Visa Procure-To-Pay Best Practices

Transcription

1 Visa Procure-To-Pay Practices Study conducted by Deloitte & Touche and Deloitte Consulting PDF FINAL Summary Overview 8.5 x 11 #16486

2 Table of Contents SECTION I: Executive Summary Introduction 3 Study Overview 4 Summary of Key Findings 9 SECTION II: Practices Procure-To-Pay Foundation 19 Commercial Card Program 37 Procure-To-Pay Process 63 Travel and Entertainment (T&E) 85 1

3 Section I Executive Summary 2

4 SECTION I Executive Summary INTRODUCTION The Visa Procure-To-Pay Practices study indicates that leading companies have adopted best practices that incorporate six key findings: 1 Proactive, ongoing senior management sponsorship for Procure-To-Pay initiatives 2 3 Collaboration to ensure communication and enforcement of Procure-To-Pay policies and procedures Progressive migration to automating the entire Procure-To-Pay Information Technology platform 4 Aggressive Strategic Sourcing focus to enhance vendor relations 5 Comprehensive data aggregation and reporting to support management and enable continuous improvement of the Procure-To-Pay process 6 Commercial Card objectives alignment with a company s overall Procure-To-Pay strategy Visa, Deloitte & Touche, and Deloitte Consulting developed 54 best practices in keeping with these findings to help large and mid-size companies attain greater work efficiencies and cost savings in their Procure-To-Pay processes. The average study participant who has adopted all of these best practices saves an average $1.76 million to $8.3 million in annual, indirect transaction processing costs (does not include potential cost savings associated with vendor discounts or front-end processing efficiencies). These findings represent a continuation in the evolution and sophistication of Procure-To-Pay Practices that were identified in the 1998 Visa Corporate and Purchasing Card Practices Study. 3

5 Study Overview Study Overview As part of an ongoing effort to understand and improve the processes of business, Visa Commercial Solutions commissioned Deloitte & Touche and Deloitte Consulting to conduct a comprehensive study of procurement and payment best practices for companies nationwide. Scope Visa s Procure-To-Pay Practices encompass the entire Procure-To-Pay process (including Procure-To-Pay Foundation, Commercial Card Management, and the end-to-end Procure-To-Pay Process from sourcing, purchasing, payment, allocation, controls, and auditing to back-end reporting), focusing on best practices of large corporate and mid-size companies their associated benefits, implementation steps, and any experience gathered from actual implementation successes. Travel and Entertainment is included in this study as a separate section and falls under the overall Procure-To-Pay process section. PROCURE-TO-PAY FOUNDATION - Strategy - Organization - Technology COMMERCIAL CARD MANAGEMENT - Purchasing Card - Travel & Entertainment Corporate Card - Fleet Card PROCURE-TO-PAY PROCESS * - Purchasing - Travel & Entertainment (T&E) *Includes sourcing, order placement, payment & settlement, reconciliation, control & audit, reporting. Section I Executive Summary 4

6 Study Overview Approach Deloitte & Touche and Deloitte Consulting identified 52 large corporate and mid-size companies considered to have leading Procure-To-Pay practices. The selection criteria ensured distribution among revenue size, geography, industry, card Issuer, and company culture. Total Revenues by Studied Companies Type of T&E Cards Used by Studied Companies Type of Purchasing Cards Used by Studied Companies 50% Greater than $1 billion 30% Less than $500 million 67% Amex 29% Visa 24% Amex 33% MC 43% Visa 4% MC 20% $500 million to $1 billion The number of study participants and their corresponding industry affiliation are summarized as follows: Company Large Middle Industry Market Market Communications 1 1 Consumer Business 6 7 Energy 2 0 Financial Services 4 3 Health Care 1 4 Manufacturing 6 11 Professional Services 2 4 5

7 Study Overview Identification of Practices A detailed questionnaire was distributed to all companies and 20 on-site interviews were conducted with select participants. The questionnaire was designed to gather quantitative and qualitative information including: Qualitative: Understanding best practices, key drivers, enablers, challenges, anecdotal information, user satisfaction ratings, service level quality Quantitative: Macro-level statistics dollar spend, average transaction on card, average dollar size of transaction, vendor-negotiated discount rates; micro-level statistics indirect activity cost and time (excluding overhead); IT/data requirements On-site interviews were conducted with Procurement, Accounts Payable (A/P), Travel managers, buyers, commercial card administrators, and representative users to gain greater insight into companies specific Procure-To-Pay functions and best practices. This data gathering effort led to the identification of 54 leading-edge practices across four categories: Foundation, Commercial Card Management, Travel & Entertainment, and Process. practices for each category follow: PROCURE-TO-PAY FOUNDATION Practices 1. Articulate a Procure-To-Pay strategy with a short- and long-term vision 2. Proactively obtain ongoing senior management and business unit support by sharing information 3. Conduct benchmarking to gain additional perspectives and strategic focus 4. Strategically position Procurement and Accounts Payable in the organization 5. Ensure center-led management and control of critical Procure-To-Pay functions 6. Develop enterprise-wide Procurement policies and procedures 7. Develop an internal communication plan to convey Procurement policies, procedures, and successes 8. Develop a comprehensive Change Management discipline 9. Develop an overall Procure-To-Pay technology strategy 10. Establish a business case for each technology investment and track your performance relative to your business case objectives 11. Maximize automation of an end-to-end technology solution 12. Implement and leverage an e-procurement solution Section I Executive Summary 6

8 Study Overview COMMERCIAL CARD MANAGEMENT Practices 1. Align commercial card program objectives with company s overall Procure-To-Pay strategy 2. Determine commercial card products(s) based on ability to achieve program objective 3. Establish center-led management and administration of the commercial card program 4. Develop and disseminate enterprise-wide commercial card policies and procedures 5. Incorporate a comprehensive commercial card training program 6. Incorporate commercial cards into business continuity planning 7. Source, select, and implement a purchasing card program 8. Establish parameters for eligible purchasing card transactions leveraging appropriate controls 9. Establish purchasing card issuance criteria for optimal distribution to employees 10. Mandate and enforce use of purchasing card for all eligible purchases 11. Investigate purchasing card program expansion to additional spend categories to maximize benefits achieved 12. Maximize use of virtual accounts i.e., ghost accounts and department cards 13. Source, select, and implement a fleet card program 14. Use fleet cards to track expenditures through both external and internal sources TRAVEL & ENTERTAINMENT PROCESS Practices 1. Institute a centralized Travel Management function 2. Develop and distribute company-wide travel policy 3. Coordinate event planning through Travel Management function 4. Source, select, and implement a T&E card program 5. Establish T&E card issuance criteria for optimal distribution to business travelers 6. Mandate and enforce use of the T&E card 7. Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program 8. Implement in-house, Web-based booking tool 9. Establish well-defined expense report audit parameters 10. Standardize and pre-populate expense reporting 11. Standardize and automate data interfaces between expense management and accounting applications 12. Capture, report, and analyze comprehensive, company-wide travel data 13. Implement post-trip exception reporting and distribute lost savings report 7

9 Study Overview PROCURE-TO-PAY PROCESS Practices 1. Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program 2. Incorporate purchasing card/ghost (virtual) account acceptance into preferred vendor contract terms 3. Utilize e-sourcing tools such as e-rfx and e-auctions to source suppliers and gain savings on one-off items 4. Limit the number of approvals required to place an order 5. Minimize the use of paper purchase orders for all eligible purchasing card purchases 6. When commercial cards are not used, employ three-way matching to reduce the number of approvals required prior to payment 7. Replace manual check payments with electronic payments 8. Understand tax liabilities 9. Use Card Issuer feed to automate delivery of card statements 10. If using electronic statements, predefine valid general ledger account codes and cost centers to facilitate end-user reconciliation 11. Outsource high-volume, specialized payment processes 12. Determine control strategy 13. Monitor Procurement performance via a scorecard that includes cost, quality, and time components 14. Gain a comprehensive view of spend by integrating data from multiple sources e.g., e-procurement, travel, ERP, purchasing cards 15. Leverage SIC and MCC codes for categorization of spend and purchasing data Section I Executive Summary 8

10 Summary of Key Findings Summary of Key Findings Market and Industry Applicability The study findings indicate that the best practices outlined here are equally applicable for large corporate and mid-size companies. Large and mid-size companies have similar goals and challenges in obtaining a leading Procure-To-Pay function, and differences among companies exist only in scale of implementation, ability to dedicate resources, and level of technology implementation. How companies handle the implementation activities depends on size, organizational structure, and company culture. Companies in the manufacturing industry have been leaders in the adoption and use of innovative Procure-To-Pay best practices. The necessary disciplines of supply chain management, sourcing, and efficient procurement of goods and services are fundamental to their existence. Financial services and consumer business companies are fast-followers in the adoption of best practices, integrating manufacturing disciplines into their internal culture. Mid-size companies can be viewed as followers of large corporate companies in the adoption of best practices. Six Key Areas The 54 best practices detailed in this study provide practical ways for companies to achieve an optimized Procure-To-Pay function by addressing six key areas: 1. Proactive, ongoing senior management sponsorship for Procure-To-Pay initiatives A consistent critical success factor from the 1998 study to the 2002 study continues to be the need to obtain senior executive sponsorship for Procure-To-Pay initiatives. For large corporate sponsorship this could include business unit leaders and executive management, and for mid-size companies sponsorship could be a direct line to a CEO/CFO. Achieving senior management sponsorship is necessary for receiving endorsement of existing initiatives, encouraging compliance to policies, and increasing awareness of Procurement initiatives throughout the organization. Leading-edge companies have become more innovative in achieving sponsorship by using relevant and realistic ROI measures, sharing information, and actively communicating goals and successes. Senior management interest in the Procure-To-Pay process has increased significantly due to economic conditions, an increased focus on cost containment, and a recent attention to employee security (in regards to travel). 2. Collaboration to ensure communication and enforcement of Procure-To-Pay policies and procedures In recent years, Procurement and A/P managers have come to view business units as internal customers. This is a progression from the siloed and often adversarial approach of the past, which yielded sporadic compliance to policies and procedures. Although compliance continues to be a challenge, leading companies are addressing this issue by encouraging business unit partnership. Shared objectives and performance measures have led to more formalized ties between business units, resulting in increased compliance to policies and a reduced overall cost structure. 9

11 Summary of Key Findings 3. Progressive migration to automating the entire Procure-To-Pay Information Technology platform While survey participants in previous studies conceptually understood and strived for an automated Procure-To-Pay process, they traditionally made isolated technology decisions instead of focusing on a plan to implement an entire solution. Leading companies have now taken a more pragmatic approach to automation, attending to the implications to the entire end-to-end platform. To support Information Technology initiatives, they set realistic and achievable ROI objectives. Leading companies are recognizing that the benefits to automation can only be achieved by incorporating process changes as part of the solution, and they are employing Change Management techniques to achieve user support and consequently optimize benefits. Mid-size companies are no longer excluded from receiving the benefits of increased automation, as IT solution providers are increasingly offering more cost-effective, packaged solutions or innovative hosting models. 4. Aggressive Strategic Sourcing focus to enhance vendor relations This is an increasingly important strategic priority for leading companies and a powerful tool in cost reduction efforts. While companies have traditionally attempted to achieve discounts with vendors, they are learning that a Strategic Sourcing discipline is the most value-added Procurement activity. A 2002 Deloitte Research study on Strategic Cost Reduction indicates a potential cost savings of 15 percent-25 percent through a focused Strategic Sourcing initiative. Strategic Sourcing offers the following benefits: Rationalizing the vendor base Maintaining stronger oversight of relationships with vendors Using the data to understand market share Pushing vendors towards deeper discounts and better service Companies have used different approaches to Strategic Sourcing and vendor management. Some companies are collaborative in their approach, while others stipulate implementation of their standards. In either case, results clearly show that focused supplier sourcing and management lead to significant bottom-line savings. Leading companies continue to dedicate resources to this discipline, with a noticeable change in strategy towards cross-functional negotiating teams e.g., Procurement, A/P, IT, and other key stakeholders, that focus on a corporate-wide view of spend. Formal tools have been developed to assess vendor and commodity spend, establish achievable sourcing targets, and support and monitor sourcing initiatives. 5. Comprehensive data aggregation and reporting to support management and enable continuous improvement of their Procure-To-Pay function Leading companies understand that data aggregation and reporting is critical to accomplishing any key activity. They also understand that reporting is not a function of the quantity of reports, but a function of the ability to integrate and analyze their data. These companies accurately define required reports and use them to share information across the business and track performance to goals. The sophistication of in-house systems e.g., ERP, e-procurement, reporting tools offered by Card Issuers, has improved to allow companies to obtain greater spend detail from internal systems. Integrating data from multiple sources has provided leading companies with a clearer understanding of the reports needed to support Procurement goals. However, large corporate and mid-size companies still rely on a significant amount of customization to reporting systems and make extensive use of ad-hoc reporting to provide necessary information. Section I Executive Summary 10

12 Summary of Key Findings 6. Commercial Card objective alignment with company s overall Procure-To-Pay strategy The study found that commercial card program success factors include: Integration of the commercial card as a payment vehicle into the overall Procure-To-Pay strategy Comprehensive training programs that help employees understand the benefits realized by the corporation through use of the commercial card Enforcement, consistent with the corporate culture, of the commercial card for eligible commodities and purchases Development of issuance criteria that target employees who have reason to use the commercial card rather than employing a broad distribution process that would include employees who do not have a need for the card Emerging Procure-To-Pay Trends The study also identified organizationally focused Procure-To-Pay strategic trends. Today, corporations are working to coordinate Accounts Payable, Procurement, and Strategic Sourcing activities, and are modifying their processes to improve information sharing. Center-led management of these disciplines supports optimal vendor selection, negotiation, and management. The 50 companies that participated in this study provided detailed insights into their current and future Procure-To-Pay goals. Study responses highlighted three emerging Procure-To-Pay trends. e-auctions e-auction applications, if not already in use, will soon be deployed by a larger percentage of this study s survey participants. Seventeen percent of study participants have already implemented an e-auction solution. An additional 22 percent of participants indicated that they plan to implement e-auctions in the next two years. While e-auctions will continue to play a role in procuring indirect and direct commodities, companies have not developed Procure-To-Pay strategies that optimize use of the commercial card as an e-auction settlement option. Benchmarking Leading companies have created a group of benchmarking partners. This group often includes companies outside of their industry as well as companies with which they may have a complementary relationship i.e., suppliers or vendors. Some companies will use third-party companies to conduct blind benchmarking studies against their immediate competitors. Additionally, leading companies participate in external benchmarking studies e.g., Forrester, IDC, Gartner, or ISM, on a periodic basis. Internet Applications for Booking and Reporting Travel and Entertainment Use of the Internet for booking travel and generating expense reports continues to increase. Companies report anticipated process savings of 80 percent as well as a significant reduction in data entry errors. Study statistics indicate: 40 percent of companies surveyed have already implemented Web-based booking; another 10 percent plan to in the next two years 26 percent of companies surveyed have implemented automated expense reporting 36 percent of companies plan to implement an automated expense reporting application in the next two years 11

13 Summary of Key Findings Benefits from Implementation Study participants that have adopted the best practices outlined in Visa s Procure-To-Pay Practices have achieved significant quantitative and qualitative benefits. Select companies have individually achieved the following: 80 percent of suppliers are under contract 90 percent of all spend with preferred vendors 75 percent of office supplies purchased through e-procurement 75 percent of e-procurement orders paid using the purchasing card 71 percent of payments are automated 98 percent compliance with audit criteria 90 percent of all trips booked through an in-house Web tool 29 percent discount on negotiated airline rates The table below reflects the performance, challenges, and benefits of companies based on their incorporation of the six key findings: Leading Company Key Practices Proactive, Ongoing Senior Sponsorship Level of Incorporation Low-Adopter Little or no senior sponsorship No clear line of communication between Procurement, A/P, and senior management Inability to advance Procure-To-Pay initiatives Common Some senior sponsorship of key Procurement initiatives Infrequent communication e.g., annually, with senior management Limited advancement of Procure-To-Pay initiatives Leading Senior sponsorship of many Procurement initiatives Periodic upward reporting to senior management Frequent communication between Procurement, A/P, and business units Advanced Visible senior sponsorship of the overall Procure-To-Pay strategy and all related initiatives Procurement and A/P department heads report directly to senior management Quarterly progress review of goals and objectives Section I Executive Summary 12

14 Summary of Key Findings Leading Company Key Practices Collaboration, Communication, and Enforcement of Policies and Procedures Progressive Migration to IT Automation Level of Incorporation Low-Adopter No policies and procedures and/or outdated or inactive policies and procedures Procurement and A/P are siloed and do not cooperate Departments are viewed as cost centers vs. business partners Poor compliance with policies and procedures Common Policies and procedures exist with little executive support and visibility Infrequent communication of changes to policy Compliance is not actively monitored or enforced Leading Effective policies and procedures developed Readily accessible by users Annual review, modification, and communication of changes Consistent feedback loop Reports produced to track compliance Some collaboration between Procurement and A/P Advanced Senior sponsorship of policy and procedure development Frequent communication across functions Procurement and A/P work collaboratively with business units Sharing of lost opportunity and cost avoidance information with business units Alignment of performance objectives Potential alignment of compensation and bonus to achievement of goals and objectives Low-Adopter Manual data entry, few or no interfaces exist between legacy systems Highly paper-intensive process Common Use of commercial cards to eliminate paper Some adoption of integrated Accounts Receivable, General Ledger, and A/P Mixed success in achieving automation Little process reengineering and Change Management to support initiatives Leading ERP adoption with integrated financials and e-procurement Business case to support new business automation initiatives Value of Change Management is recognized and used Increased automation of invoice payment Advanced End-to-end Procure-To-Pay automation including e-auctions, e-rfx, EIPP Detailed and achievable ROI measures used to prioritize future initiatives Integration of virtual accounts to support e-procurement Outsourcing of platform and maintenance explored as viable option Dedicated Change Management resources to support all initiatives 13

15 Section I Executive Summary 14 Summary of Key Findings Leading Company Key Practices Aggressive Strategic Sourcing Focus Comprehensive Data Aggregation and Reporting Level of Incorporation Low-Adopter No Strategic Sourcing effort Buyers focus on processing Purchase orders instead of sourcing Procurement does not formally manage spend through preferred vendor lists, vendor scorecards, or department metrics Multiple discounts negotiated for one vendor Common Decentralized and informal sourcing policies Negotiation with some key vendors without centrally supported effort Negotiated discounts poorly communicated to buyers Frequent occurrences of multiple discounts per vendor Leading Focused Strategic Sourcing effort Initial attempts to rationalize and reduce supplier base Central, commodity-based approach to sourcing Achievement and communication of significant discounts for key commodities Advanced Dedicated Strategic Sourcing function with integrated team Significant reduction in rationalization of vendor base Significant discounts negotiated enterprise-wide Annual review and scorecard measurement of vendor performance and communication of findings with vendor and business unit sponsor Low-Adopter Difficulty capturing appropriate data from legacy systems Data only captured from internal system Use of rudimentary reporting templates Use of vendor data is minimal or non-existent Common Some use of reporting system Manual aggregation of data from multiple internal and external data sources Inconsistent ability to capture and interpret relevant data for reporting purposes Leading Significant use of packaged or in-house reporting system Significant leverage of data from integrated application suite Well-defined, central data repository for aggregation of data from internal and external sources Ability to define and create reports needed to support the Procure-To-Pay function Advanced Central, desktop, self-service reporting Ability to integrate and analyze data from multiple sources Information is current and accurate and provides executive and managerial level reporting Ability to integrate data from new sources as they are implemented e.g., e-auction, EIPP

16 Summary of Key Findings Leading Company Key Practices Commercial Card Objectives Alignment with a Company s Overall Procure-To-Pay Strategy Level of Incorporation Low-Adopter Nominal Procure-To-Pay Strategy Indiscriminate distribution of cards No periodic assessment of card use or spend limits Lack of corporate guidance directing expansion of card use Common Laissez-faire management of card program; management is aware of card program and periodically assesses card use, but management does not directly encourage use of the commercial card as a payment vehicle Management may encourage use of card for MRO purchases only There is no effort to make the card program a primary payment vehicle Leading Procurement, Sourcing, and Accounts Payable acknowledge the commercial card as a primary payment vehicle Suppliers are either mandated to accept the commercial card or are given a preferential weighting on vendor scorecards All commodities are reviewed for inclusion in the commercial card program Advanced User goals are established based on spend limit, commodities purchased, and cost savings Reports provide periodic snapshot of goal-to-date performance i.e., cost savings reports Procurement organization stipulates use of card as payment vehicle for specific suppliers Buyers are evaluated on their movement of suppliers and commodities to the commercial card program Integration of commercial card in automated Procurement and sourcing tools 15

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18 SECTION II Practices The 54 best practices that follow are practical ways for companies to gain real-world benefits from optimizing their Procure-To-Pay functions. They are broken down into three main categories: Procure-To-Pay Foundation, Commercial Card Programs, and Procure-To-Pay Process. Travel and Entertainment is included as a separate section and falls under the overall Procure-To-Pay process section. Each entry outlines the market applicability and implementation steps for each best practice. It also details specific success stories and trends regarding its incorporation into company policy. 17

19 Section II Practices 18

20 Procure-To-Pay Foundation SUMMARY Procure-To-Pay Foundation describes the strategy, organization, and technology components of the Procure-To-Pay process. The best practices described in this section form the building blocks and essential requirements for companies to have advanced or leading-edge performance. Regardless of size or sophistication, companies will not be able to achieve best practice performance without a successful foundation. practice companies have defined a near- and long-term vision for their Procure-To-Pay process. Their Procurement and A/P functions are aligned to execute this vision, and they use technology as a key enabler to meet their goals. The best practices described in this section form the building blocks and essential requirements for companies to have advanced or leading-edge performance. STRATEGY BEST PRACTICE 1 BEST PRACTICE 2 BEST PRACTICE 3 Articulate a Procure-To-Pay strategy with a short- and long-term vision Proactively obtain ongoing senior management and business unit support by sharing information Conduct benchmarking to gain additional perspectives and strategic focus ORGANIZATION BEST PRACTICE 4 BEST PRACTICE 5 BEST PRACTICE 6 BEST PRACTICE 7 BEST PRACTICE 8 Strategically position Procurement and Accounts Payable in the organization Ensure center-led management and control of critical Procure-To-Pay functions Develop enterprise-wide Procurement policies and procedures Develop an internal communication plan to convey Procurement policies, procedures, and successes Develop a comprehensive Change Management discipline TECHNOLOGY BEST PRACTICE 9 BEST PRACTICE 10 BEST PRACTICE 11 BEST PRACTICE 12 Develop an overall Procure-To-Pay technology strategy Establish a business case for each technology investment and track your performance relative to your business case objectives Maximize automation of an end-to-end technology solution Implement and leverage an e-procurement solution 19

21 Procure-To-Pay Foundation Practice1 Strategy Articulate a Procure-To-Pay strategy with a short- and long-term vision Companies should develop an overall strategy that defines their goals for the Procure-To-Pay process, forming the blueprint for the company s process as a component of the overall company strategy. A successful strategy contains goals for overall spend, projected breakdown of spend by commodity, spend by order mechanism, spend by payment type, cost savings (either through activity-based costing or full time equivalent [FTE] savings), and supplier sourcing goals. It should also list the tactical initiatives (both operational and technological) that will enable these goals, including implementation and evaluation of existing control mechanisms, new projects, and technology. Goals are developed for the short-term (one to two years) as well as long-term (three to five years). The advantage of developing the dual focus is that it enables companies to prioritize their initiatives and helps provide direction for creating business cases. The Procure-To-Pay strategy needs to be shared throughout the organization, specifically with Procurement, A/P, IT, and key business units. This will help secure the support of key stakeholders in those functions and ensure that the organization works toward common goals. ACTION STEPS: MARKET APPLICABILITY: All Companies 1. Define a team of key stakeholders, including senior management involvement, to develop the overall strategic planning process 2. Review previous strategies and year-end spend analyses to set meaningful goals 3. Communicate strategy with Procurement and Accounts Payable to achieve buy-in Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Enables company to identify achievable cost savings goals and define a target goal for achievement Communication of strategy, encourages support from key Procure-To-Pay stakeholders Sets goals for supplier rationalization initiatives Sets guidelines for overall control strategy SUCCESS STORIES and TRENDS One study participant publicly displays the company s key Procure-To-Pay initiatives for the year and the company s progress to date in completing them. This has helped it to achieve its initial goals for the quarter. Another participant created a plan by business unit to detail how it would meet customer service requirements, increased control objectives, and reduced costs targets. This helped identify the appropriate goals for the company s purchasing card implementation. Section II Practices 20

22 Procure-To-Pay Foundation Practice2 Strategy Proactively obtain ongoing senior management and business unit support by sharing information Leading companies have recognized that obtaining ongoing senior management support e.g., business unit lead, senior or executive vice president, for the processes and technologies that the Procurement function has designed enables Procurement to add significant value to the organization. Companies have successfully maintained senior management support by developing an ongoing communication of the activity and successes of their organization through an executive-level report which could contain the following: Process metrics: Purchase order volume and trend, invoice volume and trend, travel and entertainment volume and trend, purchasing card usage and trend Savings metrics: Dollars saved through use of preferred vendors and negotiated rates, dollars saved through Procure-To-Pay process changes e.g., expanded use of purchasing card, implementation of automated expense reporting Lost savings: Dollars lost through non-compliance to Procurement policies and procedures e.g., maverick spend, use of non-preferred vendors Current initiatives underway: High-level descriptions of efforts and expected benefits to generate awareness and gain ongoing support Companies have used innovative methods to share this information with senior management including creating unique presentations, assigning business unit liaisons, and actively communicating successes through internal newsletters. In addition to simply communicating Procurement successes, Procurement organizations have actually shared their savings with their internal business customers to encourage further compliance with policies and procedures. continued on next page 21

23 Procure-To-Pay Foundation Practice2 Proactively obtain ongoing senior management and business unit support by sharing information continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control Frequent communication of Procurement successes and opportunities for improvement provides senior management with the incentive to continue support of cost-saving Procurement activities Frequent communication of savings from compliance and lost savings from non-compliance to Procurement policies and procedures encourages Senior management to promote compliance to Procurement policies and procedures ACTION STEPS: 1. Develop cross-functional team to form senior management communication initiative 2. Proactively identify compelling and relevant Procurement metrics and review them with senior managers to determine appropriateness 3. Develop communication initiative with related tools e.g., Web casts, report layouts 4. Adjust initiative to reflect feedback as received 5. Schedule periodic review meetings with senior management to share information and ensure active participation SUCCESS STORIES and TRENDS One organization tied management s bonus objectives to achievement of Procurement-related goals. Because of this, the Procurement department regularly reported its progress in meeting goals and successes to the other business units in the organization. Another survey participant shared Procurement performance numbers, such as cost avoidance and cost savings, quarterly with its peers to obtain ongoing support of initiatives. One large corporate company s Head of Procurement is a member of the company s senior management team and thus provides Procurement performance information at weekly planning and status meetings with the company s President. One-third of the study participants indicated lack of senior management support as a significant barrier to card expansion. Section II Practices 22

24 Procure-To-Pay Foundation Practice3 Strategy Conduct benchmarking to gain additional perspectives and strategic focus practice companies conduct benchmarking on a regular basis (at least annually) to assess the performance of their companies and gain additional insight into innovative practices and opportunities for improvement. Benchmarking should assess quantitative items such as direct cost to place an order, cost to produce a check payment, supplier base metrics, and qualitative findings e.g., implementation and control best practices. Leading companies have created their own group of benchmarking partners. This includes companies outside of their industry as well as ones with which they have a complementary relationship e.g., suppliers or vendors. Third-party companies are also used to conduct blind benchmarking studies against their immediate competitors. Additionally, best practice companies participate in external benchmarking studies on a periodic basis including commercial cardprovider studies as well as U.S. Government figures, Forrester, IDC, and NAPM studies. Benchmarking studies can be useful tools in promoting the success of the Procure-To-Pay function to senior management and providing information to develop business cases for key initiatives. ACTION STEPS: 1. Identify benchmarking studies to participate in as part of annual strategy and allocate resources e.g., time and budget for participation 2. Solicit companies by contacting peers, using internal networks, or going through trade groups 3. Allocate time to review results of benchmarking study, incorporate findings into strategic initiatives, and communicate results to senior management 4. Attend conferences and read industry publications on a regular basis MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management SUCCESS STORIES and TRENDS Helps set achievable cost savings goals Enables user participation and ability to benchmark user satisfaction Provides potential negotiation and sourcing goals for company One best practice company has a list of benchmarking partners to use in conducting periodic studies. The partners are companies with leading Procure-To-Pay reputations and have helped raise the expectations and goals for the company. For instance, after learning that one company saved $11.6 million through e-auctions, the company began a partnership with an e-auction company. Another study participant increased the airline discounts the company receives from 15 percent to 20 percent by reviewing trade publications and T&E benchmarking studies to understand market conditions and negotiation best practices. One study participant uses internal benchmarking that enables employees to enter time activity data on a monthly basis. This is used to calculate Procurement and Accounts Payable productivity and helps to identify areas for improvement. Two mid-size study participants participated in extensive benchmarking studies including the Hackett Study. 23

25 Procure-To-Pay Foundation Practice4 Organization Strategically position Procurement and Accounts Payable in the organization Leading companies have strategically changed their positioning of Procurement and A/P functions over the last two to three years. Traditionally, these two functions have performed as separate silos within the organization. practice companies now encourage a more collaborative relationship between the two departments in order to optimize their Procure-To-Pay process. One key driver behind the change is the new view of Procurement and A/P as internal service organizations. This resulted from inclusion in a shared services organization as well as the realization of interdependency during Procure-To-Pay reengineering initiatives such as purchasing card implementations, ERP implementations, and Strategic Sourcing. These initiatives have helped Procurement and A/P demonstrate how they jointly enable the business units to achieve their goals. In leading companies, Procurement and A/P now often refer to other business units within the organization as clients or internal customers and conduct internal surveys or reviews with business unit leaders to review service quality. Procurement and A/P representation on cross-functional teams is essential for the success of most technology and strategic initiatives. Successful companies have been able to use a combination of Procurement, A/P, and business unit personnel to focus on Strategic Sourcing and drive deeper negotiated discounts. Some Procurement organizations have assigned liaisons to work with individual business units to help set goals, provide training, and evaluate new opportunities, enhancing the service reputation of their functions. Procurement and A/P representation on cross-functional teams is essential for the success of most technology and strategic initiatives. ACTION STEPS: 1. Ensure participation of Procurement and Accounts Payable on cross-functional teams 2. Ensure business unit liaisons exist in Procurement and A/P functions 3. Align success of Procurement and A/P functions with meeting overall business goals 4. Conduct internal surveys with business units to measure their level of satisfaction and effectiveness MARKET APPLICABILITY: All Companies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Users benefit from service-oriented approach and will have greater adoption of new tools Collaboration on sourcing will drive deeper discounts; Procurement brings negotiation and industry expertise and A/P can provide detailed analyses of spend data Enables central coordination and monitoring of Procure-To-Pay function and compliance with policies One study participant helped transform his company s Procure-To-Pay function by assigning Procurement business unit liaisons. These liaisons worked with the business units to identify opportunities for vendor reduction, negotiate deeper discounts, and improve use of the e-procurement system. Another participant has his company s sourcing initiative jointly lead by Procurement and Accounts Payable. Combining Procurement s negotiating acumen with A/P s ability to produce accurate spend information has helped his company to reduce the time necessary to issue a request for proposal (RFP) by over 50 percent. Section II Practices 24

26 Procure-To-Pay Foundation Practice5 Organization Ensure center-led management and control of critical Procure-To-Pay functions Successful companies assign dedicated roles and responsibilities for their most critical Procure-To-Pay functions: contract administration, expense management, administration of designated commercial cards and development of policies and procedures. As new initiatives are introduced, other activities such as requisitioning and buying have become more decentralized and dispersed throughout the organization. This enables the Procurement and A/P functions to focus on their most critical value-added activities. Another advantage of the center-led approach is that it allows for centralized monitoring and control over the Procure-To-Pay function. Companies have an easier ability to create centralized reports tracking company spending and compliance, and enabling uniform distribution and enforcement of policies and procedures. ACTION STEPS: 1. Identify dedicated roles and assignments in the organization chart 2. Link employee bonus and performance ratings with ability to meet organization goals 3. Communicate name of central points-of-contact throughout the organization 4. Obtain senior management sponsorship of companywide policies and procedures 5. Validate reporting hierarchy to ensure center-led visibility of key reports MARKET APPLICABILITY: All companies. A single point-of-contact should be assigned where a dedicated role may not be possible. Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Reduces duplication of functional roles in the organization Reduces confusion within the organization by providing single points-of-contact Use of central management enables central negotiations with suppliers Enables central distribution and management of policies and procedures 67 percent of study participants believe they have central management and administration of their Procurement function. One study participant reports that it has been unable to maximize the benefits of the company s commercial card program because one of its business units uses different policies and procedures to manage the card. 25

27 Procure-To-Pay Foundation Practice6 Organization Develop enterprise-wide Procurement policies and procedures Leading companies document Procurement policies and procedures to communicate to their internal customers their recommended Procure-To-Pay processes. A Procurement policy should contain the following content: Mission statement and objectives of Procurement function (including alignment with company s mission statement) Procurement organization chart with contact information Sourcing and Procurement guidelines - Sourcing strategy - Requisition of expense items - Requisition of capital items - Requisition of services - Preferred vendors Approval rules Receipt and return process AP process Procurement control and audit Use of commercial card - Commercial card manager contact information - Issuance criteria and process - Cardholder agreement - Usage guidelines - Reconciliation process - Payment process On an annual basis, best practice companies review their policies and procedures and modify as needed. Changes are then communicated to users and incorporated into existing training. continued on next page Section II Practices 26

28 Procure-To-Pay Foundation Practice6 Develop enterprise-wide Procurement policies and procedures continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control Procurement policies and procedures detail standard practices designed to make a Procurement organization operate more efficiently; users who learn about and follow these practices take actions that enable Procurement savings such as use of preferred vendors Designing and documenting Procurement policies and procedures that fit a company s desired level of control enables communication of requirements to ensure compliance ACTION STEPS: 1. Develop comprehensive outline that covers all relevant aspects of Procure-To-Pay process 2. For each Policy section, research current practices and third-party research regarding best practices; determine preferred processes based upon company culture and capabilities 3. Document the policies and procedures 4. Continually reexamine policies and procedures and update as needed SUCCESS STORIES and TRENDS 85 percent of our survey respondents have documented Procurement policies and procedures. 74 percent of those respondents had less than 5 percent of all purchases fail a formal audit process. All of the study participants that do not have formally documented policies and procedures stated user inability to comply with procedures or failure to follow the approval process as the reasons why they failed audit. These items are the most common components of any policy and procedure document. 27

29 Procure-To-Pay Foundation Practice7 Organization Develop an internal communication plan to convey Procurement policies, procedures, and successes To enable understanding and compliance with Procurement policies and procedures, all guidelines not only must be documented, but widely disseminated as well. Most companies have a policies and procedures manual available on their Procurement department s intranet site, but best practice companies have developed more creative ways to disseminate their policy information. New users and new employees often receive Procurement training during their new hire orientation. This training can be delivered in person or via documentation with contact numbers for follow-up. The documentation is often laminated or brightly colored so that it is immediately recognizable to employees. practice companies also streamline all documentation to ensure that only pertinent information is included. Recognizing that ongoing communication is necessary for providing information on updates as well as refreshing users memories, some Procurement functions provide an Procurement newsletter or submit articles to a company newsletter. An article submitted at one company included a quiz regarding Procurement policies. Prizes were then given to employees who submitted correct answers. Procurement organizations have found that promoting the hard savings received from complying with policies encourages both communication and further compliance. By communicating the benefits obtained by preferred supplier compliance as well as the savings lost through non-compliance, senior management is more willing to encourage their departments to follow procedures. Procurement organizations have found that promoting the hard savings received from complying with policies encourages both communication and further compliance. ACTION STEPS: 1. Initiate cross-functional team of business units, e.g., Human Resources, Procurement, Travel, and Accounts Payable, to develop a policies and procedures communication plan 2. Track communication success and implement well-received methods 3. Develop process to ensure that updates to policies and procedures are communicated and distributed in a timely basis MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control SUCCESS STORIES and TRENDS Procurement policies and procedures detail standard practices designed to make a Procurement organization operate more efficiently; users who learn about and follow these practices take actions that enable Procurement savings, such as use of preferred vendors Designing and documenting Procurement policies and procedures that fit a company s desired level of control enables communication of requirements to ensure compliance 82 percent of survey participants have widely disseminated Procurement policies and procedures. One survey respondent developed his company s Procurement policies and procedures via a multi-disciplinary team. This team regularly meets to revise policies as needed. Section II Practices 28

30 Procure-To-Pay Foundation Practice8 Organization Develop a comprehensive Change Management discipline One of the biggest lessons that leading companies have learned from previous initiatives is the importance of Change Management. The ability to help educate, train, and communicate new messages to users is essential for any new initiative to succeed. Companies should develop a dedicated discipline to handle these activities usually as an expansion of existing training departments. Change management activities should be tailored to specific initiatives, staffed by people with training, marketing, and/or public relations experience, and included in all cross-functional initiative teams. Change management responsibilities include: Development of internal training manuals and courses Development of self-service and internal customer support Creation of internal marketing campaigns and key messages Assistance in determining the impact of an initiative on employees Identification of super-users or business unit champions for each initiative Change management teams can also help develop comprehensive and ongoing Procure-To-Pay training and education programs e.g., classes and self-service support, to help employees understand and use new Procure-To-Pay tools. ACTION STEPS: 1. Mid-size Companies: Allocate resources for Change Management in strategic initiatives 2. Large Companies: Identify Change Management role in organization chart 3. Both Companies: Identify and assign Change Management roles MARKET APPLICABILITY: A formal Change Management function would be more likely to be formed by a large corporate company. Mid-size companies should consider assignment of Change Management responsibilities to a designated person for each important initiative. Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control Enables greater adoption of new tools and technologies and therefore helps meet cost savings projections in business cases Increases likelihood of adoption through training and support Helps enable enhanced technologies with systemic controls SUCCESS STORIES and TRENDS Two large corporate companies employed different Change Management strategies in support of the rollout of their e-procurement system. One study participant employed limited Change Management activities e.g., individual tutorials as needed, to support their deployment. As a result, they estimate only $310,000 of spend has been placed through the system. The other participant provided enterprise-wide training via computer-based training (CBT) and classroom training combined with strong internal marketing. They project $1 billion in spend through the e-procurement system by the end of the year. One study participant cited lack of Change Management as the biggest reason why they were not satisfied with their automated expense reporting implementation. The system has been in place for over three years and is still not adopted enterprise-wide. 29

31 Procure-To-Pay Foundation Practice9 Technology Develop an overall Procure-To-Pay technology strategy practice companies have a focused technology strategy to complement their overall Procure-To-Pay strategy describing how technology implementations and enhancements can enable the achievement of the overall company goals. Key components of the strategy should include the following: Key short- and long-term Procure-To-Pay technology initiatives with alignment to specific Procure-To-Pay goals Vision for the current and future Procure-To-Pay platform, including integration with new technologies and potential outsourcing opportunities Identification of benefits to be gained through the technology initiatives Framework for selection of technology partners and vendors Framework for development of Service Level Agreements Proposed allocation of budget and resources Using this strategy as a blueprint, companies can then prioritize their initiatives and ensure maximum alignment with their goals. Necessary IT and outside integration resources can be budgeted appropriately and Procure-To-Pay technology initiatives can be executed effectively. This strategy can also provide additional direction for the creation of technology business cases. As with the overall strategy, the technology strategy must be presented and supported by key stakeholders in senior management, IT, Procurement, and A/P. ACTION STEPS: 1. Leverage overall company strategy, Procure-To-Pay strategy, and existing IT resources to formulate technology component 2. Review previous year s strategy to determine progress, identify gaps, and ensure consistency 3. Create and review strategy with key business stakeholders to obtain consensus and prioritize technology initiatives MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Provides company with baseline information to build business cases Ensures buy-in of user community on technology initiatives Helps provide guidelines for selection of IT vendors, including capabilities and service level expectations Provides greater alignment of control One leading-edge company had IT representatives assigned to their Procurement organization. This ensured that their e-procurement and ERP implementations were aligned to meet the company goals. After reviewing their technology strategy with business users, one mid-size company identified the need to have an ERP system. Creatively, they used an Application Service Provider (ASP) to house the system. This enabled them to have a cost-effective enterprise system to enable their back-office initiatives, while not demanding extensive use of internal IT resources. One mid-size company used its IT strategy to help map its Procure-To-Pay technology investments. Following this blueprint, the company chose to hold off on immediate implementation of an e-procurement system, as it would not have properly integrated with its existing platform and ongoing initiatives. Section II Practices 30

32 Procure-To-Pay Foundation Practice10 Technology Establish a business case for each technology investment and track your performance relative to your business case objectives Leading companies develop business cases for each of their technology investments. The creation of a business case serves several purposes: helping align all participants with the objectives of the investment, necessitating detailed understanding of investment costs, and providing a communication mechanism to gain senior management buy-in. A business case will contain the following components: Investment description Cost of the investment: the timing of the payments should be detailed if not all payments are required up-front. Investment costs will likely include third-party costs as well as internal project management costs. If known, any investment capitalization should be indicated Expected benefits from the investment: can be both qualitative and quantitative. Qualitative benefits include increased end-user satisfaction and increased productivity. Quantitative benefits include either anticipated cost reductions or cost avoidances. Cost reductions are savings off of current costs, such as an increased supplier discount or reduced staffing requirements. Cost avoidances are future costs that can be avoided as a result of the new investment, such as future maintenance costs on existing technology Cost/benefit cash flow analysis: a detailing by time period of the cash outflows and inflows based upon the expected investment cost and benefits. This information is typically analyzed to create financial risk measures. Financial metrics utilized to analyze investments include: net present value, return on investment (ROI), and investment payback period Once a business case has been established and the investment made, companies should track their actual performance relative to the planned measures indicated in the business case. These performance comparisons should be communicated and analyzed to help improve current investment performance and develop lessons learned for future investments. The creation of a business case helps align all participants with the objectives of the investment, necessitating detailed understanding of investment costs, and providing a communication mechanism to gain senior management buy-in. continued on next page 31

33 Procure-To-Pay Foundation Practice10 Establish a business case for each technology investment and track your performance relative to your business case objectives continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control The development of a business case necessitates an understanding of investment costs and benefits; that understanding combined with performance tracking facilitates benefit achievement as expectations and progress against the expectations are clearly defined Providing users with an understanding of the benefits of new process or technology investments usually results in higher compliance ACTION STEPS: 1. Develop cross-functional team of business and technology employees to analyze an investment consideration 2. Detail investment description and anticipated costs 3. Calculate quantitative and qualitative benefits that the investment will enable 4. Analyze financial costs, benefits, and risks where appropriate 5. Monitor the actual investment costs and benefits and compare actual performance to projected performance 6. Analyze performance to improve current and future investment results SUCCESS STORIES and TRENDS 50 percent of our survey respondents set an ROI goal for their technology investments; 80 percent of those who set an ROI tracked their performance relative to their goal. One survey respondent developed a business case for e-procurement that was approved based upon a clear description of the investment s costs and benefits. Benefits detailed included reduced Procurement FTEs and improved end-user productivity. Section II Practices 32

34 Procure-To-Pay Foundation Practice11 Technology Maximize automation of an end-to-end technology solution practice companies are moving in the direction of an entirely paperless Procure-To-Pay process. This follows a trend that began with ERP, Commercial Card, and e-procurement implementations. Companies see that an increase in automation provides significant cost savings through reduction of handoffs, decreased time to perform activities, and increased control and user satisfaction. A complete end-to-end technology solution would be comprised of the following components: Use of electronic auctions and vendor requests for sourcing Use of e-procurement and ERP solutions for requisition and order placement Implementation of ghost account program in e-procurement and ERP systems for automated payment Internal Web-based booking system Electronic receiving via EDI, bar coding, or XML Automated interface between Procurement and A/P and General Ledger (G/L) systems Electronic feed of card-provided data Automated pre-populated expense reporting system Electronic Invoice Presentment and Payment (EIPP) Electronic payment of suppliers, including card provider Electronic desktop reporting The ability to implement this solution in its entirety requires significant time and resources. Companies should adopt this vision as part of their technology strategy and then prioritize the initiatives needed to progress to this vision. continued on next page 33

35 Procure-To-Pay Foundation Practice11 Maximize automation of an end-to-end technology solution continued MARKET APPLICABILITY: All companies should have an automated end-to-end vision. However, some technologies, such as EIPP, may only be applicable to large corporate companies. Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Companies could reduce transaction costs significantly by eliminating paper Removes non-value-added activities such as data entry Provides greater data capture and ability to manage vendor spend Removes possibility of manual, human error from the function ACTION STEPS: 1. Develop an end-to-end Procure-To-Pay platform vision as part of the Procure-To-Pay technology strategy 2. Identify and prioritize initiatives that will achieve vision using ROI analysis 3. Incorporate initiatives into overall technology strategy 4. Evaluate appropriate options for implementing initiatives and create business cases 5. Validate presence of processes to support technology initiatives SUCCESS STORIES and TRENDS One company has been able to reduce per transaction costs from $9.00 to $0.89 through usage of an e-procurement system. One study participant used an ASP to provide an e-procurement solution that otherwise could not have been implemented within its internal IT department. The solution has been so successful that 90 percent of all spend is placed through the e-procurement application. Section II Practices 34

36 Procure-To-Pay Foundation Practice12 Strategy Implement and leverage an e-procurement solution practice companies have successfully implemented e-procurement software to streamline and automate their Procurement activities. e-procurement software applications and services are employee self-service solutions that support requisition, approval routing, and order placement. Several well-established software vendors offer complete e-procurement packages including Ariba, Commerce One, Oracle, SAP, Clarus, PeopleSoft, and Works. e-procurement software implementations share three common success factors: Focus on Return on Investment (ROI) best practice companies not only develop a clear business case but focus on tracking and meeting the goals established in their analysis Phased Rollout Strategy best practice companies utilize a phased rollout strategy. For example, some companies align deliverables by end date so a number of major project milestones are met every 100 days. This phased approach helps clients obtain quick wins, build momentum, and achieve flexibility to respond to changes in business climate Incorporate Change Management best practice companies make Change Management-related items a priority. Successful implementations have involved project sponsors and well-defined communication programs, as well as job-role redefinition and training Successful implementers of e-procurement software are able to achieve significant Procurement-related savings. Adopters of e-procurement have been able to renegotiate contracted rates down by 5 percent to 10 percent through improved contract compliance, reduce average order requisition costs from $114 per order to $31, shorten purchase and fulfillment cycles from eight days to two days, and in some cases, reduce maverick purchasing by 50 percent. 1 continued on next page 1 Aberdeen Group. Indirect Expense Management: Driving Bottom-Line Benefits. November,

37 Procure-To-Pay Foundation Implement and leverage an e-procurement solution continued Practice12 MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Significantly reduces Procurement costs and transaction times Simplifies Procurement process and eliminates paperwork Eases vendor selection process and increases data capture Reduces maverick spend and human error ACTION STEPS: 1. Develop cross-functional team of business and technology employees to analyze e-procurement investment consideration 2. Detail investment description and anticipated costs 3. Develop quantitative and qualitative benefits the e-procurement software will enable 4. Conduct financial analysis of costs and benefits where appropriate 5. Present information to gain senior management approval for e-procurement implementation 6. Develop mechanism to track the actual investment costs and benefits and compare actual performance to projected performance 7. Develop Change Management process including a well-defined communication plan 8. Select and implement e-procurement software 9. Analyze performance to improve current and future e-procurement results SUCCESS STORIES and TRENDS 85 percent of survey respondents who have implemented an e-procurement system have been satisfied with the results. 60 percent of survey respondents who have implemented an e-procurement system have been able to dramatically reduce the amount of time required to place an order. Section II Practices 36

38 Commercial Card Program General SUMMARY Commercial cards are purchasing and payment vehicles used for a company s Procurement, Fleet, and Travel and Entertainment (T&E) expenditures. For the purposes of this report, the term commercial card is used to encompass the entire business card program, including purchasing cards, one cards, fleet cards, and T&E cards. A commercial card program could include any combination of the card types listed. Companies can incorporate commercial cards as one component of their Procure-To-Pay strategy. It is important to assess use of cards against other purchase and payment vehicles to maximize the mix of methods used. This section contains best practice information applicable to all card programs. Following the general section are best practice sections specifically relevant to purchasing cards, fleet cards, and Travel and Entertainment. BEST PRACTICE 1 BEST PRACTICE 2 BEST PRACTICE 3 BEST PRACTICE 4 BEST PRACTICE 5 BEST PRACTICE 6 Align commercial card program objectives with company s overall Procure-To-Pay strategy Determine commercial card product(s) based on ability to achieve program objective Establish center-led management and administration of the commercial card program Develop and disseminate enterprise-wide commercial card policies and procedures Incorporate a comprehensive commercial card training program Incorporate commercial cards into business continuity planning 37

39 Commercial Card Program General Practice1 Align commercial card program objectives with company s overall Procure-To-Pay strategy A commercial card program should be consistent with, and implemented as part of, the company s overall Procure-To-Pay strategy. Procure-To-Pay strategies typically have the following objectives: reduce transactions costs, improve vendor management, increase controls, and enhance user satisfaction. practice companies ensure specific commercial card performance measures are in place to correlate to Procure-To-Pay objectives. Measurements can include: purchase transaction cost, invoice payment cost, spend on card, and user satisfaction data. Leading companies also periodically review card program objectives and performance for continuous improvement purposes. ACTION STEPS: 1. Review corporate/ Procurement mission and vision statement; review current Procure-To-Pay policy 2. Develop simple commercial card goals and objectives; highlight objectives that can be modified as the program evolves or as business needs change 3. Ensure that goals are measurable and attainable e.g., reduction in invoice volume, increase in card penetration, reduction of number of suppliers 4. Build in flexibility to allow modification according to specific division/unit/ country needs 5. Communicate goals and drivers for each goal or objective to cardholders and managers 6. Track these goals for continuous improvement efforts; publicize successes MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control SUCCESS STORIES and TRENDS Leveraging cards as part of an overall company strategy assists companies in using the most efficient and cost-effective method for purchasing and payment Ensuring that commercial card program goal setting and tracking is performed in conjunction with Procure-To-Pay performance measures will facilitate greater management control of objectives One study participant had a strategic initiative to reduce the overhead cost of its transactional Procurement functions and reallocate resources to other parts of the company. Through implementation of a purchasing card program, it was able to reduce A/P headcount by 75 percent from 135 personnel to 45 personnel over a four-year span. Another study participant was able to meet its company s productivity goals of reducing manual process of paper invoices by increasing the volume of transactions on the card by 40 percent which enabled its A/P personnel to focus on more strategic activities. Section II Practices 38

40 Commercial Card Program General Practice2 Determine commercial card product(s) based on ability to achieve program objectives Leading companies select commercial card products that will help the company meet its Procure-To-Pay goals and objectives. When selecting commercial card products, companies must determine the following: Card Issuer e.g., financial institution or other issuer, Card Provider e.g., Visa, MasterCard, American Express, and card type e.g., purchasing card, fleet card, one card, or T&E card. Prior to implementing a card solution, best practice organizations analyze the costs and benefits of each program, taking into consideration any product variations among Card Issuers and assessing the following: Card Issuer: - Industry reputation - Current relationship - Financial arrangement - Card management and administration tools available through Card Issuer, including: - Templates to assist with implementation e.g., policies and procedures - Integration of card data with financials or ERP - On-line account administration - On-line reporting capabilities - Expense management tools - Knowledge/experience of card sales personnel and ability to provide consultative services - Customer service levels: Service Level Agreements, proactive relationship Card Provider: - Standard transaction cost for use of card - Merchant acceptance: consider commodity and international acceptance Card Type: - Multiple cards to cover purchasing, T&E, and fleet transactions - One card: single card that combines Procurement with T&E, fleet, and phone card features One card programs offer the following benefits: increased negotiating leverage and streamlined relationship maintenance with the Card Provider; reduced number of card accounts managed, particularly for companies with a high degree of purchasing and T&E cardholder overlap; and streamlined card administration. The one card benefits must be balanced against the following considerations: complexity of spending controls and reconciliation and single liability structure requirement. The following can enhance the success of a one card implementation: split liability/diversion billing by MCC code; single unified method of allocating and posting card transactions; streamlined receipt retention policies; and tax compliance process. continued on next page 39

41 Commercial Card Program General Practice2 Determine commercial card product(s) based on ability to achieve program objectives continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Selection of the appropriate program helps enable savings goals associated with Procure-To-Pay initiatives Ensures that the card program meets the needs of the end-users Thorough review of card program enables company to select a card that provides needed vendor acceptance and delivers the most detailed and accurate spend data Ensures that the selected card program has the appropriate controls in place ACTION STEPS: 1. Review goals and objectives for the commercial card program 2. Create cross-functional team of key stakeholders to participate in card selection process at a minimum include both Procurement and A/P personnel 3. Develop request for proposal (RFP) and distribute to Card Issuers 4. Evaluate Card Issuer responses against commercial card goals and objectives and select Card Issuer based upon ability to meet those goals and objectives SUCCESS STORIES and TRENDS The top two reasons cited by study participants for selecting a particular issuer were financial arrangement with Card Issuer and merchant acceptance. Section II Practices 40

42 Commercial Card Program General Practice3 Establish center-led management and administration of the commercial card program Center-led oversight facilitates standardization of the commercial card program. While card requirements and restrictions may vary slightly based upon business unit Procurement needs, the overall program will be consistent across the company. This best practice approach reduces cardholder confusion and reinforces compliance with a consistent corporate policy. The majority of study participants reported centralized management of the commercial card program development of commercial card policies and procedures, vendor management and Strategic Sourcing, creation of training programs, and program scorecard creation and management are all performed centrally. Large or geographically dispersed companies often have centralized oversight with programs administered by location-specific representatives. These representatives are typically responsible for location-specific reporting, reconciliation, training delivery, and response to end-user inquiries. Center-led oversight facilitates standardization of the commercial card program. ACTION STEPS: 1. Position the commercial card program in a centralized function that has visibility and access to senior management 2. Analyze the need for centralized management to be supplemented with site-specific representatives 3. Communicate the appropriate points-of-contact for the commercial card program to cardholders; make contact list available on company intranet and/or distribute updates to cardholders MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control SUCCESS STORIES and TRENDS Facilitates employee awareness and understanding of commercial card program which increases card usage Improves employee awareness of appropriate personnel to contact for questions and issues Facilitates standardization of card program; increases employee awareness of program which improves understanding of program importance and potentially increases spend placed on cards Several best practice companies directly attributed the success of their purchasing card program to having dedicated and attentive administrators. One company has credited its administrator for more than doubling the card distribution and usage (from 2,000 users to 4,100 users) over a four-year time period. 65 percent of surveyed companies centralize the card program administration in Procurement and 31 percent placed it in Finance/Accounts Payable. 41

43 Commercial Card Program General Practice4 Develop and disseminate enterprise-wide commercial card policies and procedures Leading companies document commercial card policies and procedures to communicate appropriate use to cardholders. Policies should provide clear guidelines and be widely disseminated, as cardholders are more likely to use cards appropriately if they understand what the eligible purchases are and how policy and procedural compliance fits within the overall company strategy. Companies report a variety of reasons why they have implemented card programs, and their policies reflect these objectives. Commercial card policies should contain the following content (by commercial card type): Commercial card objectives Auditing procedures Cardholder responsibilities Approving manager responsibilities Credit/Transaction/Spending limits Ordering process/eligible purchases Record keeping/reconciliation Security and liability Restricted transactions Dispute resolution Lost card procedures Cardholder agreement form Card activation Training ACTION STEPS: 1. Review corporate/ Procurement mission and vision statement; review current Procure-To-Pay Policy to understand how a commercial card meets policy objectives 2. Develop and disseminate a policy to address the commercial card program selected, including the items listed above 3. Review policy and update periodically as needed MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control Clear guidelines empower the cardholders to use cards appropriately, ensuring expected savings are achieved Clear guidelines empower the cardholders to use cards appropriately; use of cards is more convenient than purchase orders Policies document and communicate expectations and control mechanisms to managers, administrators, and cardholders Section II Practices 42

44 Commercial Card Program General Practice5 Incorporate a comprehensive commercial card training program practice companies develop training materials with relevant information and mandate that employees receive appropriate commercial card training prior to card issue. Encouraging and thus increasing usage of the card has helped our Procurement Organization reduce its focus on processing and increase its focus on more value-added strategic initiatives. Large Corporate Non-durable Manufacturing Company Strong policies and procedures must be established as the foundation for the training effort. Fundamentals of a training program include goals, type of trainees, content per trainee, and formats for delivery. Training goals should be matched to trainee type: Trainee Type Trainee Type Definition Training Goals Executive Super-User Approver Cardholder Designated to be a senior vice president or above Heavy use of card for purchasing with reconciliation approval responsibilities Infrequent need to requisition; primary role to be approval of requisitions Use of card for purchasing, with little approval capability Card program awareness Detailed commercial card policies and procedures training Overview of commercial card policies and procedures and detailed training on approval processes Overview of commercial card policies and procedures and detailed training on eligible purchases There are multiple training delivery formats. practice companies analyze each format and determine the appropriate mix for the organization and trainee types. Delivery formats include: virtual training e.g., Web casts, classroom training, and self-study. continued on next page 43

45 Commercial Card Program General Practice5 Incorporate a comprehensive commercial card training program continued Additional training materials such as Quick Reference Cards can be posted at employees desks to summarize critical training topics. Delivery Format Advantages Disadvantages Virtual Self-study computer-based training Classroom via train the trainer Enables virtual classroom setting Enables deep buy-in and accountability Scalable and repeatable Low cost Ensures consistent presentation of materials time to use if geographically dispersed organization Scalable and repeatable Low cost Training facility not required Can be completed at trainee s own pace Enables center-led design and decentralized execution of training program Enables face-to-face interaction Preferred style of learning Presents new learning style Requires knowledge of intranet technology Assumes companies have intranet Requires trainee to independently access and complete the training Eliminates face-to-face human interaction Expensive Not easily repeatable Potential for inconsistency of presentation of materials Requires training facilities ACTION STEPS: 1. Identify the trainee types 2. Match training content and delivery modes to each trainee type 3. Execute training program 4. Review the training program for effectiveness (policy compliance) and relevance (end-user evaluations) 5. Periodically update according to changes in policies and procedures MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Reduces costs through compliance Empowers employees to comply with policies Increases the likelihood of choosing approved vendors Increases the likelihood that established policies and procedures will be used A survey respondent had a dedicated purchasing card-training program and directly linked this to the successful penetration and expansion of the card program. Cardholders understood the benefits and therefore were empowered to use the card. Another survey respondent directly attributed increased purchasing card usage through incorporating purchasing card training into its new-hire training program. Section II Practices 44

46 Commercial Card Program General Practice1 Practice6 Incorporate commercial cards into business continuity planning Leading companies incorporate continuity planning into all business operations and leverage commercial cards as part of their plan. Whether business disruption causes are minor e.g., system outage, or catastrophic e.g., natural disaster, the use of commercial cards can facilitate continuing business operations. Purchasing cards and T&E cards can be utilized as alternate forms of purchase and payment for transactions and additionally be used as a cash management tool or for immediate access to credit. Credit limit increases may necessitate coordinating with your Card Issuer. Study participants regularly reported use of commercial cards to remedy unexpected circumstances. ACTION STEPS: 1. Include use of commercial card in contingency planning documents as an alternate form of purchase and payment 2. Detail commercial card use in the event of a business disruption in the commercial card policy 3. As part of communication of purchasing card successes, tips, and updates, include use of card to resolve continuity or emergency issues MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control SUCCESS STORIES and TRENDS Reduces need to process emergency cash advances and check requests Enables employees to use purchasing cards to handle unexpected business events; reduces employee stress with resolving these issues Enables employees to manage business needs through unforeseen circumstances One New York City-based study participant reported that use of its commercial card allowed it to facilitate business continuity when the events of September 11th impacted its purchasing and payment technology infrastructure. At one company, video equipment did not arrive in a timely fashion for use at a marketing event. Employees were able to lease video equipment locally using a purchasing card and the marketing event continued as planned. 45

47 Section II Practices 46

48 Commercial Card Program Purchasing Cards SUMMARY The use of cards as a purchasing and payment method can reduce purchase transaction costs and settlement costs for organizations, while substantially reducing the need for purchase orders. Card statements, which contain multiple transactions per statement, can substantially reduce the number of invoices and checks processed, and electronic delivery of card statements further reduces transaction costs. End-users are often pleased with the ease of purchasing provided by a card versus generating and manually reconciling purchase orders, receipts, and invoices. The primary benefit to vendors is faster payment of purchases made through a commercial card. Purchasing card programs were initially introduced as a cost-effective way to handle high-volume, low-dollar value transactions and to replace the need for petty cash disbursements. Initial estimates showed that use of the card could reduce internal transaction costs by approximately 65 percent ($81 to $28). 2 As with any reengineering initiative, the success companies have achieved through card programs has varied based on implementation. practice companies aggressively have targeted appropriate categories for purchasing using the card and internally have mandated the card and trained users. Leading companies are integrating the program into their strategic initiatives such as e-procurement and Strategic Sourcing in order to maximize the benefits of the program. Before our purchasing card implementation two years ago, we had a cube full of paper invoices waiting to be paid, and we were incurring late payment fees from vendors. We demonstrated to management that the purchasing card was an easy, inexpensive solution to the stacking invoices problem. We now have $95MM of our spend on the card, we have reduced Accounts Payable-related paperwork by 50 percent, and we have eliminated late payment fees. Large Corporate Retail Company BEST PRACTICE 1 BEST PRACTICE 2 BEST PRACTICE 3 BEST PRACTICE 4 BEST PRACTICE 5 BEST PRACTICE 6 Source, select, and implement a purchasing card program Establish parameters for eligible purchasing card transactions leveraging appropriate controls Establish purchasing card issuance criteria for optimal distribution to employees Mandate and enforce use of purchasing card for all eligible purchases Investigate purchasing card program expansion to additional spend categories to maximize benefits achieved Maximize use of virtual accounts i.e., ghost accounts and department cards 2 Lehigh University. Reducing the Transaction Costs of Purchasing Goods and Services. March,

49 Commercial Card Program Purchasing Cards Practice1 Source, select, and implement a purchasing card program Leading companies use a thorough sourcing process to select a purchasing card program that will help the company meet its goals and objectives. Sourcing a purchasing card program can occur at implementation of a new program or at a transition point when the needs of the company change. Companies must determine the following when selecting a card program: Card Issuer e.g., financial institution or other issuer, Card Provider e.g., Visa, MasterCard, American Express, and card type e.g., purchasing card and one card. Benefits of implementation of a purchasing card program include: Integration of purchasing card data into internal MIS, Accounts Payable (A/P), and General Ledger systems - Streamlines data input - Improves data quality and accuracy - Automates mapping of transactions to cost centers - On-line access to cardholder account data - Consolidation of spend for reporting purposes e.g., sourcing, exception reporting Reduced transaction costs for purchasing and payment activities - Reduces volume of purchase requisitions and purchase orders - Automates payment to suppliers - Enables consolidation of transactions for single payment to Card Issuer Increased cardholder satisfaction - Streamlines Procurement process - Reduces requirement to fill out purchase requisitions and obtain approvals for typical purchases - Empowers user to make timely purchases Improved control over spend Maintains control through use of card restrictions and parameters on front-end e.g., credit limits Increases visibility to potential non-compliant purchases through back-end exception reporting Reduced petty cash and check requests, resulting in reduced costs associated with processing and tracking petty cash and check requests continued on next page Section II Practices 48

50 Commercial Card Program Purchasing Cards Practice1 Source, select, and implement a purchasing card program continued Leading companies develop specific and achievable goals and objectives for their purchasing card programs that are consistent with corporate culture and Procurement policies and then periodically review those goals and objectives for continuous improvement purposes. Prior to implementing any purchasing card solution, companies should analyze the costs and benefits of each available program, taking into consideration any product variations from one Card Issuer to another. Leading companies develop specific and achievable goals and objectives for their purchasing card programs that are consistent with corporate culture and Procurement policies. Companies should compare purchasing programs based on the following criteria: Merchant acceptance Current Card Issuer relationship Financial arrangement Industry reputation Card management and administration tools available through Card Issuer, including: - Templates to assist with implementation e.g., Policies and Procedures - Integration of card data with financials or ERP - On-line account administration - On-line reporting capabilities - Expense reporting management tools Knowledge/experience of card sales personnel and ability to provide consultative services Customer service levels e.g., Service Level Agreements, proactive relationship Companies compare purchasing cards based upon the following factors: Standard transaction cost charged for use of the card Merchant acceptance continued on next page 49

51 Commercial Card Program Purchasing Cards Practice1 Source, select, and implement a purchasing card program continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Sourcing for an appropriate card program ensures the greatest possible cost savings Ensures that the card program meets the needs of the end-users Thorough review of card program enables company to select a card that provides needed vendor acceptance and provides greatest data for vendor management and negotiations Ensures that the selected card program has the appropriate controls in place ACTION STEPS: 1. Review goals and objectives for the purchasing card program 2. Create cross-functional team of key stakeholders to participate in card selection process at a minimum include both Procurement and A/P personnel 3. Develop request for proposal and distribute to Card Issuers 4. Evaluate Card Issuer responses against purchasing card goals and objectives and select Card Issuer based upon ability to meet those goals and objectives SUCCESS STORIES and TRENDS The top two reasons cited by study participants for selecting a particular issuer were financial arrangement with Card Issuer and merchant acceptance. 67 percent of study participants had implemented a purchasing card program to meet the objectives of transaction cost reduction, settlement convenience, and user convenience. Section II Practices 50

52 Commercial Card Program Purchasing Cards Practice2 Establish parameters for eligible purchasing card transactions leveraging appropriate controls One of the most critical steps in establishing a purchasing card program is to define well-thought-out parameters, such as identification of the appropriate commodity and spend limits that encourage ease-of-use but allow for appropriate control. Leading companies clearly define eligible commodities spend targets for purchasing card use. Companies surveyed differ by the commodity-types that are eligible for their card program from office supplies only, to all indirect spend of a certain dollar value, to all capital and expense items. Companies also differ by their established card spend targets, ranging from all items under $250 to all items under $5,000. To determine the appropriate purchasing parameters, a company should undergo a spend analysis process of A/P data to identify spend patterns such as average spend and number of transactions by commodity. Where possible, high-volume transactions or recurring transactions should be transitioned to purchase through the card program. Companies should also analyze current approval requirements e.g., signature approvals, purchase requisitions, for commodities and dollar amounts, to determine which items back-end audit procedures can be leveraged (to maintain controls). Leading companies leverage Card Issuer experience and knowledge in determining eligible purchases. Once commodities for card usage are determined, a spend target should be established. Spend targets should be set at a dollar amount that enables cardholders to use their cards for items in eligible commodity groups that are frequently purchased. Organizations should set credit limits that strike a balance between control and ease-of-use. No single credit limit will be appropriate for every organization. Within organizations, different business units and levels of employees may have different credit limits associated with their individual card accounts. Initial setting of credit limits should incorporate an analysis of monthly purchase volumes, so the cardholder will be able to make purchases as required. Limits should be reviewed and adjusted on a periodic basis. practice companies optimize use of Merchant Category Code (MCC) blocking they ensure that appropriate purchases are not declined due to an MCC block, but also restrict purchases that are outside of company policy, such as purchases at jewelers or casinos. The key to making the purchasing card program work is making the transaction limits high enough. We have individual transaction limits set at $1,000. Some maintenance people have $5,000 individual transaction limits. This reduces the paper pushing with purchase orders. Mid-size Durable Manufacturing Company continued on next page 51

53 Commercial Card Program Purchasing Cards Practice2 Establish parameters for eligible purchasing card transactions leveraging appropriate controls continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control Conducting a thorough analysis of spend to be placed on purchasing cards ensures that goods and services are purchased through the most cost-effective method Clear guidelines empower the cardholders to use cards appropriately Spend parameters provide clear guidelines for what items should be purchased through the card ACTION STEPS: 1. Review spend and number of transactions for each commodity, division, and role; review current spend and commodities on cards 2. Identify the high-end dollar amount for typical purchases; identify the dollar amount for most frequent purchases 3. Select commodities and dollar amounts to target for card program 4. Set card spend targets for the various commodities, divisions, and/or roles; card spend targets should be slightly higher than the cost of the most frequent purchases SUCCESS STORIES and TRENDS One mid-size manufacturing company established a purchasing card spend target for all manufacturing purchases up to $1,000. This step significantly reduced the number of requisitions processed by each manufacturing facility. Another study participant established spend targets of $1,000 within the manufacturing facility and $5,000 for engineers, as the engineering group regularly purchased larger-dollar items. One large corporate company places 60 percent of its Procurement transactions, accounting for 12 percent of its $11.4 billion of annual spend, on its purchasing card. Another large corporate company places 49 percent of its $30.5 billion of annual spend on its purchasing card. One company reviewed credit limits monthly during pilot and rollout and transitioned to quarterly review on an ongoing basis. One study respondent identified that Procurement increases in the summer, so limits were temporarily increased for that period of time. Section II Practices 52

54 Commercial Card Program Purchasing Cards Practice3 Establish purchasing card issuance criteria for optimal distribution to employees Leading companies ensure that purchasing cards are distributed appropriately, developing criteria for distribution of cards that are consistent with company culture, policies, and spend parameters. Issuing cards to the right people and encouraging use of the cards is key to the success of a purchasing card program. Distribution of cards should be wide enough to ensure all regular purchasers of card-eligible purchases have a purchasing card or have access to a department-designated card. practice companies also identify super-users designated buyers who will use the card on a frequent basis. Super-users may be responsible for all purchases for a business unit or facility. In addition, they may be the primary point-of-contact for a particular type of purchase e.g., furniture, event planning, computers. These users often become the largest supporters of the card and can encourage issuance to additional users. In order to identify regular purchasers, conduct a review of purchase orders, petty cash distributions, and check requests. ACTION STEPS: 1. Develop criteria for distribution of cards that is consistent with company culture and policies; review purchase orders, petty cash distributions, and check requests to identify typical purchasers at your organization 2. Distribute criteria for card issuance as part of Procurement and purchasing card policies 3. Distribute cards to super-users and other identified purchasers 4. Solicit feedback from cardholders and managers to ensure appropriate distribution e.g., if a cardholder is regularly making purchases for another employee, that employee may require a card 5. Review activation reports to identify individuals that have not activated cards after issuance; these individuals are likely to be purchasing card-eligible items through other methods. Particular attention should be paid to this during rollout of a new card program, as there may be some resistance to change MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control SUCCESS STORIES and TRENDS Distribution of cards to those that regularly purchase items ensures that the maximum number of eligible purchases go through the card, reducing transaction costs associated with purchase orders and petty cash Ensuring that appropriate personnel have cards improves satisfaction with Procurement process; individuals who do make purchases appreciate the convenience of the card Increases control by placing cards in the hands of the appropriate employees Survey respondents reported that identification of the appropriate purchasers and distribution of purchasing cards to those individuals, directly led to the success of their card programs. Leading companies regularly review inactive card and card activation reports to identify cards that are not being used. Companies reported that this information was used to identify individuals who do not need cards, need additional education on use, or need encouragement to transition to a new process. One company that gave cards to designated users was able to move 100,000 transactions from purchase orders to purchasing cards. 53

55 Commercial Card Program Purchasing Cards Practice4 Mandate and enforce use of purchasing card for all eligible purchases practice organizations mandate and enforce use of commercial cards. Consolidating eligible spend onto purchasing cards improves the organization s ability to achieve cost savings and control maverick spend. Some companies strongly encourage usage through education and compliance reporting, while other companies mandate usage and charge those business units not in compliance with the cost of purchase order generation. Other companies reward business units by passing cost savings back to the business unit. Each company must determine how best to encourage purchasing card usage for eligible transactions based upon their culture. Each company must determine how best to encourage purchasing card usage for eligible transactions based upon their culture. ACTION STEPS: 1. Regularly communicate which purchases are eligible for purchasing on purchasing cards 2. Review purchases made through other methods e.g., purchase orders, to determine whether purchases should have been made on a card 3. Notify cardholders and/or management when purchases should have been made through a purchasing card 4. Communicate benefits of and successes associated with use of cards MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control SUCCESS STORIES and TRENDS Increased use of the card for eligible purchases reduces transaction costs associated with those purchases and overall program costs Increases compliance with criteria for placing eligible spend on commercial cards Survey results indicate that 68 percent of the respondents either mandate or strongly encourage the usage of their purchasing cards to maximize savings. One survey participant distributed purchasing card spending goals to all business units to generate competition to increase eligible spend placed on the card. Another survey respondent reported that encouragement and communication worked with all but one business unit. To force compliance, the Procurement department declined to pay the invoice and forwarded it to the business unit to figure out how to pay the vendor. One survey participant declined purchase requisitions for items that met criteria for purchase with the purchasing card. This significantly reduced the number of purchase orders being processed at the company and increased eligible spend on the purchasing card. Mid-size companies have reported that declining check requests and decreasing petty cash on hand have resulted in increased use of commercial cards for eligible purchases. One company mandated use of the commercial card for all eligible spending. If cardholders did not follow policy, they were given a warning after the first violation and then incurred increasing charges back to the business unit for each additional violation. Section II Practices 54

56 Commercial Card Program Purchasing Cards Practice5 Investigate purchasing card expansion to additional spend categories to maximize benefits achieved The use of cards as a payment method can reduce purchase transaction costs and settlement costs for organizations. Companies tend to focus on using cards only for hightransaction, low-dollar items. While use of cards for this purpose provides significant benefit, companies should also investigate expansion of use into other spend categories, including recurring payments e.g., phone, utilities, temporary services, and computers. To identify the spend categories that will provide the greatest benefit from transition to a card program, look at ongoing vendor relationships and select vendors with whom you have high transactions/spend or recurring payments. Card Issuers can assist with analysis of Accounts Payable file, vendor targeting, and incorporation of data and can provide services to help companies identify which suppliers within the company s vendor base already accept cards as a form of payment. Recognizing the advantages of using purchasing cards, leading companies often require that their preferred vendors accept purchasing cards as a form of payment. Some also use other techniques to encourage card acceptance, such as identifying large local companies that have implemented cards and investigating the use of the same vendors. They then developed a consortium relationship and leveraged the combined purchasing power of the group to encourage vendor acceptance of cards. In addition, they incorporated card acceptance into the request for proposal (RFP) or bid process. We currently have 50 percent of our indirect spend on our purchasing cards. Our goal is to have 85 percent of indirect spend on the card as our program has continued to meet our objectives of user convenience, transaction cost reduction, and settlement convenience. Mid-size Durable Manufacturing Company continued on next page 55

57 Commercial Card Program Purchasing Cards Practice5 Investigate purchasing card expansion to additional spend categories to maximize benefits achieved continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Increases ability of purchasing cards to reduce transaction costs by eliminating additional purchase orders and processing of paper invoices Employees often find purchasing items with cards easier and faster than completing a requisition to generate a purchase order Placement of additional spend categories on cards enables reporting by vendor through card program By increasing the volume and commodities purchased through the card, companies achieve greater visibility to spend and increased control in those areas ACTION STEPS: 1. Review categories of spend to identify target areas for transition to card program e.g., recurring charges, services, temporary services, projects, raw materials 2. Request Card Issuer conduct a supplier/merchant matching to identify which of your vendors accept payment by credit card to identify additional commodities for transition to card program e.g., The Visa Supplier Matching Service 3. For those vendors that do not currently accept cards as a method of payment, request that vendor begin to accept payment; if necessary, use creative methods detailed above SUCCESS STORIES and TRENDS One mid-size company leveraged its significant spend with local vendors to require their acceptance of cards for payment. One company used its card program to expand spend to recurring payments for phone services, pager services, copier maintenance, shredding, coffee supplier, flowers, catering, etc. Due to the financial success of this initiative, management continues to investigate opportunities to expand spend and has incorporated the requirement for acceptance of commercial cards in RFPs. Survey responses illustrate spend for a variety of commodities: - Two mid-size manufacturing companies use the card for over 75 percent of hardware/software purchases - One large corporate finance company uses the card for 100 percent of spend with temporary employees and contractors - One large corporate services company uses the card for 80 percent of spend on packaging and shipping Section II Practices 56

58 Commercial Card Program Purchasing Cards Practice6 Maximize use of virtual accounts i.e., ghost accounts and department cards Virtual accounts are commercial cards associated with one department or vendor, regardless of the particular end-user making the purchase. The two most common examples of virtual accounts are ghost accounts and department cards. Ghost accounts are master accounts with no associated physical card. A department card is a plastic card that is assigned to a specific group within the company. In both cases, purchases are charged to an individual commercial card account number that can only be accessed by designated purchasers. practice companies leverage virtual accounts as part of their overall purchasing card strategies. Consolidation of spend onto virtual accounts reduces administration of purchase orders, various card programs e.g., virtual accounts can be substituted for supplier cards, and multiple card statements. Spend categories that are typically handled through virtual accounts include: Recurring charges through service companies, such as monthly bills for shredding, cleaning, telephone/pager services, rent, and utilities Services, such as temporary services, catering, and copier maintenance Events planning expenses, such as hotels and transportation for marketing or training functions Capital items for projects, such as technology equipment Ghost accounts are a particularly effective and efficient method of payment for e-procurement purchases, because they provide settlement convenience: a single Electronic Funds Transfer (EFT) payment for multiple charges instead of numerous individual checks. Ghost accounts should be set up for each e-procurement supplier with high levels of spend. For both e-procurement and standard purchasing, this approach minimizes administrative work allowing the company to manage fewer accounts. For ghost accounts, the vendor typically maintains the card number at its location charging the card either at the time of each purchase or on a monthly basis. Ghost accounts reduce the risk of late payments, reduce the burden on A/P to pay recurring monthly bills, and increase vendor satisfaction by ensuring timely payment. Ghost accounts are a particularly effective and efficient method of payment for e-procurement purchases, because they provide settlement convenience. continued on next page 57

59 Commercial Card Program Purchasing Cards Practice6 Maximize use of virtual accounts i.e., ghost accounts and department cards continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Use of ghost accounts reduces time for reconciliation and settlement of transactions Eases both the order placement and payment processes; increases vendor satisfaction through timeliness of payments Maintaining a single vendor and/or commodity on a ghost account allows for improved tracking of spend with the supplier(s) Use of back-end audit maintains the controls on these purchases; improved controls can be achieved through reporting on the card account e.g., companies can review monthly charges for variance and month-to-month variance; enables greater management of departmental or commodity-based spend ACTION STEPS: 1. Evaluate current spend and identify suppliers or commodities to target for virtual card programs 2. Leverage Card Issuer experience to implement and manage a virtual card program 3. For current suppliers, coordinate transition to ghost accounts 4. Determine data requirements and communicate to vendor 5. Finalize requirements for reconciliation purposes and communicate to purchaser/cardholder SUCCESS STORIES and TRENDS Half of the survey respondents use virtual accounts. One study participant has significantly leveraged use of the ghost account program for all possible recurring expenditures, including catering, telephone, cellular phone, pagers, shredding, and maintenance, which significantly improved the reconciliation process and vendor negotiations by placing all spend with each vendor on a single account. The transition also resulted in a significant reduction in the number of invoices and purchase orders. One survey respondent implemented e-procurement and ghost accounts with designated vendors e.g., computer provider. Ghost account use facilitated issue resolution and expedited payment. Section II Practices 58

60 Commercial Card Program Fleet Cards SUMMARY The fleet card program is an important tool for managing variable vehicle expenses such as fuel, maintenance, and other operational costs. But a fleet card program can also provide valuable information to assist in driver monitoring and cost allocation and reporting processes. Implementing fleet card programs enables companies to: Gather unique fleet data to improve management reporting e.g., odometer readings, fuel purchase detail, vehicle identification number, mileage, time of purchase. This data enables companies to track scheduled maintenance, mileage, and compliance with Procurement policies Enhance vendor negotiations: By tracking fleet spending, management may identify preferred vendors and use actual spending volume to negotiate discounts Streamline accounting processes: Companies can remit single payments for all fleet expenses instead of multiple purchase orders, invoices and/or expense reimbursements Monitor corporate policy compliance: Because fleet card reporting consolidates all spend (including fuel type, scheduled maintenance, vehicle usage, and preferred vendor thresholds), companies can monitor compliance with corporate policies and progress toward negotiated volume thresholds. Exception reporting can be generated to ensure that cardholders do not use fleet cards to make personal or other unauthorized fuel purchases Improve spending controls: Improved reporting and card controls are provided by fleet card programs, such as restricting purchases by transaction or billing cycle limits, fuel types, and MCCs Eliminate use of employees credit cards for fleet-related expenses: Companies can separate employee business and personal spending, free up available credit by providing company-issued fleet cards, and facilitate expense reporting The two best practices presented here are unique to fleet card programs. BEST PRACTICE 1 BEST PRACTICE 2 Source, select, and implement a fleet card program Use fleet cards to track expenditures through both external and internal sources 59

61 Commercial Card Program Fleet Cards Practice1 Source, select, and implement a fleet card program Companies must first determine whether or not they have a need for a fleet card program. If a company maintains a pool of vehicles or provides company cars, then it is most likely a strong candidate for a fleet card program. Leading companies that implement fleet card programs conduct a thorough sourcing analysis to ensure that the selection of a fleet card will achieve program objectives. Companies should consider the following when selecting a fleet card program: 1. Assess fleet mix and use of that fleet mix: Allocation by vehicle: These companies tend to have a pool of vehicles that have rotating drivers, perhaps due to shift work or high turnover. The drivers don t have personal resources to pay and companies do not want to distribute petty cash Allocation by driver: These drivers are typically management/supervisors, operations, or sales individuals that have access to a company vehicle. Companies in these situations also consider expanding the spend permitted on the card beyond the traditional fleet expenditures to include travel and purchasing needs into a single card 2. After completing initial assessment of the company s requirements for a fleet card program, fleet managers should compare the features and options available through the various card programs: Merchant Acceptance: Merchant acceptance is not just an issue of user convenience. With increased merchant acceptance, costs are reduced as drivers have a greater ability to select the lowest price fuel and do not need to divert off the travel path to get to a particular gas station Cost of card or available discounts: Compare fees associated with cards and available discounts e.g., discount on price per gallon over a specified volume of gas purchased Data and Reporting: Compare the reporting features available through various programs and against fleet card program objectives. Card Issuer reports provide the specific information necessary to perform accounting functions, manage programs, ensure effective negotiations with vendors, and control and audit expenditures Exception Reporting: These reports are used to identify exceptions to fleet policies, practices, and budgets by flagging potentially inappropriate use of the fleet cards e.g., volume of fuel per day exceeded Program Controls: Compare the controls available through programs e.g., ability to restrict spending by MCCs, ability to require input of an ID number each time the card is used Leading companies that implement fleet card programs conduct a thorough sourcing analysis to ensure that the selection of a fleet card will achieve program objectives. continued on next page Section II Practices 60

62 Commercial Card Program Fleet Cards Practice1 Source, select, and implement a fleet card program continued MARKET APPLICABILITY: Companies with fleet vehicles Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Optimizes maintenance schedules, reduces excessive or inappropriate spending End-users often find it easier to use a fleet card, as there is no need to process the purchase through an expense report for reimbursement; high user convenience for cards that have wide merchant acceptance Provides additional vehicle data for use in vendor negotiations When cards are assigned to a single vehicle, it increases ability to audit for inappropriate usage e.g., multiple fuel charges in a single day to a single vehicle raises a flag ACTION STEPS: 1. Review goals and objectives for the fleet card program 2. Create cross-functional team of key stakeholders to participate in card selection process at a minimum, include fleet manager and Procurement and A/P personnel 3. Develop RFP and distribute to Card Issuers 4. Evaluate Card Issuer responses against commercial card goals and objectives and select Card Issuer based upon ability to meet those goals and objectives SUCCESS STORIES and TRENDS One company used a card program that included reporting of fuel type. 3 percent of its vehicles required premium fuel; however reporting demonstrated that 23 percent were actually purchasing premium fuel. This data enabled the company to reinforce policy, which directly reduced unnecessary costs. One company conducted a cost analysis and determined that the fully loaded cost of a driver in a company vehicle was $200 an hour. It set merchant acceptance as a priority for its fleet card program and decreased the calculated cost by $33. Through implementation of a card program with broad merchant acceptance, this company was able to reduce the need for drivers to divert from the travel path to refuel. This directly impacted the cost of travel, as this company calculated that a 1 percent reduction in miles driven results in a $14.50 savings. 61

63 Commercial Card Program Fleet Cards Practice2 Use fleet cards to track expenditures through both external and internal sources Traditionally, fleet cards are used for transactions at external vendors, but many companies also have vehicle maintenance and operating needs that are met through internal sources e.g., company-owned fuel pumps. Typically, these transactions are tracked through internal processes. Leading companies are now implementing processes to use fleet cards for purchases of fuel and maintenance from internal company sources. For example, if a company has a business unit that provides maintenance on company vehicles, that cost should be allocated to the vehicle. This forward-thinking approach enables companies to capture and track the true total cost of operating and maintaining a vehicle through the fleet card program. An additional benefit is the ability to maintain company-owned, unmanned fuel pumps. These internal fuel pumps can be set up to accept only the fleet card, enabling the total cost of the fuel used for operating the vehicle to be captured. Use of the fleet card has helped us eliminate cash advances for fuel purchases. Large Corporate Utility Company ACTION STEPS: 1. Assess need to track internal expenditures, if a maintenance facility or fuel pumps are maintained internally 2. Coordinate with Card Issuer, fuel supplier, and equipment vendor i.e., manufacturer of fuel pump, to set up acceptance of the fleet card through internal sources 3. Establish a fee-based relationship for internal purchases e.g., monthly fee or per transaction fee, and fee percentage for external purchases MARKET APPLICABILITY: Companies with fleet vehicles and internal maintenance and/or fuel facilities Benefit: User Satisfaction/Process Efficiencies Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Vehicle operators find it easier to use a fleet card for payments rather than use a T&E card and process an expense report for the fuel or maintenance purchase; maintenance providers find the use of a fleet card is simpler than traditional paperwork used to allocate the cost to the vehicle Enhances the ability to manage suppliers and negotiate better pricing by keeping closer record of fleet spending through reporting Provides a single tool for the internal accounting of costs associated with the operation and maintenance of a vehicle One company reports tracking external and internal fleet expenditures with the fleet card and the associated benefits of the comprehensive data it provides on each vehicle. Only one reporting tool is now required to analyze the total cost of ownership and operation of each vehicle. One study participant set up an internal repair shop for vehicle repair. The fleet card was used as the method of payment for internal repairs and provided significant assistance with internal accounting for that repair shop. Section II Practices 62

64 Procure-To-Pay Process SUMMARY The Procure-To-Pay process section describes innovative practices companies use to support and enhance their Procurement and Payment functions. How companies design and manage their process activities is critical to optimizing the benefits of their Procure-To-Pay initiatives. The process section covers all activities in the following areas: Sourcing Order Placement Payment & Settlement Reconciliation Control Reporting Leading companies create value-added vendor relationships that meet their crucial business requirements. They benefit from selection and monitoring of preferred vendor relationships, design of beneficial contract terms, and interaction with suppliers using new processes and technology, such as e-auctions. Companies should streamline their goods and services ordering by reducing the number of required approvals and decreasing the number of purchase orders generated for orders. Through automation of the receipt and payment of goods and services, companies have achieved benefits and efficiencies in payment and settlement. When reconciling invoices and statements, leading companies have automated the receipt and validation of invoices and designed an optimal tax liability strategy. These activities are supported and checked by a thorough and efficient process and spend controls. Leading companies ensure the effectiveness of their overall program and process functions through the use of comprehensive data capture and reporting techniques. This enables them to monitor their overall Procure-To-Pay function and seek opportunities for improvement. continued on next page 63

65 Procure-To-Pay Process SOURCING BEST PRACTICE 1 BEST PRACTICE 2 BEST PRACTICE 3 Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program Incorporate purchasing card/ghost (virtual) account acceptance into preferred vendor contract terms Utilize e-sourcing tools such as e-rfx and e-auctions to source suppliers and gain savings on one-off items ORDER PLACEMENT BEST PRACTICE 4 BEST PRACTICE 5 Limit the number of approvals required to place an order Minimize the use of paper purchase orders for all eligible purchasing card purchases PAYMENT & SETTLEMENT BEST PRACTICE 6 BEST PRACTICE 7 When commercial cards are not used, employ three-way matching to reduce the number of approvals required prior to payment Replace manual check payments with electronic payments RECONCILIATION BEST PRACTICE 8 BEST PRACTICE 9 BEST PRACTICE 10 BEST PRACTICE 11 Understand tax liabilities Use Card Issuer feed to automate delivery of card statements If using electronic statements, predefine valid general ledger account codes and cost centers to facilitate end-user reconciliation Outsource high-volume, specialized payment processes CONTROL BEST PRACTICE 12 Determine control strategy REPORTING BEST PRACTICE 13 BEST PRACTICE 14 BEST PRACTICE 15 Monitor Procurement performance via a scorecard that includes cost, quality, and time components Gain a comprehensive view of spend by integrating data from multiple sources e.g., e-procurement, travel, ERP, purchasing cards Leverage SIC and MCC codes for categorization of spend and purchasing data Section II Practices 64

66 Procure-To-Pay Process Practice1 Sourcing Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program Leading companies have centrally administered, corporate-wide Vendor Management programs to guide selection and ongoing management of vendors. The program they design is often the cornerstone of a Strategic Sourcing effort. Strategic Sourcing was the most frequently cited Procure-To-Pay initiative underway, with 77 percent of survey respondents believing they can improve their Strategic Sourcing activities. Interest in Strategic Sourcing is likely due to an understanding of the savings potential of a well-designed and executed Vendor Management program. Our research indicates that 78 percent of those companies, who have at least 70 percent of spend under contract, believe they are able to achieve significant supplier discounts. Those companies that do not believe they achieve significant supplier discounts have only 37 percent of spend under contract. practice Vendor Management programs consist of the following components: Vendor Management program objectives: - Strategic e.g., number of contracts, use of minority and woman-owned businesses - Financial e.g., percent of spend under contract, annual spend savings per year Contract term guidelines e.g., when to utilize volume guarantees, contract length Preferred vendor criteria: - Product criteria e.g., product performance, parts - Service level criteria e.g., order replenishment turnaround, maintenance timing - Fully loaded cost of doing business with a vendor e.g., freight, taxes - Vendor automation criteria e.g., ordering, invoicing, reporting - Collaboration expectations e.g., order tracking, inventory levels, demand forecasting, input into product design process - Commercial card acceptance Vendor performance monitoring and reporting against key criteria Our research indicates that 78 percent of companies who have at least 70 percent of spend under contract believe they are able to achieve significant supplier discounts. continued on next page 65

67 Procure-To-Pay Process Practice1 Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Enables supplier rationalization which can increase supplier discounts and reduce cost of spot-buy sourcing activities and maverick spending One objective of vendor management is to obtain end-user vendor service expectations, and then monitor and report on user satisfaction with preferred vendors performance A corporate-wide, centrally organized Vendor Management program is the critical component to successful vendor management By having a well-communicated and disseminated program in place, companies increase controls by ensuring employees make use of the companyapproved vendors, limiting rogue spending ACTION STEPS: 1. Interview key stakeholders to define company objectives, scope, expected benefits, and work plan to support the Vendor Management program 2. Present Vendor Management program charter to senior executives to obtain program buy-in 3. Create cross-functional team of key stakeholders e.g., A/P, Procurement, other Procurement groups, to develop Vendor Management program components 4. Once the program components have been determined, select initial commodity-types to target for spend, supplier analysis, and potential contract negotiation 5. Continue to extend analysis and vendor rationalization effort to additional commodity-types according to defined vendor management program objectives; monitor existing preferred vendor performance SUCCESS STORIES and TRENDS 79 percent of survey respondents determine their company s preferred suppliers centrally, allowing them to understand aggregate supplier usage and improve negotiation efforts and vendor performance. One survey respondent changed the name of their Procurement organization to Strategic Sourcing and Contracts to represent their focus on delivering value-added activities to their company. Several survey participants utilize cross-functional, commodity-type specific teams of Procurement resources, business resources, and where appropriate, third-party experts to conduct supplier analysis, rationalization, and contract negotiation. One large corporate survey participant has gained senior management and end-user support for vendor consolidation by demonstrating clear, substantial savings. One survey participant has the goal by year-end to consolidate 80 percent of its spend with 1,500 vendors. Additionally, this company conducts annual Vendor Days to educate and align its vendors to the Procurement goals for the year and vendor performance expectations. Section II Practices 66

68 Procure-To-Pay Process Practice2 Sourcing Incorporate purchasing card/ghost (virtual) account acceptance into preferred vendor contract terms Utilizing cards as a payment method can significantly reduce purchase transaction costs and settlement costs for organizations. Card purchases do not require purchase orders, and payment of accounts, which have multiple transactions per statement, can substantially reduce the number of paper invoices processed. Plus, end-users are often pleased with the ease of use that a card provides. The primary benefit to vendors is faster payment of card purchases. Recognizing the advantage of using purchasing cards as a payment method, leading companies often require that their preferred vendors accept purchasing cards as a form of payment. Also, where appropriate, they work through the details of vendor acceptance of virtual accounts, (accounts set up in order to charge transactions with one supplier/commodity-type to one account regardless of the end-user making the purchase). Companies should also work with vendors to define the transaction information (such as Level III data) they would like to receive to supplement their reporting and sourcing needs. Our initial implementation of the purchasing card program resulted in a 40 percent drop in the number of purchase orders processed. This success has encouraged us to broaden use of the purchasing card program. Our goal is to eliminate 250 purchase orders per month. Mid-size Non-durable Manufacturing Company ACTION STEPS: 1. Include purchasing card/ ghost account acceptance in preferred vendor selection criteria 2. Review with vendors rationale for the requirement that they accept purchasing cards/ ghost accounts 3. Finalize details of card utilization and reporting requirements MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management SUCCESS STORIES and TRENDS Utilization of purchasing cards reduces transaction costs by eliminating the creation of purchase orders and processing of paper invoices End-users often find purchasing items with cards much easier and faster than completing a requisition to generate a purchase order Vendor spend data is more accessible through purchasing cards and/or virtual accounts 50 percent of the survey respondents who electronically requisition goods use the purchasing card as a form of payment for those orders. On average, they pay 30 percent of their transactions with a card. The three most frequently cited objectives of a purchasing card program by our survey participants were transaction cost reduction, settlement convenience, and user convenience. Implementation of these best practices facilitates achievement of these objectives. Several survey participants had the vendor ghost account number embedded in their order entry system. This provided further settlement convenience. 67

69 Procure-To-Pay Process Practice3 Sourcing Utilize e-sourcing tools such as e-rfx and e-auctions to source suppliers and gain savings on one-off items Leading companies are beginning to utilize e-sourcing tools to automate and improve their Strategic Sourcing process. The greatest benefits achieved through e-sourcing are reduced pricing (savings up to 30 percent), decreased vendor negotiation cycle time, improved product/service quality, and improved decision making. Seventeen percent of survey respondents indicated they have implemented an e-marketplace/e-auction capability and an additional 22 percent said they plan to make such an investment in the next two years. 3 e-rfx tools automate and streamline the process of negotiating new supplier agreements and renegotiating existing contracts. They handle more than just an electronic request for quotation (RFQ), they enable buyers to manage the creation, packaging, and dissemination of RFQs, requests for proposals (RFPs), and requests for information (RFIs) to prospective bidders. They also enable buyers to negotiate product specifications and other terms and conditions to compare their responses to select the best deal. e-auctions can be utilized to acquire new goods or dispose of excess inventory or assets. Reverse auctions let organizations set price ceilings suppliers can then bid down against each other. Commerce networks, also known as e-marketplaces, e-markets, or e-procurement hubs, are Web-based business centers or sections of on-line business communities designed to manage catalog content, broker transactions, and communication between buyers and suppliers. The greatest benefits achieved through e-sourcing are reduced pricing (savings up to 30 percent), decreased vendor negotiation cycle time, improved product/service quality, and improved decision making. continued on next page 3 Aberdeen Group. e-procurement: Finally Ready for Prime Time. March, Section II Practices 68

70 Procure-To-Pay Process Practice3 Utilize e-sourcing tools such as e-rfx and e-auctions to source suppliers and gain savings on one-off items continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control These tools often achieve better pricing by enabling uniform price comparisons across suppliers and increasing competition as a result of a broader reach; additionally, Procurement productivity is enhanced by reducing administrative time spent on creating and issuing RFQs and negotiating with suppliers Drive improved quality and product availability Enable better vendor selection decisions by imposing a structured process to vendor negotiation Automation provides better control through bid comparisons and bid management ACTION STEPS: 1. Develop a business case to project potential savings and understand investment that can be afforded 2. Define company objectives for use of on-line RFX and auction capabilities 3. Research commerce networks and software vendors to understand their pricing, product capabilities, and service as compared to company s requirements 4. Select the process and tool that will meet company s objectives and ROI targets 5. Pilot selection with less complex RFQs and/ or purchases 6. Expand the program based on a channel analysis that determines which products and services lend themselves to selected on-line models SUCCESS STORIES and TRENDS Of the survey respondents that indicated they have implemented e-marketplace/e-auction capabilities, 38 percent are very satisfied with the technology, with the remainder being somewhat satisfied largely because they were still in a pilot phase of their implementation. One large corporate survey participant has used e-auctions as a replacement for some one-off purchase order transactions. They estimate that they will save $400 million using this practice next year. 69

71 Procure-To-Pay Process Practice4 Order Placement Limit the number of approvals required to place an order Leading companies design an approval process that balances the requirement to exercise Procurement controls with the desire to minimize the cost of a transaction. Survey participants indicated that receiving approvals was the most time-intensive activity involved with placing an order. Companies often decide that low-dollar purchases ordered from an approved vendor s catalog do not need additional approvals during the ordering process. Large-ticket purchases and specialty items, such as IT equipment, often require additional approvals due to their dollar size and unique characteristics. Companies typically do not require approvals prior to placing an order with a card and prefer to reconcile the card statements on the back-end by reviewing exception reports for non-compliance. Ultimately, each company must match its approval process design to its culture. Our research has shown that typical authority levels are: Type of Purchase Authority Levels Authority Levels Indirect Goods via a Purchase Requisition IT Purchases Service Contracts Purchasing Card Transactions Up to $500 Up to $2,000 Up to $50,000 Up to $300,000 Over $300,000 Over $500 Up to $2,000 Up to $100,000 Up to $300,000 Over $300,000 Set by card parameters None required Manager Director Vice President CFO, CEO IT Manager Manager Director Vice President CFO, CEO All contracts over $20,000 must be reviewed by Legal Not applicable, although cardholder s supervisor is required to sign all reconciled card statements To accelerate the approval process, best practice companies often create approval business rules in their electronic Procurement and requisition systems to enable automated and efficient approval workflows. Based on the requisitioner and item type, these business rules are able to determine which approvals, if any, are required. These rules should be updated regularly and/or linked to a Human Resources system that holds the most up-to-date, pre-approved spend levels by person. While many spending authority limits are determined by level, companies often give those persons in their departments who frequently order goods (such as an administrative assistant) higher spending limits, so they can place orders for their entire department. continued on next page Section II Practices 70

72 Procure-To-Pay Process Practice4 Limit the number of approvals required to place an order continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control Optimizing the number of approvals can reduce the cost of placing an order with a vendor by approximately $7-$8 4 End-users desire that their orders be delivered to the vendor promptly Designing an approval process with appropriate checks and balances ensures the desired control is included in the process ACTION STEPS: 1. Review or document current approval processes 2. Perform an analysis that balances the need for efficiency with the level of control desired, such as average dollar value of transactions, materials purchased, capitalized items, etc. 3. Conduct analysis to determine opportunity to revise approval process 4. Develop training around revised approval process that includes the business justification for the change 5. Roll out the new process and review/update on regular basis SUCCESS STORIES and TRENDS No approvals were required by survey respondents: - for purchases under $100, 44 percent - for purchases under $500, 33 percent - for purchases under $1,000, 21 percent Many of the study participants do not require Procurement department approval when an item is ordered from a preferred vendor and has the appropriate number of business unit approvals. Procurement is only involved if items desired require sourcing. The overall approval effort is reduced and the Procurement process streamlined. 4 Gartner Group. e-procurement: A Blueprint for Revolution or Hype? February,

73 Procure-To-Pay Process Practice5 Order Placement Minimize the use of paper purchase orders for all purchasing card eligible purchases Research indicates that an order placed using a paper purchase order costs $81.23, whereas an order placed via a purchasing card only costs $ Recognizing the tremendous cost savings gained from placing orders on purchasing cards, many companies have tried to minimize the use of purchase orders for purchasing card eligible purchases. To accomplish this, companies must decide which transactions are purchasing card eligible. Some companies make this decision based upon commodity-type, while others base it on dollar size of the transaction and/or frequency of a certain transaction-type. Companies must also determine the best way to encourage compliance to its prescribed use of the purchasing card. Some companies encourage usage through education and compliance reporting, while others mandate usage and charge those business units not in compliance with the cost of the purchase order generation. Recognizing the tremendous cost savings gained from placing orders on purchasing cards, many companies have tried to minimize the use of purchase orders. ACTION STEPS: 1. Examine current spend payment-type; develop a recommendation for purchases that are better placed on the card due to their volume, vendor, or dollar amount 2. Determine best way to achieve compliance to card recommended card use, based on company culture 3. Communicate purchasing card usage policy to end-users 4. Monitor and report on purchasing card usage including exception reports: same account, same vendor, same day; lost savings; etc. Continue to encourage policy compliance MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction SUCCESS STORIES and TRENDS Utilization of purchasing cards reduces the costs associated with purchase order creation and invoice processing by 65 percent End-users find the process of using a purchasing card much faster and easier than completing purchase orders; end-users feel empowered to quickly obtain goods necessary to do their jobs Recognizing the savings from reducing purchase orders through increased purchasing card usage, one survey participant has mandated card usage for all purchases under $5,000. To enforce compliance, the Accounts Payable department identifies non-compliant purchases and sends a letter to those purchasers, warning that future non-compliant purchases will not be paid. Another survey participant, who mandates purchasing card usage for those purchases less than $500, will charge the non-compliant cost center the cost of a purchase order on the second non-compliant purchase and thereafter. A survey participant that has not established any purchasing card usage guidelines tracks and reports on purchasing card usage by department. Each department s leader has a target level of purchasing card usage within their management bonus plan. It is up to that department leader to determine how to meet that usage requirement. 5 Lehigh University. Reducing the Transaction Costs of Purchasing Goods and Services. March, Section II Practices 72

74 Procure-To-Pay Process Practice6 Payment & Settlement When commercial cards are not used, employ three-way matching to reduce the number of approvals required prior to payment In an automated environment, best practice companies conduct three-way matching between the purchase order, the packing slip, and the invoice. If all documents match within a designated threshold, the invoice is authorized for payment. This minimizes the time Accounts Payable spends reviewing invoices, enables the department to manage by exception, and significantly reduces manual activity associated with invoice and receipt retention. The vendor should send Accounts Payable the invoice electronically. Leading companies are beginning to explore the viability of Electronic Invoice Presentment and Payment (EIPP) solutions as well as e-receiving packages. Central or Desktop Receiving enters the packing slip into the system and resolves any delivery issues at the time of receipt. The purchase order that initiated the transaction via an e-procurement or ERP should already be in the system. Some enabling tools for three-way matching include: e-procurement ERP systems e.g., Procurement and Accounts Payable functions Bar coding Scanners to create electronic invoices and receipts ACTION STEPS: 1. Incorporate formal receipt and three-way matching into policies and procedures 2. Train end-users and Procure-To-Pay employees on formal receipt and receiving 3. Track internal and vendor three-way matching performance MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Reduces settlement and payment cycle time End-users do not have to solicit signatures prior to payment Vendor scorecard metrics often measure delivery and matching performance including percent of POs that could not be matched to invoice, delivery timing, quantity discrepancies, etc. Ensures that invoices paid are valid SUCCESS STORIES and TRENDS One survey respondent uses bar coding integrated into the company s ERP system to facilitate receipt and three-way matching. Two study participants reported use of scanners for documentation of receipts. For one company, this enabled the electronic transmission of receipts, which improved the processing time of receipts. The other company processed a large number of expense reports each month as a result, there were significant cost savings through reduced document storage needs. 73

75 Procure-To-Pay Process Practice7 Payment & Settlement Replace manual check payments with electronic payments practice companies minimize the effort spent on manual payments. e-marketer estimates that processing an invoice manually costs approximately three times as much as an automated payment. Additionally, automated payments help increase cash flow, reduce transaction costs, and facilitate managing exceptions. 6 Mid-size and large corporate companies can automate payments by: Creating a software feed into an Excel invoice template Using ghost accounts dedicated to suppliers Implementing ACH/EFT Implementing EIP Utilizing EDI or XML ACTION STEPS: 1. Review vendors, invoices, and payment methods from A/P and G/L ledgers 2. Identify appropriate vendors for electronic payments; factors for inclusion are number of transactions, size of transactions, supplier sophistication, and complexity of payment terms e.g., multi-currency 3. Determine appropriate type of automated payment mechanism 4. Implement solution. Monitor success and continue to review opportunities for increasing electronic payment partnerships MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Vendor Management SUCCESS STORIES and TRENDS Replaces expensive and time-consuming methods of payments. Improves cash flow management Strengthens vendor relationship by providing funds immediately and increasing technology touch points Survey findings indicate that 26 percent of payments are currently automated. Gartner estimates that 40 percent of B2B payments will be automated by emarketer estimates that on-line invoicing costs $1.65 while manual payments cost $ One survey respondent has automated 70 percent of payments, which represented best in class. 6 emarketer. The Electronic Payments Report. October, Gartner Group. e-procurement: A Blueprint for Revolution or Hype? February, emarketer. The Electronic Payments Report. October, Section II Practices 74

76 Procure-To-Pay Process Practice8 Reconciliation Understand tax liabilities Leading organizations understand and manage their businesses within the labyrinth of tax regulations imposed by local, state, and federal jurisdictions. Understanding anticipated tax liabilities is a key factor in developing sound ROI evaluations, business case assessments, and managing overall spend. As companies implement automated Procurement processing technologies and adopt commercial card products and programs, it is also an appropriate opportunity to implement solutions that support the reporting and payment of sales-and-use taxes. In this survey, businesses reported using software solutions like Vertex, TaxWare, and InfoSpan to collect and manage tax related information. practice companies endeavor to understand the liabilities associated with underpayment. The most successful tax strategies ensure collaboration between commercial card program and Corporate Tax administrators. Generally, the most accurate and auditable results have been obtained in programs where taxes are calculated without cardholder involvement. Leading organizations develop a tax compliance methodology that combines the amount of electronic transaction data delivered to the program administrator with assumptions regarding the tax consequences of certain types of purchases. For example, some programs assume that if the transaction data shows that the cardholder and vendor are located within the same state, the transaction was correctly taxed. Programs make this assumption because in most jurisdictions the vendor would charge tax unless presented with a valid exemption certificate. Tax determinations between cardholders and out-of-state vendors rely on a variety of approaches such as enhanced transaction data to substantiate tax paid or certain characteristics of the out-of-state vendor. After eliminating the exempt transactions and transactions where sales tax was paid, use tax is accrued on the remaining transactions. Commercial card transaction receipts are retained until the state s authority to audit expires. practice companies implement a process that documents transactions where sales tax was collected by the vendor, identifies purchases of items exempt from tax, and calculates the use tax accrual on taxable purchases where tax was not charged by the vendor. Generally, the most accurate and auditable results have been obtained in programs where taxes are calculated without cardholder involvement. continued on next page 75

77 Procure-To-Pay Process Practice8 Understand tax liabilities continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control Tax record management processing and appropriate tax accrual calculation Provides visibility over tax liability ACTION STEPS: 1. Partner with Corporate Tax to understand Procurement tax liability 2. Implement a tax tracking mechanism and train users 3. Continually monitor program compliance and adjust accordingly SUCCESS STORIES and TRENDS 86 percent of study participants have implemented strategies and accounting systems designed to expedite tax reconciliation and accrual and move responsibility away from the individual employee. These companies no longer consider reconciliation of sales-and-use tax a time-intensive activity. One study participant worked with the company s Corporate Tax department to design a purchasing card statement and receipt retention process that augmented the company s existing sales-and-use tax compliance and reporting capabilities. Through accurate reporting and thorough record keeping, the company has been able to effectively estimate and pay its taxes and comply with IRS regulations. Section II Practices 76

78 Procure-To-Pay Process Practice9 Reconciliation Use Card Issuer feed to automate delivery of card statements practice companies automate the reconciliation process by minimizing the time spent receiving statements. Cardholders or Card Administrators can: Download an electronic statement from an Issuer s Web site Receive the data via Receive feeds according to a predefined schedule or based upon transaction volume for delivery Automated delivery enables cardholders to receive statements faster and in a more easily updateable format than those sent by mail. ACTION STEPS: 1. Determine automated delivery mechanism with the Card Issuer 2. Incorporate automated delivery into cardholders training MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Reduces processing time for card reconciliation and reduces errors through manual processing Provides easily accessible information to cardholder SUCCESS STORIES and TRENDS 54 percent of surveyed companies have implemented automated delivery of electronic card statements to minimize the most time intensive activities reported: buyer reconciliation and assignment of cost center. 77

79 Procure-To-Pay Process Practice10 Reconciliation If using electronic statements, predefine valid general ledger account codes and cost centers to facilitate end-user reconciliation practice companies streamline the reconciliation process by predefining valid account codes and cost centers. By predefining valid general ledger (G/L) codes, a cardholder can select from a limited number of G/L codes versus what is potentially thousands. Predefined rules can be based on criteria such as Level II data, vendor name, cardholder, or merchant category code. Companies should weigh the benefit of having allocation detail available for reporting against the cost of maintaining allocation detail in predefined rules. ACTION STEPS: 1. Select and implement a Card Issuer tool 2. Before cards are issued, predefine valid G/L codes and cost centers for the cardholder in the tool 3. Incorporate use of tool and card reconciliation process into cardholder training MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control Reduces the amount of time spent on reconciliation Facilitates cardholder reconciliation efforts Enables a company to efficiently trigger the correct G/L codes to track spend in the financial system and improve the budgeting process SUCCESS STORIES and TRENDS Several survey respondents linked predefinition of codes with success of reconciliation efforts and purchasing card programs. Implementation of an automated system facilitated the management of spend through the one card program. One survey respondent, who predefines G/L codes, reduced invoice transaction costs from an average of $2.50 to $1.90. Section II Practices 78

80 Procure-To-Pay Process Practice11 Reconciliation Outsource high-volume, specialized payment processes practice companies understand their core competencies and find that certain, nonstrategic business activities can be outsourced cost-effectively, yielding the following benefits: Improve company focus on strategic activities Access to world-class capabilities and consistent best practices Reduced or controlled operating costs Increased availability of capital funds Access to short-term resources Assistance for a function that is specialized or difficult to manage Outsourcing is a strategic management tool for organizational change. It is a long-term business strategy that should be developed with a clear sense of the competencies that make the company unique and give it strength in the market skills and expertise that allow a company to create unique, leading-edge products and services. Outsourcing is simply the make versus buy decision that organizations have always had to make. Today, however, the number and capabilities of external suppliers have exploded, offering specialized solutions for every conceivable aspect of a company s operations. Technology has made it easier than ever to integrate the operations of separate companies into a cohesive and seamless whole, while increased competition has forced every organization to reexamine and challenge all aspects of its operations. A successful outsourcing strategy identifies functions and activities for which the company has neither a critical strategic need nor special capability and then makes smart, strategic decisions to source it from a leading provider. practice companies have examined their payment core competencies and often outsource management functions such as: Freight consolidation Check printing Invoice scanning Temporary services Technology has made it easier than ever to integrate the operations of separate companies into a cohesive and seamless whole. continued on next page 79

81 Procure-To-Pay Process Practice11 Outsource high-volume, specialized payment processes continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Vendor Management Benefit: Control Can result in significant cost savings for high-volume or specialized functions Increases the importance of vendor management since a business process is no longer in-house Enables a specialist to focus on its core competency ACTION STEPS: 1. Define core competencies and potential areas to outsource 2. Create a business case that defines outsourcing goals and outlines impact on organization 3. Select outsourcing vendors; include service level agreements and fee ceilings 4. Determine if personnel can be redeployed 5. Reengineer processes to include outsourced function 6. Conduct Change Management program to gain acceptance 7. Proactively manage vendors to ensure they provide defined service levels SUCCESS STORIES and TRENDS One survey respondent outsources freight payables. Outsourcing enables greater leverage and discounts received with freight spend and ensures that all freight billings are valid. Additional Deloitte research and client work indicates that best practice companies, who have a big use of contingent workers outsource management of invoicing and payment for temporary services. Section II Practices 80

82 Procure-To-Pay Process Practice12 Audit Determine control strategy practice companies define a consistent control strategy that increases visibility and minimizes fraud, while ensuring that control and audit goals are aligned with company needs and overall strategy. High-profile bankruptcies have highlighted the importance of internal audit and independent review of Procurement, A/P, and individual business units. Corporate culture should support the ability to question the appropriateness of company practices. A control strategy should include the following components: Types of transactions to be reviewed Groups responsible for review Acceptable thresholds/exception triggers and profiles Frequency of audits Sampling methods e.g., statistics sampling Proper authorizations and verifications Record retention Compliance reporting Tax issues The strategy should balance visibility, effort required, and processing efficiency. Controls can provide significant impact in an organization. Aberdeen estimates that maverick spend accounts for 10 percent of purchases in an organization. In a billion-dollar company that purchases $400 million in goods and services, $40 million of spend can occur outside of controls. 9 ACTION STEPS: 1. Define the control strategy 2. Ensure policies and procedures embody the control strategy including Procurement, purchasing card, and A/P policies 3. Educate end-users on control policies 4. Monitor and evaluate compliance MARKET APPLICABILITY: All Companies Benefit: Control SUCCESS STORIES and TRENDS Enables increased visibility to spend data and business practices 73 percent of companies of surveyed listed employee misuse as a top three control concern; at 65 percent of companies surveyed this was addressed through implementation of audit policies that have checks in place for original receipts, approval signatures, and employee misuse. Two mid-size companies reported improved controls through use of card reporting tools for audit. 9 Aberdeen Group. Indirect Expense Management: Driving Bottom-Line benefits. November,

83 Procure-To-Pay Process Practice13 Reporting Monitor Procurement performance via a scorecard that includes cost, quality, and time components Leading-edge Procurement departments monitor and improve performance using various cost and process measures. Metrics help drive behavior and should be clear, measurable, and actionable. Performance targets should be achievable and based upon internal and external benchmarks. Categories include: Department measures such as strategic goals of department and percent of company spend impacted by Procurement Cost measures such as dollars saved and percent of vendors rationalized Quality measures such as purchase orders matched and number of complaints Time measures such as cycle time for sourcing These metrics can be used to create a comprehensive scorecard to capture transaction costs, measure performance against goals, and identify opportunities for improvement. Communication of goals and progress helps motivate employees to achieve those goals. ACTION STEPS: 1. Define appropriate metrics for Procurement and its practitioners; this can include category metrics such as overall department, cost, quality, and cycle-time 2. Define targets using internal and external benchmarks; targets can include items such as achieving budget objectives, user community satisfaction, rationalization of vendors, percent of spend on negotiated contracts, and percent of on-time delivery 3. Monitor and evaluate performance MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control SUCCESS STORIES and TRENDS Monitors company savings Allows the company to manage by information versus beliefs One survey respondent creates an annual scorecard with 5 to 8 metrics that measure productivity, sourcing effectiveness, and service. The company develops scorecards with external benchmarks and reviews them on a quarterly basis with senior management driving continuous improvement. One survey respondent creates a business plan every year that includes scorecard measures for customer service, control objectives, and cost savings targets. Section II Practices 82

84 Procure-To-Pay Process Practice14 Reporting Gain a comprehensive view of spend by integrating data from multiple sources e.g., e-procurement, travel, ERP, purchasing cards Leading Procurement organizations consolidate commodity spend data available through multiple sources, with Accounts Payable (A/P) data often providing the most detailed spend report. Leading companies leverage additional data available from vendors, Card Issuers, and travel agencies to ensure a comprehensive view of spend for vendor negotiation and reconciliation purposes. Companies can consolidate spend data via the following tools: Spreadsheet financial software databases Accounts Payable/General Ledger/Purchase Order reporting tools Data Mart/Data Warehouse Once data is consolidated, companies can use data analysis to identify trends, manage vendors, and ensure compliance with Procurement policies. ACTION STEPS: 1. Understand payment data sources e.g., e-procurement, travel, ERP, commercial card 2. Define the information that should be consolidated by understanding information available through A/P as well as information available from vendors, travel agents, and Card Issuers 3. Select the data repository to consolidate data sources 4. Combine data into repository 5. Determine reports necessary to analyze findings MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Enhances Strategic Sourcing efforts by examining comprehensive data Provides a holistic view of the Procurement process Provides visibility over all sources of spend One survey respondent initiated its Strategic Sourcing efforts by creating a spend analysis. The spend analysis integrated data from multiple sources and formed the foundation for its Strategic Sourcing successes. 83

85 Procure-To-Pay Process Practice15 Reporting Leverage SIC and MCC codes for categorization of spend and purchasing data practice companies use SIC and MCC codes to classify spend and provide summarized reporting. Card Issuers and vendors provide this information with commercial cards to facilitate reconciliation with G/L codes. Companies often associate SIC codes with vendors and MCC codes with transactions in their ERP systems to provide a view of commodity-level spend. MARKET APPLICABILITY: All Companies Benefit: Vendor Management Benefit: Control Assists in classifying and consolidating vendor spend data Provides comprehensive, standardized data summaries ACTION STEPS: 1. Define spend classification method 2. Partner with Card Issuers, vendors, and other external vendors to receive SIC and MCC information 3. Incorporate SIC and MCC information into the ERP system or spend data repository 4. Analyze spend and card use using SIC and MCC codes SUCCESS STORIES and TRENDS One survey respondent added SIC codes to its vendor file in a Strategic Sourcing initiative. It enabled the company to reduce RFP time by 50 percent. Section II Practices 84

86 Travel and Entertainment (T&E) SUMMARY Travel and Entertainment (T&E) is considered to be the third largest controllable indirect spend in an organization and possibly the most visible. 10 Travel Management can be complicated because of diverse issues such as rate structures, negotiated rates, last-minute bookings, geographically dispersed travelers, and varying travel patterns. Consequently, use of Travel Management programs is on the rise. As travel volume increases, the importance of managing travel and its associated issues escalates. Although many of the principles of effective Travel and Entertainment management have remained the same (such as use of T&E card programs to help manage spend and generate time and cost savings), there have been noticeable changes in overall T&E strategy. Current market conditions have had a significant impact on business travel. Many companies are reevaluating their business travel needs and are leveraging new communication-based technologies to reduce the need to travel for training and internal meetings. Some companies have also instituted major T&E policy changes such as requiring pre-approval for all business travel on a short-term basis. Companies have also begun to encourage increased travel-related self-service by employees through implementing in-house, Web-based booking tools and meeting planning software. The relationships between companies and suppliers have also changed significantly over the past three to five years. Airline vendors are beginning to examine their fee and commission arrangements with travel agents. Companies have enhanced their ability to negotiate discounts by capturing spend data and moving market share to other vendors. Some have also begun to take advantage of the weakened economic state of many of the leading air, hotel, and car vendors to reopen contract negotiations. Conversely, vendors are more carefully monitoring company volume guarantees. The best practices described in this section encourage companies to have a Travel Management discipline that will be successful regardless of changing economic conditions. The best practices stress the implementation of sound fundamentals in Travel Management and organization and include innovative yet practical tools to enable companies to achieve additional cost savings and benefits. As travel volume increases, the importance of managing travel and its associated issues escalates. continued on next page 10 Aberdeen Group. Expense Management Automation. March,

87 Travel and Entertainment ORGANIZATION BEST PRACTICE 1 BEST PRACTICE 2 BEST PRACTICE 3 Institute a centralized Travel Management function Develop and distribute company-wide travel policy Coordinate event planning through Travel Management function CARD PROGRAM BEST PRACTICE 4 BEST PRACTICE 5 BEST PRACTICE 6 Source, select, and implement a T&E card program Establish T&E card issuance criteria for optimal distribution to business travelers Mandate and enforce use of the T&E card SOURCING BEST PRACTICE 7 Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program ORDER PLACEMENT BEST PRACTICE 8 Implement in-house, Web-based booking tool AUDIT BEST PRACTICE 9 Establish well-defined expense report audit parameters REPORTING BEST PRACTICE 10 BEST PRACTICE 11 BEST PRACTICE 12 BEST PRACTICE 13 Standardize and pre-populate expense reporting Standardize and automate data interfaces between expense management and accounting applications Capture, report, and analyze comprehensive, company-wide travel data Implement post-trip exception reporting and distribute lost savings report Section II Practices 86

88 Travel and Entertainment Practice1 Organization Institute a centralized Travel Management function practice companies have centralized the Travel Management function achieving the following benefits: Improved travel coordination efforts Enhanced negotiating strength Consistent development and application of travel policy Streamlined communication with vendors Increased user satisfaction from centralized service Consistent and comprehensive reporting The majority of study participants reported centralized Travel Management. At a minimum, the development of travel policies and vendor negotiations and management should be centralized. Other activities that can be centralized include: Travel policy management Travel policy communication e.g., newsletters, Web site T&E card administration Management of Travel Agent(s) of any type: - Outsourced - In-house - Location-specific Management of in-house travel Web site Customer service management e.g., reservation booking, responses to inquires Travel and entertainment reporting continued on next page 87

89 Travel and Entertainment Practice1 Institute a centralized Travel Management function continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Centralized travel and consolidation of spend reduces costs and improves discounts Improves employee awareness of appropriate personnel to contact for questions and issues Improves vendor relationships and enhances management of travel vendors; information collected in this function supports the contract negotiation process Improves the ability to track and analyze travel spend at centralized location ACTION STEPS: 1. Identify the size and scope of travel volume e.g., number of travelers, city pairs 2. Determine Travel Management activities and reporting structure, and divide responsibilities according to required skills 3. Staff the Travel Management function with individual(s) that are knowledgeable in the travel industry to ensure the greatest benefits are achieved through the program; alternatively, train those responsible for the Travel Management function on travel industry specific reporting, tools, negotiation techniques, and processes to ensure staff have expertise necessary to perform successfully 4. Determine and develop common tools to support the Travel Management function (including vendor database, card management policies, data extracts from ERP system to track spend, dedicated Web site, and travel index/guides) SUCCESS STORIES and TRENDS 70 percent of our survey participants have a centralized Travel Management function. Two-thirds of the participants have this function reporting to the Finance or Procurement departments. One study participant transitioned to centralized Travel Management, which consolidated spend and allowed the company to decrease the number of travel agencies servicing the company to one. The move to a single travel agency reduced rates and streamlined the vendor relationship effort. Section II Practices 88

90 Travel and Entertainment Practice2 Organization Develop and distribute company-wide travel policy practice companies develop company-wide T&E policies and communicate them in ways that maximize compliance. The policy should be clear, easily accessible, and widely disseminated. Enhancing travelers understanding and buy-in to the policy improve compliance, diminishes policy-related conflicts at the point of booking, and increases benefits. Leading companies ensure that T&E policies are aligned with overall Procure-To-Pay objectives and are actively endorsed by senior management. Travel policies should contain the following topics: Objectives Non-reimbursable expenses Summary responsibilities Travel approval process Designated Travel Agency Air travel policies Auto travel policies Rental car travel policies Other out-of-town expense policies Other business expense policies Reimbursable expense guidelines - Air travel - Car rental - Personal vehicle use - Lodging - Meals/Business entertainment - Spousal travel expenses Reimbursement process T&E card - Cardholder benefits - Cardholder responsibilities - Credit limits, restriction/controls - Liability associated with the card - Restricted transactions - Dispute resolution - Lost card procedures - Cardholder agreement form - Card activation Policy violations Safety and security measures Enhancing travelers understanding and buy-in to the policy improves compliance, diminishes policy-related conflicts at the point of booking, and increases benefits. continued on next page 89

91 Travel and Entertainment Practice2 Develop and distribute company-wide travel policy continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Increases compliance with use of preferred vendors, thereby leveraging the established discounts and increasing the ability to maintain or gain additional discounts through those vendors Improves employees ability to access travel policy requirements and restrictions; empowers employees to make appropriate travel decisions Increases compliance with use of preferred vendors, providing Travel Management function with greater ability to assess vendor pricing performance and greater leverage with vendors to improve performance and pricing e.g., concierge services, upgrades, travel incentives ACTION STEPS: 1. Develop a policy that is consistent with company culture and needs by reviewing current policies, surveying employees to gain user insights, and reviewing current travel spend data e.g., hotels, airlines, rental car agencies, and cellular phone carriers 2. Gain senior management approval and participation to demonstrate corporate sponsorship 3. Present the policy in a user-friendly format that guides travelers through the entire process; include answers to frequently asked questions (FAQs) 4. Make the travel policies available through new hire orientation; maintain the travel policies on a company intranet 5. Communicate updates to the policy and related successes of the program on an ongoing basis; issue periodic traveler tips that focus on key elements of the T&E policies Benefit: Control SUCCESS STORIES and TRENDS Provides employees with understanding of travel restrictions, mandates, and policy updates; employees that are aware of and understand policies are more likely to follow them Three study participants noted that regular communication of travel tips for non-compliance areas improved employee compliance with the policy e.g., in s or through company newsletters. One mid-size study participant not only reviewed and updated its company s travel policies periodically, but also communicated the changes to travelers. This review and communication process resulted in a reduction of the travel budget by one-third over the last three years, which equated to a reduction from $9 million to $6 million. Section II Practices 90

92 Travel and Entertainment Practice 3 Organization Coordinate event planning through Travel Management function practice companies ensure that the Travel Management group incorporates or acts as a business partner with other corporate organizational entities with sizeable T&E spend Sales and Marketing, Recruiting, and Training. Coordination between company event decision makers and the Travel Management function will help ensure that travel-related vendor contracts and benefits such as travel discounts, reduced fares, and reduced accommodation fees are incorporated into all business travel and event decisions. It will also give the Travel Management function added visibility over all travel spend, exposing additional negotiation opportunities. Tools that can further facilitate the event planning include: Appropriate use of commercial cards e.g., increased credit limits for Sales and Marketing, Recruiting, and Training Event automation software tools Implementation of our company billed T&E card enabled us to implement automated expense reporting. According to the Hackett benchmarking, we are in the 90 th percentile for costs, with expense reports only costing $1.30 each to process. Large Corporate Durable Manufacturing Company continued on next page 91

93 Travel and Entertainment Practice 3 Coordinate event planning through Travel Management function continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Information collected from all travel-related functions creates greater leverage for contract negotiations with travel vendors to reduce costs Ability for event planners to leverage Travel Management and/or Travel Agency expertise Increased vendor relationship management possible and ability to apply spend toward quotas for discounts Improved ability to track events planning and other unique travel spend as a subset of overall firm travel spend; increases ratio of spend through preferred vendors ACTION STEPS: 1. Identify the size and scope of the organization s other travel planners e.g., event planning may be a responsibility under Travel Management or may require dedicated staff working in coordination with Travel Management 2. Determine the optimal level of coordination between travel/event related activities e.g., contract reviews and negotiation, budgeting/ forecasting of travel spend, reporting, and Travel Management, including the reporting required to support the coordination effort 3. Communicate the need to coordinate events through Travel Management in the travel policies 4. Train those responsible for the coordination effort SUCCESS STORIES and TRENDS One survey participant arranged all conferences through the travel function. This enabled the company to capture hotel spend and airline spend data and incorporate it into contract negotiations, improving its position to negotiate better pricing. One survey respondent has plans to implement event planning software that will enable employees and guests to enroll in a conference and link with the in-house Web-booking for airline and hotel reservations. This will enable better coordination, directing travelers to preferred vendors, and reduce time spent booking travel. Section II Practices 92

94 Travel and Entertainment Practice 4 Card Program Source, select, and implement a T&E card program Travel and entertainment (T&E) cards are a very effective tool for managing travel-related spend, reducing cash advances, and providing travelers with an easy, fast, and safe method of payment while on the road. T&E cards should be considered even for businesses with low volumes of travel. Leading companies recognize the following benefits are gained through implementation of a T&E card program: Reduced cash advances, resulting in improved cash management and reduced costs associated with processing and tracking cash advances Integration of T&E card data into internal MIS, expense reporting, Accounts Payable (A/P), and General Ledger systems - Streamlined expense report administration - Reduced expense report cycle time - Improved travel data quality and accuracy Improved traveler convenience and safety - Decreased concerns regarding funds while traveling - No need to use personal cards for travel - No need to carry large cash advances while traveling - On-line access to cardholder account data Improved access to funds for international travel - Converts funds to US dollars on T&E statement - Reduces currency conversion rates as card transaction rates are typically better than those available at stores providing this service - Cash access provides money in local currency Companies should develop specific and achievable goals and objectives for their T&E card programs that are consistent with corporate culture and travel policies. practice companies periodically review these goals and objectives for continuous improvement purposes. Leading companies utilize a thorough sourcing process to select a T&E card program that will help the company meet the goals and objectives set for the program. Sourcing a card program can occur during the implementation of a new program or at any transition point where the needs of the company change. Card Issuers are vendors and should be included in the standard vendor reviews to ensure that they continue to provide services that meet program objectives. Prior to implementing a T&E card solution, best practice companies analyze the costs and benefits of each available program, taking into consideration any product variations from one Card Issuer to another. Companies compare T&E programs based on the following factors: Merchant acceptance Current relationship Financial arrangement Industry reputation continued on next page 93

95 Travel and Entertainment Practice 4 Source, select, and implement a T&E card program continued Card management and administration tools available through Card Issuer, including: - Templates to assist with implementation e.g., Policies and Procedures - Integration of card data with financials or ERP - On-line account administration - On-line reporting capabilities - Expense reporting management tools Knowledge/experience of card sales personnel and ability to provide consultative services Customer service levels e.g., Service Level Agreements, proactive relationship Companies compare T&E Card Issuers based upon the following factors: Standard transaction cost charged for use of the card Merchant acceptance Leading companies utilize a thorough sourcing process to select a T&E card program that will help the company meet the goals and objectives set for the program. ACTION STEPS: 1. Review Travel Policy and set goals and objectives for the T&E card program; consider any cultural implications e.g., employee desire for reward programs 2. Create cross-functional team of key stakeholders to participate in card selection process at a minimum include Procurement, Travel Management, and A/P personnel 3. Develop request for proposal and distribute to Card Issuers 4. Evaluate Card Issuer responses against commercial card goals and objectives and select Card Issuer based upon ability to meet those goals and objectives 5. Leverage Card Issuer experience and expertise for implementation of the T&E card program e.g., policies, recommended reports MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Allows for the most efficient and cost effective method of purchasing and paying for travel-related services; card programs reduce need for cash advances, which improves cash management and reduces processing and tracking costs; also provides improved efficiency in expense report processing and expense management T&E cards provide significantly improved travel convenience Implementation of a T&E card provides improved data quality and accuracy for vendor management and negotiations Card programs facilitate a degree of control through card features and through back-end audit and exception reporting 69 percent of our survey respondents have implemented a T&E card program. The primary reasons for selection of the Card Issuers were merchant acceptance followed by reporting capabilities. Six of the survey participants reported that one of the greatest benefits of the card program was traveler convenience, as travelers did not have to wait for cash advances to begin travel. Several companies reported that transitioning to T&E cards provided them with improved data access for vendor negotiation purposes. Section II Practices 94

96 Travel and Entertainment Practice 5 Card Program Mandate and enforce use of the T&E card practice companies mandate and enforce use of T&E cards. Consolidating travel payments into a single payment vehicle improves a company s ability to capture and analyze data for vendor negotiations and compliance reporting e.g., tracking of progress against volume guarantees and use of preferred vendors and facilitates automated pre-populated expense reporting. Using T&E cards also helps minimize the need for cash advances. One-third of the survey participants mandated usage of their T&E cards. Companies use a variety of techniques, based upon their corporate culture, to enforce use of the card. A typical method is distribution of exception reporting to non-compliant travelers and their supervisors. Some companies reported that employees are given initial warnings for non-compliant behavior e.g., , voice mail, in person. Should the traveler continue to spend outside of policy, the company will not reimburse those expenses. We decided to mandate use of the T&E card for all airfare to reduce control concerns associated with travel booked but not taken. Through implementation of this program we reduced over $10,000 in air credit. Mid-size Professional Services Company ACTION STEPS: 1. Develop policies and procedures as a foundation to compliance 2. Mandate T&E card use and communicate benefits to cardholders 3. Encourage card use by training cardholders on proper use 4. Regularly communicate benefits and successes of the T&E card program 5. T&E card administrators, Travel Managers, and/or Accounts Payable should monitor compliance; review expense reports to identify exceptions; leverage exception reporting tools available through Card Issuers 6. Based on culture, distribute non-compliance reporting to non-compliant traveler, direct supervisor, and/or management 7. Based on culture, take steps to enforce use for continued non-compliance MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Increases compliance, reducing travel costs and trip planning effort; reduces the level of effort required to gather travel spend information Can help strengthen vendor relationship due to increased use, and improved data can be used for future contract negotiations Enables company-wide, centralized visibility to spend data and supports effective reporting for audit and control purposes A large corporate study participant mandated and enforced use of the corporate T&E card, increasing spend on the card and enabling reduced fees through the Card Issuer. On average, survey participants that mandated T&E card use also appeared to achieve higher discounts through travel vendors. For air travel, the average discount was 26 percent, compared with 13 percent for companies that did not mandate T&E card use. Of the survey participants that mandated T&E card use, only 20 percent felt the need to continue to provide cash advances. Of the survey participants that did not mandate use of the T&E card, 55 percent continued to fund cash advances to their employees. A mid-size company mandated use of the corporate T&E card for all airfare to reduce control concerns associated with travel booked but not taken. Through implementation of this program, the company achieved better tracking of unused travel and was able to reduce thousands of dollars of unused airfare credit. 95

97 Travel and Entertainment Practice 6 Card Program Establish T&E card issuance criteria for optimal distribution to business travelers Leading companies ensure that T&E cards are distributed appropriately. They develop criteria for distribution of cards that is consistent with company culture, policies, and spend parameters. Some companies distribute T&E cards to all travelers, while others distribute cards only to regular travelers. To identify individuals who require T&E cards, companies review cash advance requests and expense reports. Companies should also review travel volume and needs of various business units e.g., Sales and roles when identifying travelers. T&E cards can be a significant benefit to employees who may not have an established credit history. For employees who do not travel regularly (typically only once a year or less) or for recruits/ interns that may be involved in limited short-term travel, companies may want to investigate the use of virtual accounts or central billing accounts to handle airline, hotel, and car rental costs. The T&E card is a huge plus for international travelers. Last time I went to Europe I didn t pay cash for anything. And I didn t have to calculate or track conversion rates it s right there on my statement in US dollars. Large Corporate Durable Manufacturing Company ACTION STEPS: 1. Develop a criteria for distribution of T&E cards that is consistent with company culture and policies; coordinate with managers to determine profile of a typical traveler; review expense reports and cash advances to identify individuals who should have T&E cards 2. Prior to any travel for a non-cardholder, managers should determine whether the employee will have ongoing travel responsibilities if the employee does, then the manager should consider issuing a T&E card to the employee 3. Regularly review inactive T&E card reports; determine whether employee is using his own card to pay for travel-related expenses; if so, encourage use of the card; if not, reevaluate the need for the employee to have the card MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control SUCCESS STORIES and TRENDS Encourages all travel-related expenses to be purchased with the T&E card, reducing transaction costs associated with cash advances and check requests Improves travelers ability to pay for travel-related expenses, reduces travelers concerns over access to funds while traveling, and alleviates need for travelers to use personal funds or credit for business travel Optimal distribution of T&E cards increases eligible spend on the cards, providing improved reporting of actual travel spend for vendor management Increases control through consolidation of spend allows for improved reporting and reconciliation of travel spend practice companies have increased their issuance of T&E cards by monitoring expense reports and identifying travelers who pay exclusively out-of-pocket. A majority of the companies surveyed reported that use of T&E cards significantly reduces the need for cash advances. One company issued cards to all employees who needed to travel and mandated use of the card. That company was able to achieve a 29 percent discount on its $3.5 million travel spend. Section II Practices 96

98 Travel and Entertainment Practice 7 Sourcing Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program Leading companies have a centrally administered corporate-wide travel and entertainment Vendor Management program to guide selection and ongoing management of vendors. A Vendor Management program is often the cornerstone of a Strategic Sourcing initiative that focuses on supplier, base rationalization, and discounted rate achievement. practice travel Vendor Management programs consist of the following components: Establish travel Vendor Management program objectives: - Strategic e.g., improving services to traveling employees through advanced reporting and reconciliation tools - Financial e.g., percent of spend under contract, annual spend savings per year Develop contract term guidelines e.g., contract length, volume guarantees, and how to optimize monitoring efforts analyze current travel, city pairs, hotels consider negotiating volume guarantees when switching from one provider to another Establish preferred vendor criteria: - Service level e.g., 24/7 availability, emergency assistance, one-call consultation - Fully loaded cost of doing business with a vendor e.g., freight, taxes - Vendor automation e.g., ticketing, invoicing, reporting - Collaboration expectations e.g., fare evaluation, hotel service and comparative cost assessments, dining recommendations, corporate event planning Develop vendor scorecards and targets for travel suppliers, including Travel Agency, and implement vendor performance monitoring continued on next page 97

99 Travel and Entertainment Practice 7 Optimize number of suppliers by selecting and monitoring vendors through a formal Vendor Management program continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Enables supplier rationalization which can increase supplier discounts and reduce cost of last-minute bookings and reservations One objective of vendor management is to obtain feedback from end-users on vendor service expectations and then monitor and report on user satisfaction with preferred vendors performance Corporate-wide, centrally designed Vendor Management provides a structure for measuring and monitoring vendor performance Optimizes travel costs and selection of preferred vendors and facilitates management of vendor performance ACTION STEPS: 1. Analyze traveler preferences, company travel trends, common geographic destinations, company travel policies, and projected travel budgets to prepare baseline requirements 2. Develop and present travel Vendor Management program charter (company objectives, scope, expected benefits, and work plan) to senior executives to obtain program buy-in 3. Create cross-functional team of key stakeholders to develop travel Vendor Management program 4. Develop Vendor Management program that introduces and provides assistance to internal participants 5. Perform ongoing spend and supplier analysis 6. Continue to evaluate Vendor Management program objectives and monitor existing preferred vendors SUCCESS STORIES and TRENDS Survey respondents were able to achieve an average airfare discount of 17 percent, with a reported range of 5 percent to 29 percent. practice companies track and maintain comprehensive data for travel vendor negotiations. Study participants reported the ability to achieve significant discounts by tracking nights stayed at hotels and city pairs for air travel. These companies used this data to guarantee volume and to monitor status of volume throughout the year. Section II Practices 98

100 Travel and Entertainment Practice 8 Order Placement Implement in-house, Web-based booking tool Over the last few years, on-line Procurement has increased significantly, especially with respect to travel-related purchases. In 2000, U.S. consumers purchased $12.2 billion of leisure travel over the Internet (68 percent of which was airline tickets). By 2004, Forrester research predicts that $28.9 billion will be spent on-line for travel. 11 As employees and companies have become more comfortable using the Internet for booking travel, many companies are making on-line travel booking of business travel a company policy. practice companies are turning to Web-based travel booking tools, applications that can be implemented on an intranet site or through a Travel Agency. Implementation of an in-house, Web-based travel reservation tool can improve a company s ability to balance and manage business travel requirements with the traveler s personal preferences. Web-based application selection criteria should include: Reporting capabilities Ease of integration Ease of use Software can be modified based on company policy. Rules are built into the tool restricting users to specific vendors or allowing users to evaluate vendor offerings that benefit budget and/or travel schedule. As reservations are completed, Web-based applications can require the completion of reason codes to explain an expenditure that is outside of company policy. Benefits of implementing an in-house, Web-based booking tool include: Better positioning to discontinue time-based contracts e.g., annual Travel Management service contracts, transition to transaction-based contracts with Travel Agencies User self-service/user empowerment Improved use of preferred travel vendors Reduced cost of service and maintenance High-value-added services by travel agents such as complex travel and travel modifications Improved access to travel and entertainment data By 2004, Forrester research predicts that $28.9 billion will be spent on-line for travel. 11 continued on next page 11 Forrester Research. Travel Data Overview: On-line Leisure Travel Soars Even Higher. August,

101 Travel and Entertainment Practice 8 Implement in-house, Web-based booking tool continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Vendor Management Benefit: Control Reduces cost of Travel Agency relationship, facilitates vendor rationalization and management, and allows user to select most cost-effective options Empowers users as they are able to manage their travel requirements within corporate guidelines, budget requirements, and personal preferences Aggregation of travel spend improves ability to manage vendor relationship Company can restrict user to specific vendor relationships; facilitates ability to create exception reports ACTION STEPS: 1. Define reservation management processes and policies for travelers 2. Develop definition of how the company will utilize, pay, and manage selected Travel Agency services 3. Define Web-based tool application requirements e.g., reporting capabilities, ease of use, ease of integration, adaptability of rules for company policy 4. Select and implement Web-based booking tool 5. Develop plan for use of information retrievable from the tool and tie to sourcing activities e.g., tracking volume, spend by vendor, city pairs 6. Develop a training program that explains the application features, functions, and operation requirements 7. Analyze performance to review adoption rate and develop initiatives to increase SUCCESS STORIES and TRENDS 40 percent of companies surveyed have implemented an in-house, Web-based booking tool. An additional 10 percent plan to implement one in the next two years. 80 percent of those who implemented were either very satisfied or somewhat satisfied with their selected tool. On average, companies that utilize an in-house, Web-based booking tool have been able to book 53 percent of their transactions through the tool. One study participant reported reducing travel agency transaction costs from $45 for telephoneassisted booking to $15 per on-line transaction by implementing a Web-based booking system. One company achieved its goal of booking 60 percent of travel through an internal, Web-based booking system within the first few months of implementation. The company used a variety of techniques to encourage the shift to the Internet, including publication of reduced transaction fees, distribution of lost savings reports, distribution of non-compliance reports, and development of incentive programs e.g., randomly awarding airline tickets to employees that booked through the Web-based tool. Section II Practices 100

102 Travel and Entertainment Practice 9 Audit Establish well-defined expense report audit parameters Auditing T&E information is vital for measuring compliance to travel policies. practice companies define clear audit parameters with timely, efficient, periodic reviews conducted to evaluate compliance to T&E policies. Audit policies should also align with the organization s overall strategy and staff should be trained to effectively execute audits. The audit strategy should include the following components: Department responsible for review Acceptable thresholds/exception triggers and profiles Frequency of audits Sampling methods e.g., statistical sampling Proper authorizations and verifications Record retention Compliance reporting Correction at point of audit The audit strategy should balance visibility, effort required, and processing efficiency. ACTION STEPS: 1. Define audit strategy including exception triggers 2. Create policies and procedures that embody the audit strategy including Procurement, T&E, and Accounts Payable policies 3. Train auditor on audit strategy and procedures 4. Monitor and evaluate audit strategy and execution MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control SUCCESS STORIES and TRENDS Statistical sampling significantly reduces processing costs, while catching and reducing maverick spend Improves the efficiency and accuracy of the control process; added controls allows the organization to proceed without undue fears of misuse or fraud 65 percent of study participants have an audit strategy that targets employee misuse, accurate approval signatures, and original receipts using statistical sampling as well as a defined dollar threshold. 101

103 Travel and Entertainment Practice10 Reporting Standardize and pre-populate expense reporting Leading companies seek out ways to minimize the low-value tasks of their employees. One of the most time-consuming administrative tasks required of traveling professionals is travel expense reporting. According to Aberdeen, the average employee spends approximately minutes to complete a manual expense report with a cost of approximately $45 to process it on the back-end. An automated report, pre-populated with card data, can be completed in minutes (a 67 percent improvement from manual reporting) reducing processing costs by 80 percent. This also helps reduce reconciliation errors associated with manual data entry and encourages T&E card use compliance. 12 practice companies have begun to implement automated expense reporting systems. These systems provide an automated form that can be accessed from the user s desktop and allow for integration with the data feed from the T&E Card Provider. When the user accesses the system, he or she receives an expense report that has been pre-populated with T&E card data. Fields are created for allocation to cost centers and entry of out-of-pocket expenses. After completion, the form is electronically routed using workflow rules (included with the system) for automated manager approval and subsequent delivery to the Accounts Payable department (for reconciliation and reimbursement). Receipts are forwarded to A/P in a separate envelope. Twenty-six percent of companies surveyed have implemented an enterprise-wide, pre-populated expense reporting solution, which is better than the 9 percent industry average. While automated expense reporting is viewed as an innovative T&E best practice, it has not been as widely adopted as predicted. This low adoption has been attributed to other Procure-To-Pay solutions such as e-procurement, Strategic Sourcing, and ERP implementations that have eclipsed automated expense reporting in priority. Over the last ten years, automated expense reporting solutions have improved functionality and so enhanced potential cost savings for companies. The results of the survey indicate that companies will begin to adopt these tools more rapidly going forward. Compared to five years ago, the number of companies offering expense-reporting solutions has grown dramatically. ERP and e-procurement vendors have developed automated expense reporting solutions and marketed them as second-wave initiatives. Other third-party products have developed strategic alliances with card providers and software companies to provide more robust functionality. Mid-size companies that do not necessarily have the resources to spend and implement an expense reporting solution have explored cost-optimal alternatives such as outside hosting of the expense reporting package or creation of in-house, automated expense templates. We look at reporting through our travel agency, but we find that we get better data through the T&E card. We can see spend each month by category and vendor. Mid-size Durable Manufacturing Company continued on next page 12 Aberdeen Group. Expense Management Automation. March, Section II Practices 102

104 Travel and Entertainment Practice10 Standardize and pre-populate expense reporting continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: User Satisfaction Benefit: Control Significantly reduces cycle time, data input, and input errors Users appreciate the ease, convenience, and time savings of pre-populated expense reports Pre-population of data increases control over data and reduces possible data input errors ACTION STEPS: 1. Evaluate third-party expense reporting packages for ability to meet functionality and integrate with existing platform 2. Work with Card Issuers to receive automated feed, define cost center codes, and create workflow rules 3. Pilot expense reporting package within a business unit to optimize solution and build initial momentum 4. Develop and deliver comprehensive training program to ensure user acceptance and satisfaction with the product 5. Roll out expense reporting package, including comprehensive training SUCCESS STORIES and TRENDS In addition to the 26 percent of study participants that have already implemented an enterprise-wide expense reporting solution, 36 percent plan to implement one in the next two years. One large corporate participant reported the average time to complete a pre-populated, automated expense report is two minutes; this is a 93 percent improvement from the industry average for completing a manual report. 100 percent of the companies that implemented an enterprise-wide solution expressed satisfaction with their product and the associated cost savings. 103

105 Travel and Entertainment Practice11 Reporting Standardize and automate data interfaces between expense management and accounting applications Leading companies have developed automated interfaces between expense management applications and their ERP or accounting applications. This step significantly streamlines the reconciliation process by removing the time-intensive activity of manually entering expense report data into the Accounts Payable and General Ledger systems. Automation of this interface is often done in collaboration with the implementation of an automated expense reporting solution. Understanding what was spent, the entity or cost center responsible for the expense, the timing of the expense, and the management of the payable is a significant step in encouraging cost management collaboration between Accounting and Travel Management functions. Well-planned and -tested interfaces reduce errors and processing time, enable timely payment, and provide decision makers a view of consolidated and consistent information. Although the need to audit for approvals and original receipts will still exist, the focus of the audit will shift from validating accurate data entry to ensuring appropriate cost allocation of expenses. Well-planned and -tested interfaces reduce errors and processing time, enable timely payment, and provide decision makers a view of consolidated and consistent information. ACTION STEPS: 1. Map data requirements e.g., cost center, employee information, spend information to ensure accurate interface 2. Develop and thoroughly test interface prior to deployment 3. Work with Audit to develop new process for reviewing and improving expense reports MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Vendor Management Benefit: User Satisfaction Benefit: Control SUCCESS STORIES and TRENDS Reduces cycle time, manual data input, and potential for errors Rationale Improves timely reimbursement Reduces mistakes generally attributed to human error 58 percent of study participants listed manual entry of expense data into the A/P system as one of the most time-intensive activities during the reconciliation process. Section II Practices 104

106 Travel and Entertainment Practice12 Reporting Capture, report, and analyze comprehensive, company-wide travel data practice companies identify the appropriate internal and external sources for travel data to facilitate comprehensive data management. Access to comprehensive data is critical to effective vendor negotiations and Travel and Entertainment policy compliance tracking. Information sources include: Travel Agency T&E card Expense reports Vendors e.g., hotels, airlines Web-based booking tool Companies should capture travel data in a central location. The data should consist of per-trip information on costs, vendors, dates, and locations and should be collected in an easy-to-analyze format which includes the ability to sort by different variables. For some companies, this may be as simple as aggregating the data into a software spreadsheet. Mandating and enforcing use of a single Travel Agency or T&E card can provide improved access to data in a single repository. Data can be used for vendor negotiations, continuous improvement, and exception reporting. Common analysis may include a review for patterns and exceptions in areas such as: Airline city pairs Spend with T&E suppliers Airline credits with each airline Top-volume suppliers during a given period of time Cash advances taken through T&E card for companies that permit cash access on cards Merchant Category Code (MCC) exception reporting continued on next page 105

107 Travel and Entertainment Practice12 Capture, report, and analyze comprehensive, company-wide travel data continued MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Vendor Management Benefit: Control Comprehensive data enables greater ability to negotiate discounts, reducing overall travel costs to the firm Comprehensive information will better support vendor negotiations and vendor consolidation Enables the firm visibility to comprehensive spend data and supports effective reporting, allows for the evaluation of travel compliance by region, business unit, period, or policy, and improves decision making ACTION STEPS: 1. Identify all internal and external sources of data (see information sources above); meet with all travel planners to identify any other travel data collection resources 2. Work with sources to retrieve data e.g., data feeds, spreadsheets, queries 3. Consolidate data into single reporting mechanism (this will depend on technological sophistication and format of the data) 4. Determine cost-effective method for continuous update of data e.g., may range from weekly download and merge to fully integrated system SUCCESS STORIES and TRENDS Study participants that consolidated data from multiple sources averaged a 19.6 percent discount on airline rates. This is significantly greater than the overall study average of 9.7 percent. One study participant transitioned to mandate use of the T&E card for all travel-related expenses, which enabled greater visibility to comprehensive spend data from a single location, thereby improving spend information and analysis capabilities. Where additional detail was required, the company leveraged data supplied through the Travel Agency. Section II Practices 106

108 Travel and Entertainment Practice13 Reporting Implement post-trip exception reporting and distribute lost savings report Leading organizations use exception reporting to track, communicate, and resolve non-compliance issues. Maverick or rogue spend by employees can significantly impact costs as non-compliant spend does not take advantage of negotiated rates. A post-trip report contains information about expenses incurred for completed travel (by business unit, traveler, etc.) over a given time period. The Travel Management function should review these reports to monitor expenses and lost savings, and, as needed, investigate policy violations. By tracking post-trip information, organizations can track non-compliance and deliver related lost savings information to individuals and their managers. ACTION STEPS: 1. Define critical metrics for post-trip reporting e.g., travel expenses by business unit; hotels, airlines, car rentals used 2. Track metrics using reporting system determined by available technology and reporting sophistication 3. Utilize exception reporting to identify travelers who are violating policy 4. Communicate with violators to determine underlying causes e.g., frequent flyer miles, last-minute booking 5. Train non-compliant employees on travel policies e.g., show lost savings report; develop a quick reference card for travel policies 6. Track individuals non-compliance over time for additional communication and follow-up MARKET APPLICABILITY: All Companies Benefit: Cost Savings/Process Efficiencies Benefit: Control SUCCESS STORIES and TRENDS Reduces costs over time as compliance improves by exposing lost savings and encouraging compliance Communication of costs and benefits improves compliance over time Approximately half of the survey participants utilize post-trip exception and post-trip lost savings reports. Two large corporate companies utilized internal, Web-based booking systems, which required employees to type in reasons for booking travel outside of company policy; reporting through the Web-based tool was used in non-compliance reporting. Another large corporate company generated and distributed non-compliance reports among business units to encourage compliance. 107

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