Are You Leaving Money on the Table?
Now, more than ever, you need to do more with less as most state and local governments continue to battle economic challenges and budget constraints. Industry studies routinely cite reducing procure-to-pay (P2P) process costs as a top priority for organizations of all types, including government, and rightly so. It presents a gold mine of opportunity, but some organizations remain rooted in cumbersome P2P practices, even when simple adjustments can yield measurable process savings. Is your agency among those leaving money on the table?
We’ve always done it this way, you hear. But what is the business case for “the way it has always been done?” In the government sector, cumbersome practices might be tolerated in the name of control, but inefficiencies likely would not sit well with taxpayers. While all payment methods present risks, options within the Commercial Card realm, including purchasing cards (p-cards), have proven to be “safe” — a notion supported by industry research. According to the 2010 Purchasing Card Benchmark Survey Results by RPMG Research Corp., the bulk of fraud is concentrated in a small percent of organizations, presumably those that lack effective controls.
Habits can be hard to break and often require concerted change management, but the benefits of P2P process improvements are worth the effort. Two areas to consider are:
- your agency’s p-card P2P process and
- how your agency determines which payment tool is appropriate for each purchase — specifically how traditional p-cards and electronic payables solutions co-exist
People tend to forget about the inherent value of p-cards. Time and again, studies prove that organizations are missing opportunities. To review, p-cards are ideal for low-value transactions (e.g., under $2,500), which comprise the majority of an organization’s payments — typically around 80 percent, but generally only 5 percent of spend. These types of purchases do not merit many steps of a traditional P2P process. The process cost of a $25 purchase is the same as a $2,500 purchase because the same process is followed. It could cost more to purchase the item than the value of the item itself. A well-designed p-card program, with an efficient P2P process that omits non-value-added steps, yields significant savings. Table I shows examples.
Do you know your current P2P process costs for p-card, as well as non-p-card processes? The NAPCP conducted a poll on this topic in 2011 and found that approximately two-thirds of respondents either did not know their process costs or admitted that past evaluations were outdated. Further, in the fourth quarter of 2011, the NAPCP launched a best practices quiz for members, which also asked whether organizations knew current P2P process costs; out of 139 responses (including government folks), 66 percent responded “No.”
To optimize savings, a p-card payment should not be added to the end of a current, inefficient P2P process; this provides little benefit to your organization and its suppliers. The key is to eliminate inefficiencies. For example, evaluate two aspects of your program:
- Are p-cards difficult to use — bound, for example, by more restrictions and rules than other P2P processes?
- Are cardholders required to seek pre-purchase approvals each time?
If you can answer yes to one or both questions, cardholders could be disgruntled and/or afraid of making a mistake, leading to a stale program that does not offer the process savings inherent to p-cards. P-cards should support a department’s business operations — not hinder them.
Sometimes I hear the argument that dismisses or minimizes process savings, claiming revenue share (i.e., rebate) as the real prize. However, if you compare rebate and process savings, rebate pales in comparison.
Taking a broader P2P perspective, does your agency have guidelines for determining the appropriate payment tool for various purchases? Do your policies address this? For example, do you have an ideal blend of p-cards and other electronic payment systems (epayments)?
Over the years, organizations have expanded p-card usage to include higher dollar transactions, too. Nevertheless, there continue to be purchases for which organizations need to retain a traditional P2P process, especially invoice receipt and approval prior to payment.
Electronic payables solutions offered by card issuers emerged in the late 1990s as a complement to p-cards, targeting additional types of purchases (those that organizations often exclude from a p-card program, such as inventory).
While there are many similarities between p-cards and electronic payables, including no federal 1099 reporting, the differences are more distinct: different P2P processes, controls and targeted purchases. The pairing of p-cards and electronic payables within your organization’s payments strategy requires careful planning to ensure an appropriate co-existence. Work closely with your provider to optimize both solutions. Factors impacting when to use each include: the goods/services purchased, such as frequency, complexity and cost; invoice-related requirements, if any; and your relationships with suppliers and current payment terms.
Lynn Larson, CPCP, is manager of education for The NAPCP, a membership-based professional association created to advance the Commercial Card and payment industry.
TABLE: Quantifying P-Card Savings Using Industry Averages
|Average process cost 1||$93.00||$22.00||$71.00 savings|
|Average process cost per month (5,000 transactions) 2||$465,000||$110,000||$355,000 savings per month|
|Annualized process cost||$5,580,000||$1,320,000||$4,260,000 savings per year|
|Number of steps||More than 30||Fewer than 20||Omission of at least 10 steps|
As specified within the 2010 Purchasing Card Benchmark Survey Results by RPMG Research Corporation; survey yielded more than 1,900 responses from end-users throughout North America.
Based on average monthly card spend of $1.5M and average transaction size of $300, aligning with data in the 2010 RPMG Research report.