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P-cards: The Canadian story
Lisa Wichmann
Up until now, there's been very little research done on how Canadian organizations use purchasing cards. Plenty of reports have been released on the US and overall North American markets, but Canadian data was rarely broken out.
This fall, an extensive study was released on how Canadian firms use
p-cards. It pegged what categories they're used for, spending limits, and the best practices employed by leading edge organizations. Clear-cut benefits—including dollar savings and head count reductions—have been summed up too.
The bearer of the data was Richard Palmer, a well-known scholar of p-cards and procurement. Palmer, professor of business at Eastern Illinois University, has been researching the market for years. He paid a visit to Toronto in October, to give a presentation on the report, which was written with his colleague, Mahendra Gupta.
"I've been waiting for p-cards to die. But they get stronger instead of weaker," Palmer said. Indeed, purchasing cards have faced challenges, such as concern over employee misuse. But the efficiencies they provide are just too tantalizing to refuse, and fears of card security are largely abating.
In Canada, use of p-cards has been climbing steadily. In 2003, Canadian organizations chalked up $4.8 billion on corporate cards. The figure for 2006 is $6.1 billion. Growth is expected to clip along at 11 per cent each year through to 2010, Palmer noted.
It's little wonder, considering how much cheaper it is to make a purchase with a p-card. Canadian transaction cost for p-cards is an average of $23, compared to $92 for requisitions and cheques.
Still, we aren't as enthusiastic about the cards as Americans are. We know they provide value, but we're not charging ahead in full march as the US seems to be. Palmer wonders if it's a cultural thing—an innate sense of caution.
We're not the biggest laggards on the globe, though. Palmer travelled to Europe recently, and noted even more reticence around p-cards. "The Europeans were quibbling about whether money would be saved; and really, would efficiencies be gained from purchasing cards," he said.
"I got up and I upset them a little bit. I said, 'look guys. That discussion is over in North America. We know that it makes an impact on the efficiency of an organization. We're onto the next thing: what else can this card do for us?'"
Is your program effective?
So what can corporate cards achieve when they're brought to the next level? For starters, they're known for their usefulness in data mining—getting the big picture of how much is spent across the organization by supplier, category, department, employee, time frame, and so on.
But tapping into that data won't happen unless users move away from the 'test the waters' approach. The full benefits will be realized only with broad-based, executive-supported implementation. For Palmer, the litmus test is spend per employee.
"When studying best practices, we look at the spending in relation to the total number of employees. In the entire [survey] sample, typical spending per employee, per month is $156 dollars," he said.
"And this is a quick way to benchmark your own program. How many employees do you have? Multiply by $156, multiply by 12 [months] and find out if you're above the average or below the average. And that's size adjusted. It doesn't matter what the size of your organization is."
In Canada, spending per employee is a little lower, at $100 per month. In general, the fewer number of p-cards you hand out, the less effective your program will be.
"Some organizations don't give out many cards, but their spend per card may be very high. And they say, 'we're doing great. Our average spend per card is $50,000 a year, but they give the card to so few people."
On that front, Canada is bucking the trend. We may not use p-cards as aggressively as the US—in terms of categories and the number of transactions—but we don’t mind handing them out to employees.
Consider the North American picture. The ratio of p-cards to employees is 8.5 per cent. In Canada, the ratio is 10.5 per cent. "The percentage of employees given a card is actually higher [in Canada] than in the United States and that's a very interesting fact," Palmer said.
He expected Canadian spending limits to be lower, since we hand out more cards, but that's not the case. Spending limits in Canada are about the same as in the US.
So where are we falling short? Basically, in the number of transactions per month, and the fact that we limit the categories the p-cards are used for, he said.
Lower volume
"Canadian organizations are less likely to buy transportation and delivery on the charge card. It's something to the effect of 50 per cent [in North America] versus 30 per cent [in Canada]. They're less likely to use the card for office equipment and supplies...utilities…They just don't use it in as broad a categorization as the US."
However, Canadians are more likely to use corporate cards for travel. "If you look at travel cards, people usually travel two or three times a year," Palmer said. "So I think I can understand now why the transactions are a little bit lower as a whole [in Canada."
We do OK in the maintenance and repair, and capital assets categories, where our rate of p-card spending is about the same as the US. But in most other areas, including professional services, leasing and rental payments, printing, temporary help, office equipment, advertising and computers, our rate of p-card spending comes in below the North American average.
American companies are more relaxed, telling employees to use their p-cards for just about anything under $2,500.
But what does that mean to the big picture? Simply put, fewer savings and less efficiency, Palmer explained. Companies with lukewarm use of the cards will still have to maintain a large headcount in accounts payable to process transactions and cut cheques. And indeed, paper cheques are still used in Canada for 61.7 per cent of all purchases below $2,500.
He advises to keep moving purchases over to the p-card "until you get to the point where you're shifting so many transactions over to the card that you can now liberate that accounts payable person from that drudgery and move him over to something better and more useful for your organization."
At that point, the benefits are tangible. In the survey of Canadian firms, 62 per cent with established p-card programs report "hard" reductions in accounts payable headcount requirements. Seventy per cent noticed hard reductions in purchasing headcount. In terms of strategic sourcing, 21 per cent use the card data to negotiate discounts.
In the US, government employees get an automatic discount at certain vendors, every time they swipe the card, Palmer said. P-cards also make it easier to service employees who work out in the field.
Once the programs are well established, they can function as an invaluable source of information. "In America we see a greater emphasis on wanting better control, better reporting. [They're saying] 'I want to make this part of my supplier management tool. I want to know who I'm spending with and I want to use this information for negotiation purposes, to see what I can do about getting discounts from these particular vendors.”
Palmer knows of at least three companies in the US spending about $1 billion per year through purchasing cards. "We're talking about organizations that are really at another level. And their constraints are now this: they need greater supplier acceptance."
These companies are targeting vendors who still prefer cheques and other forms of payments, and trying to persuade them to accept commercial cards. Smaller service providers—such as electricians—traditionally aren't equipped to take the cards, so this group is another frontier for card users to target.
SOX problems
While overall use of purchasing cards is on the rise, new challenges have cropped up in the past few years. Isolated incidences of misuse in the US have curbed the government’s appetite for cards, and they've actually pruned back their programs. In some cases, American organizations have "over pruned," Palmer said.
Then there's Sarbanes-Oxley, and its inherent focus on spending control. Logically, p-card programs—with all their data and tracking functionality—actually help foster compliance. But some consultants don't see it that way.
"[They say] 'I want you to cut your p-card program in half. You need more control.' But that's not what risk management is about. And it's not what controls are about."
As a result of this advice from SOX auditors, some organizations are opting to give out fewer cards, and only to upper level executives. You now see a handful of cards with $100,000 spending limits—and that creates all kinds of new risks.
"The biggest thing that can go wrong is an executive with a big spending limit goes crazy."
That situation actually occurred in the US, where an army General was misusing his high-limit card, and his underlings were afraid to blow the whistle, he explained.
For lower-level employees, the policies and security measures built into the cards mitigate just about all the risk. There are merchant category code blocks, to prevent the cards from being used at certain categories of merchants, such as jewellery stores.
Managers also have reams of electronic data to track card use, Palmer explained. For example, red flags would appear if an employee consistently purchases amounts of $499, with a credit limit of $500; or tends to make back-to-back purchases; or all of a sudden starts buying from a new vendor.
Another indicator is payment made to a company with a mailing address that matches the employee’s. Chances are, if the employee is abusing the purchasing card, he's "ripping the company off" in other ways too, Palmer said. So the p-card can actually alert managers to thefts that otherwise would have gone unnoticed.
The advantages are clear, certainly. Whether purchasing cards will work for every company remains to be seen. And perhaps putting all the focus on p-cards loses touch with the larger strategy.
"We don't look at cards and card-based payments as a hammer and that every problem at accounts payable is the nail that needs to be addressed," Palmer said. "It's not a one-trick pony.
"I've been examining the market since 1993...and there are other solutions out there. I think the larger issue that businesses should be moving toward is an electronic procure-to-pay process," he added. "But I will say...that the cards are a very powerful tool."
With that in mind, 2007 might see managers who have shied away from cards to take a second look; and companies that already use the cards to leverage the potential for data mining.
About the study
Conducted by Richard Palmer and Mahendra Gupta in 2005, the survey drew 1,288 responses, for a response rate of 31 per cent. Of the total number of responses, nine per cent were Canadian. They originated from several categories, such as public corporations (25 per cent); private corporations (29 per cent); federal government agencies (three per cent); municipalities (16 per cent); universities (seven per cent) and school district/other (12 per cent).
Future p-card trends
Aviva Klein, senior product manager at Visa Canada, who hosted the Richard Palmer event, says purchasers will ramp up efforts to incorporate p-card data into backbone ERP systems, for increased data mining. They'll also use more card data to determine if employees are adhering to contracts and policies with preferred suppliers.
The focus on control will also expand. "They're not just going to give a card to everybody and put that limit at $10,000. They may look and say, 'this person only needs a $2,000 spending limit and this person needs $15,000' and really create a detailed program for the needs of their users."
Finally, companies with well-developed programs will try to get more suppliers to accept p-card payment.
Canadian best practices
From the Canadian data, Palmer noticed some companies have more effective p-card programs, for the following reasons:
• They have a higher p-card to employee ratio: 25 per cent, versus the 9.9 per cent cited as "needs improvement";
• Best performers make an average 2,631 p-card transactions, versus 659 in the needs improvement category;
• They use p-cards for 57 per cent of transactions under $2,500, compared to seven per cent among need-to-improvers.
• Card spending per employee is $466 per month, versus $94 per cent for under performers;
• Their per-transaction spending limits are three times higher than average;
• They're less likely to restrict p-card use to managers or supervisors, or to allocate a card to just one person per department;
• They customize spending limits based on employees' requirements, instead of assigning everyone the same limit;
• Purchasing departments refuse to process requisitions that could be bought on the p-card;
• Accounts payable is required to send a memo to remind employees who requisition a purchase that the card could have been used instead;
• They regularly review requisition traffic to identify employees who need p-cards;
• Managers compare their supplier lists against the bank's list of card-accepting merchants to identify more opportunities for p-card payment;
• Use the cards to pay invoices for goods and services acquired with a purchase order.
Palmer noted other best practices among North American companies, such as monitoring the program to ensure unused cards are deactivated; reducing or increasing spending limits where required; and exploring why certain employees are hesitant to use the cards.
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