Delivering the Benefits of Procurement Cards in the UK Public Sector

Transcription

1 PUBLIC SECTOR In collaboration with Appropriate Fit Procurement Delivering the Benefits of Procurement Cards in the UK Public Sector

2 Table of Contents 1 Introduction 2 Delivering Public Services in Today s Economic Environment 2 The Challenges Facing Procurement Today 3 The Role of Procurement Cards in Procurement and 3 Purchase-to-Pay Strategy 2 Programme Management 6 3 Segmentation 7 Segmentation by Customer Characteristics 7 Segmentation by Commodity 8 Selling the Concept and Delivering Benefit 9 4 MasterCard Products 12 incontrol 12 Smart Data OnLine 12 Information Hub 12 MasterCard Optimiser 13 VAT Recovery Service 13 5 Conclusion 14 1

3 1 Introduction Providing world-class public services in a challenging economic climate In the current economic environment, an efficient procurement process can be instrumental in driving efficiency improvements and reducing cost. 1.1 Delivering Public Services in Today s Economic Environment Public sector organisations in the UK are under increasing pressure to provide better services to stakeholders in terms of quality, value, prompt payment, security, transparency and personalisation. In addition, there is a clear requirement to improve efficiencies to support a high level of sustainable service delivery and, in the current economic climate, organisations are expected to do this with fewer resources in real terms. The Operational Efficiency Programme (OEP) report, published alongside the Budget for 2009, forms a key part of the Government s drive to achieve greater efficiency savings across public spending. The report suggests potential savings of 15 billion by compared with spending, of which 6 billion is to come from collaborative procurement. Previously, the European Union s 2010 egovernment Action Plan called for improvements in integrated eservices provided by governments to the public. The Plan states that electronic procurement and invoicing can result in savings in total procurement costs of 5% and reduce transaction costs by 10% or more. The importance of procurement in driving public sector improvements can also be seen from the Procurement Capability Reviews (PCRs) carried out by the Office of Government Commerce (OGC). The PCRs have been used to assess how far UK government departments meet the demanding procurement standards required to deliver value for money services, now and in the future. The reviews highlight the need for an overarching procurement strategy, especially where organisations are decentralised and fragmented. The OGC also advocates the use of procurement cards within government departments as a step towards achieving process efficiency savings. Procurement cards were originally developed to modernise and improve the efficiency of an organisation s low-value procurement process. However, they should now be seen as part of a solution that goes beyond low-value orders. In addition to fulfilling purchasing and payment requirements, procurement cards bring optimal benefits when used as part of an overall procurement and payments strategy. 1 Operational Efficiency Programme: Final Report, April 2009, p egovernment Action Plan: Accelerating egovernment in Europe for the Benefit of All, Commission of the European Communities, April 2006 Delivering the Benefits of Procurement Cards in the UK Public Sector 2

4 Procurement cards have a role to play in the end-to-end procurement process Procurement cards are not just about low-value order processing but are an important contributor to overall efficiency and effectiveness. (The) GPC III complements the e-procurement process and should not be regarded separately. Maximum benefits available through using GPC will be more quickly realised and maximised if you treat the project as a re-engineering of the purchase to pay process. GPC Best Practice Guide, Buying Solutions online 1.2 The Challenges Facing Procurement Today The OEP report states that whilst the UK public sector has the potential to become an extremely powerful purchaser, in general procurement of common goods and services is fragmented; management information on government expenditure is regarded as poor; and the procurement environment as a whole is seen as complex and uncoordinated. Public sector organisations are also seen to be challenged by a lack of skilled resources and a lack of structure in strategic supplier relationship management processes. Despite these challenges, with a non-pay expenditure in excess of 200 billion, the UK public sector holds tremendous potential for improvement using procurement card services. A key element of success is to establish a clear and overarching procurement strategy that takes into account market and category segmentation and in which procurement cards are viewed as an important component of the overall purchase-to-pay (P2P) strategy. Procurement cards enable an organisation to achieve process efficiencies, provide better management and accounting information, enhance supplier relationships and contribute to a sustainable procurement environment. Rather than merely a low-value order tool, procurement cards are seen as having an important role within a suite of P2P tools directly contributing to an organisation s efforts to achieve the efficiency savings targets set by the public sector agenda. The e-payments and smart payments arena has dramatically changed with exciting new products that can contribute significantly to the percentage of payments processed electronically. Physical cards no longer require to be issued. A step change has taken place through the development of limited controlled payment numbers. Compliance - a major contributor to the delivery of savings from procurement - can now be driven through e-payments. 1.3 The Role of Procurement Cards in Procurement and Purchase-to-Pay Strategy Procurement cards have been around for over 15 years the first purchasing card was used in the early 1990s in the UK and they have been used traditionally to improve efficiencies in an organisation s low-value procurement process. The original Government Procurement Card (GPC) framework agreement was launched in October 1997 by HM Treasury for use by Central Civil Government, its agencies and non-departmental public bodies. The rationale behind the GPC was to enable authorised staff to conduct low-value transactions quickly and to consolidate large numbers of invoices from multiple suppliers into a single monthly invoice, thus removing process costs and improving management information, resulting in a saving of 28 per transaction. 3

5 Procurement card benefits The procurement card is a strategic tool that provides clear benefits to customers, suppliers and the economy. Process efficiencies Faster delivery of goods and services, consolidated invoices, improved cycle times Better information automated audit trail for accounting and procurement systems; timely and accessible management information Improved cashflow and liquidity for SMEs through prompt payment Increased compliance with contracts Cost reduction 28 saving per transaction of a procurement card payment over a traditional invoice payment Cashable savings from negotiated pricing and rebates Discounts to customers in return for early payment Reduced procurement costs from using the Buying Solutions Framework Agreements In addition Economic benefits prompt payment can be equivalent to a cash injection to kick start the economy Sustainability an efficient procurement system ensures a sustainable procurement environment. Although GPC usage has risen over the last ten years, the capacity for growth remains high. The GPC is the most sustainable and successful procurement solution in use by government today 3 and there is still room for improvement. Buying Solutions new frameworks (GPC III) represent a major increase in possibility. Following the initial implementations of ERPs, e-marketplaces and e-procurement there is now a greater maturity across the UK public sector on purchase-to-pay solutions. Having invested substantially in ERPs and e-procurement, public sector organisations are now looking to secure greater efficiencies from their investments by integrating with other esolutions. Procurement cards can be a beneficial tool in addressing many of the key focus areas in the UK public sector agenda. For example, the Glover Review states that, in Accelerating the [Small and Medium Sized Enterprise] SME economic engine, there is a need for public sector organisations to work in an innovative, inclusive manner for a more transparent procurement process. SMEs constitute more than 99% of businesses in the UK, employ 59% of the private sector workforce and make up 52% of business turnover 4. A critical issue for SMEs is cash-flow and liquidity: across the UK, they now face a 26 billion late payment problem a 40% increase from 2008 figures and a staggering additional 7.4 billion of overdue late payments 5. Procurement cards make a difference as a speedy payment mechanism. New research from commercial credit reference agency Graydon UK suggests that the government pledge to ease the cashflow problems faced by small firms through the payment by government departments of trade invoices, in 10 rather than 30 days, is taking longer than expected to take effect. The survey, conducted in March 2009, reveals that just 1% of small businesses questioned, which are currently supplying government agencies, are now receiving payments due to them within the pledged 10-day period. With the average payment in the UK currently standing between 30 and 60 days, these results indicate that the majority of SMEs consider that government departments are still no different to others in the market, in terms of payment procedures. Further afield, European businesses spend a minimum of 25 billion on chasing late payments from consumers and businesses each year. Research by leading credit management services company Intrum Justitia shows that European governments could provide a 65 billion stimulus to their home economies by simply paying invoices owed to suppliers in full and on time. This could prove a real lifeline to European businesses and in particular SMEs, who are fighting for survival in these challenging times. 3 Focus on e Procurement Purchasing Power, Government Opportunities Magazine June Glover Review: Accelerating the SME economic engine: through transparent, simple and strategic procurement, November 2008, p7 5 Independent research conducted by Continental Research Delivering the Benefits of Procurement Cards in the UK Public Sector 4

6 The social care system in the UK has also recently been under scrutiny, with increasing demands for more effective and efficient service delivery. One response to the challenge of consistent and fair funding for social care has been the advent of personal budgets and the personalisation of care in the health sector would involve paying the individual budget onto a prepaid card, rather than into a bank account. Analysis of prepaid opportunities suggests potential time savings of up to 135 days per year and cost savings of up to 21%. MasterCard s solution to the SME issue The case for using procurement cards in an overall P2P strategy is strong but the take-up has been disappointing. Despite the rise in usage of procurement cards since they were first introduced and their potential to improve efficiency, the real benefits have rarely been maximised. The secret to a successful implementation is to adopt three key strategies an implementation approach grounded in effective programme management, segmentation in launch and roll-out and the deployment of the right products for the right outcomes. MasterCard provides an effective solution as a global e-enabled payment platform to accelerate prompt payment, cash-flow and liquidity for UK SMEs. MasterCard can facilitate payment to SMEs in two to four days exceeding the UK government commitment of 10 days thereby improving cash-flow and liquidity, and reducing the administrative costs of chasing late payments whilst providing time savings to SMEs. 5

7 2 Programme Management For a procurement card implementation to be successful and sustainable, it is crucial for there to be strong programme management from the outset. Criticism of some e-procurement implementations is that they are perpetual pilots that never fully infiltrate into the organisation as a whole. A solid programme management approach involves clearly defined plans, milestones, target benefits and risk management and regular review of performance. An example of a successful P2P programme management approach to implementation can be found in the eprocurement Scotl@nd programme: Figure 1: Best Practice Case Study: eprocurement Scotl@nd The eprocurement Scotland (eps) programme is an example of a successful procurement transformation programme that focuses on three key elements: A transformation approach: The implementation of the eprocurement Service has been deployed as a large scale change programme with the eprocurement technology as the enabler. Collaboration: The eprocurement service has been used as a vehicle for collaboration that began with the sharing of supplier adoption resources and catalogue content. This has developed into organisations working together and exploiting opportunities of better buying. This will be enhanced further by the introduction of the eps collaborative catalogue management system currently being introduced to allow content to be easily shared nationally and across sectors. Sustainability: Focus has always been on the delivery of long-term benefits and not on quick fixes. eprocurement Scotl@nd is one of the most comprehensive and successful e-government initiatives in the world. John Swinney, Finance Minister, February 2008 Delivering the Benefits of Procurement Cards in the UK Public Sector 6

8 3 Segmentation The UK public sector is fragmented and varied in terms of size, expenditure and ambition, therefore the need for market and commodity segmentation is important in the effective use of P2P solutions. There is no one-size fits all strategy and different organisations with varying levels of expenditure and varying procurement strategies will need different routes to market. It is therefore necessary to perform a market and commodity segmentation analysis to develop different methods of implementing a procurement card system to find the best fit for an organisation. 3.1 Segmentation by Customer Characteristics Figure 2 below illustrates the role of segmentation in identifying the most effective method of implementing procurement cards within an organisation s procurement strategy. This has come out of a number of workshops held with issuing banks that see segmentation as follows: Figure 2: Performance and development framework High 1 2 Expenditure Low 3 4 Low Level of Ambition High The horizontal axis shows the ambition of an organisation in terms of investment in e-procurement, high-level sponsorship and support services, whereas the vertical axis shows the size of expenditure. Traditionally, as a purchasing tool, procurement cards have featured in the bottom left quadrant despite having applicability across the board. Procurement card users can be segmented into the four quadrants as shown in the diagram. An organisation with large expenditure but low ambition (Quadrant 1) will require senior level sponsorship and a strong business case for a procurement card implementation. 7

9 With greater ambition, an organisation with high levels of expenditure (Quadrant 2) should build procurement cards into its overall P2P and e-procurement strategy. This type of organisation would advocate continual improvement and have an ever-increasing interest in purchase-to-pay solutions, making it an ideal platform for an optimal roll-out of a procurement card strategy. When an organisation has a smaller level of expenditure and low ambition (Quadrant 3), it would initially be looking for simplicity, ease of implementation and a self-service product. Therefore a more traditional or basic procurement card implementation will be of benefit. However, low expenditure need not be a barrier to organisations with high ambition (Quadrant 4), as they could collaborate with other organisations to optimise benefits from a procurement card strategy. 3.2 Segmentation by Commodity An organisation typically has a mix of low- and high-value orders and contracts and procurement cards have generally been used for low-value order processing. Whilst these will bring quick savings, the real benefits will be seen from looking at the overall return on investment of implementing a procurement card system as part of a sourcing strategy. To maximise the benefits of procurement cards, a clear purchase-to-pay channel strategy has to be in place, making effective use of both procurement cards and other e-procurement solutions for different categories of expenditure. By characterising and prioritising commodities according to volume and expenditure, an organisation can identify the areas in which procurement cards can be most beneficial. The Spikes Cavell and MasterCard e-enabled payment Information Hub allows for detailed spend and supplier analysis, which can help with deploying procurement cards within an organisation, and this will be discussed in more detail in Section 4. The way in which goods and services are bought can also affect the procurement strategy deployed by an organisation. For example, some goods may be purchased by users in remote and variable locations, such as maintenance engineers, TV production crews or social workers. In these cases, procurement cards can be allocated with specific budgets and preferred suppliers, to eliminate bureaucracy and save time. There is benefit to be derived from using a procurement card as a purchasing tool in the bottom left hand corner of the grid amongst other P2P tools as illustrated in Figure 3. There is even more to be gained in taking a channel management approach, which is commodity based and places the purchasing card as part of both the overall P2P strategy and the individual category strategy as illustrated in Figure 4. Delivering the Benefits of Procurement Cards in the UK Public Sector 8

10 Figure 3 High Bottleneck Strategic Marketplaces e-collaboration Market Complexity e-catalogue e-tender Punch- Out Buying Consortia Low Routine Internet Buying P-card e-auction Business Impact Leverage High Figure 4 Sourcing Tools Potential Suppliers Buying Channels Order from Suppliers Category Management e-auction e-tender Major Projects P Cards e-procurement Catalalogue e-procurement Non-catalalogue ERP Sustainable Best Value Identify Best Value Secure Best Value Contract with Suppliers Deliver Best Value 3.3 Selling the Concept and Delivering Benefit Procurement cards can be successfully implemented within public sector organisations regardless of size and ambition. The flexibility of procurement cards means that organisations can use different implementation strategies to find the best fit. With a basic or traditional implementation, an organisation can roll out procurement cards in isolation for specific categories of expenditure. Typically used for low-value orders, this type of implementation will reduce the number of invoices and cut transaction costs. 9

11 Figure 5 Increasing Benefits Strategic Purchase-to-Pay Commodity Implementation Gold Basic Implementation Silver Bronze Collaboration Programme Management For a commodity-focused implementation, procurement cards are built into the sourcing strategy of an organisation. Where there is a high volume of transactions, procurement cards can reduce the number of purchase orders and invoices in the procurement process. The benefits of procurement cards will be optimised when introduced as part of an organisation s overall purchase-to-pay strategy alongside other e-procurement solutions. Procurement cards integrate well into e-procurement systems and financial back-end systems, and this feature means that the benefits will translate into all areas of the procurement strategy. An important factor to note is that each of these strategies has to be underpinned by strong programme management to ensure a successful, sustainable implementation. Figure 6: Collaborative implementation in Wales Value Wales Procurement launched the Welsh Purchasing Card (WPC) programme to provide the Welsh public sector with an alternative purchase-to-pay process, designed to deliver significant cost savings by removing the need for purchase orders and processing of invoices. The WPC was successful not only because it was managed as a programme, but also due to the understanding of segmentation. Value Wales Procurement had a uniquely strong focus on growing the scheme s supplier network, which has increasingly enhanced its appeal with public sector organisations. For example, while the programme was initially only used for low-value, high volume transactions, such as procurement catering or office supplies, as the supplier network has grown, the card can now be used to procure higher value items as well, such as tarmac and stone for highways maintenance. Another key element to its success was the deployment of the right product MasterCard: All public sector organisations in Wales that have adopted the WPC scheme over the past two and a half years have specifically chosen the MasterCard solution. Alan Oram, Value Wales Procurement Delivering the Benefits of Procurement Cards in the UK Public Sector 10

12 Whilst the ideal for procurement cards is to move away from transactional buying, organisations may choose to implement one or more varying strategies depending on size, ambition and commodity type. Thus an eco-system with a complete suite of solutions is critical for flexibility and to encourage uptake of the product. An organisation should build elements of collaborative procurement into its strategy, regardless of the type of implementation. By working together with other organisations to reduce the cost of implementation and to maximise savings and benefits, it can achieve efficiencies through economies of scale, better contract management and standard processes. 11

13 4 MasterCard Products MasterCard has the right products to address the current and future needs of the market The right products are crucial to a successful implementation. MasterCard provides two innovative services incontrol and Smart Data Online, as well as a shared Information Hub. These products meet current government requirements for control, security, traceability, flexibility and personalisation as well as for supplier and spend information. 4.1 incontrol MasterCard incontrol is an innovative platform that offers an array of advanced authorisation controls, intelligent transaction routing capability and robust alert functionality designed to enable issuers to provide enhanced levels of security, control, data capture and traceability on every purchase. incontrol also provides the capability for limited-use account or virtual card numbers, which reduce the risk of primary-account fraud. 4.2 Smart Data OnLine MasterCard Smart Data OnLine service provides users with 24/7 on-line access to all transactions for complete security, as well as on-line management of card purchases. This also includes detailed transaction information, which can be delivered through both standard and customised reporting. Smart Data OnLine can be specifically configured to the requirements of each user organisation thus allowing them to create their own review/authorisation workflow, account coding capability and data file exports suitable for loading into local accounting systems. 4.3 Information Hub The Spikes Cavell and MasterCard e-enabled payment Information Hub provides detailed purchase-to-pay transactional analysis by UK regions, sectors and by commodity category and services spend. This analysis assists in identifying where the various procurement card products can be applied, through which business cases for payment card deployment can be produced. Importantly we are now able to analyse core or common suppliers across the 12 regions of the UK and foster collaboration amongst public sector organisations to enable a more focused merchant acquisition activity. The Information Hub will provide information with which to identify opportunities for further performance improvement and maximise the investment in the P2P programme. Delivering the Benefits of Procurement Cards in the UK Public Sector 12

14 4.4 MasterCard Optimiser The MasterCard Optimiser is an intuitive web-based diagnostic tool that allows organisations to identify and measure strategies for improving new or existing corporate and P-card programmes. It takes only 20 minutes to use and produces a customised report including an analysis of current usage patterns and opportunities to expand the roll-out and increase the delivery of benefits. 4.5 VAT Recovery Service In partnership with Meridian, the MasterCard platform provides the ability to identify easily how much VAT has been paid and estimate how much might be recovered. It provides a simplified process to handle the VAT recovery on behalf of organisations. The reports provided are HMRC certified. 13

15 5 Conclusion In the current climate, numerous government initiatives have been launched to drive public sector improvements. Procurement is seen as a key area in which these improvements can be manifested. Procurement cards are a robust, proven tool and can bring significant benefits to public sector organisations regardless of size or ambition. The time is right to consider implementing procurement cards. They can play a significant role in improving efficiency in today's difficult economic environment and in line with public sector budgetary constraints. Procurement cards need to be deployed as part of the overall procurement strategy; to maximise benefits organisations need to focus on the end-to-end business process and to view procurement cards as a tool within the procurement eco-system and not just as a purchasing or payment mechanism. Procurement cards deliver most when they are part of an overall P2P strategy and plan that positions the right products in the right segment of the process. Delivering the Benefits of Procurement Cards in the UK Public Sector 14

16 About MasterCard Worldwide MasterCard Worldwide advances global commerce by providing a critical economic link among financial institutions, businesses, cardholders and merchants worldwide. As a franchisor, processor and advisor, MasterCard develops and markets payment solutions, processes approximately 21 billion transactions each year, and provides industryleading analysis and consulting services to financial institution customers and merchants. Powered by the MasterCard Worldwide Network and through its family of brands, including MasterCard, Maestro and Cirrus, MasterCard serves consumers and businesses in more than 210 countries and territories. For more information go to About Capgemini Capgemini, one of the world's foremost providers of consulting, technology and outsourcing services, enables its clients to transform and perform through technologies. Capgemini provides its clients with insights and capabilities that boost their freedom to achieve superior results through a unique way of working, the Collaborative Business ExperienceTM. The Group relies on its global delivery model called Rightshore, which aims to get the right balance of the best talent from multiple locations, working as one team to create and deliver the optimum solution for clients. Present in more than 30 countries, Capgemini reported 2008 global revenues of EUR 8.7 billion and employs 90,000 people worldwide. More information is available at Capgemini Consulting is the strategy and transformation consulting division of the Capgemini Group, with a team of over 4,000 consultants worldwide. Leveraging its deep sector and business expertise, Capgemini Consulting advises and supports organizations in transforming their business, from strategy through to execution. Working side by side with its clients, Capgemini Consulting crafts innovative strategies and transformation roadmaps to deliver sustainable performance improvement. More information is available at For further information please contact: Laurent Vreven Business Leader Global Commercial Products MasterCard Europe Tel laurent_vreven@mastercard.com Contributors: Seetha Nambiar Capgemini Laurent Vreven MasterCard Tom Wilson AFP Capgemini Consulting Copyright 2009 MasterCard. All rights reserved. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group