Recession is a good time to grow your p-card programs
As more purchasing organizations extend efforts to manage costs, purchasing cards are playing a bigger role.
By William Atkinson -- Purchasing, 4/30/2009 2:00:00 AM
According to some observers, any economy is a good economy for using purchasing cards, because they are so effective in managing spend and reducing costs. So, if you believe the experts, here are your options: If you don't have a p-card program, a down economy is a good time to start one. If you do have one, it is a good time to create a formal process to "grow" it.
MORE ON BUYING IN A RECESSION For more information and best practices on buying in a recession go to Purchasing.com's special report available only online at Purchasing.com/Recession |
"We expect a pretty dramatic uptick in the use of p-cards in 2009, about a 5% overall increase," says Frank Martien, a partner with First Annapolis Consulting in Linthicum, Md. This is primarily because p-cards serve as an effective spend management tool and in this market, everyone can use more of those. P-cards can improve spend visibility and create controls over who can spend what. "Being in a recession, corporate spending may decrease this year, and p-cards can help to better control this," he explains.
But even after the recession, First Annapolis believes that the increased growth of p-cards will definitely stick. "Once companies see the benefits of p-cards, they continue to use them," says Martien. And as the economy improves and spending increases, then the growth will really skyrocket. Another trend that bodes well for the growth of p-card programs is that payment cards in general represent only about 1–2% of overall commercial expenditures, which provides a lot of room for growth, Martien says. He sees the main areas for growth opportunities in the future being in the indirect spend categories, especially travel management.
The Hackett Group also sees growing interest in p-cards. "Our research has found that 86% of companies using p-cards do so to reduce the number of invoices," reports Kurt Albertson, director of advisory services at Miami-based Hackett. About 75% of p-card users like the cards as a way to streamline the purchasing of one-off type transactions. And about 70% also like the rebates they receive from the p-card issuers, which can be a source of cost reduction. "On average, companies tend to drive about 10% of their indirect spend through p-cards," he says.
More recently, Hackett Group is seeing a lot of organizations asking questions around how to drive more spend and transactions to their p-cards for improved leverage. "A lot of companies want to optimize their overall supplier payment strategy, helping their suppliers to get paid quicker, which is especially important in this economic environment," adds Albertson.
First Data, a provider of merchant processing services in Greenwood Village, Colo., is also seeing growth in p-cards, especially in terms of the size of individual transactions. In the past, according to Jim Lister, vice president of e-commerce solutions for B2B at First Data, the average p-card transaction was about $500. "These days, transactions can be as much as $40,000, so there is clearly a change in what cards are being used for," he says.
For this and other reasons, First Data has been beefing up its security features, which flag certain transactions, providing users with control and more peace of mind. "We are also enhancing our tracking and monitoring tools, since we are seeing larger-ticketed transactions coming through on p-cards than we did in the past," he adds.
Strategies
Growing a p-card program effectively requires some well thought-out planning, however. Growth needs to come about from a formal strategic plan and process, say the experts.
According to Lynn Larson, manager of industry information and research for the National Association of Purchasing Card Professionals in Minnetonka, Minn., p-card program growth tends to take two primary forms: expansion and optimization. The two strategies can be mutually exclusive, Larson says, "but when pursued together, can result in the greatest rewards."
Larson says p-card program expansion can be measured by growth in spend on the cards, transaction volume, expense/purchase types, number of cardholders or number of suppliers. Examples of effective expansion methods include utilization of p-card variations, such as debit-based products (eg: payroll cards, relocation cards, etc.); adding travel-related expenses; allowing p-card usage for the purchase of inventory and/or fixed assets; and international expansion of a card program.
Beyond those expansion methods, p-card program optimization can also help expand a program into new areas. Optimization focuses on tools and tactics that may not be critical when launching a program, but that could result in a program fully reaping its inherent benefits. Examples include automated data mining; integration of p-card data with systems other than just the finance system (such as an e-procurement system); and strategic sourcing, which may also result in supplier discounts. Optimization could include strategies for improving one or more processes for increased process savings, and/or improving compliance with program policies and procedures.
"The NAPCP emphasizes that an organization should ensure that there is a supporting business case prior to implementing any expansion and/or optimization pursuits," emphasizes Larson. "Adopting something new purely to boost revenue-sharing incentives can be a poor practice if it actually complicates a process, which will raise costs for the organization or its suppliers." To guard against this, new initiatives often require changes to p-card policies and procedures, as well as changes to card controls and other program elements to support the initiatives.
The Hackett Group's Albertson says on the purchasing (purchase-to-pay) side, the first step towards expanding a p-card program is to analyze your spend and supplier base, and conduct a segmentation of these. Segmentation is based on level of risk that is assumed with the particular category of spend. Examples of risk can include not leveraging preferred pricing or having a stockout. Then identify the minimum level of control you need to mitigate these risks. "Then you can assign categories of spend based on commodity risk and control profiles," he states.
On the settlement side, in order to drive additional spend as a way to get the most rebates possible, it is important to work with suppliers. This involves encouraging suppliers to accept p-card payments for invoices, rather than checks or other payment forms. "Suppliers have to pay the extra fee, but they usually prefer the benefit of receiving payment more quickly," especially in this market, says Albertson. Many banks are also now offering a service, where companies can submit their invoices and the banks will try to settle these invoices with the suppliers and provide the added rebates to the companies.
Expanding a p-card program also requires executive buy-in, says Martien. "Executives need to make it clear to everyone that p-cards are a strategic priority for the organization," he says. Also, purchasing must create a p-card process that ensures continuity.
"In the current economic climate, there may be layoffs and reassignments," Martien notes. "This will lead to a lot of churn in the accounts payable function, so it is important to create some kind of continuity in the p-card program, even if the people are changing."
Case study #1
Harris Corp.
Melbourne, Fla.
Challenge: Grow p-card program to improve cash flow and payment efficiency
Solutions:
-
Use card more widely accepted in global markets
-
Automate p-card payment reconciliation process
-
Create sub-teams to focus on specific strategies
-
Present to management on benefits of p-card program expansion
One company that has had significant success in growing its p-card program is Harris Corp. When Teresa Harris joined the company as senior manager of business operations about a year and a half ago, she saw the opportunity and benefits of p-card growth right away. "I came from GE and Lockheed Martin, which have huge p-card programs," she tells Purchasing. "So I realized when I came to Harris, we weren't using the p-card program as extensively as we could in order to optimize all of the benefits that it had, such as rebates, transactional efficiencies, and improved cashflow."
The opportunities for improved cash flow were an effective selling point in expanding the program, Harris says. "Instead of paying suppliers in 30 days, with the p-card program, there is a 30-day billing period, after which we pay the provider within 25 days, so we would be able to take 30-day terms to 55-day terms," she explains.
Around the time she arrived, Harris' treasury department had made the decision to switch p-card providers, primarily because the existing card wasn't accepted widely enough in international markets. Harris created a comprehensive presentation for management on all of the benefits of increasing p-card usage as it was transitioning to the new p-card provider. She realized, though, that, before the company could even consider expanding p-card usage, it had to come up with more streamlined and automated ways to manage the program overall. For example, at the time, the company was using a manual process to reconcile its p-card transactions.
"Cardholders were sticking all of their p-card receipts into a folder each month, then manually typing them into a spreadsheet," she says.
Harris created a formal project management environment to build p-card usage and split the project team into four sub-teams. One was focused on p-card automation to eliminate the manual process. Another was focused on e-payables. The third was focused on optimization and looking at the current spend profile in the program to identify areas of opportunity. And the fourth team focused on centralizing the p-card program's administration, policies and procedures.
"We did a lot of training on the new procedures and all of the benefits and ease of use," Harris says. "Users instantly saw the benefits."
The results of Harris' efforts are clear. Prior to the introduction of the new program, the company's total spend was about $2.5 billion, with about $7 million of this on p-card transactions. Since rolling out the new program, spend on p-cards has already increased about 30%, and it is expected to eventually more than double by the end of June to about $16 million.
Case study #2
Powell Electronics
Swedesboro, N.J.
Challenge: Getting suppliers to accept p-cards
Solutions:
-
Use the most widely accepted card
-
Check with suppliers first to see which already accept p-cards
-
Work on reducing the number of invoices created by the program
There are a lot of ways to increase the scope of a p-card program. However, if certain suppliers or service providers refuse to accept p-cards, either on the procurement side or the accounts payable side, it can limit the return on the investment in p-cards.
Understanding this, Powell Electronics focused its p-card expansion plans on suppliers' acceptance of cards. The company utilizes a popular corporate card as a ghost card to pay a number of suppliers. Since the card provides interest-free money, given the 30 days on the billing cycle and the 25-day payment cycle, the company wants to expand the use of the card as much as possible. The company also likes the rebate.
"As a result, we are trying to pay as many bills as we can with as many vendors as we can, especially large suppliers," says Robert J. Oldrati, controller and IT director at Powell Electronics.
One area of difficulty, however, was that a number of large suppliers, especially those from which Powell Electronics purchases millions of dollars a year, have been reluctant to accept p-card payments because of the cost back to them. Powell Electric has worked to build more acceptance with a number of strategies.
When Powell Electronics started the program, it made sure it selected one of the more popular cards, one that most suppliers would accept. Second, the company will visit a supplier's website to see if it accepts p-card payments. Then, when Powell Electronics contacts the supplier to discuss p-card payments, it already has done its homework and knows what cards they accept.
Third, charges for individual invoices were of concern to a number of suppliers. "For example, if we purchase $20 million a year from a supplier, the majority of the individual invoices may be less than $1,000 each," says Oldrati. The company cuts checks twice a month. As a result, each payment is made up of a very large number of individual invoices. However, the exchange charges the supplier on a per-invoice basis, even though Powell Electronics is just sending through one payment. "I don't control that," he explains. "The exchange does." As a result, Oldrati began working with the bank that issued the card, to try to get them to negotiate with the exchange. As an incentive to the exchange, the bank would tell the exchange, "We have a customer who can give you a fair amount of usage, and we, the bank, are willing to back the customer."
And on a related note, the company tells many of its vendors that it will create a minimum and maximum amount that the card could charge, which will help to control the number of invoices.
Now Playing: 