Procurement cards, or P-cards, are marketed for their ability to bypass traditional procurement procedures and enable speedy processing and ultimately efficient utilization of resources. Despite these benefits, P-cards are still a no-no for most organizations because of the multiple challenges associated with their use.
In today's procurement scenario, when single-line solutions are being replaced by integrated technologies, it is worth analyzing whether P-cards bring real benefits to organizations looking to adopt best-in-class practices.
What drives the need for procurement cards?
When it comes to procurement, most organizations do not really differentiate transactions based on their value, so they are likely to use the same purchase order (PO) process for a $100 and a $1 million transaction. Procurement cards find relevance where they help executives consolidate invoices involving recurring transactions, such as expenses for travel, stationery, and maintenance, into a single statement. This process, as opposed to conventional PO processing, brings significant savings in administration expenses. According to a First Data study, one P-card payment is equivalent to an average of 3.3 invoices in today's typical business environment.
P-cards can also strengthen e-procurement by streamlining payments. Transactions involving the cards can be easily integrated into the procurement chain. All transaction details, such as product description, quantity, price, tax components, and shipping charges, are updated in the system automatically and much faster than the conventional PO processing methods. Savings can be even greater if the transactions are effectively integrated into an organization's key financial and accounting systems.
It's a fact that procurement cards reduce manual intervention in PO processing, so payment cycles are reduced — from the typical 30-45 days to about 4-5 days. In fact, the cards have created a new business model by converting the accounts receivables into procurement card clients. The transactions happen between the supplier and the cardholder and, in turn, the bank. Electronic ordering, payment, and reconciliation are done by email. Financial teams can get up-to-date tax and purchase data. Single monthly payments to the bank and simplified credit procedures help streamline the process further. Another advantage of the procurement card is its ability to consolidate all types of purchasing activities — online, by phone, in person, email, and so forth.
Be aware of the risks
Procurement cards also bring challenges to organizations. A P-card, like a credit card, gives cardholders discretionary purchasing freedom. This freedom may open an organization's procurement system to abuse. Often users end up selecting suppliers in haste, eliminating the organization's ability to negotiate in key transactions. This results in overspending. In addition, buyers will have to bear the transaction fee that P-card providers charge to the suppliers; that fee will be indirectly reflected in their invoices.
The cards might also jeopardize the supplier management system as they fail to adhere to strict compliance and service level agreement (SLA) practices. Lack of PO level terms and conditions can bring conflicts between the parties involved. Also, products/services purchased with a card are not usually covered by insurance, so such transactions can create a loophole in the supplier management process.
Relevance of P-cards in modern procurement
Now, the question arises whether P-cards can find a place in modern procurement scenarios. With the rapid evolution of e-procurement, organizations are moving to advanced solutions that help them automate the procurement process, regardless of the number of transactions and suppliers they handle on a daily basis.
The cards can be beneficial for organizations that still rely on conventional paper-based or hybrid practices in procurement, but they may not be the winning strategy for those that have adopted, or are planning to adopt, modern practices. Modern procurement concepts, as adopted by best-in-class organizations, revolve around implementing best practices in e-sourcing, supplier management, invoice processing, PO processing, contract management, and more. With modern technologies, organizations can build a strategy that not only simplifies each procurement process, but also brings huge operational savings.
Single-line solutions, like procurement cards, may help improve a fraction of the procurement process, but their future in streamlining the entire procurement process remains questionable. Has your organization made the leap to using P-cards? Share your experiences in the comment section below.