Procurement to Payment Processes and the Role of Procurement Cards

Transcription

1 Procurement to Payment es and the Role of Procurement Cards

2 Contents Introduction Executive Summary Efficiency Sourcing Effectiveness Compliance Solution Costs and Implementation Study Overview Objectives Methodology Demographics Efficiency Costs Order to Receipt Invoice and Payment Trends Procurement Card Trends Sourcing Effectiveness Compliance Solution Costs and Implementation The Role of Procurement Cards Efficiency Sourcing Effectiveness Compliance Solution Costs and Implementation The Disadvantages of Procurement Cards Efficiency Compliance Sourcing Effectiveness Appendix A - Procurement Card Administration Procurement Card Administration Appendix B - Glossary of Terms General Definitions Solutions Sourcing Appendix C - Survey Participants About Accenture

3 Introduction Business trends of the late 1990's (globalization, increased outsourcing, merger and acquisition activity, an explosion in the number of available procurement technologies and solutions, etc.) have led to numerous challenges for procurement departments. This has resulted in a multiplicity of Procurement to Payment processes in many of today's organizations. The economic environment has recently heightened the focus on procurement activity, with organizations demanding better control of their expenditure from large ticket items down to office products. Accenture surveyed over 50 leading organizations in the U.S. and Europe across 12 industries (listed in Appendix A) to determine how organizations are handling their Procurement to Payment processes. In particular, the study focuses on indirect expenditure where many organizations have opportunities to improve their procurement performance through effective sourcing of goods and services, management of preferred supplier compliance and efficient processing of large volumes of transactions (see Figure 1). This study covers the most frequently encountered solutions and looks closely at the role of procurement cards in the end-to-end processes (see Figure 2). Figure 2 Illustrative Solution Deployment Figure 1 Procurement to Payment Value Levers Improve Profitability Increase Value Improve Capital Allocation Increase Revenues Reduce Costs Reduce Invested Capital Reduce Cost of Capital COGS Sourcing Effectiveness Compliance Improvements Operating Expense Efficiency Working Capital Payment Terms Assets Solution Costs and Implementation Indirect Expenditure: Spend on goods or services that are not directly used in the end product. Spend of this nature is also often referred to as "overhead." Procurement Card Overview Requisition/Order ERP Requisition/Order ERP Procurement Cards became popular as a corporate purchasing solution during the 1990 s. Today they are commonplace in leading organizations that have employed them to drive process efficiencies and gain control of low value, high volume purchases. Transaction Value Invoicing and Reconciliation N/A Requisition/Order Commercial Card Invoicing and Reconciliation EDI Invoice Requisition/Order eprocurement ERP Procurement Card They allow end-users to deal directly with suppliers, placing orders via traditional methods, online or using eprocurement solutions with payment details provided in the form of a card or account number. The merchant or supplier transmits transaction information to the card processor network. This information increasingly includes tax information and line item detail as well as basic transaction information. Invoicing and Reconcillation Commercial Card Invoicing and Reconcillation Procurement Card Invoice Consolidated transaction information is then provided to the buying organization in electronic format typically on a monthly basis. Volume of Transactions Typical Procurement Card controls available to buying organizations include: - Individual transaction limits - Monthly spend limits - Category/Supplier restrictions 1

4 Executive Summary With organizations facing increasing complexity in their businesses, Accenture conducted this study on Procurement to Payment es and the Role of Procurement Cards to determine how these processes are being handled today and how they are likely to change. In particular, we looked at leading companies in the U.S. and Europe to further understand end-to-end procurement effectiveness, process costs and efficiencies. The study focused on indirect expenditure but, excluded Travel & Entertainment expenses and associated processes. This study reveals that organizations are continuing to focus on making Procurement to Payment process efficiencies through automation. These organizations also recognize the need to drive compliance to preferred supplier agreements and find ways to reduce costs of procured goods and services in indirect spend areas. To do so, organizations are planning to expand their use of eprocurement and Procurement Cards solutions by 5% to 6% over the next 12 months. Today's organizations are using a multiplicity of Procurement to Payment processes with varying degrees of automation to deliver these savings. This study looks at the most popular processes utilized for indirect purchases: Manual/Paper ERP with Paper Invoice Procurement Card eprocurement with Paper Invoice Efficiency Organizations still use manual processes for a large percentage of indirect transactions (on average 35% of transactions) with an average end-to-end requisition to payment process cost of $97 per transaction. Over 60% of the total cost is distributed within the business in terms of requisition, approval and order costs. Enterprise Resource Planning (ERP) solutions play an important role, particularly in manufacturing, but most transactions still result in the receipt of a paper invoice. Average end-to-end requisition to payment process costs equal $81 per transaction and a majority of this cost is within the order to receipt process. The use of eprocurement solutions continues to grow, but it still only accounts for approximately 14% of indirect spend. As with ERP solutions, most transactions result in a paper invoice. Average process costs equal $53 per transaction. Procurement Cards only account for about 5% of an organization's indirect spend; however, they account for approximately 16% of the transactions. The average cost of a Procurement Card transaction was the lowest of all the evaluated processes at $19 per transaction. Although businesses recognize the process efficiencies made by using procurement cards, survey participants noted that they realized average full time employee savings of $11 per transaction. The transaction costs of Procurement Cards when used with eprocurement solutions are comparable to standalone use with the additional benefit of being able to enforce line item compliance. Sourcing Effectiveness Participants achieved average contract discounts of 11.4% for indirect spend. The greatest savings were achieved through driving compliance (10%) and spend consolidation (5%). Participants indicated that procurement cards contributed 23% to the 5% spend consolidation savings. In addition, participants also indicated that they experienced average price decreases of 0.3%. Compliance The average compliance level for indirect expenditure was 68% with average contract discounts of 11.4%. Participants noted that enforcing compliance to achieve contract discounts was a key opportunity to increase indirect procurement benefits. Procurement cards enabled companies to improve compliance by 12%, with those using Preferred Supplier List functionality achieving an additional 9% improvement. Solution Costs and Implementation ERP solutions cost an average of $10-15 million and typically require one to three years to implement. Numbers can vary widely based on the size and complexity of the organization. Maintenance costs are typically 20% of the original installation cost. Organizations have typically invested over $1 million and six to eight months to implement eprocurement solutions. Numbers may vary, based on the size of the catalog being implemented, number of users, etc. Procurement Cards are the least expensive amongst all solutions, costing approximately $150,000 to implement and requiring on average three months from start of implementation to first transaction. Ramping up the spend took time, with 50% spend level typically reached in 14 months and 100% of spend in 22 months. 2

5 Study Overview Figure 3 Study Participants by Number of Employees Objectives With organizations facing increasing complexity in their businesses, Accenture conducted this study on Procurement to Payment es and the Role of Procurement Cards to determine how these processes are being handled today and how they are likely to change. Small (<1,000) 36% Large (>10,000) 56% In particular, we looked at leading companies in the U.S. and Europe to further understand end-to-end procurement effectiveness, process costs and efficiencies. The study focused on indirect expenditure, but excluded Travel & Entertainment expenses and associated processes. Methodology Within the U.S. and Europe, Accenture conducted: Medium (1,000 to 10,000) 8% Study Participants by Region Primary research survey with over 50 leading organizations across multiple industries Primary research interviews with 10 of these organizations across multiple industries Primary research interviews with suppliers across multiple industries Europe 33% U.S. 67% Secondary sources, including: annual reports, subject matter experts and Accenture research. Demographics The survey covered a range of industries and company sizes (see Figure 3 for participant segmentation): Organizations from 12 different industries participated in this study 63% of the participants had annual revenues over $5 billion 67% of the participants were located in the U.S. and 33% in Europe 56% of the organizations had over 10,000 employees Those with less than 1,000 employees (36%) included a number of organizations who responded for their business units 78% of the participants had Procurement Card programs Study Participants by Industry Wood, Paper & Forestry 2% Communications 4% Fabricated Goods 6% Transportation 6% Automotive & Aerospace 7% Computers & s 9% Food & Tobacco 9% Services 15% <$1 billion 11% Utilities & Energy 11% Chemicals 11% Finance 11% Healthcare 9% Study Participants by Company Size $1 billion to $5 billion 26% >$5 billion 63% 3

6 Efficiency Indirect commodities account for on average 40% of the participant expenditure and 70% of their transactions (see Figure 4). This accounts for why many organizations continue to focus on process efficiency to increase savings on their indirect expenditure. Today's organizations are using a multiplicity of Procurement to Payment processes with varying degrees of automation to deliver these savings. This study looks at the most popular processes utilized for indirect purchases: Manual/Paper ERP with Paper Invoice Procurement Card eprocurement with Paper Invoice The manual paper process is still the most commonly used process for indirect spend, accounting for an average of 42% of spend and 35% of transactions. ERP solutions continue to play an important role, particularly in manufacturing organizations, but the Figure 4 Average Percentage of Indirect Spend and Transactions by majority of transactions still result in paper-based invoices. Although many organizations have experimented with electronic invoicing, it has not yet established itself as a viable alternative to Data Interchange, which remains prohibitively expensive for indirect expenditure. The use of eprocurement solutions continues to grow. However, it has not yet achieved the growth projected during the Dotcom hype, accounting for only 14% of a company's indirect expenditure and 21% of transactions. While Procurement Cards, on average, only account for 5% of spend, they are employed in high transaction volume areas and account for approximately 16% of transactions. es utilized for indirect purchases varied by region, with U.S. based organizations leading the way in the use of eprocurement, Procurement Card and Invoicing. Costs To understand the true costs associated with each of the many Procurement to Payment es that organizations used, we focused on the cost drivers including the creation of requisitions, approvals, purchase orders, receipting, invoice processing, reconciliation, payment and tax processing. This involved looking at the distributed costs within the business and the Procurement to Payment costs incurred within the procurement and finance organizations. Manual/ Paper ERP with Paper Invoice Procurement Card 4.5% 14.2% 24.7% 19.1% 34.7% 41.5% The majority of the companies indicated that they operated hybrid procurement organizations (a combination of centralized and decentralized resources). Overall, procurement professionals continue to spend a large proportion of their time processing requisitions and creating purchase orders (see Figure 5 on page 5). eprocurement with Paper Invoice eprocurement with Invoice ERP with EDI Manual with Invoice ERP with Consolidated Invoice eprocurement with Procurement Card ERP with Procurement Card 8.9% 11.7% 4.4% 7.1% 5.3% 3.5% 4.5% 2.7% 3.7% 2.2% 0.6% 1.7% 0.6% 0.3% Average % of Indirect Spend Average % of Indirect Transactions Survey participants were asked to state the percent of indirect spend and transactions that fall into each of the processes listed in the chart above. Over 70% of finance organizations continue to be mainly centralized, with 10% indicating they are using shared services. The largest fully loaded costs for employee positions are the procurement professional, finance professional, and the business approver. Figure 6 (see page 6) shows the average fully loaded costs for the different business, procurement, and finance functions that touch the procurement to payment processes. In addition to understanding the cost of resources involved in procurement to payment processes, we must also understand the associated effort. Figure 7 (see page 6) shows the distribution of average time effort required to 4

7 Figure 5 Time Spent on Professional/ Buyer Activities by Percent Expediting 8% Reporting and Admin 12% Supplier Management 22% Other 3% Sourcing Activity 31% Creating PO's and ing Transactions 24% Participants were asked to estimate percent of time spent on each of the following activities; sourcing activity, creating POs and processing transactions, supplier management, reporting and administration, expediting and other specific activity. Time Spent on Procurement Administrator Activities by Percent Reporting 11% Responding to Supplier Queries 16% Responding to Buyer Queries 16% Other 7% ing Requisitions and Completing POs 42% Creating and Maintaining Supplier Records 14% Participants were asked to estimate percent of time spent on each of the following activities; processing requisitions and completing POs, creating and maintaining supplier records, responding to buyer queries, responding to supplier queries, reporting and other specific activity. Time Spent on Financial Administrator Activities by Percent Tax Related ing 4% Generating Payments 9% Responding to Supplier Queries 11% Invoice Exception Resolution 16% Other 6% Invoice ing 54% Participants were asked to estimate percent of time spent on each of the following activities; invoice processing, invoice exception resolution, responding to supplier queries, generating payments, tax related processing, and other specific activity. complete key steps in the process. This analysis indicates that exception management is the most time consuming activity, taking on average between 20 and 25 minutes per exception. To ensure accuracy in assessing the typical per transaction process costs, only organizations with over 20% of transactions following a particular process were considered. costs for indirect expenditure were constructed by building a total cost model based on the value levers. The average cost of a transaction following a manual paper process was calculated to be $97 (end-to-end requisition to payment cost). The majority of this cost is distributed within the business in terms of requisition, approval and order costs which accounted for over 60% of the total. Figure 8 (see page 6) shows the typical per transaction Procurement to Payment costs for participants based on the type of order and invoice process and the costs incurred to support these. The use of ERP solutions has enabled organizations to gain some process efficiencies for indirect expenditure, although with a paper invoice the average process costs equal $81. eprocurement systems with their user-friendly interfaces reduce order costs further. However, the net reductions are less than anticipated, because they typically require requisitions and approval (requisitioners and approvers are typically more expensive resources). Typical process costs are $53 per transaction. Procurement Cards allowed organizations to reduce process costs even further, down to an average of $19 per transaction. The low transaction costs are achieved by removal of administrative process steps, allowing end-users to deal directly with suppliers, using preset spend limits and consolidating invoices. Although companies recognize the process efficiencies made by implementing procurement cards, survey participants noted that they realized average full time employee savings of $11 per transaction in addition. Using eprocurement systems along with Procurement Cards results in a total cost higher than $19, which can be attributed to the additional requisition and approval costs when using an eprocurement system. When approvals are removed process costs are comparable. For further detail on these costs see sections on: Order to Receipt Invoice to Settlement 5

8 Order to Receipt Organizations use four types of processes for their indirect purchases: Manual order ERP order eprocurement order Procurement Card order The manual order costs (see Figure 9 on page 7) are over 60% of the total process costs and have two major components approval costs (20%) and costs associated with creation and placement of an order (56%). In recent years, many organizations have been looking for an efficient way to allow business requisitioners to purchase indirect goods and services with pre-defined approval thresholds and automatically generated orders. Many companies are now using eprocurement solutions to facilitate the buying process for indirect categories. Of the companies surveyed, 10% indicated that they do not set any approval thresholds. 46% required business approval while only 17% required finance approval. For those requiring approvals from a business approver, the average threshold was $3,500 and from a finance approver it was $21,500. On average companies stated that 74% of requisitions required business approval while 39% required finance approval, a majority of which we suspect would require manual requisitions. ERP processes can be quite labor intensive since these processes are in most cases an electronic form of the manual paper passing process. Creation and placement of orders still represents 56% of overall order cost. Approval Figure 6 Average Loaded Costs for Positions in Business, Procurement and Finance Figure 8 Average Cost Per Transaction by Procurement Adminstrator $42,500 Procurement Professional $75,500 Manual/Paper $97 Finance Administrator $38,500 Finance Professional $66,000 ERP with Paper Invoice $81 Business Requisitioner Business Approver $55,500 $90,000 Manual with Invoice $68 Centralized Receiving $44,500 Participants were asked to give their fully loaded costs for each of the roles shown. Figure 7 eprocurement with Paper Invoice ERP with EDI $53 $52 Average Effort for Core Activities (Minutes) eprocurement with pcard $26 Time to Complete a Receipt Time Spent to Approve an Invoice Time Spent to Approve a Requisition Time to an Invoice Time to Complete a Purchase Requisition Time to Complete a Purchase Order Time to an Exception Participants were asked for the average time spent to complete the activities above Procurement Card Requisition Approval Order Receive $19 Invoice Reconcile The process cost metric provides an indicative cost per transaction for the given process type. These have been calculated by analyzing the total costs associated with the Procurement to Payment process. This includes costs of Procurement Professionals and Administrators, Finance Administrators and the distributed time within the business associated with the cost drivers, for example, creation of a requisition. Pay 6

9 costs remain a high percentage of overall cost (19%) with 33% of companies requiring business and 13% requiring finance approval. eprocurement order costs are significantly lower than the manual and ERP order processes primarily due to the automation of the creation and placement of orders and the much lower cost of approvals since a majority are purchased through catalogs. Using Procurement Cards to order yielded the lowest overall cost due to: Elimination of requisitions and approvals Procurement Card controls that allow the setting of pre-approved spend and transaction levels The average cycle time (or lead time) from order to receipt across all processes was 12.5 days. The average order error rate was 10%. Companies that moved towards eprocurement and Procurement Card solutions stated that they were able to reduce cycle times significantly, with next-day delivery a common occurrence. Invoice and Payment Invoice processes can be classified into three categories (see Figure 10 on page 8): Paper invoice process invoice process Procurement Card invoice process While there has been a focus on automating the order process, manual processes still dominate the invoice and payment process (48% of companies and 67% transactions) and are by far the most expensive. A majority of the costs stem from invoice receipt and processing cost (40%) and exceptions and query management cost (36%) (see Figure 10 on page 8). Companies are trying to automate the processing of invoices by using an electronic exchange of information and automated matching. Over 60% of companies perform a 2-way (reconciliation of purchase order with invoice) or a 3-way match (reconciliation of purchase order with invoice and receipt), which apply to approximately 50% of transactions. The average threshold limit for a 2-way or a 3-way match was $10,000, although this ranged from $200 upwards. Figure 9 Order to Receipt Total Manual Order Generate Requisition Obtain Approval (Optional) Create and Place Order Expedite and Receive Goods $64 $8.60 $13.00 $35.80 $6.60 ERP Order Generate Requisition Obtain Approval (Optional) Create and Place Order Expedite and Receive Goods $48 $8.10 $8.40 $25.20 $6.60 eprocurement Order Generate Requisition Obtain Create and Approval Place Order (Optional) Expedite and Receive Goods $20 $8.60 $5.80 $0.40 $5.50 Procurement Card Order Obtain Approval (Optional) Place Order Receive Goods $14 $1.00 $8.80 $4.60 Note: Manual order process is based on the end-to-end manual process. ERP order process is based on the end-to-end ERP with paper invoice process. eprocurement order process is based on the end-to-end eprocurement with paper invoice process. Procurement card order process is based on the end-to-end Procurement Card process. 7

10 Interview participants with mature Procurement Card programs felt no loss of control when it came to the reconciliation process. The monthly statement provided by Procurement Card providers acts as both the invoice and the purchase order. When the end user reviews and approves this monthly statement, they are, in essence, performing a 3-way match. A key driver of the invoice processing costs is the level of exceptions associated with each process. It is clear that properly managed electronic invoice and Procurement Card programs capture a much higher quality of data than a paper process typically yields. The ability of these solutions to lessen manual manipulation of line item and cost center information drastically reduced the amount of exceptions from an average of approximately 20% with manual processes to less than 10% with electronic invoices and Procurement Cards. In many organizations, payment must be approved for invoices with values over a pre-defined policy threshold. 22% of the companies reported requiring approval for invoices with an average invoice threshold of $5,250. This retrospective check may allow organizations to crack down on persistent offenders, but for the average employee purchasing on behalf of the business it has little impact. That check can add a great deal of costs for resources and payment process cycle time. Over 60% of organizations surveyed use checks and/or electronics funds transfer for payment. On average a company's payment period cycle time was 40 days, lower than the average standard contract term of 41 days. Only 12% of payments were classified as late payments. After implementing a Procurement Card, companies reported their payment cycle time was reduced by 20 days. Trends With these cost profiles, it is not surprising to find that companies are planning to expand their eprocurement and Procurement Card programs to further improve process efficiencies. The usage of eprocurement and Procurement Card order processes is expected to increase by 5% to 6% within the next 12 months, while an equivalent reduction in manual processes is expected (see Figure 11 on page 9). Similarly, the use of electronic invoice and Procurement Card invoice processes are expected to grow with a reduction of 9% in the use of paper invoice process. Figure 10 Invoice to Payment es Total Paper Invoice Invoice Receipt and ing Exception and Query Management Invoice Approval and Payment Tax ing $33 $13.10 $11.70 $7.30 $0.50 Invoice Invoice Receipt and ing Exception and Query Management Invoice Approval and Payment Tax ing $4 $0.00 $2.70 $0.60 $0.30 Procurement Card Invoice Exception and Query Management $2.30 Invoice ing $1.90 Tax ing $0.30 $5 Note: Paper invoice process is based on the end-to-end manual process. invoice process is based on the end-to-end manual order with electronic invoice process. Procurement card invoice process is based on the end-to-end Procurement Card process. Manual order process. 8

11 Procurement Card Trends The overall usage of Procurement Cards is expected to increase over the next 12 months with both standalone usage and in combination with eprocurement solutions. Organizations are applying Procurement Cards to achieve numerous goals such as: Improve budget compliance and compliance to preferred supplier contracts Reduce invoice volumes in high transaction areas Facilitate buying processes in distributed environments Increase visibility and obtain more detailed information for indirect transactions Figure 12 Applicability of Procurement Cards Industrial Supplies and Equipment Office Products and Services PCs, Software and Peripherals Temporary Labor/ Services Overnight Mail Telecommunications Organizations are also recognizing the applicability of Procurement Cards to other non-traditional categories such as industrial supplies and equipment (see Figure 12). Advertising and Marketing Fleet and Equipment Leasing Sourcing Effectiveness Meaningful information is a critical component of effective sourcing. Organizations can greatly improve their ability to obtain relevant sourcing information by using ERP, eprocurement and Procurement Card solutions. Of course, how this information is translated into a sourcing benefit depends on the organization's sourcing skills. Survey participants Freight/Shipping Not Low Medium High Very Applicable High Participants were asked to assess the category applicability for Procurement Cards for each of the categories shown above. 2.4 Figure 11 Expected Changes in Types of Order es used in 2003 Expected Changes in Types of Invoice es used in % 6% 4% 2% 0% -2% Manual Order 0% ERP Order 5% eprocurement Order 6% Procurement Card Order 8% 6% 4% 2% 0% -2% Paper Invoice 3% Invoice 6% Procurement Card Order -4% -4% -6% -6% -8% -8% -10% -10% -9% -12% -11% -12% Participants were asked to select the current requisition to pay process and the anticipated requisition to pay process that will be used in 12 months time for each of the following commodities; Industrial Supplies & Equipment, Office Products & Services, PCs, Software & Peripherals, Temporary Labor/Services, Overnight Mail, Telecommunications, Advertising & Marketing, Fleet & Equipment Leasing, Freight/Shipping. 9

12 achieved an average contract saving of 11.4% across their indirect expenditure, although specific commodities exceeded this discount (see Figure 13). Participants stated that they gained greatest sourcing benefits from improving contract compliance, enforcing budget compliance, and consolidating spend (see Figure 14). While volume rebates and unit cost reductions were targeted, control of indirect purchases appeared to be the key driver of benefits. Opinions were divided on how Procurement Cards contributed to sourcing benefits achieved. Some believed their Procurement Cards did contribute to spend consolidation, volume rebate and unit cost reduction benefits, whilst others did not. The key benefits enabled through Procurement Cards (see Figure 15 on page 11) were in the areas of compliance and spend consolidation (dealt with separately below). Spend consolidation benefits were typically attributed to the implementation process in which companies rationalized their use of suppliers. A common view expressed when discussing Procurement Cards was the risk of increased prices from the suppliers who may pass on some of the incurred charges. Figure 13 Average Contract Discount for Indirect Categories (%) Survey participants indicated that they did not experience price increases, and on average in fact they achieved small price decreases when using Procurement Cards (see Figure 16 on page 11, which shows the distribution of price changes). Interviewed participants said that there was obviously a point in the average transaction value where costs incurred would be passed back to the buying organization, but most organizations responded to this by stating that suppliers acceptance of Procurement Cards was a prerequisite for doing business. The information provided through Procurement Cards has improved since their launch and the providers are now growing their level 3 networks, which include line item detail and tax information (see Figure 17 on page 11). Within Europe level 3 information is now commonplace. In addition, over 50% of Procurement Card users indicated that they used online end user reports and administration. In order to get the best from their programs, companies are integrating their Procurement Card solutions with Financial Systems (88%) and Data Warehouses (15%). Figure 14 Average Procurement Benefits Achieved as a % Spend Industrial Supplies and Equipment 12.8% Contract/Supplier Compliance 5.4% Office Products and Services 16.7% Cost Avoidance/ Budget Compliance 4.9% PCs, Software and Peripherals 17.4% Spend Consolidation Unit Cost Reductions 3.0% 4.9% Temporary Labor/ Services 12.0% Volume Rebates 2.1% All Indirect Spend Average 11.4% Regulatory/Tax Compliance 1.4% Participants were asked for the average contract discounts they achieve through using preferred suppliers (as a % total category spend). The graph shows the results broken down across key indirect commodity areas. Survey participants were asked to indicate the typical procurement benefits achieved in each of the areas (as a % total expenditure). 10

13 Figure 15 Procurement Card Contribution to Procurement Benefits Contract/Supplier Compliance Cost Avoidance/ Budget Compliance Spend Consolidation Unit Cost Reductions Volume Rebates 10% 16% 23% 23% 23% With the increasing use of Procurement Cards with eprocurement solutions, many organizations are integrating these solutions (39%); moreover they are using Purchase Order information capture to allow matching process automation. Compliance When assessing the overall value of the end-to-end Procurement to Payment processes, procurement organizations are looking to further enable and enforce compliance benefits. Compliance for indirect expenditure averaged 68% across the participants and with average contract savings of 11.4% available, this is a key area of opportunity for savings (see Figure 18 on page 12). Not surprisingly organizations now view compliance control as a key requirement of any end-to-end process. Regulatory/Tax Compliance 6% Survey participants were asked to indicate the typical procurement benefits achieved in each of the areas (as a % total expenditure). Figure 16 Procurement Card Price Changes Participants were also divided on the level of compliance improvement achieved by implementing a Procurement Card program. Some found a strong link and indicated large changes in compliance, while others indicated there was no impact on compliance (many organizations did not measure the impact). On average, organizations indicated that compliance improved by 12%, with those using preferred Figure 17 Procurement Card Information Capture 0.00% 0.0% 80th Percentile Purchase Order Information 40% -0.20% -0.40% Average -0.3% Line Item Detail 53% Delivery/Ship to Information 52% -0.60% -0.80% 20th Percentile -0.9% Tax Information 82% -1.00% Basic Merchant Information 97% Survey participants were asked on average what price changes they experience with procurement card suppliers (as % of overall spend). Survey participants were asked what information their procurement card offers and for approximately what percentage of transactions. 11

14 supplier list functionality achieving an additional 9% improvement (see Figure 19). Interviewed participants stated that the use of preferred supplier lists was the primary reason for the substantial improvement contract compliance with Procurement Cards. Better contract compliance also led to increased volumes for preferred suppliers and hence improved negotiation leverage. In addition to contract compliance, interviewees stated that tax information also motivated them to move spend towards Procurement Card programs. Although most organizations stated that they reclaimed the majority of recoverable tax, they viewed the reduced administration effort as a key benefit in Europe. Solution Costs and Implementation Although the benefits available through optimizing indirect purchasing processes are clear, the overall solution implementation costs are an important consideration in deciding what indirect processes an organization will take on. Many organizations, particularly in manufacturing, are keen to capitalize on their ERP investments, which cost an average of $10-15 million dollars and typically between Figure 18 Average Compliance for Indirect Spend Categories one to three years to implement. Numbers vary widely based on the size and the complexity of the organization. Typical maintenance cost for an ERP system average 20% of original installation cost. Although these solutions are not optimal for indirect expenditure, they do enable organizations to gain better control and make processes more efficient. Over the past couple of years other organizations have invested in technology specifically to optimize indirect procurement processes. They have typically invested approximately $1 million dollars and six to eight months to implement their eprocurement solutions. Numbers vary widely by business driven by the size of the catalog being implemented, number of users, etc. Some organizations have used Procurement Cards as a cost effective way to address indirect spend, with average implementation costs around $150,000. Many implementations, however, have been small scale and do not maximize the available benefits. Participants indicated that it took them three months on average from start of implementation to the first transaction. Ramping up the spend then took time with 50% spend level typically reached in 14 months and 100% in 22 months. Procurement Card programs were largely (over 75%) owned by the procurement organization. Figure 19 Impact of Procurement Card on Compliance 35% 20% 14% 27% 32% 21% 65% 80% 86% 73% 68% 12% Industrial Supplies and Equipment Office Products and Services PCs, Software and Peripherals Temporary Labor/ Services All Indirect Spend Average Participants were asked for the current level of compliance and the average contract discounts achieved through using preferred suppliers (as % total category spend) for the set of commodities listed and for their total indirect expenditure. Preferred Supplier Lists Participant Average Participants were asked to approximate the change in compliance as a result of implementing their procurement card program (as a % total procurement card spend). 12

15 The Role of Procurement Cards Procurement Cards are one of the many Procurement to Payment processes being used in today's organizations to drive process efficiency, compliance and sourcing benefits. As organizations move towards automating their inefficient manual processes, Procurement Cards provide an effective way to derive bottom line benefits. Efficiency Procurement Cards allow organizations to achieve the lowest process costs amongst all Procurement to Payment es in use today whether used on their own or with eprocurement solutions by: Reducing approval costs with pre-approval of spend and transaction limits Eliminating purchase orders Consolidating invoices from multiple suppliers into one electronic invoice Capturing enhanced information that helps with faster reconciliation, more rapidly resolving disputes and quicker tax processing Sourcing Effectiveness The Procurement Card program offers benefits in spend consolidation by rationalizing suppliers Contrary to popular perception, participants indicated that they received slight price reductions when purchasing with Procurement Cards Procurement Cards also enable users to produce reports easily that then enable them to analyze spend and identify further opportunities for better sourcing The Disadvantages of Procurement Cards Procurement Cards are well suited to indirect spend, but there are disadvantages that should be considered. Efficiency Use of Procurement Cards also results in a decrease in the payment cycle time by 20 days. Although organizations are currently not typically concerned about indirect expenditure cash flow, as Procurement Card spend levels increase, it is possible that the shorter payment cycles may lead to organizations having to weigh the consequences of cash flow contraction with the benefits resulting due to gain in process efficiency. Compliance Although Procurement Cards can enable substantial improvements in compliance, they cannot provide the level of control offered by eprocurement solutions, enforcing compliance at line item level. Sourcing Effectiveness Suppliers may increase prices due to the discount rate imposed on them by Procurement Card providers. The study indicated this is countered by the competitive pressures in the marketplace which require suppliers to accept cards as a part of doing business with buyers, resulting in price decreases versus price increases. However, the balance is likely to be tipped when purchases exceed a certain value and the costs become unsustainable for suppliers. Compliance Procurement Cards enable companies to improve contract compliance by establishing clear buying processes Preferred supplier controls allow organizations to further improve compliance by forcing end-users to buy only from a pre-selected list of suppliers Card features such as transaction and monthly spend limits as well as increased spend visibility help control the spending habits of the end-users and maintain budget compliance The ability to capture Line Item Detail and Tax information enables companies to manage tax compliance and automate their tax processing Solution Costs and Implementation Compared with other solutions, Procurement Cards offer a cost effective way to process indirect purchases. Installation costs are approximately $150,000 versus several million dollars for other solutions Installation time for Procurement Cards average between 3 months versus 8-24 months for other solutions 13

16 Appendix A Procurement Card Administration The survey requested information on how companies administered their Procurement Card program upon implementation. The following section describes the highlights from analysis of survey responses. Figure 20 Companies by Procurement Card Control Procurement Card Administration On average two full-time employees (FTE's) were used for administration, exception and dispute management, tax processing and reporting. However, companies indicated that a majority of the FTE's time was spent on Procurement Card administration. Companies reported that over 60% of their FTE savings as a result of a Procurement Card program was in the finance function. Transaction Spend Limits Transactions per Period Monthly Spend Limits 17% 90% 88% On average 71% of the Procurement Cards used were individual cards, 25% were group/department cards. Supplier/ghosted Procurement Cards represented only a small fraction of the cards in use. Temporary Spend Limits 26% About of half of those surveyed indicated that they mandate Procurement Card use for certain categories and close to 90% indicated that they do not require a purchase order to be issued when a Procurement Card is used for purchases. Preferred Supplier Lists 36% Participants were asked to select the statements that best describe the card controls that are applied in their organization. Participants indicated that transaction spend limits and monthly spend limits were the most popular Procurement Card controls they employed. On average they imposed monthly spend limits of $10,766 and per transaction spend limit of $2,191 (see Figure 20). Average Procurement Card Control Levels/Ranges Figure 21 (see page 15) shows that program fee waiver, speed of payment and spend volume were the most common form of incentives received from Procurement Card providers. A majority of companies indicated that their Procurement Card programs were well integrated with their financial systems (see Figure 22 on page 15). Integration of Procurement Card system with other company systems was not as prevalent. Transaction Spend Limits Monthly Spend Limits $4,500 $585 $2,190 $10,800 $15,400 Over 60% indicated that they use end user reports and end user administration. End user reconciliation and dispute management were used only infrequently. Card holder, cost center, line manager and tax reports were the most popular reports in use. $3,300 20th Percentile Average 80th Percentile Participants were asked to select the levels/ranges for the card controls that are applied in their organization. 14

17 40% of Procurement Card companies indicated that they had been through a tax audit. For supporting their tax audits, 38% indicated that they used their Procurement Card reports, 21% indicated they used paper invoices and 14% indicated that they used sampling. Participants in Europe indicated that there was little change in the amount of VAT reclaimed upon implementation of a Procurement Card. Figure 21 Companies by Procurement Card Incentives Integration Services 12% Transaction Volume 7% Other 4% Program Fee Waiver 27% Spend Volume 31% Speed of Payment 19% Participants were asked to specify the type of incentives they received from their procurement card providers. Figure 22 Systems Integrated with Procurement Card Financial Systems 88% eprocurement 39% HR Systems/ Employee Records Integrated Data Warehouse 15% 22% Inventory Management System 2% Asset Tracking System 7% B2B Marketplaces 7% Other 7% Participants were asked what systems their procurement card program was integrated with. 15

18 Appendix B Glossary of Terms General Definitions Invoice eprocurement Order ERP Order Paper Invoice Manual Order Procurement Card Invoice Procurement Card Order Solutions Data Interchange (EDI) Invoice Enterprise Resource Planning (ERP) Invoice process in which receipt, reconciliation and match are all electronic. Order process wherein an eprocurement system is used to place the order. Order process wherein an ERP system is used to place the order. Invoice process in which all processing is manual. Order process wherein all steps are conducted manually. Invoice process in which a consolidated electronic invoice is used and receipt, reconciliation and match are all electronic. Order process wherein a Procurement Card is used for payment and the order is place by phone or fax or online. EDI is the electronic exchange of routine business transactions. These transactions include such documents as purchase orders, invoices, inquiries, inventory, planning, acknowledgements, pricing, order status, scheduling, test results, shipping and receiving, payments, and financial reporting. EDI messages can be transmitted and received directly into sales and accounting systems without any manual intervention. EDI relies on trading partners agreeing to a standard format for electronic documents. Unfortunately only limited progress has been made in agreeing on universal formats and consequently EDI enablement requires changes to supplier and buyer systems to allow common message formats to be read. Value Added Networks (VANs) are used to perform mailboxing functions. VAN's store and forward data/messages and guarantee delivery for a fee based on monthly minimums, transaction size and frequency. EDI message formats, software and connectivity are expensive, require specialized infrastructure, technical skills, and maintenance and many disparate messaging formats exist. An electronic form of a traditional invoice which may take various forms, for example EIPP; a web-enabled solution for exchanging invoices and arranging payment. The EIPP process can be broken down into three parts: The Supplier presents an electronic invoice through the EIPP platform. This can be done by either keying the invoice into a web form (for low volume) or by uploading an invoice file through an interface (for high volume). The Buyer views and approves the invoice, either on the EIPP platform/website or by downloading it for auto matching in the Finance System. Payment can be arranged either through the EIPP platform interfaces with banking systems or through the buyer s own Finance system (checks, BACS, etc.). An Enterprise Resource Planning solution often forms the backbone to a business' IT architecture. These solutions consist of multiple modules that support all the major business processes: sales, purchasing, production planning, finance and accounting, HR, etc. Invoicing ERP purchases will usually take place via standard invoice, EDI, EIPP, or XML. ERP systems make use of a common data structure that can be accessed by all the modules to provide visibility and real-time collaboration. ERP systems are functionally very rich but expensive to implement 16

19 and maintain as a result. Even the most basic ERP systems will include modules to manage the creation of purchase orders (both manually and through stock reorder triggers), the matching of PO's with GRN's and invoices, payment generation and automatic posting of accounting information to the GL. ERP systems provide the platform for many ebusiness applications that extend and enhance ERP capabilities (e.g., Siebel/Broadvision for CRM, i2 for supply chain planning and eprocurement applications). eprocurement Procurement Card Sourcing Contract Compliance Benefit Cost Avoidance/Budget Compliance Benefit Regulatory/Tax Compliance Benefit Spend Consolidation Benefit Unit Cost Reduction Benefit Volume Rebates Benefit eprocurement applications push transactional procurement effort from a central admin unit to the point of need on business user desktops ensuring compliance to preferred supplier deals through online catalogues which users browse to find the items they need. Key features include: electronic catalogues, easy to use web interfaces, configurable requisition approval workflow based on individual authority limits, electronic PO's dispatched over an internet network to suppliers, adaptors for integration with accounting systems, and line item reporting capabilities. In order to close the requisition to payment cycle solutions include integration of Procurement Card solutions or integration with A/P solutions for invoice matching. Special-purpose cards supported by sophisticated networks that capture point-ofsale and end-user information (such as tax amount, ship-to-zip code and departmental cost center) required to manage operating expense purchases. The Procurement Card provider acts as an invoice consolidator and performs the matching process for the purchaser. The purchaser generally sends payment on monthly basis to the Procurement Card provider. The cost savings achieved as a results of buying goods and services with preferred suppliers (at contracted rates) versus dealing with non-preferred suppliers. The cost savings achieved through ensuring compliance to the budget, usually due to increased visibility of external spend and therefore avoiding 'unnecessary costs'. This is often seen as a reduction in spend for commodities where visibility is increased. Costs savings through compliance to regulations, for example, reduction in tax paid. Cost savings achieved through leveraging the total cost across a commodity or with a supplier. This usually results in lower contract prices. This can apply at a regional or global level. Cost savings achieved through ensuring items are purchased at the optimum price. This is applicable within contracts where suppliers may have not applied the contract price, or across similar items purchased within multiple suppliers. Cost savings achieved by maximizing the volume rebates agreed with suppliers. 17

20 Appendix C Survey Participants Air Products and Chemicals, Inc. American Electric Power (AEP) BASF Corporation Bombardier Transportation BP Chemicals Ltd. (Europe) British American Tobacco Cornerstone Family Services EMC Corporation Endesa Forest Laboratories Iberdrola ICI Paints J.D. Edwards & Co. Miller Brewing Company Nestlé UK Ltd. New York City Department of Education Owens Corning Pharmacia Corporation PricewaterhouseCoopers LLP Renault Royal Mail Group Smith & Nephew Inc. Smurfit-Stone Container Symbol Technologies, Inc. The Boots Company PLC Vodafone UK Vought Aircraft Industries, Inc. Wachovia Wake County Public Schools Willis Note: 54 companies participated in this survey, companies not listed wished to remain anonymous 18