When purchasing cards blossomed onto the landscape in the mid-1990s, the strategy behind the concept was pretty straightforward. It was based on the assumption that the cost of purchasing an item using the card, and therefore consolidating thousands of invoices into one for accounts payable, would be less than the cost of having the transaction handled by the purchasing department.
According to a survey analysis by Hackett Collaborative Learning, the cost of buying an item through a company purchasing department is approximately $150, while the accounts payable cost is about $3 per item purchased. Looking at those numbers, it’s not surprising that quite a few corporations embraced this strategy. But while consolidating many invoices into one does help reduce costs, there are other factors that can have an even more dramatic impact.
“The real advantage of purchasing cards is not the cost reduction you get,” says Steve Kopp, president and founder of Disbursement Processes Advisory Group (DPAG), which services the needs of organizations looking to make improvements around their card programs. “The real advantage is it frees up the purchasing department from a lot of silly paper processing.”
If your corporate purchasing card program is still generating a high cost per purchasing card transaction, don’t abandon it. Instead, consider that there are some key pitfalls, usually in the form of excessive controls, which might be hindering the program’s effectiveness.
Auditing Transactions
According to the Hackett Collaborative Learning survey, management at many companies fear that purchasing cards will result in employees either buying more items or buying items not in compliance with company policy. Their solution? Conduct full audits of purchasing card transactions, which immediately drives up the cost per transaction. But in fact, when the companies in the study were asked if they discovered any misuse, very few incidents were mentioned.
Progressive companies have viewed the use of audits much like any other monetary expenditure: what is the payback? According to the survey, companies conducting a large volume of audits found that on average only 1 percent of items purchased were out of compliance. When combined with the relatively low dollar value of items purchased with a purchasing card, it becomes difficult to justify the cost of audits. Rather, progressive companies have placed control of purchasing card spending in the hands of individual managers, since they are almost always required to review individual purchasing card statements.
Who Gets a Card?
If the goal of a purchasing card program is to use the card for as many low-dollar transactions as possible, and it should be, then it makes sense to give a card to any employee who makes these types of purchases. However, many companies still restrict card issuance.
According to the Hackett survey, companies whose purchasing card program had experienced an average cost per transaction of $1.10 had given cards to more than twice as many employees as companies that registered an average transaction cost of $4.07.
Any Merchant Can Participate
Just as with restrictions on which employees are issued a purchasing card, limiting the vendors from whom employees can make purchases can also defeat the purpose of the card program. Certainly, blocking certain establishments like massage parlors might be in order. But a blocking strategy can often backfire.
According to Walt Hazelton, research director at Hackett Best Practices, one company blocked fishing tackle stores. When an employee from the company’s lab attempted to purchase some fishing lines for the purpose of tying items together during an experiment — a very legitimate purchase — he was blocked. “What happens when that employee is denied at the counter? They’re never going to use the card again because they were embarrassed in front of other people.”
And if reduced cost is your goal, consider that the Hackett survey found that 83 percent of the companies with the lower cost per transaction permitted any merchant to participate in the purchasing card process, compared with only 36 percent of companies with a higher per transaction cost.
Eliminate the Fear Factor
According to the Hackett survey, companies that cannot overcome the fear of misuse in a purchasing card program and institute much less stringent controls will probably find that their program is not providing the savings they had anticipated.
“If the advantage of a purchasing card is to reduce the volume of transactions going through purchasing and accounts payable, then the goal should be to maximize volume,” says Hazelton. “And the way you do that is you give a card to anybody who might have a need, you don’t restrict the merchants, and you don’t limit the types of things that can be purchased.”
Taking those steps to institute a more flexible program, rather than simply giving up, should significantly improve the savings and efficiencies.
