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Reengineering Your Purchasing Card Program.

Concerns with fraud and abuse have kept many companies from aggressively building purchasing card efforts. But research shows that those concerns are overblown, and that greater usage and fewer restrictions can boost savings.

Most companies think their purchasing card programs are working. But the typical program is capturing only about 30 percent of its potential savings. Why? Studies identify three main culprits: companies are putting the cards in too few hands, imposing too many controls and restricting their use to too few products, services and vendors,

The initial impetus for purchasing card programs came from the recognition that small-dollar orders do not merit the same oversight as large-dollar orders. However, when companies first began instituting purchasing card programs, concerns about fraud and abuse led them to restrict cards to trusted employees, to limit purchases to specific categories of products and services from approved vendors, and to apply layers of controls.

Companies invested considerable time and money in getting their programs running. They had to sell the concept to management, employees and unions, then train everyone how to use the cards correctly. In most companies, someone had to administer the program; in some cases, that entailed a full-time staff. There were also costs for computer programming and the development of purchasing card Web sites. All in all, instituting the programs was a lot of work, and once they began generating savings, there was little incentive to rethink them.

Now, a number of pioneering companies have eliminated many of the traditional limitations on purchasing card usage and greatly increased their savings. They've found that their initial fears of fraud and abuse were exaggerated. Their success provides an argument for other companies to revisit their programs and reengineer areas where money now being lost can be recaptured. Here are 10 suggestions that may provide real opportunities:

1. Put Cards in More Hands -- Studies have found a direct correlation between the number of employees with cards and the volume of purchases handled by -- and savings generated from -- purchasing cards, Companies that expanded programs, including even hourly workers, report that fears of widespread fraud and abuse proved unfounded.

2. Increase Dollar Limits -- Seventy percent of most company transactions are less that $1,000. The higher the dollar limit, the greater the percentage of transactions that can be handled via purchasing cards. In companies that Gunn Partners has studied, the average dollar limit is $1,800. Most companies can go to even higher limits without significant exposure to abuse or fraud.

3. Simplify Controls -- Purchasing card controls are often too stringent for small-dollar orders. Studies show that the cost of controls can greatly exceed possible losses from fraud and abuse. Also, an obsession with allocating every penny properly can be very costly, especially when such allocations involve small-dollar, non-strategic items. Companies that have scrapped a rigorous allocation process report that the savings far outweigh the concern that some $50 purchase may be charged against the wrong budget. Similarly, exception reports add to costs and discourage card use.

Every card program should continually review its exception-report requirements and ask if the data it's getting justifies the added costs. Of course, some publicly regulated companies and government agencies require detailed information and have no choice but to impose stringent controls.

4. Include More Categories -- Initially, most programs did not permit cardholders to use cards for capital items, travel & entertainment, MRO (maintenance, repair and operations) supplies, cash advances and fleet expenses. All of these are now being successfully handled by leading programs.

5. Include More Suppliers -- Some companies limit purchases to a mandatory list of suppliers, in order to exert more leverage over them. However, the dollars involved are small, and the costs of tracking and controlling the purchases can easily eat up the savings. In addition, studies show that letting cardholders buy wherever they want increases card usage and cuts supervisory costs.

6. Make Cards Mandatory -- Studies show that cardholders take the path of least resistance: If using cards is easy, they use them. Otherwise, they use traditional purchasing requisitions, petty cash or other more costly methods. Making cards mandatory for certain categories of goods and services, and for purchases under specified dollar limits, can greatly increase usage.

7. Use the Same Card for Purchases, T&E and Fleet -- Companies that have gone the one-card route report economies from improved efficiencies and easier administration, but it can be difficult to implement. For one thing, purchasing, T&E and fleet generally report to different managers. For another, T&E expenses are typically handled differently from purchases, with employees paying the charges and receiving reimbursement only after the expenses have been approved. Gaining agreement across all three areas may require intervention by top management.

8. Simplify Sales Tax -- Purchasing card programs capture far less data than old-fashioned purchasing orders. In particular, their failure to accurately capture sales-tax data worries many companies and limits their use of cards. However, research has shown that trying to make sales-tax data accurate to the nth degree can be wasteful and self-defeating. Companies have found that they can calculate these taxes just as accurately as before by using estimation and sampling techniques like those used by sales-tax auditors. In the few cases Gunn knows of where companies using purchasing cards were audited for sales-tax payments, they either paid no penalties or were given refunds.

9. Assign a Full-time Manager -- Without a full-time person to handle program design, rollout, administration and ongoing improvement, the program will probably never reach its full potential.

10. Invest Money in Communications and Training -- With purchasing card programs, work previously done in purchasing and payables shifts to the cardholder. Sourcing the purchase becomes the employee's responsibility, as do processing the receipt of goods, dealing with discrepancies and reconciling monthly statements. Months before the first cards are issued, employees must be trained on using the card. Some companies have established Web sites to answer employees' questions and provide ongoing training.

Building Success

Developing a new purchasing card program or reengineering an existing one involves all key corporate players. At a minimum, this would include senior management, operations, internal audit, purchasing, accounts payable, treasury and the shared-services group. In any given culture, one high-level "pocket veto" can kill a program, particularly if there is no one at the top to argue the program's merits.

Educating senior management about the long-term advantages is particularly important. For example, many programs justify themselves in terms of headcount reduction. Yet, some companies have found that instead of cutting back on personnel, it can make more sense to assign their freed-up labor to negotiate lower prices for big-dollar purchases, resulting in big savings. However, it's also a harder approach to explain and justify than a simple headcount reduction.

It's also vital to win the support of the prospective cardholders. The success of the programs rests on the cardholders using the cards to the permissible maximum.

What's New?

The change in corporate purchasing cards that seems to have attracted the most attention is the movement to a single, all-purpose card. This allows companies to pay all charges centrally, then ask employees to reconcile the charges, including T&E expenses, at the end of the month. Other companies are having their card issuers send employees a statement that separates T&E expenses from regular purchases. The employees pay the T&E charges directly to the card issuer, while the company pays the other procurement charges.

Electronic buying over the Internet is also impacting purchasing card programs. For smaller suppliers with limited electronic capability, purchasing cards are providing an easy way to handle payments. Purchasing cards also make it possible for smaller suppliers to compete more effectively, giving companies more suppliers to choose from and a wider range of options.

Purchasing cards understandably make many financial executives nervous. In the wrong hands, they can lead to waste and malfeasance. Yet best-practice programs provide ample evidence that the risks are far lower than they seem and that excessive efforts to contain them can severely crimp the rewards. The lesson is clear: to maximize your program's potential benefits, you have to challenge the risks and raise your "comfort zone."

Stephen Kopp is Senior Director of Events and Conferences with Gunn Partners Inc., an Exult Company.
COPYRIGHT 2001 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Kopp, Stephen
Publication:Financial Executive
Geographic Code:1USA
Date:Jan 1, 2001
Previous Article:EDS Reorganizes for a Value-Added Treasury.

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