Department of Defense Purchase Card Program: A Financial Management Reform Success Story.

Over the past several years, the Purchase Card Program has proven to be one of the more prominent and successful reforms that the Department of Defense (DoD) has undertaken in the procurement arena. While this program inarguably has revolutionized how DoD makes small purchases, limiting the impact of this program only to the procurement process understates its positive effect on the financial management process associated with those purchases.

Many of the articles that have been written about the Purchase Card Program focused on the procurement-related savings--for example, the cost-avoidance savings of generating and processing purchase orders. In fact, whatever success the program has enjoyed in the recent past rests on two factors: the partnering of the acquisition community and the financial management community throughout DoD and tangible, internal savings and efficiencies to both communities.

Background

An executive order in 1982 directed the executive-branch departments and agencies to include the government purchase card (GPC) in reform initiatives aimed at lowering the cost of buying goods and services. Follow-on pilot programs at several agencies demonstrated that the card could effectively streamline procurement processes. Subsequently, DoD entered the program in 1989, when the General Services Administration (GSA) made a competitive award for commercial purchase card services.

DoD struggled over the next five years to determine how best to utilize the card in the purchasing process. At issue was the requirement to include various congressionally mandated clauses and provisions in the documentation supporting each purchase request--regardless of dollar value.

The card program received a tremendous boost with the passage of the Federal Acquisition and Streamlining Act of 1994. That legislation created the micro purchase threshold--those purchases under $2,500 that no longer required the use of contract clauses and representations. With that change came the opportunity to eliminate paper. By the end of fiscal year (FY) 1995, DoD was making 37 percent of its micro purchases using the card.

Notwithstanding the growth of purchase card use by FY1995, senior officials within DoD realized that additional, unknown barriers were limiting the full potential use of the card. So the Under Secretaries of Defense (Comptroller and Acquisition, Logistics, and Technology) established two teams to examine and recommend use of the GPC both above and below the micro purchase threshold. Below the micro purchase threshold, the card would continue to be used as an acquisition method. Above that level, the card would be used as a method of payment against existing contract vehicles that contained the required clauses.

The resulting study, which was jointly produced by the two teams and published on September 30, 1996, made 57 recommendations aimed at expanding card use by making the card the easier method of procurement. The implementation of those recommendations--coupled with the personal involvement of Dr. John J. Hamre, first in his capacity as the Under Secretary of Defense (Comptroller) and subsequently as the Deputy Secretary of Defense--led to the explosive growth in GPC transaction volumes during the late 1990s.

Financial-Management-Related Reforms

The 1996 study identified a number of impediments to expanded GPC use and a streamlining of attendant processes. Several of those impediments centered on financial management functions.

Advance Reservation of Funds

One of the more salient recommendations in the 1996 study centered on streamlining the multiple approvals required at that time to effect a purchase card transaction. Among those approvals was a requirement for the cardholder to receive a separate citation of funds (line of accounting (LoA)) from the resource manager for each purchase to be made using the card.

That time-consuming and costly requirement increased the number of transactions that needed to be entered into the accounting system (and DoD Components must pay the Defense Finance and Accounting Service (DFAS) for all such transactions). The 1996 study recommended advance (bulk) funding for GPC activity to eliminate the laborious and repetitive process used to place LoAs on the documents supporting every card-based purchase.

In 1997 the U.S. Army Audit Agency substantiated the cost savings associated with the bulk funding of cards in Army processes. That agency's analysis identified, on average, an $18 cost avoidance for every purchase made under the bulk funding process (in lieu of individual fund cites for each card transaction). Subsequently, the Under Secretary of Defense (Comptroller) issued a policy that required the advance reservation (bulk) funding of all purchases made using the purchase card. (That policy is the Purchase Card Reengineering Implementation Memorandum #3: Streamlined Financial Management Procedures.)

Summary Accounting of Card Transactions

In the early years of GPC use within DoD, program management needs often dictated the inclusion of extensive line item detail to accompany each purchase made with the card. Activities typically assigned a separate LoA to each card transaction in order to monitor budget execution at the installation, project, or work-order level. This approach was taken even though that level of transaction detail was not required at the departmental level for most of GPC-type purchases. For those transactions, only a report on the aggregate amount spent on micro purchases was required.

Including a separate LoA with each transaction burdened the associated accounting system and drove up the cost of accounting for all card transactions because they had to be entered manually from the paper invoices submitted by the cardholders and their supervisors (known as billing officials).

Additionally, the complexity of these detailed LoAs frequently resulted in errors by input clerks at the supporting entitlement, disbursement, and accounting offices. Those errors contributed significantly to DoD's problem disbursements dilemma.

The 1996 study recommended the use of summary-level accounting detail for most GPC transactions. To accomplish this, a default LoA was assigned to each card account, and the LoA was attached to all purchases made using that GPC account. When more accounting detail was required to support local program management needs, it was recommended that the Components use an automated reconciliation system to meet those functional needs. These two recommendations were formalized in Purchase Card Reengineering Implementation Memorandum #3.

It soon became apparent, however, that a dichotomy existed. While reform efforts were focused on eliminating detail, budget formulation and execution processes typically mandated the justification of every penny in budget submittals. A compromise had to be brokered. When DoD awarded task orders for GPC issuance m 1998 to U.S. Bank and Citibank, a key discriminator in the source selection was whether the card contractors' systems could summarize transactions with the same LoA or reallocate card transactions to alternate LoAs, when necessary.

Departmental policy still requires summary-level accounting when appropriate. The DoD Components were no longer required to maintain or develop costly automated reconciliation systems for their local program management needs. Instead, the card contractors offered cardholders a software tool to facilitate needed reallocations.

Today, program officials have the functional and technological tools needed to summarize the accounting of GPC transactions. This has resulted in significant savings to the Components just from the reduction in the numbers of LoAs that DFAS is required to process. In addition, with DFAS personnel entering a much smaller number of LoAs, the number of input errors and of resultant problem disbursements has also been significantly reduced.

Redundant Statement (Invoice) Reconciliation

Prior to the implementation of certifying officer legislation in DoD, multiple statement (invoice) reviews were conducted by (in order) cardholders, approving officials, and disbursing offices. More often than not, however, the reviews conducted by cardholders and approving officials were cursory at best.

Even if the reviews by cardholders and approving officials were comprehensive, the supporting disbursing office also conducted a separate, detailed entitlement review before making the payment. These reviews often required billing officials and cardholders to forward copies of receipts and other purchase documentation to the supporting disbursing office. The applicable disbursing officer found it necessary to conduct such reviews in order to protect his or her "pocketbook" from the pecuniary liability that singularly accompanied personal certifications that the invoice payments were legal, proper, and correct.

With the establishment of certifying officers within DoD, pecuniary liability under the Purchase Card Program was transferred from the disbursing officer to the approving official. Thus, the approving officials became personally liable for any erroneous payments that resulted from their negligent behavior.

In addition, DoD's implementation of the certifying officer legislation went one step further than in the civilian agencies. DoD elected to make all officials responsible for providing information or products in support of payment to carry a degree of pecuniary liability. Virtually overnight the "rubber-stamping" reviews of billing statements by cardholders and approving officials disappeared as these program officials came to understand their potential liability.

In fact, for the first several months of the existence of the certifying officer and accountable official roles in DoD, the card program came to a virtual standstill. Many of these officials did not want to accept this liability despite recognizing that performing this role was the essence of their job responsibilities.

Without exception, the certifying/accountable official process is the underpinning to the system of internal controls to minimize fraud occurrences within the program. Cardholders are required to review, reconcile (their purchases in purchase logs against billing statements), and approve the card contractor's statement of purchases. Once the cardholder review is completed, the billing (certifying officer) official--typically the cardholder's supervisor--conducts an independent review. The billing official certifies the billing statement as legal, proper, and correct under the penalty of pecuniary liability.

In summary, the certifying officer legislation generates internal savings associated with eliminating a redundant review of the disbursing office, and it provides the basis for minimizing fraud losses resulting from use of the card.

Automated Payment and Reconciliation Process

The DoD task orders awarded in 1998 also required both of the card-issuing banks to develop automated interfaces between their transactional databases and the applicable DoD financial management systems. Implementing these electronic "bridges" is producing a number of positive benefits for DoD financial management processes. For example, this tool allows DoD to reduce the reconciliation and payment time lines, thereby maximizing the rebates (refunds) that cardholders earn on their purchases.

At the same time, DoD is minimizing the prompt payment interest and the penalties it incurs on GPC billings that are paid late. Cardholders earn increased rebates on their purchases by more quickly settling and paying their bills. Today's paper-based process takes an average of thirty-one days from end of billing cycle to bank receipt of payment. The paper process resulted in rebate amounts DoD-wide of about $20 million in FY2000.

Under that process, cardholders received their billing statements in the mail about 7 to 10 days after the end of the billing cycle. The cardholder reconciled the statement and then forwarded the statement to the billing (certifying) official.

The certifying official conducted a separate review, certified the invoice for payment, and forwarded the certified paper statement by mail to the supporting accounting/paying office.

Once the paying office received the certified bill, personnel in that office performed entitlement determination (that is, matching the obligation and invoice (billing statement)). The paying office then would cash-managed the payment so that the 30-day-payment grace period was leveraged.

Under the electronic process, the cardholder is able to access his or her statement via the Internet throughout the billing cycle. Thus, the cardholder is in a position to approve his or her account the first calendar day following the end of the billing cycle. Once the cardholder approves his or her GPC statement, the billing official can certify the billing statement. After the cardholders and certifying officials have completed these actions, the GPC bank locks down the statements and securely transmits them (along with the associated general ledger transaction that creates the obligation) to the supporting finance and accounting systems.

By eliminating mail time and providing program officials with the tools to streamline the account review and reconciliation process, the average payment time line can be reduced to seven or eight days. A reduction of this magnitude should easily enable DoD, in future years, to more than double the rebates paid out on GPC accounts.

The automated process has other benefits as well. Since the bank-furnished electronic access systems allow local resource managers to participate in establishing card accounts, the population of the correct default and alternate LoAs into these accounts is ensured. This capability is called source automation of accounting and payment data.

All GPC purchases transacted carry the pre-established LoA, and the data are electronically forwarded to the supporting accounting and paying organizations to populate their systems. Thus, input errors and the attendant problem disbursements are further minimized.

Moreover, as a result of eliminating data input, the DFAS can reduce its transaction processing charges by an average of 64 percent for activities using the electronic process.

Future Benefits--The DoD Electronic Mall (E-Mail)

DoD also recognizes that additional savings are possible by conducting Internet ordering through the use of E-Malls (DoD's version of amazon.com). Buying activities--having knowledge of what cardholders are buying--can leverage this buying power to negotiate large-volume discount contracts. Those items on contract then could be placed on an e-mail where cardholders could take advantage of the lower negotiated volume discounts. DoD's e-mail will facilitate merging the two cost-saving processes (decentralized purchasing and centralized contracting). The result truly is "Faster, Better, and Less Costly Purchasing."

Conclusion

In summary, the GPC program has demonstrated that electronic commerce tools--when combined with a top management commitment to reengineer the business process across traditional functional boundaries--can benefit the entire enterprise. This business model will become increasingly important to DoD as it endeavors to minimize overhead expenses to the benefit of its varied and challenging operational missions in support of national objectives and assistance to the larger international community.

Dennis Hudner is the Deputy Director of the Purchase Card Joint Program Management Office. He has over 29 years of federal government management experience.