Validating P-Card Best Practices

A purchasing card veteran points to survey results showing more extensive use of controls yields higher savings

Mesa, AZ — May 23, 2003 — Making more extensive use of the administrative controls available with purchasing card programs can yield higher savings, said a purchasing card veteran, pointing to the results of a recent survey on p-card use and benefits.

Mac Schuessler, vice president of global corporate purchasing solutions at card issuer American Express, noted in an interview that the survey of 54 large companies, conducted by consultancy Accenture in conjunction with the card company (see related story), showed that companies using a purchasing card experienced an average 12 percent improvement in compliance.

But the survey results indicated that those organizations using the front-end controls of a purchasing card to set preferred supplier restrictions on their cards were able to drive an additional 9 percent improvement in compliance, for a total average compliance rate of almost 90 percent (versus the average compliance level of 68 percent for indirect materials). "It's definitely a best practice to use the front end on these cards drive compliance on your contracts," Schuessler said.

Compliance can be critical in achieving sourcing savings, the study showed. Among the 54 companies surveyed, the average procurement benefits achieved through contract or supplier compliance, as a percentage of total expenditures, was 5.4 percent, higher than cost avoidance/budget compliance and spend consolidation, at 4.9 percent each.

Overall, the survey respondents reported, on average, that 23 percent of the savings achieved through higher compliance could be attributed to the use of a purchasing card. In this regard, Schuessler, who has been working on p-cards programs for almost seven years, said that it is a best practice for companies to use the reporting features of a purchasing card to better understand their spend. Enterprises also should use the exception reporting features of a purchasing card to alert program managers to users buying off-contract so that corrective measures can be taken.

Schuessler believes the study's findings are an important validation of the benefits of using a p-card. "Everyone had talked about how purchasing cards can help you increase compliance and sourcing effectiveness," he said, "but there were no true analytical client data to validate that hypothesis."

The study also appeared to dispel some misconceptions about purchasing cards, including the notion that implementing a p-card program would inevitably result in driving up unit costs as suppliers passed along their card-related costs. In fact, the study found adoption of a purchasing card resulting in a slight — 0.3 percent — drop in prices.

"Many suppliers," asserted Schuessler, "are pleased with the procurement card program because (a) they're paid faster and (b) they see higher compliance levels from the buyers, because the buyers now have controls in place with their requisitioners that really drive the spend back to those suppliers. There may be individual circumstances where you do see price-creep, but when you average it out that's not the case."

Another misconception that Schuessler said he encounters among some companies lacking a p-card program is that the purchasing card will not come with sufficient controls to let them achieve the kinds of savings documented in the study. The Accenture study revealed that 90 percent of the companies using a p-card are applying transaction spend limits, and 88 percent are using monthly spend limits, although just 36 percent are using a preferred supplier list and only 17 percent are limiting the number of transactions that a card holder can make per period. Nevertheless, close to 90 percent of the respondents to the survey said that they were not requiring a purchase order to be issued when the p-card is used to make a purchase.

What are the secrets to getting the greatest savings and efficiencies out of a p-card program? Schuessler said that the most successful companies are doing the front-end analysis to understand what a purchasing card can do for their organizations. On a tactical level, that means understanding such details as which areas of spend should be moved to a p-card and which users should be involved in the program, and on a strategic level, how the benefits that a p-card program offers can help the organization meets its overall business goals.

With that information in hand, the next steps include lining up strong executive support for a p-card program as an important part of the company's procure-to-pay initiatives, and then implementing a consistent change management effort to ensure adoption among the end user community. The Accenture study found that companies typically are ramping up their p-card spend over time, reach about 50 percent of the target spend level in 14 months and 100 percent in 22 months.

Once a program is underway, Schuessler suggested that the companies that seem to achieve the best results are those that consistently apply the administrative controls available with the card, that use the data generated by card usage to analyze their spend and track compliance, and that work to expand the types of categories covered by the p-card.

"The companies that are successful with the p-card are those that are constantly committed to that initiative, constantly analyzing how they are doing and how they can continue to leverage this tool," Schuessler said. "Then the key is to continually challenge yourself to identify more transactions that you can put through the system."