Implementing Purchase Cards

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Procurement cards Guide Guidance Paper Version 1.5.1NePP Status: Final 01/04/2008

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Implementingprocurement

cardsA guide for publicsector managers


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Procurement Cards Guide Guidance Paper Version 1.5.1www.ticon.uk.com 0207 836 1999 01/04/2008

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Introduction:

Procurement cardsare the quickest

route to e-procurementprocess savings forthe public sector.This introduction

explains how theywork and thebenefits they canbring.


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Introduction: Aboutprocurement cards

What is a procurement card?Procurement cards are a purchasing solutionthat allows buyers to make use of cards tomake purchases. The cards look and feel like apersonal bank card, and cardholders use themto make purchases in the same way: face toface, over the internet, via phone or via fax.Procurement cars are different from personalbank cards, however, because the purchasesare accrued and managed on a corporatelevel, allowing managers to control the activityof buyers either on a personal level or bydepartment or across the whole organisation.

A procurement card programme is aprogramme that co-ordinates the use of anumber of procurement cards across anorganisation. A procurement card programmeallows buying organisations to receive monthlyreports for all the cards in a programme in anelectronic file. This means that the buying

organisation can determine spend activity byindividual cardholder, department and supplier.Procurement card programmes are commonlydeployed using a card managementinformation solution to help reconcile the bankfile into the financial ledger and to helpcategorise spend and report on buyer activity.

How does a procurement card work?Card programmes allow the suppliers cardprocessor to make the payment to the supplier,

usually within four days. The cardholdersissuing bank notes the payment in a monthlystatement and once paid, the funds are passedto the suppliers bank, usually via a clearinghouse. So instead of a supplier waiting for thebuyer to instruct the buyers bank to make apayment into their bank, the suppliers bankadvances the money to the supplier, becausethe buyers card has effectively pre-authorisedthe payment. In return for the advance thesupplier pays a small fee called the Merchant

Service Charge (MSC). Typically this fee willbe between 1.75% and 3.0% of the cost of the

transaction. This fee can be negotiated withone of the banks providing card acceptancesolutions.

Where do the benefits come from?

Procurement card programmes create benefitsfor organisations by making purchasing quickerand easier. Traditional purchasing processesthat use paper require buyers to complete timeconsuming requisitions and approvals beforeorders can be sent to suppliers. Once thegoods have been received another round oftime consuming processes are normallyundertaken in order to approve invoices, makepayments and enter data into the financialledger. Using procurement cards removes the

need for completing paper forms and allowsbuyers to concentrate on productive workrather than filling out the paper formstraditionally required to make purchases.

Even if an organisation uses an e-orderingsolution, they can benefit from usingprocurement cards, because procurementcards can be used as a method to consolidateinvoices (multiple transactions will beprocessed as a single payment) and to provideelectronic data and management information.This information can be used to identify newcontracting opportunities and to take control ofspend and provide an audit trail for purchasesmade by individual buyers.

Time savingsHow is the time saved expressed as anefficiency? In 1999, the National Audit Office(NAO) completed a piece of research to

identify the average value of the time savedwhen using the GPC to pay for a transaction.They estimated that the value of the timesaved was on average 28 per transaction. Astudy by Deloitte for the NePP in 2004estimated the saving to be 33 per transaction.Both these estimates were derived bycalculating the time it would take to undertakea transaction from purchase to pay using paperforms. Some time was also included to accountfor errors and omissions.


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Whatever the figure chosen by otherorganisations, each buying organisation shouldundertake their own research to determine thelikely effect that a procurement card will haveon their organisation, and use this research to

determine a per transaction estimate ofsavings.

Understanding the marketPrior to approaching a bank about aprocurement card programme it is important tounderstand how the procurement card marketworks. In the UK there are three major cardacceptance brands, Visa, American Expressand MasterCard. This means that the majorityof suppliers who can accept payments by card

will accept cards carrying one of these brands.Six Visa issuing banks have been contractedby the OGC to provide the GovernmentProcurement Card (GPC) using the Visanetwork. Under this contract, the issuing bankscan provide all public sector bodies with apurchasing card solution that does not chargeany fees for processing transactions or issuingcards. Additional charges may accrue forservices such as consulting, cash transactionsand advanced management information. Formore information on how to buy a procurementcard programme and GPC, see Buying asolution 1: procurement cards on page 23.

Intangible benefitsProcurement cards are flexible tools that canbe used for a wide variety of purposes, forexample using procurement cards foremergency purchasing has proven to be veryeffective. GPC procurement cards were used

by staff attending the Buncefield oil depot fireand staff attending the 2005 July bombings inLondon. Procurement cards have givenofficers who deal with emergencies the meansto make immediate purchases in order toprotect and support members of the public. It isnot possible to quantify this sort of benefit infinancial terms, but the positive aspects ofusing a procurement card in this way areobvious.

Realising the benefits

Using procurement cards will create someautomatic cashable savings because they donot require the organisation to raise paperorders or reconcile each invoice by hand,however, the majority of savings will be

realised in the shape of staff time. For thesesavings to become cashable it will benecessary to reduce the wage costs of theorganisation, either by employing fewertemporary staff or by reducing the number offull time equivalent (FTE) employees. For moreinformation on realising the benefits ofprocurement cards see Running a programme3: Identifying and recovering the benefits onpage 41.

Defining the success of a procurement cardscheme?It is essential for an organisation to considertheir vision of success before implementing aprocurement card programme. Will the aim beto gain efficiencies? If so, how much of thisefficiency is planned to be cashable and howmuch is planned to be non-cashable? Makinga clear statement of the programmes goals iscrucial to delivering a successful procurementcard programme. This statement should bepart of a structured business case. For moreinformation on business cases see Businesscase 1: Analysis on page 6.

Procurement cards need to be viewed in thecontext of the full range of e-procurementtechnologies. Procurement cards will need toimplemented as part of a wider e-procurementstrategy. This will require the development of acomprehensive strategy for their use,

including, knowing which suppliers and whichprocesses are appropriate for use withprocurement cards. Once the transactionshave been made management informationfrom the various sources needs also to becollated in order to help procurementmanagers gain valuable procurementinformation.


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Businesscase:

Three steps to

building a businesscase forprocurement cards,including spendand process

analysis, savingsestimates andbuilding the finalcase.


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Business case 1:Analysis

The need for a business caseA procurement card programme will commonlyneed the approval of the senior staffresponsible for efficiency, the director offinance and the head of audit. In order to gaintheir support it will be necessary to providethese officers with a business case for usingprocurement cards. The business case willneed to identify the scope of the programmeand what affect the cards will have on theexisting purchasing processes. The businesscase must also provide information on thecosts associated with the programme includingadditional software, implementation andmaintenance.

Assessing the opportunityTo identify the opportunity for usingprocurement cards it is important tounderstand which of the purchases currentlybeing made using paper-based processes

could be made using a card. In order to knowwhich transactions can be transferred to cards,it is important to understand the following:1. The strategy for using cards.2. Which transactions fall within the definedstrategy.3. What process is currently being used tocomplete these transactions.

StrategyProcurement cards are a flexible tool, they can

be used to pay a large number of smallsuppliers or a small number of large suppliersdepending on the strategy determined by theorganisation. Procurement cards can also beused for common lower value purchases, or forinfrequent, high value items. They can be usedas part of corporate e-enablement programmefor many buyers or for emergency onlypurchases with one or two buyers. The widevariety of uses ascribed to procurement cardsdemonstrates the need for a strategy for using

procurement cards. The most commonstrategy for using procurement cards is to

transform frequent, lower value purchases, butorganisations can use them to achieve benefitin a wide variety of scenarios.Bank staff and external consultants can helpdefine a strategy for using cards if needed.

AnalysisAssuming that an organisation wishes totransform the processes used to purchaselower value, high volume goods, it will benecessary to complete some basic analysis toidentify the purchases that need to bechanged. This analysis can be broken down asfollows: invoice analysis, process analysis andacceptance analysis.

Step 1: Invoice analysisUsing the payments made from theorganisations finance system it is possible toidentify how many invoices the organisation isprocessing in certain value bands. A typicalprofile of invoices by value will be as follows:

Fig 1, Correlation between invoice value and volume of invoices

The diagram above shows the likely ratios oflower value invoices to high value invoices in atypical public sector organisation. The pool ofinvoices that will be available for use with aprocurement card will be dictated by thetransaction limits that an organisation mightplace on their card programme. Count thenumber of invoices in bands from 100 to

1,000 - 5,000

> 5,000

500 - 1,000

100 500

< 100

3%

7%

10%

30%

50%


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5,000 to identify the number of invoices thatthe organisation processes in each value band.

Fig 2, The total value to an organisation of invoices in spend bands

Figure 2 shows a typical assessment of thecumulative value of the invoices beingprocessed by a public sector organisation. Thediagram clearly shows that the total value ofthe spend in transactions under 100 is likelyto be around 2% of the organisations

expenditure. However, as we see in figure 1,invoices in this value band accounts for aroundhalf the invoices processed by theorganisation.

Step 2: Process analysisProcess analysis is a mapping process thatallows an organisation to understand howpurchasing data flows through theorganisation, from initial requisition within adepartment to logging a payment onto the

financial ledger. Staff undertaking processanalysis must thoroughly research theprogress of each departments purchasingprocesses in order to generate acomprehensive flowchart of the differentmethods used to raise orders, processtransactions, make payments and reconcile thetransactions. Process analysis will help anorganisation determine whether a transactioncan be transferred to procurement cards andwill also highlight the most inefficientprocesses in place within the organisation. By

combining the invoice analysis and the processanalysis the organisation can draft a priority listfor the transactions that are most appropriateto procurement cards, with frequent and highlyinefficient transactions at the top of the list and

infrequent inefficient transactions at the bottomof the list.

Typical transactions that can be moved toprocurement cards are as follows:

Frequent lower value transactions.

Transactions made by staff working off-site, e.g. maintenance staff.

Travel and subsistence transactions.

Internet purchases.

One off transactions with suppliers whodont need to be included in the financialsystems database of suppliers.

Cheque payments.

Temporary staff payments.

Cash transactions / imprest accounts.

Step 3: Acceptance analysisHaving identified and prioritised the keytransactions that the organisation needs totransfer to procurement cards, it is necessary

to determine how many of the organisationssuppliers are able to accept payment from acard. Different suppliers will accept differentcards, but banks and card companies may beable to help identify which suppliers acceptpayment using their card schemes. It may alsobe worth approaching some of the supplierswho are creating the priority transactions toidentify whether they accept cards and whichcards they accept. Understanding whichsuppliers accept payment by card is important

because it will help the organisationunderstand how many transactions can bemoved to procurement cards immediately. Thisanalysis will also identify which suppliers it willbe beneficial to encourage to accept cardpayments in the future

The spend and process analysis tasks detailedabove are not just appropriate to procurementcards but can be used to identify the potentialsavings for any e-procurement initiative.

Initiatives such as e-invoicing, e-ordering and

100 - 500

5,000

2%

10%

10%

18%

60%


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marketplace can all benefit from invoice andprocess analysis. It is also critical tounderstand what role other technologies suchas e-invoicing are going to play alongsideprocurement cards. Both technologies are

used to increase the efficiency of invoiceprocessing and each has their own strengthsand weaknesses. In a case where anorganisation is considering using bothtechnologies, it is important to assess howeach technology will affect the organisation.The business case for each technology mustnot overlap by claiming time savings fromimproving process associated with using eachtechnology on the same transactions.

In addition to providing a clear understandingof the existing procedures, process and invoiceanalysis will provide organisations with a clearunderstanding of how to change the existingprocurement processes, providing a criticalinsight to the challenge of changemanagement.


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Business case 2:Estimating the

savingsEstimating time savingsIn order to estimate the time savings likely tobe gained from using procurement cards it isnecessary to examine key, regularlyperformed, tasks in the purchasing process.See table 1 below for an example of thecommon tasks that timings can be calculatedfor.

The amount of time that can be saved whenreconciling transactions will be significantlyaffected by the use of a reconciliation solutionthat will upload data to the financial ledger andmay also provide managers with a suite oftools to manage card data and categorisespend. Therefore if time savings in thereconciliation process are being attributed tofunctionality available in a planned integrationtool, the costings for purchasing and

implementing this tool need to be included inany business case.

Time savings can only be recovered ascashable time savings if either temporary or fulltime staff are removed from the organisation.Non-cashable savings can be recovered byapplying a per transaction efficiency saving, orby allocating staff to a citizen facing service. Ifthe intention is to recover cashable savings, itwill be easier to recover savings in

departments where a higher volume ofcommon tasks are concentrated amongstfewer individuals. Tasks that are undertakeninfrequently within departments will requiresignificant effort to consolidate to a level thatwill allow for staff numbers to be reduced.

Cost savingsAs well as generating time savings, cards cangenerate cost savings for an organisation.Typically cost savings will focus on the costsassociated with printing, postage and faxing

orders to suppliers. However, savings shouldnot be limited to these costs alone, forexample, giving cards to buildingsmaintenance staff might reduce the number ofjourneys made to source stock or file

paperwork, the cost savings associated withtravel can be directly attributed to theprocurement card programme.

Contract complianceIf a contract for a good or service has been putin place, using a procurement card can help toidentify when buyers have chosen to purchasefrom an off-contract supplier. Knowing who ismaking the purchase, will help procurementstaff to enforce the contract, which will in turn

secure savings. For more information onmanaging contract compliance, see Running aprogramme 2: Securing contract complianceon page 39.

Early settlement discountsCash flow is critical to suppliers of all sizes, butespecially to small and medium enterprisesand is a common reason for small businessesto fail. Choosing to pay by card can helpsuppliers by providing them with prompterpayment. Even the standard thirty day term forpayment of invoices can cause problems forsuppliers if the total value of these invoices arelarge. Late payments can cause even greaterproblems. Where cash flow becomes aproblem, suppliers will be forced to borrowmoney in order to avoid running out of money.Borrowing money is expensive, which is whysome suppliers are prepared to offer earlysettlement discounts. Discounts of 5% are not

uncommon but will need to be negotiated onan individual basis with each supplier.

Other benefitsAs well as the time and cost savings, cardshave a number of intangible or indirectbenefits that have no measurable efficiency interms of savings, but can be included in abusiness case to show how the organisationwill benefit from having a procurement cardprogramme. Intangible benefits include:

Greater transparency of spend


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Organisations that are still using paperprocesses to conduct purchasing will havelimited knowledge of which buyers in whichdepartments are making purchases, includinghow much they are spending and what the

money is being spent on. Procurement cardswill bring some awareness to the activities ofbuyers and departmental spend.

Management informationA procurement card programme, when used inconjunction with reconciliation software thatprovides reporting tools, can be used to reporton a wide range of procurement activities,including departmental, category, cardholderand programme wide reporting. Reporting

allows project managers to see whereprogress is being made, to track the use ofcards and to identify whether the programme ismeeting the targets set out in the businesscase.

Time savings tableIn order to estimate the savings to be madefrom using a more efficient buying andreconciliation process, a timing comparisonshould be made. Timings recorded forcommon tasks in the paper based purchasingprocess and timings for common tasks in thenew procurement card process should becompared to estimate a per transaction timesaving.

Below is an example of someof the steps thatcan be compared between a traditional paperprocess and the process for using procurementcards. The processes described below are

indicative of some of the most common tasksin a purchase process. Due to the diversity oftasks in different purchasing processes, thislisting should not be seen as comprehensive.Once a list of tasks has been agreed, the tablecan be given to buyers or staff who processinvoices to complete the three blank columns.

Time = the time taken to complete a taskFrequency of task = the amount of times a taskis completed in a period of time (usually a

week)

% of Workload = the proportion of anindividuals workload attributed to the task

This data will provide managers with a goodunderstanding of how much time will be saved

by staff once procurement cards are in place.


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Table 1: Estimating savings from procurement card transactionsNon procurementcard transactionprocess

TimeFrequencyof task

% ofWorkload

Procurementcard transactionprocess

Estimatedtime

Frequencyof task

% ofWorkload

Selecting suitablesupplier

Selecting asuitable supplier

Raise a requisition Order by phone

Requisition approvalManually updatetransaction log

Raise a purchaseorder

Allocation of eachcard transaction electronic

Purchase orderapproval

Allocation of eachcard transaction manual

Filing copies ofrequisitions and

orders

Pack and post order

Check supplieracknowledgement

Non procurementcard reconciliationprocess

Procurementcardreconciliationprocess(monthly)

Allocatingcommitment in the

ledger system

Checkingcardholder

statementChecking supplieradvice note

Queries withcardholderstatement

Allocating accrual inthe ledger system

Approval ofcardholderstatement

Checking supplyinvoice

Checking cardsummarystatement

Allocating invoiceactual cost in theledger system

Approval of cardsummarystatement

Queries with invoicedetails

Allocation of cardsummarystatement

Reconcilitation of aquery

Creating a BACs orcheque payment persupplier

Reconciliation of asupplier statement

Total


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Business case 3:Building the case

Having completed the necessary analysis anddetermined appropriate time savings for tasksit will be possible to build a detailed businesscase for implementing a procurement cardprogramme. A comprehensive business caseshould including the following sections.

StrategyThe strategy should detail the reason forimplementing procurement cards and thesuccess that the organisation seeks to achievefrom their use.

Scope of the programmeThe scope of the programme is defined by thetotal number of transactions that are expectedto be transferred to procurement cards

Time savingsThe time savings attributable to the use of aprocurement card. Timings can also be given a

monetary value by estimating the amount oftime saved per transaction and then giving it afiscal value according to the equivalent cost intime for an administrative staff member. Thiswill generate a per transaction cost savingwhich can be multiplied by the number oftransactions that are expected to betransferred to a procurement card.

Cost savingsThe savings made from postage, fax etc.

Costs setupThe cost of software, implementation,consulting, project management and trainingrequired to implement a programme.

Costs managementOn going software costs, as well as anymaintenance and management fees that willbe incurred.

Actual SavingsSavings can now be calculated on a perannum basis over three years. This allows forset up costs and a staggered increase in thenumber of card transactions to make an

estimate of the savings available over a threeyear period.

Quick business case

1. Identify the top 100 suppliers by the volume of invoicesthey issue.Be careful not to include suppliers that are expected tobe involved in any existing e-procurement initiative, suchas marketplace.

2. Call the suppliers to find out if they accept payment by

card.Be sure you know which card you intend to use, or makesure you find out which brand of card the supplier canaccept.

3. Add up the number of transactions from all the cardenabled suppliers to determine a total number oftransactions that can be put onto to cards immediately.Transactions from suppliers that dont take payment bycard can be added to the list, but an additional cost forsupplier adoption will need to be accounted for.

4. Multiply the total number of transactions by an

estimated value for the time saved on each transaction(5 - 30) to create a total number of savingsRemember to increase the saving if the organisation willuse some automatic reconciliation software.

5. Estimate the cost of software and other set up fees(3k - 30k).Other costs needs to include consulting fees forintegration and any project management time.

6. Estimate the cost of maintaining the procurement cardprogramme.How much staff time is it going to take each month to

reconcile the statements and how much time will it taketo manage the programme.

7. Multiply the total estimated savings by 3 (to create athree year plan) and subtract the set up costs as well asthe total maintenance costs for three years.This will give you the business case for an instantprocurement card programme that requires no supplieradoption. Of course, additional savings may becomeavailable from encouraging suppliers to use procurementcards or choosing to use alternative suppliers who acceptprocurement cards.

An online business case can be completed at:www.purchasingcard.info


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Handlingobjections:

How to manage

some commonobjections to usingprocurement cards,including, fraud,spend control and

managementinformation.


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Handling objections1: Controlling fraud

A common perception regarding procurementcards is that their use will encourageemployees to make fraudulent transactionsand that this fraud cannot be countered orcontrolled using cards. Details of how tomanage these concerns are covered below

Getting used to not having preventativecontrolsDespite procurement cards being seen as aneffective method of procurement by manyauditors in the UK public sector (the GPCscheme has over 750 programmes), somemanagers still associate cards with fraud.Although there were over 2.8 milliontransactions placed using the GPC in 2005,there is still a perception that becausetransactions are audited after the purchase hasbeen made that the cards can be used tocommit fraud and that using procurementcards means relinquishing the preventative

controls usually associated with purchasing.

In fact, using procurement cards does notmean relinquishing controls, rather, usingprocurement cards just means taking adifferent approach to preventing fraud. Buyingorganisations can use a range of technicalcontrols to restrict cardholder activities. Formore information on card controls seeHandling objections 2: Spend controls onpage 16. Aside from these controls, much of

the responsibility to purchase within thepolicies of the buying organisation lies with thecardholder.

In order to prevent fraud cardholders need tobe reminded of the corporate procurementpolicies, the corporate procurementprocedures and their duty in complying withthese rules. Informing cardholders about thedata that will be provided by the bank in themonthly statements and the consequences of

using the card fraudulently are, in almost all

cases, sufficient motivation to preventfraudulent use of cards.This fact is borne out by the following statistic:in all the commercial (public and private sector)schemes that Visa operates across Europe,

including GPC, only 0.000007% of thetransactions made in these schemes havebeen subject to claims for employee fraud.

However, where fraud does occur aprocurement card actually provides a valuableaudit trail and information about individualspurchasing activity making it far more likelythat fraud will be identified and that any culpritis caught.

Anti-fraud measures and existingpurchasing processesFraud must also been viewed in the context ofexisting paper procedures. Anti-fraudmeasures used in standard purchasingprocedures rely on the separation of duties,whereby each order is required to be approvedby a separate individual prior to being sent tothe supplier. Where procurement cards are inuse this protection is only available when cardsare used in conjunction with paper processesor additional software solutions.

However, it is worth noting that the fraudprevention measures commonly used withpaper transactions are not sophisticated, andcircumnavigating them is relatively easy forthose who are determined to defraud anorganisation. For example, approvals of orderscommonly use stamps and signatures whichcan often be forged.

Protecting against fraud when making cashpayments is also difficult. Using procurementcards as a replacement for petty cash preventsfraud, monitors transactions more effectivelyand protects the employees from the risksassociated with handling cash.

Procurement cards are not one hundred percent fraud-proof, however, using procurementcards will provide more accurate, easily

accessible information on an individualsspending. A traditional paper based process


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will provide a paper trail that is unlikely to bestored centrally and is unlikely to provideinformation on the individual buyer. Therefore,if a procurement card programme is correctlyset up and regularly monitored, the controls

and data available to both prevent fraud andidentify fraud are significantly greater than thecontrols and data that usually exist in paperbased processes.

Finally, if an organisation is subjected to fraudthrough the use of their procurement cards,banks have insured themselves against fraudand will reimburse the organisation for fraudcommitted by an employee using a card wherethe goods or funds are not recoverable.


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Handling objections2: Spend controls

Whilst some senior managers will accept thatcards are able to control fraudulent spend, theystill believe that by making transactions easierthey will lose control of spending and thatbudgetary control will suffer from the use ofprocurement cards. However, procurementcards programmes can use a number oftechnical controls in order to manage spendand retain budgetary control.

Understanding controlsEach procurement card can be given a spendlimit according to a single transaction andaccording to a cumulative monthly spend.

1. Programme limit the maximum to be spenton a whole procurement card programme inany given month.2. Department limit the maximum to be spentby a department using procurement cards inany given month

3. Cardholder limit the maximum to be spentby a cardholder in any given month4. Transaction limit the maximum to be spentin any single transaction.

When a purchase exceeds a limit, the card isrejected at the point of purchase*. However,there is a balance that needs to be struckwhen using technical controls. If the limits on acard are too aggressive then a card will not getthe use it was designed for. Equally, limits

need to be set so that risk can be managed bythe organisation.

Merchant category blockingAdditionally, spend can be blocked accordingto the type of supplier in use. When a suppliersigns up with a bank to become a cardacceptor they are asked to categorisethemselves using a standard for merchantcategorisation. When issuing cards thepurchasing card programme manager can

chose to restrict any of the categories for useeither by the individual card holder or across

the whole programme. This means thatcardholders can be blocked from making cashwithdrawals or making any purchases fromcompanies offering financial services. It shouldbe noted, however, that merchant category

blocking is a relatively blunt tool for controllingspend. For example, blocking financialservices companies does not prevent acardholder from purchasing financial servicesfrom a supplier that has categorisedthemselves in another category, for exampleTesco. Blocking only restricts the cardholderfrom using the card with those suppliers thathave chosen to categorise themselves asproviders of financial services. Alternatively,should a supplier such as Tesco choose to

categorise themselves as a provider offinancial services, a card holder blocked fromusing this category would not be able topurchase anything in a Tesco store, regardlessof whether the item was a financial service ornot. A list of merchant categories can be foundbelow. This categorisation is used by both Visaand MasterCard.

Merchant Category DescriptionsAuto RentalAutomotive FuelBooks and PeriodicalsBuilding MaterialsBuilding ServicesBusiness Clothing and FootwearCash withdrawalsCatering and Catering SuppliesCleaning Services and SuppliesClubs/Associations/OrganisationsComputer Equipment and Services

Estate and Garden ServicesFinancial ServicesFreight and StorageGeneral Retail and WholesaleHotels and AccommodationLeisure ActivitiesMail Order / Direct SellingMail Order and Courier ServicesMedical Supplies and ServicesMiscellaneousMiscellaneous Industrial/Commercial Supplies

Office Stationery Equipment and SuppliesPersonal Services**


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Print and AdvertisingProfessional ServicesRestaurants and BarsStaff Temporary RecruitmentStatutory Bodies

Telecommunication ServicesTraining and EducationalTravelUtilities and Non Automotive FuelVehicles Servicing and Spares

Non-technical controlsUsing procurement cards does not preventmanagers from using traditional purchasingcontrol procedures such as approval ofpurchases. A full range of procedural control is

available to organisations using procurementcards. The only aspect of purchasing thatchanges with procurement cards is thatdiscovery of bad practice by cardholders willoccur at the end of the month, after thepurchase has been made. Whilst this mayseem to run against the grain of traditionalprocurement practice, organisations usingapprovals can use the approval log to identifynon-approved transactions and actaccordingly.

* Point of purchase blocks rely on themerchant having a dial up link to the issuingbank.

** Personal Services cover services such ascounseling, childcare, investigative servicesand funeral and crematorium services.


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Handling objections3: Management

informationIt is common for procurement managers toexpress concern about the quality ofinformation provided by procurement cardschemes. This is because the majority ofprocurement card merchants dont provide lineitem detail (LID) on purchases. LID is commonin marketplaces and other e-procurementsystems and can be used as VAT evidence.

LID is also used by procurement managers tocategorise spend, identify contractingopportunities and manage demand.

Understanding data levelsEach month, the bank will provide theorganisation with a electronic file containing allof the transaction data from the organisationspurchasing card programme. The data will be acollation of all the information generated by thesuppliers that have been used by the

programmes cardholders during the previousmonth. Depending on the type of terminal thatthe supplier uses to process card transactions,different information will be provided in thebuying organisations monthly bank file. Thedifferent ranges of information are known asdata levels.

Level 1, or Standard LevelLevel 1 data is equivalent to the informationthat a buyer would normally expect to see on a

credit card statement. This means that no VATdata is included with level 1 data and in orderto reclaim VAT from HMRC on the transaction,it is necessary to retain paper receipts to beused as evidence of having paid VAT.

Level 2, or Summary LevelSuppliers with equipment capable of providinglevel 2 data, will provide the same informationas suppliers providing level 1 data, in additionthey will provide the total amount of VAT thathas been paid on each transaction. Level 2

data has been approved by HMRC assufficient evidence for VAT reclaim for alltransactions under 5,000. Transactions abovethis threshold require a VAT receipt forevidence.

Level 3, or Line Item Detail (LID) Level.LID suppliers can provide a more completedata set on the purchases made with asupplier. This will include details of each itempurchased in a transaction and the amount ofVAT paid on each item, rather than a summaryof VAT paid for on all the items in atransaction. HMRC have approved LID data assufficient evidence for VAT reclaim regardlessof the value of the transaction.

Table 2: Details of data provided by differentsuppliersINFORMATION

REQUIRED

LID SUMMARY STANDARD

Customers card no.

Expiry date

Order Date

Customers Reference

Supplier OrderReference

Product code

Commodity code (referto sep. list)

Product Description

Quantity

Unit of Measure (i.e.each, 5, etc)

Unit Cost

Discount (for this item)

Net (ex vat) Total of theline

VAT rate (usually17.5%)

Total transactiondiscount

Total transaction value(inc. VAT)

Total Transaction VATAmount

Unfortunately, the majority of suppliers provideonly level 1 data, because the cost of theequipment required to be a level one supplieris significantly less than the equipment needed

for providing advanced data levels such as


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level 3. Managing concerns about data levelsare covered below.

Option 1: use only LID enabled suppliersIf staff are particularly concerned about the

management information being provided into acard programme, then an organisation canmake a conscious decision to restrict the useof the programme to those suppliers providinglevel 3 data because the information providedis more valuable to the buying organisation.Whilst this may restrict the use of the cards,many organisations feel this is the mostappropriate use for their cards.

Option 2: accept that level 1 data is better

than no dataAlternatively, the organisation may choose toenable as many transactions as possible, andwill therefore choose to work with level 1enabled suppliers. Whilst this will certainlybroaden the scope of any programme, it willalso reduce the amount of informationavailable and require the organisation to collectpaper receipts to evidence the VATexpenditure on level 1 transactions.

However, organisations also need to askthemselves what other plans are in place togather the data from these transactions, if theyare not going to be placed on a procurementcard? If there are no plans to use an e-procurement system for purchases with level 1suppliers, it is worth using this low-costsolution, to enable the transactions.

Transactions processed using level 1 data will

certainly create opportunities for makingefficiency savings and will also bringopportunities for controlling spend andconsolidating invoices.


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Handling objections4: Cards and

financeIt is not uncommon for managers responsiblefor invoice processing to look at cardsmistrustfully. This is because they believe thatcards will make the life of buyers easier, butwill leave the finance department with extrawork. This is due to the amount of dailymanagement required in a card programme,the fact that card programmes go against the

grain of commitment accounting and thenumber of level 1 transactions that needmanual intervention in order to process theVAT reclaim.

Understanding VAT reclaimBecause level 1 card transactions do notprovide any VAT evidence in the transactiondata, it is necessary to provide HMRC withevidence of the VAT paid on the transactionbefore this VAT can be reclaimed. This means

the buyer gathering a paper VAT receipt fromthe supplier and passing it to the financedepartment for the data to be keyed into thefinancial ledger.

This process entails the buyer collecting a VATreceipt at the point of sale, retaining the receiptand passing it on to the finance departmentalong with any transaction log at the end of themonth. Managing this process can bedemanding and frustrating as receipts are

often lost and not all suppliers provide VATreceipts as a matter of course. For example,the large super markets dont always provideVAT receipts from their tills, VAT receipts areinstead written out by hand at the enquiriesdesk. The problem becomes even morepronounced when orders are placed with thesesuppliers over the internet, as this can requirethe buyer to visit the store in order to collect avalid VAT receipt. It is worth noting that thisproblem is not unique to procurement cardsand if organisations choose not to implement a

procurement card programme the problem willstill be there for cash transactions.

Managing procurement cardsProcurement card programmes will require a

significant amount of administration.Cardholders contract spend will need to bemonitored, the number of times limits arereached will need to monitored, users will needto be trained, their training will need to belogged and cards will need to be returned ifthey are not being used sufficiently. All of thesetasks have to rest somewhere in theorganisation, and because the card transactiondata will be sent to the finance department, theresponsibility can often be given to finance.

Commitment accountingCommitment accounting is an accountingprinciple that has become available throughthe use of electronic finance systems.Commitment accounting allows anorganisation to quantify their outgoings andincomings and generate a financial statementat any time, giving finance staff the knowledgeof whether a department is overspendingagainst a budget. Procurement cards preventthis form of instant accounting becauseexpenditure is effectively being collated by theissuing bank ready to be sent to theorganisation at the end of the month. Thismeans that any financial statement createdusing the accounts software can only be mademonthly in order to be 100% accurate. Again,this problem is not unique to cards, and anyimprest accounts that exist in the organisationwill not be accounted for within a financial

statement.

It is possible to combat some of this concernby creating a weekly commitment accountingscenario, either by asking for weeklystatements from the issuing bank, or bycollating transaction logs on a weekly basis.However, asking for weekly statements willprobably incur extra costs from the bank, andmanaging transaction logs on a weekly basis islikely to create additional work. Alternatively, it

is possible to overcome the problem entirely byusing web based transaction logs that are


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linked to the finance system. Provided the logsare kept up to date, a full financial statementcan be generated at any time. The setting upand monitoring of such a solution will obviouslyrequire additional resource and expense.

The problem is that in almost all cases theseissues will have to be handled by the financedepartment. It is therefore easy to understandwhy some finance managers might viewprocurement card programmes a littlesceptically. However, all of this extra work hasto be offset against the benefits of using aprocurement card. The task of approving eachindividual invoice for payment and logging thatpayment on the financial ledger will, in the

majority of instances, be more time consumingthan reconciling the VAT for level 1transactions. Cards will also remove the task ofgenerating payment files, setting up BACStransactions and dealing with payment queriesfrom suppliers. Provided efficient processesare put in place, procurement cards will reducetime spent managing payments and will alsofree up buyers time.

Even if the estimates for times savings to begained from using a card are deemed to beminimal, there is still a strong argument forusing the cards to gain control and visibility ofthe organisations spend in areas where nonewas previously available.

Resource the management of aprocurement card programme.In order to counter the concerns of managerswho believe that procurement cards will create

extra work within their departments; it will benecessary to work with them to determine whattasks need to be completed and who will beresponsible for these tasks. Resources need tobe made available to the departments tocomplete this work. If this means providingmore resource than was originally estimated, itmay be a sacrifice worth making in order to geta programme up and running.

Take an informed approach to benefits

realisation

Once a programme is established, it will bepossible to review the activity in theprogramme, gather evidence on the time takento manage VAT records, process weeklytransaction logs and monitor cardholder

activity. This work can be compared againstthe manual processing of invoices. Using thisevidence will help to identify whether additionaltime savings are being made, or whether aprocess could be improved. Remember, thenon-fiscal benefits of procurement cards maybe sufficient to the organisation to warrant theirimplementation.

Use level 3 enabled suppliersIf the challenge of using procurement cards to

process level 1 transactions, is estimated to betoo burdensome then it may be better to usethe cards with suppliers who are level 3enabled. However, this will restrict theprogramme and will likely create work insupplier adoption as the organisation seeks tomove suppliers up to being level 3 merchants.


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Buying a

solution:

Details of how tobuy a procurementcard solution andcard managementsoftware.


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Buying a solution 1:procurement cards

What is a card service?Its important to understand what a card serviceis so that it can be purchased effectively. At itsmost basic, a card service is a service offeredby a bank (the issuing bank) that allows anorganisation to make use of the banks cardnetwork (Visa, MasterCard etc) to makepurchases with suppliers on that network. Aswell as the managed payment service, thebank will oversee the secure distribution ofcards, the provision of monthly statements andinsurance against theft or fraud. The bank mayoffer a number of additional services, includingthe provision of software and the opportunity tohave branded cards that feature the buyingorganisations logo.

Below is a diagram tracing the route of apayment between a cardholder and their bankand supplier and their bank.

Buyer Supplier

Suppliers BankIssuing Bank

2. RFP 3. Payment

1. Order

5. Payment

4. RFP

7. Payment

Goods

6. RFP

Figure 3, the payment process using a card.(RFP = request for payment)

Working with the issuing banksBanks are able to arrange different pricingmodels and provide more advanced solutionsfor different programmes. There are a range offactors that will affect the cost of managing a

solution for the banks. Bank costs will beincurred around setting up the solution and

managing the solution. So, if the solutionrequires a large number of cards with complexspend and control limits, as well asdepartmental charge points then it is likely thatthis will create a significant amount of work for

bank staff. If the amount of funds that theorganisation plans to place through thesolution are not significant, the bank may wishto charge the organisation for any specialistservices they require. This is because the bankearns money based on the value of thetransactions passing through the programme,rather than on a per transaction basis.

Account managementAnother critical aspect of any procurement

card programme is the amount of resource andsupport being offered by the bank. In somecases banks may offer additional functionality,a better rebate percentage or better technologyin place of a dedicated account manager.Depending on the buying organisationspriorities, additional services may be preferableto a dedicated account manager, butorganisations need to have a thoroughunderstanding of the support that will be madeavailable to them from the bank.

The GPC framework agreementThe first agreement for GPC was signed in1997, between the OGC and Visa. The firstagreement was available only to CentralGovernment Departments. The secondcontract, signed in 2002, can be used by allpublic sector bodies. Under this agreement theissuing banks can provide all public sectorbodies with a purchasing card solution for no

cost, for a guaranteed minimum set of termsand conditions.. The latest contract hasrecently been extended until 2010.

The agreement has been made with six of theVisa issuing banks. This means that any publicsector body can approach one of the GPCissuing banks and ask them to provide theGPC service, without any need for a tender.The contact details for the GPC issuing banksare listed at the end of this document. For

more details on the GPC contract and to


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download the latest GPC annual report, visitwww.purchasingcard.info.

Non-GPC schemesIf an organisation wishes, they can chose to

approach any card issuing bank to negotiate acontract for the supply of a procurement cardsolution. Choosing a non-GPC solution willoffer an organisation different functionality andthe option to use MasterCard. However, thisneeds to be weighed against any likely costand the demands of completing an OJEU orother tender when a well managed agreementalready exists.


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Buying a solution 2:Card management

information toolWhat do the tools do?Management tools offer varying degrees offunctionality. The most basic tools only providea method for transferring data from the bankfile directly into the organisations financesystem. More advanced tools provide theability to codify the spend that is being putthrough a scheme. Some examples of coding

are as follows:

1. Spend on a card can be coded by theidentity of the supplier the transaction wasplaced with. This can be done using the basicmerchant categorisation used by the cardcompany, or transactions with frequently usedsuppliers can be set up to be allocated todifferent cost centres.

2. The cardholder information can be used to

code spend by a number of other factors suchas job type, department or project.

3. Both the cardholder data and the spendclassification data can be used to allocate thespend to the organisations own pre-determined spend categories.

Tools can also include functionality to manageapprovals, and workflow. These tools are usedto allow cardholders and their managers to

have the ability to confirm that each purchaseon a statement is correct and has been madeappropriately.

Other tools may include the ability to managejob costings and VAT reconciliation (fortransactions completed using level two andabove equipment). The majority ofcommercially available integration tools willprovide some form of reporting functionality,which allows procurement card programmemanagers investigate the amount of use that

individual cards, departments or the schemeas a whole are progressing against targets foruse.

How much do the tools cost?

Tools can vary in price, with the most basictools costing several thousand pounds perannum and the most expensive tools costingaround twenty thousand pounds per annum.OGCbuying.solutions, in partnership withPCCL, have made an arrangement on behalfof all GPC users to make available an onlinereporting tool. This offering is expected to beavailable by April, 2007. The basic software,which will cost nothing will have somereporting functionality. Additional functionality

will be available at a cost and , for moreinformation, please check theOGCbuying.solutions website in early 2007 forupdates. As well as the software providers,some banks have also developed their ownsolutions and provide these for no or limitedcost, it is worth asking your card issuer orpotential issuers if they are able to provide anymanagement information functionality.

Embedded cards and software solutionsIn addition to card management informationsystems, it is possible to use cards inconjunction with electronic order processingsoftware, including purchase order paymenttools included in ERP systems and stand aloneprocurement tools such as marketplace, orspecialist procurement tools built aroundprocurement cards. When using thesesolutions, single cards are linked to a softwaretool that allows users to raise orders and send

the order to a supplier in an encrypted e-mail.The card is used as a payment mechanism bythe supplier and the cost of the purchase issettled with the card issuer in the normal way.

Is there an alternative to using anintegration tool?It is possible to manually copy the data foreach transaction from the card statement intothe organisations financial ledger, but there isa strong likelihood that much of the time saved

by not having to raise a purchase order is lostin the time required to undertake this task


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manually. Therefore we would recommendopting for a system that automates the uploadof data to the finance system as a minimumrequirement for creating efficiency.

Another alternative to purchasing a tool is touse any internal programming resource todevelop a basic tool for managing the transferof the bank file into the payments record on thefinancial ledger system. Whilst this solutionmay be appear to be a little rough and ready ifthe key focus of the organisation is to movedata into the financial ledger it can be a verycost effective method for securing timesavings.


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Implementing:

How to implement aprocurement card

programme,including how toresource theprogramme, how toprepare for cards,

how to engage withsuppliers, how toset up theprogramme andhow to roll out the

cards.


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Implementing 1:Resourcing a

programmePutting a procurement card programme intoplace requires a significant effort on behalf ofthe staff in an organisation and should not beunderestimated. Below is a list of theresources likely to be involved in animplementation.

Cross functional board

The ultimate authority for managing aprocurement card project should lie with theboard that has responsibility for meeting theGershon efficiency targets. The projectsponsor should report on the progress againstthe procurement card strategy and establishedtargets to the board on a monthly or quarterlybasis.Involvement: strategic / minimum workload

Project sponsor

The project sponsor should be a managerwithin the organisation with the authorityrequired to support the programme and ownthe responsibility for the implementation. Theproject sponsor needs to have the ability toraise the profile of the initiative and to cutthrough objections and obstacles.Involvement: strategic / varied workload

Project managerThe project manager will work closely with

finance, procurement and the departments thatwill be issued with cards. The project managerwill take ultimate responsibility for ensuring thatthe procurement card programme aligns withthe agreed strategy and that a working solutionis put into place. The project manager mustalso work with the IT department, bank andsoftware providers to co-ordinate the technicalimplementation. The project manager will alsowork to co-ordinate the supplier adoptionefforts of the organisation.

Involvement: detailed and strategic, highworkload.Technical teamResponsible for overseeing the technicalimplementation, this team will be made up of

staff from the bank, the organisations own ITdepartment and, if necessary, a technicalconsultant for the card management softwarebeing put into place. This team will implementthe project in line with the organisationsstrategy for procurement. For more informationon technical implementation seeImplementation 4: Set up on page 34Involvement: detailed, high workload for shortperiod of time.

Procurement managerThe procurement manager will work with thetechnical team and project manager to help setup the categorisations to be used as well asthe merchant category blocking and spendlimits.Involvement: operational, low workload

Finance managerThe finance manager will work with thetechnical team and project manager to ensurethat the data integration meets therequirements of the finance team and toestablish a process for managing VATreclaims.Involvement: operational, low workload

Procurement card managerOnce the implementation is live, the task ofmanaging the programme will need to be givento a staff member. The procurement card

programme manager must ensure that theproject remains aligned with the procurementcard strategy and to monitor processes,contract compliance and usage. Theprocurement card manager will usually belocated within finance or procurement and willbe charged with reporting to the projectsponsor.Involvement: operational, workload will dependon the number of cards in use

Procurement card administrator(s)


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In addition to the procurement card manager,there will be a requirement for someadministration resource to help manage theprocurement card programme. This work willinvolve, overseeing data uploads to the finance

system, handling the VAT evidence, collatingtransaction logs, overseeing approvals andidentifying maverick spend.Involvement: operational, workload will dependon the number of cards in use.

Efficiency managerIn order to recover cashable efficiencies from aprocurement card programme, there will needto be some involvement from a manager whois responsible for operational efficiency in the

organisation with the remit to restructure partsof the organisation in order to recover timesavings made by both buyers and invoiceprocessing staff. This manager may have awide brief for managing operationalefficiencies, beyond the efficiencies linked toprocurement cards.Involvement: strategic, workload will dependon the wider efficiency initiatives in place


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Implementation 2:Preparation

ImplementationPrior to distributing any cards, the technologymust be implemented. In almost all instances,putting the technology into the organisation isnot difficult, the demanding part of the work ispreparing the organisation for the newtechnology.

Policies and proceduresA clear and simple explanation of theorganisations policies and procedures hasproven to be a valuable asset for the mostsuccessful card programmes. This documentneeds to include details of four key areas:audit, administration, procurement andcardholder instructions.

Implementation planningRegardless of the scale of the implementation,the organisation needs to work with the keystakeholders (listed above) to agree an

implementation plan. This plan needs to detailthe resourcing requirements of animplementation and the estimated timescalesfor the implementation. If a pilot project is to berun first, the plan needs to detail how long anypilot will operate for and what measures will beused to determine whether the pilot is asuccess.

Involvement of auditAudit will be responsible for ensuring that the

process for comparing transaction logs to themonthly statement is sufficiently robust to beable to identify any instances of fraud and thatthe risk of any fraud is minimised. Audit willtherefore have a key role in determining thespend limits of cardholders. Audit will need toestablish a policy for auditing statements forerrors or fraudulent transactions. The policy forauditing statements can either becomprehensive and include an audit of all cardstatements, or can use a sample of

statements.

Card administrationAdministration policies need to be establishedin order to detail how data will be processedonce the file has been received from the bank.

Policies needs to include information about theretention and storing of receipts, the allocationof spend to budgets, VAT reconciliation andthe integration of procurement card spend withany commitment accounting principles inplace.

Cardholder guideIt is essential to draft a short document forcardholders to remind them of theirresponsibilities when using cards. A cardholder

guide should include details of the following:

How and when cardholders should use thecard, including using it for online purchases. The importance of the procurement cardscheme to the organisations efficiency targets. The importance of buying on contract. A list of the suppliers the organisation hascontracts with. Details of the disciplinary measures formisuse. Procedural information such as details of thespend limits in place on their cards and what todo with when a cardholder has forgotten theirPIN. Details of any new purchase procedures. How staff should redeem loyalty points, e.g.Nectar points, accrued whilst makingpurchases with a procurement card. When, and if, cards are to be used by morethan one member of staff.

Most organisations choose to requirecardholders to reconcile their purchases everymonth in a transaction log. The cardholderguide needs to explain how cardholders mustundertake this task and where to send theinformation.

All issuing banks should have a templatecardholder guide that can be used as a basisfor the organisations own guide. Other public

sector organisations with card schemes will


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have cardholder guides that may also behelpful.


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Implementation 3:Supplier

engagementAlready enabled suppliersUsing the acceptance analysis, (see Businesscase 1: Analysis on page 6), an organisationwill have a list of suppliers that already acceptpayment via card. It will normally be a relativelysimple task to bring these suppliers into theprocurement card programme. The projectmanager can write to the supplier to inform

them that the buying organisation wishes paythe supplier by procurement card. The lettershould request that the supplier confirms theyare willing to accept payment by card.

In some instances, even though a supplier hasthe facility to accept payment by cards, theremay be some restrictions on the type oftransactions the suppliers are willing to acceptpayment by card for. If these are self imposedrestrictions it will be worth discussing with the

supplier their reasons for these restrictions andexplaining the benefits to both the buyingorganisation and the supplier of using aprocurement card.

If the supplier is willing to accept payment byprocurement card the next step will be toestablish what level of VAT data the supplier isable to provide (for an explanation on thedifferent levels of data see Handlingobjections 3: Management information on

page 18). The buying organisation may wish todiscuss with the supplier the possibility ofproviding a higher level of VAT data in order tomaximise the efficiencies achieved through theprocess.

The increasing popularity of procurementcards in the public and private sectors, meansthat a number of suppliers are choosing tomove to providing level 3 data. At the sametime, a wider variety of solutions are appearingin the level 3 acquiring market making it easier

for suppliers, even those who take large, orinfrequent payments to accept payment bycard. For more details on these solutionscontact your issuing bank.

Working with suppliers who do not acceptprocurement cardsWhen approaching suppliers who are not setup to receive card payments the buyingorganisation must focus on educating thesuppliers to understand the opportunitypresented by procurement cards. Suppliersneed to understand why the organisation ischoosing to use procurement cards, what theimplication is for the supplier and how to makethe move to become a card acceptance

merchant. Organisations should be prepared touse a full range of methods to communicatewith suppliers, including letters, e-mails,meetings and phone calls. Issuing banks canhelp organisations define their supplieradoption strategy.

It is crucial that all supplier engagementmaterial details the benefits to the supplier ofusing procurement cards. In order to make aninformed decision, suppliers need to cost theeffort of managing the traditional method ofpayment against the benefits of using cards.The benefits are seen below:

Prompt payment.Cost savings through process reduction.Reduces the need for credit controlmanagement.Invoice queries diminish.Duplicate invoice requests diminish.

Empowers suppliers to do business with othercardholders and other public sector buyingorganisations that use procurement cards.Improves relationship with the buyingorganisation.

In order to communicate the importance ofworking with suppliers who accept payment bycard, an organisation can ask supplierssubmitting tenders to state whether they areable to accept cards or would be willing to

accept them should they win the business.This will secure transactional efficiency into


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future transactions for both the supplier andthe buying organisation.

Some suppliers may be willing to offer adiscount to buyers for prompt payment through

the use of a procurement card. Alternatively,some suppliers may wish the buyer to coverthe cost of the MSC. When approachingsuppliers to discuss the use of procurementcards, it may be useful to open anyconversation by asking what discount would beavailable in exchange for early payment ofinvoices.

If a supplier is adamant that they do not wish toaccept payment by procurement card it will be

necessary for the buying organisation toassess the benefit to be gained throughtransacting with the supplier by procurementcard against the value of finding an alternativesupplier. If the supplier works in a verycompetitive market, the argument for changingsupplier may be relatively simple. If the reverseis true and the supplier provides a uniqueservice or preferential terms there may be avalid case for continuing with the supplierdespite their reluctance to accept payment byprocurement cards.

Suppliers can also conduct an online businesscase for accepting card payments usingwww.purchasingcard.info


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Implementation 4:Set up

In order to implement a procurement cardprogramme all the data on individualcardholders and the appropriate spend limitsneeds to be co-ordinated before the cards canbe distributed.

ControlsEach cardholder will need to have theirmonthly and transaction limits documented,whilst programme and departmental limits willalso need to be set up. In organisations thatare choosing to implement a large number ofcards, a hierarchical design for different levelsof cardholder is usually drawn up, and spendlimits applied to each level as appropriate. Thishierarchy of cardholder levels can also be usedto define the merchant category blocks that theorganisation may wish to use.

Many organisations choose to implementcontrols that are seen as necessary in the first

instance and are then replaced because theyare deemed to be restrictive. It is worth notingthat the instances of employee fraud in publicsector procurement card programmes hasbeen very low.

Cost allocationThe final piece of preparation will focus on theway that costs will be allocated to differentbudgets. Card costs can be allocated todifferent cost centres according to the

merchant category of the supplier being usedor by the identity of the cardholder (provided apiece of integration software is in use).Alternatively, cards can be allocated their owncost centre. This work will require theinvolvement of staff from the financedepartment.

Card productionUsing the hierarchy, the organisation can listthe individuals who will become cardholders.

Each cardholder will have to complete anapplication form and send it to the issuing

bank. Using the information on spend controls,merchant blocks and other information, thebank can assemble the scheme and start theproduction of the cards, which will usually besent to the procurement card manager.

As well as the card production, theorganisation will need to implement any cardmanagement information solution. This workwill require the involvement of the ITdepartment and may also require theinvolvement of a consultant with anunderstanding of the software in use.

The work required to implement the solutionwill depend largely on the functionality

available in the solution and the way in whichthe organisation wants to use the tool. Adviceon how best to implement these tools can besought from individual suppliers.

It is likely that the card management softwarewill include some reporting functionality. A setof reports will need to be set up to help theprocurement card manager identify how theprogramme is progressing against targets.Common reports will include the following:

Organisational and departmental activity. Individual cardholder activity. Merchant category activity. Exception and limits reporting

Targets for useAll procurement card schemes should monitorthe purchasing activity on the cards and settargets for individual card holders, departments

and the organisation as a whole. Targets willallow managers to identify how they areprogressing with the project and how best torecover the efficiencies gained from using thecards. Targets should therefore be set for anumber of activities including the following:

Number of cards in use. Number of transactions per month. Number of transactions per card per month. Ratio of paper to card transactions with

suppliers adopted to procurement cards (splitby department if possible).


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Number of suppliers adopted to theprocurement card scheme. Total value of spend placed through thescheme

Implementing a successful procurement cardprogramme requires organisations to be bothcommitted and co-ordinated. Soundpreparation in the form of spend and processanalysis is likely to make a significantdifference to the work of implementing aprocurement card programme.


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Implementation 5:Rollout

CommunicationThe first step in rolling out a card programme isto communicate with the cardholders. Eachcardholder needs to receive a copy of thecardholder guide as well as a copy of theprocurement card programme policy andprocedures. It is recommended that thedocuments are also made available through acorporate intranet as well.

TrainingThe staff most affected by a procurement cardimplementation will be cardholders themselvesand staff working on transaction reconciliationin the finance department. All of these staff willneed to be trained in order for them tounderstand their new responsibilities. Someadditional staff such as line managers will notbecome cardholders but will need tounderstand how approvals and otherresponsibilities will change.

As part of the training it is advisable to paintthe big picture so that staff know why theorganisation is changing their procurementprocedures. Training materials will need to beproduced, banks will likely have some templatematerials available for use. Materials need toinclude the following:

Why the cards are being used. How the organisation will benefit.

How cardholders have been selected. How to use the tool. How to reconcile statements. How cardholders will benefit. The consequences for misuse and some ofthe processes used by audit.

Training does not need to be face to face, butall cardholders mustbe trained prior to beingissued with a card. There are increasinglyinnovative approaches to training being used

by buying organisations. For example, onepublic sector body has initiated an intranet

based training programme that requires apass grade before cardholder can be qualifiedto use the card.

Facing resistance

In some circumstances an employee maydecide that they do not wish to receive or use acard. Whilst the employee may have legitimatefears about using the card, employeereluctance is not a sufficient reason to continueto use out of date and inefficient processes. Inthis instance, unwilling staff need to beidentified and approached by a senior managerto address the problem directly.

Distributing cards

Cards can be distributed by inviting thecardholders to sign for them in the finance orprocurement department offices. However,many organisations are choosing to see thedistribution of cards as an opportunity forsenior managers to make a very clear, visualstatement of their support for the procurementcard programme. If possible, invite the ChiefExecutive or another senior manager to makean explicit statement of support by beingpresent at the issuing of the first cards. Anevent of this nature will increase the value ofthe cards in the eyes of the cardholders andwill help staff to make better use of the cards.

Cardholders and targetsWhere targets for using cards are going to beused, it is important to communicate whatmeasurements will be put in place and how theperformance of both cardholders anddepartments will be monitored.


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Running aprogramme:

Guidance on how to

run a programme,including the day today management ofa programme,securing

compliance tocontracts andrecovering benefits.


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Running aprogramme 2:

Securing contractcomplianceAdhering to contracts is the root of goodprocurement practice and wherever possibleprocurement card programmes should befocused on delivering contract compliance.

Whilst desktop based procurement systems,

such as marketplace, can be used to ensurebuyers only use contracted suppliers, aprocurement card can be used by a cardholderin any supplier that accepts payment by thecard held by the buyer. So, regardless ofwhether theres a contract in place, providedthe supplier category is not blocked the cardcan be used. This creates a challenge forprocurement managers whose savings targetswill be based on making sure that buyerspurchase only certain items from certain

suppliers. There are a number of actions thatprocurement managers can take to ensurecontract compliance when using procurementcards.

Use lodge or embedded cardsEmbedding cards is the only way to restrict acardholder from exercising their own choicewhen selecting a supplier. A lodge card is acard that resides with the supplier. Lodgecards allow multiple buyers to place an order

for goods or services and have the charge forthe goods and services placed on a cardprovided an appropriate reference number isquoted on the order. At the end of each month,the bank file is reconciled with the transactionlogs of buyers to ensure that no errors havebeen made. An increasing number of suppliersare prepared to accept lodge cards, many ofwhom provide level 3 data.

Train cardholders thoroughlyTo prevent cardholders from purchasing fromsuppliers that arent on contract, it helps ifcardholders and their managers are informedabout which suppliers to use. Equally important

is ensuring they have a real understanding ofthe importance of procurement and the valueof better procurement to the authority.

Discipline cardholders who buy off contractCardholders who consistently buy off contractare costing the organisation money. If theorganisation is prepared to address persistentoffenders in the same way as staff who attemptto defraud the authority, a clear signal can besent to cardholders that the need to use

contracts is taken seriously by theorganisation.

Monitor cardholders activity 1The most thorough way to do this is to checkeach card statement for off-contract spend.However, whilst this is likely to be the mosteffective it is also the most work intensive andnot feasible unless the programme has only ahandful of cards. Instead the organisationshould routinely take a random sample ofpurchases from card statements and reviewthem in order to see if any off-contractsuppliers have been used.

Monitor cardholders activity 2As well as taking a random sample ofpurchases, managers should choose to targetindividual cardholders for signs of off-contractspend. Target cardholders will include,cardholders who have previously bought off-

contract, new cardholders and the highestspending cardholders.

Monitor the use of rival suppliersIn situations where a contracted supplier has awell known rival supplier, managers shouldimmediately flag any purchase through a rivalsupplier for investigation. This will forcecardholders to understand that their activity isbeing monitored closely, dissuading them frompurchasing off-contract in the future.

Make departmental managers accountable


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If a cardholder is being given the ability tomake purchases without prior written approval,this does not absolve departmental managersfrom monitoring the purchase activity of theirstaff. Departmental managers need also to be

responsible for making sure that cardholdersare complying with contracts. This shouldmean encouraging suppliers to use thecontracts in place and monitoring thetransaction logs of cardholders. Managers whoroutinely allow cardholders to purchase offcontract should also be subject to disciplinarymeasures.

Use level 3 suppliersOrganisations can restrict their use of cards to

suppliers offering level 3 data. With line itemdetail data it is easier for procurement staff tosee exactly what is being bought and whetherany goods or services purchased could havebeen bought through a contract.


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Running aprogramme 3:

Identifying andrecovering thebenefitsTime savingsProcurement cards save time in two ways, thetime the cardholder spends making thepurchase is reduced, and the time spent

receipting goods and approving an invoice forpayment is also reduced. Recovering thesetime savings requires different approaches inorder to reduce the cost of resourcing or toreallocate staff to the front line.

Volume of transactionsTime savings can only be realised as cashablesavings if the number of temporary orpermanent staff in the organisation is reduced.Non-cashable efficiencies can be recovered

through reallocation of staff. In both cases,some form of departmental reorganisation willbe required. In a department making a largenumber of purchases, if four or five staffmembers are responsible for managing thosepurchases it may be possible to change therole of one these staff members. However, todo this the time savings made on eachpurchase must accrue to either a full-timeequivalent (FTE) post or half-time equivalent(HTE) post.

One FTE post is equivalent to over 90,000working minutes in a year. This means that anew process that saves ten minutes each timeit is run, still needs to be repeated ninethousand times in a year before accruing the90,000 minutes required for an employee to beable to be moved from processing purchaseseither to another task, or out of theorganisation.

Cardholder time savings

Time saved by the cardholder is the mostdifficult to realise. For example, cardholdersare not always professional buyers, they canbe staff who complete a wide variety ofadministrative or value adding tasks. Because

responsibility for purchasing sits with so manyindividuals, the time saved from more efficientpurchasing by a cardholder may amount toonly a few minutes per week. Certainly notenough to warrant reducing the number of staffcompleting the work and reallocating amember of staff to another role in theorganisation.

Secondly, the amount of time saved dependson the process that was in place prior to the

cards being used. Buyers dont alwaysundertake the time consuming orderingprocedures they are expected to. Therefore, ifa buyer was circumventing procedures andsimply making a phone call to the supplier thenthe time saving available from using a card willbe annulled.

The most effective way to recover time savingsfrom cardholders, is to concentrate as much,routine buying activity into as few staff aspossible in a department. This will allow thesavings to accrue in a way that may allow for ateam or department to be restructured.

Invoice time savingsIt is common for the management of card dataand reconciliation of the card data into financesystems to be centralised. Where cards areimplemented into an organisation withcentralised invoice processing the task of

recovering efficiency is much easier, becausethere is a high concentration of peopleundertaking an inefficient task that is to bereplaced with a new more efficient task.

Even where invoicing isnt centralised, if themanagement of procurement cards iscentralised, provided enough transactions arebeing processed it is possible to restructure themanagement of invoicing to free upadministrative time in the departments.


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Invoice management time savings are alsoincreased when card management software isbeing used as this reduces the need formanual keying of information, often from handwritten purchase orders.

Recovering the benefitsCollating enough time saving to allow for staffto be moved requires evidence. It is thereforeadvisable for a programme to have beenrunning successfully for at least six monthsbefore attempting to recover time savings.Using timings for the previous process and atiming of the new process, it is possible todetermine a time saving for each transactionmade when using a procurement card.

Multiplying these timings by the number oftimes a transaction is made in a department ororganisation will give an indication of the timeto be saved.

If this time amounts to more than 45,000minutes, then an HTE can be saved, if the timeamounts to more than 90,000 minutes then anFTE can be saved. If the time saving is lessthan either of these figures, but theorganisation is using temporary staff tocomplete administrative work, the use of thistemporary resource can be reduced by theequivalent estimated time saving.

Material savingsIt is worth noting that procurement cards canalso save money by removing the need forpostage, faxing and storage space, as well asexpensive printer cartridges and order pads.Whilst these savings are likely to be minimal,

once accrued, they may be sufficient to meritrecording as a cashable saving.

Non-cashable savingsUsing procurement cards may also create arang

Implementing Purchase Cards

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