How often do we pause to evaluate if an area or process merely exists or if it’s actually optimized to provide the most value to the organization? Outside theoretical debate, companies often struggle to understand the basics of how to make an informed fact-based decision, resulting in an inevitable evaluation conundrum. Open the dialogue up in the procurement area and this conversation can take many directions, however within source-to-pay we can use the purchasing card for illustration purposes. Companies often turn to purchasing cards as an option to address ingrained purchase and payment inefficiencies and to drive savings. They establish a purchasing card program to achieve greater procurement discipline but, in the end, have they merely implemented or optimized this program for their organization?
Purchasing cards are often a solution to improve a specific segment of company spend. It carries a dual- benefit as a way to simplify the management of both purchasing and payment. The possibility to reduce the activities in administering, controlling, maintaining and executing the entire process from purchase to payment is alluring and, while not a perfect solution for all purchases, purchasing cards can be an important part of a well managed portfolio of purchase and payment options.
The devil is in the details
Aligning on scope is especially key and purchasing cards for this illustration can be narrowly and simply defined as the physical plastic cards (multiple variations, forms and uses are a topic for another day). Corporations establish a program with a bank to issue employees a purchasing cards (corporate credit card). Employees make purchasing decisions and directly pay the supplier. As most users are already comfortable with their own personal cards, adoption should be quick . The high-level theory is simple.
In starting up a new program, most companies move straight to action. They begin by forecasting the benefits which are directly related to initial design assumptions for purchasing policy and key procedures. Consider both ends of the spectrum….Company A only provides policy level guidance, empowering the employees with complete control over the sourcing and purchase activity. Company B requires the employee to use the same purchasing tools that existed prior to the card introduction, effectively keeping the same purchasing process. Implementing these programs typically begins with an in-depth spend analysis and produces category level purchasing recommendations. In some instances, it may be appropriate to restrict card use to specific suppliers or through specific intermediary buying channels.
A common pitfall in developing an new approach is taking the process from simple to stifling by not getting the organization to let go of old practices, which can destroy a large portion of the new programs promised value. For purchasing cards, if the organization can adopt new practices, purchases without pre-purchase approval can greatly eliminate processing work. Following a streamlined approach, even vendor set-up and maintenance in a complicated and lengthy ERP process can be reduced / eliminated.
Following the purchase, payment activities change dramatically with the introduction of the purchasing card. Previous processes are often complex and require multiple steps, participants and systems to complete invoice receipt and validation. All of this becomes a two-step process between the purchaser and supplier as the supplier processes payment and the purchaser validates the charge. For the company, the approach to validate purchases can range from basic paper-based processes to fully integrated technical solutions. Purchasing cards can relieve many of payment activities required by traditional check and electronic payment channels. by putting payment activity in the hands of the purchasers. With these benefits, there are also tradeoffs the organization needs to navigate during implementation.
Validating the expected savings post implementation typically starts with cash rebates as they are discrete and easy to isolate. Often overlooked and commonly underestimated are the process savings, where a reduction in activity processing, head count and other savings opportunities can play a larger role than some might originally assume. Significant cost deltas really do exist between the fully weighted cost of PO based check process when compared to a purchasing card process. One of many recent popular data points is the RPMG Research Corporation ‘2010 Purchasing Card Benchmark Survey Results’ which identified a savings delta of $71 per transaction, which adds up quickly. The challenges to reaching such improvements are part of the program design phase, but these decisions should be based on the company’s own internal analysis.
Implemented or Optimized?
As the benefits clearly exist, the struggle becomes managing the trade-offs to maximize the benefit. Even though a purchasing card is a narrowly focused topic within Source-to-Pay, there are several areas and ways to increase the benefit of these programs:
- Is the program set up with the correct purchasing policy guidance?
- Are cards in the hands of enough of the right people and has the company done its job to ensure adoption and use?
- Should guidance be changed on what is in-scope or appropriate purchases?
- Is the structure in place to evaluate if limits be changed or increase and changes made to allowable categories, or the program to expand or increase use in areas that are already allowed but underutilized?
- Was the process designed free of prior constraints?
In the end, companies are very different and the approach should reflect the company, it’s objectives and leadership direction. Whether this discussion is narrowly focused or as broad as procurement source-to-pay, a solid understanding of the starting point is key, including a detailed understanding of the organization, processes, technology and risk tolerance of the organization. Understanding the company’s challenges and restrictions leads to a successful transformation. Clearly, this process is more difficult than most would first assume which is why so many programs begin without first completing the preliminary steps. Fact-based analysis and the right leadership alignment typically clears a path to next steps. Interestingly enough, I recently had the opportunity to evaluate two procurement programs with seemingly similar purchasing guidance. They both provided clear high level purchasing direction but the results were decidedly different. One ran successfully, the other was short lived—the real difference was that only one was optimized from the beginning.