PURCHASING - Paper savings on the cards.

There are two types of purchasing card: the first is generally wielded by senior executives with large expense accounts; the second by personnel rather further down the corporate ladder. The first kind are known as travel and entertainment (T&E) or corporate cards. They are used to pay for transatlantic cradle seats or suites in New York’s Four Seasons hotel, and may also be used for purchasing odd sundry supplies: Hermes ties, for example, or duty-free Courvoisier. In contrast, the cards commonly known as purchasing cards are typically used for buying low-value, high-volume staples such as stationery or courier services from approved suppliers. Unlike T&E cardholders, purchasing card users don’t necessarily possess a card at all. Instead, they have a unique reference number that they quote to suppliers when ordering goods. There are other differences, too. For example, T&E cards generally have no limit on spending, whereas purchasing cards do. However, both types have similar effects: they reduce paperwork for the finance and purchasing departments, and hence cut administration and processing costs. According to a recent American Express survey of 80 major corporations across Europe, the amount spent by the average company on T&E administrative processes was equivalent to 8% of their total T&E budget. Companies applying best practice purchasing techniques using a T&E card could cut that to 2%. Impressive claims are also being made for the potential impact of purchasing cards. According to the American Express Purchasing Process and Automation Study, published this summer by American Express Corporate Services and Ernst & Young Management Consulting, companies can save up to 95% of the administrative costs associated with buying everyday items such as office supplies. These savings are attributed to streamlined buying and payment processes, and reduced time spent on reconciliation and data integration. The theory behind purchasing cards is simple. When an employee places an order with an approved supplier (which is signed up to the card system), his or her reference number is automatically checked to validate the purchase. The supplier then delivers the goods to the employee and sends details of the transaction to the purchasing-card provider (Amex, for example), which then pays the supplier within five banking days. At the end of the month, Amex sends the purchasing company a single invoice, which is settled by direct debit. “There is one bill to pay for everything that all the card holders bought that month,” says Laurent Gampel, head of Corporate Purchasing Card Europe at Amex. “But we also send a database file that contains everything that has been bought. It is detailed by cardholders, by supplier, by cost-centre manager, by you name it.” This data can then be subjected to detailed analysis and imported into the company’s accounting system. The scope to reduce data inputting, reconciliation and processing is obvious. However, purchasing cards are still in their infancy. American Express, for example, only launched its Corporate Purchasing Card (CPC) in the US in 1994, before tackling the UK in 1995. And many in the industry feel there is still widespread misunderstanding about the systems. “The perception of purchasing cards is quite low,” says Liz King, marketing manager with Cendant Business Partners, whose purchasing card system, Synchro, was launched two years ago. Cendant believes that using the word “card” when discussing purchasing systems deters some potential customers, and the company is considering removing all references to cards when talking about its system. “The card is really only the mechanism to remember the reference number,” King says. She also believes that many people don’t understand the up-front controls that purchasing card systems give companies. These have the apparently contradictory effects of increasing the finance department’s control over spending and budgets, while empowering employees to make purchases as needed. On the control side, each employee’s card can be tailored to block or allow purchases from named suppliers, purchases up to pre-set spending limits, and purchases from certain defined categories of product. Sarah Deaves, head of commercial cards at NatWest, says another control companies can set up is a “soft block”. “This means that an employee will be able to make a certain transaction, but it will create an exception report,” she says. Meanwhile, employees using a card system are empowered because they don’t need to fill in a purchase order and have it approved each time they need something. For them, approval is automatically in the system. Paula Howard, executive consultant at KPMG, says that the savings achieved just by preventing purchases from non-approved suppliers can be significant. “We have worked out that users buying outside of pre-negotiated contracts can potentially cost about 6% of the indirect purchasing spend within your average company,” she says. Getting the most out of purchasing card systems requires the card supplier’s database of transactions to be imported into the user company’s accounting systems, and IT investment is usually required to get this process running. Entertainment and drinks group The Seagram Company, which opted for NatWest’s purchasing card, initially had difficulty getting the maximum from the electronic data it received when moving it around the organisation. Even after two years Seagram is still getting to grips with the full back-office implications. “So far it’s been very front-end efficient but back-end inefficient,” says Jonathan Stobart, director of finance, global strategic sourcing. However, he says, the company is increasing its efforts in this area and has now selected software that will interface data received from NatWest into its email system, so that it can be passed around. Yet, even if more work is needed to achieve maximum results, Stobart is impressed by the benefits already reaped from using purchasing cards. “We have probably managed to take between 25,000 and 30,000 invoices out of the system,” he says. Around 40% of Seagram’s low-value purchases are now made through the card set-up and Stobart estimates that this saves the company the equivalent of three full-time employees. Further savings are anticipated. “We are now gearing up to roll-out the purchasing card across Europe,” he says. The extent to which purchasing cards can revolutionise processing and cut out paper depends in part on the ability of suppliers to generate electronic invoices with sufficient data to satisfy Customs & Excise. “One of the unique selling points of the purchasing card is that, when it is used in a purchasing environment with the right terminal, it can drive a full electronic invoice,” says NatWest’s Deaves. “A lot of our customers are integrating their tax and settlement data with their accounting data. They can have an electronic tax management system and use it to seek VAT reclaims.” However, not all terminals on the Visa network, which NatWest uses, are capable of producing electronic invoices of sufficient detail. This means that paper invoices may sometimes still be required. Indirect tax also causes problems for purchasing cards used across borders. “At Visa we are negotiating with the tax authorities across Europe so that they recognise the Visa file as a substitute for the invoice,” says Alain Falys, senior vice president, commercial products, for Visa in Europe. Visa secured accreditation in the UK two years ago but progress on the continent is slower. “With the growth of e-commerce we will have a lot of cross-border transactions so we do need a pan-European tax solution,” Falys says. The full benefits from a purchasing card system don’t come without considerable upheaval. The purchasing process has to be re-engineered, preferred suppliers selected and equipped with the necessary software, purchase contracts renegotiated and employees trained in the new system. The whole process can take up to three years. Apart from costs associated with the re-engineering, card suppliers also charge a fee for their services. However, the savings should quickly outweigh these costs. Amex claims that the typical payback period for a purchasing card system is between nine months and a year. Beyond the initial savings, companies are also being tempted by the prospect of truly paperless purchasing. Chris Sharp, head of corporate card sales at American Express says that in the future the card will be the basis of all travel transactions. “Billing information will come back electronically, pre-populated into expense vouchers in the company’s system and will then be sent down the line for authorisation and payment.” But he admits that we are only at the start of that particular revolution. Nevertheless, the prospect of such a wholesale change is enticing – especially to anyone who has ever wasted time filling out lengthy expense claims and purchase orders.