From fraud prevention to lowering administration costs, procurement cards offer various advantages to organizations
May 30, 2012
by By Jacob Stoller
Purchasing cards, also known as p-cards, have been gaining in popularity since their introduction in the mid-1990s. Originally modelled on the highly-successful corporate travel card, p-cards help organizations manage purchasing costs and simplify their processes in selected areas, particularly small dollar transactions where overhead is disproportionate to the overall spend.
Today, about 75 percent of organizations from corporate, to public, to non-profit have some type of p-card program in place. Statistics from industry watcher RPMG Research Corporation forecast p-card spending to increase from $213 billion in 2012 to $255 billion by 2014, with higher growth rates expected among corporations (13.6 percent) versus government and non-profit organizations (10.6 percent). In view of this rapid growth, p-cards have become a “must-know” area for purchasing managers. Here are five key points to be aware of.
A p-card is not a credit card
P-cards look a lot like credit cards, particularly those carrying the logos of familiar brands such as Visa and MasterCard, and the likeness may confuse managers and employees new to their company’s p-card program. But there are characteristics specific to p-cards. For one, they don’t allow organizations to carry an ongoing balance—debt on the card must be paid off a minimum of once a month.
What makes p-cards especially valuable to procurement departments is that organizations can govern their use by employing built-in spending limits and allowable categories. “All cards have the ability to restrict by industry through what are referred to as merchant category codes,” says Lynn Larson, education manager for Minnesota-based National Association of Purchasing Card Professionals (NAPCP), whose website (www.napcp.org) provides a go-to source on the subject. The ability to further restrict buyers to pre-determined vendors through card controls might also be possible, depending on card issuer and the solution, Larson notes.
P-cards reduce administration costs
The traditional procurement process involving a requisition, a purchase order, an invoice and a cheque payment is overkill for simple purchases such as office supplies. p-cards simplify the process and reduce transaction costs, which otherwise could easily exceed the dollar value of the purchase. According to the RPMG statistics, p-cards reduce the cycle time by approximately 12 days, resulting in an average staff reduction or redeployment of 16 percent in accounts payable and procurement functions. This reduces transaction costs dramatically, with the approximate average dropping from $93 to $22. This reduction makes p-cards a no-brainer for the smaller buys such as office supplies, where per-transaction costs are highest in proportion to the spend.
P-cards make life easier for buyers and suppliers
Less administration also means less hassle for employees who make purchases within their line of work. “Issue cards to employees who initiate purchases for which purchasing involvement doesn’t add value,” says Larson. “For example, if you were to just give the HR person a p-card, they can order their training materials right from the vendor that they know they want to use.”
P-cards also add transparency. For one, audit trails are automatically established and maintained, while cost centre managers can easily access their spend data online. Because purchasing policies can be built into the cards, p-cards also improve compliance with purchasing policies. Finally, p-cards make life easier for suppliers—a reduced need to issue invoices reduces their costs, making for better supplier relations.
P-cards can help prevent fraud and abuse
While abuse is the exception rather than the rule, it pays to have some protective measures in place. P-cards provide various options for such protection, such as single-purchase dollar limits and monthly limits. As well, the built-in audit trails that p-cards provide prevent irregularities that could otherwise be hidden in a more cumbersome internal process. P-cards can also put an end to hard-to-manage purchasing practices such as the use of expense accounts or petty cash for the purchase of consumable items.
P-cards are not commodity items
The point of p-cards is that they can support an organization’s procurement policies, so it pays to establish what your needs are first before shopping for features. “A common mistake that organizations make is they jump right into an RFP process when choosing a card provider, and then they try to figure out the program,” says Larson. “I think there’s a lot of work that people should do before they ever issue the RFP, and a lot of times they do it backwards.”
Before considering products, Larson recommends organizations carefully define the desired business benefits from a p-card program. Next, they should decide on key issues such as who will be using p-cards, where the cards will be used, what the expected spend will be and how the process will be monitored. “Once you have a better understanding of what you’re buying as an organization and who you’re buying it from,” says Larson, “then all that research and data can go into making a more robust RFP to help you pick the best issuer for your needs.”
A well-designed program, backed by an appropriately chosen p-card, can help an organization avoid costly administrative costs, improve transparency, provide better administrative service to employees and create smoother relationships with suppliers. The rapid growth of p-cards will cause the financial industry to come up with new options that will allow a better fit with an organization’s procurement policies. As purchasing managers find new ways to utilize p-cards, vendors will likely provide new products to support them. It makes sense to monitor this changing field regularly.