be most prevalent among midsize companies. Most large enterprises maintain separate programs, as they have separate purchasing processes anyway. For example, the company may have an expense management tool for travel costs that wouldn't apply to purchasing card purchases. As a result, the savings resulting from consolidating programs doesn't compensate for the work required on the back end to get entries coded correctly.
Of course, another way to boost purchasing card spending is to get more employees to use the cards. When Richard Landerholm, supplier manager for indirect sourcing with Woodward Governor Company, began managing the purchasing card program in late 2005, just a couple of dozen cards were in use. Woodward Governor, based in Fort Collins, Col., designs and manufactures systems for aircraft and industrial engines.
Expanding wasn't easy. “I got a lot of push-back from many departments,” Landerholm says. Some employees were leery of the record-keeping involved. They use an online system to review their transactions and allocate costs. Their supervisor then reviews and approves the transactions. Each month, employees submit these reports, as well as their receipts, to the accounting department.
However, the time actually required to do this is less than many employees anticipate, Landerholm says. In addition, employees like the fact that the purchasing card system chops several days off the time it takes to receive goods, when compared to a purchase order process. In addition, payment is streamlined. Previously, about three-quarters of all purchase orders contained an error. While most were immaterial — say, a digit was off in an item number — they were enough to kick the transaction out of the system, forcing the buyer to research the problem.
To build the acceptance, Landerholm talked up these benefits with employees. He also offered them the option of going back to the purchase order process. “I would say to try it, and if you don't like it, return it,” Landerholm says. No one has taken him up on the offer.
Moreover, some transactions have to be made via the purchasing card. This is the case with a few suppliers that provide discounts for items bought online. The Web sites are set up so that only a purchasing card is accepted for payment. This ensures that employees take advantage of the discounts, which average about 10 percent. “We eliminate purchase orders and invoices, and get better discounts because we see how much we're paying,” Landerholm says. In 2008, he expects p-card transactions on the 240-some cards now in use among Woodward Governor's employees to total about $6 million.
Woodward Governor isn't the only organization to require that some purchases be made via p-cards. About two-thirds of respondents to a 2007 study, “Global Commercial Payment Cards: Cutting Costs and Boosting Control on a Global Stage,” indicated that mandating use was the top reason for growth in their programs. The study was conducted by Aberdeen Group.
Another trend occurring across most companies is the move to more tightly integrate purchasing card systems with other corporate systems, such as the ERP and general ledger applications. The goals are, not surprisingly, saving money and streamlining processes. When the systems are integrated, data can be automatically transmitted from the p-card system, making it easier to electronically allocate expenses. The companies responding to a commercial card integration study conducted by Deloitte Consulting for Visa in 2007 saved between $360,000 and $900,000 annually as a result of their system integrations.
With the purchasing card market fairly mature in the U.S., the next growth areas could be in other countries. For instance, more European financial executives are showing an interest in purchasing cards, says Christopher Juneau, a product marketing director with Concur Technologies, Inc., a provider of expense management tools based in Redmond, Wash.
However, several obstacles make establishing truly global programs difficult. For starters, regulations and tax codes vary considerably between countries. Also, many European countries have highly automated bank settlement systems, and companies use fewer checks than in the U.S., giving both banks and corporations less reason to turn to p-cards to replace paper forms and manual processes, Verdin says.
In the U.S., however, plenty of opportunity remains. Currently, the average company captures about 10 percent of its indirect spending on purchasing cards, says Bartolini. Best-in-class operations, in contrast, capture about 22 percent. “You still see dramatic cost savings as purchases move to a purchasing card process,” he adds.
See the "Best Practices for Maximing Purchasing Card Program Control" chart.