V I S A C O M M E R C I A L S O L U T I O N S p r o c u r e - t o - p ay a n d C o m m e r c i a l c a r d b e s t P r a c t i c e s w h i t e p a p e r Procure-to-pay and commercial card best practices during a difficult economy. Author: Rafael DeLaVega, Senior Business Leader, Commercial Products, Visa Inc.
Introduction In response to a weaker global economy, today s corporate leaders and financial executives are refining their focus on the efficiency of their business operations and cash management processes. Current economic conditions are forcing businesses to take action in streamlining operations and cutting costs with a renewed perspective on creating higher levels of compliance and transparency. Finding more effective and efficient approaches to managing working capital has also become critical in an era of tightening credit where adequate cash flow is paramount in maintaining liquidity and sustaining business operations. Within this challenging environment, the value of commercial payment cards is becoming more apparent when it comes to the management of your company s cash flow and related payment processes. A commercial card programme can help you strengthen your cash management function, refine your focus on strategic supplier relationships, improve spending controls and streamline payment processes to operate more efficiently in an adverse economy. As a leader in providing global commercial payment solutions, Visa has conducted a comprehensive study of leading-edge companies from across the globe that are maximising the benefits of commercial cards in streamlining their procurement and payment processes. With the 2008 Visa Global Procure-to-Pay and Commercial Card Best Practices Study, you can benefit from companies who have applied commercial card best practices to achieve measurable results to their bottom line by using their experience to help your company achieve its goals. This Visa Commercial Perspectives white paper summarises key best practices from this valuable study and puts them into context of how they can be applied in response to a difficult economic environment. Gaining this new perspective on the many benefits of commercial cards, and taking the appropriate steps to put them in place at your company, can help boost your bottom line in a variety of ways. Cash management and working capital Today s corporate financial executives are being driven by the tough economy to find better and more efficient ways to manage their cash, improve liquidity and maintain working capital. When maintaining capital becomes more difficult due to declining access to credit, companies can become more adept at better managing existing cash resources. This takes on added significance when considering that three-quarters of financial executives expect access to credit will be a major factor affecting their business over the next 12 months. 1 Tough economic conditions have created a challenging business environment. Now, more than ever, businesses must focus on streamlining their overall procureto-pay process to generate efficiencydriven cost savings, improve compliance and accountability, and more strategically manage their cash and capital resources. Darren Parslow, Global Head of Commercial Solutions, Visa Inc. Moreover, corporate financial executives see the lack of streamlined operational processes as the leading challenge to cash management process efficiency. 2 Utilising a commercial card programme to more efficiently manage company payables, and then optimising the card programme to help streamline cash management processes, can be an effective way to maintain higher levels of working capital and improve liquidity in response to declining access to credit. 1 Association of Financial Professionals, 2009 Business Outlook Survey. 2 Visa Inc., 2008 Global Cash Management Survey. 1
Commercial cards also enable longer payment cycles than cheques and provide the financial data necessary to help accounts payable more efficiently manage your company s cash position. Longer payment cycles are the result of consolidating purchases on cards so that only a single monthly payment to the card-issuing financial institution is required instead of separate more frequent payments to individual suppliers. For example, if your company pays its card balance every 25-30 days, you might be able to extend your payables cycle by another 15 days while your suppliers have been paid by your financial institution within just 1-2 days of charging the commercial card. Key best practices to help your company make improvements in the areas of cash management and working capital include: Articulate a procure-to-pay strategy with a short and long-term vision A well defined and prioritised procure-to-pay strategy can help your company identify short- and long-term cost savings goals with a focus on increasing process efficiency. Successful strategies contain goals for: overall spend, commodity type, order placement, payment, cost savings and sourcing. Establish centre-led management of critical procure-to-pay functions A centre-led management approach ensures consistency of key procure-to-pay activities across the entire company, while allowing requirements and restrictions to vary slightly based upon the business unit or regional needs. Selected activities that often have centralised oversight with location-specific tailoring as needed include: strategic sourcing, order placement, expense management, control and audit, and reporting and analysis. Achieve active senior management support of the commercial card programme Obtaining senior management endorsement and involvement in the implementation and successful administration of your commercial card programme is critical to maximise the programme s benefits. Senior management can include a business unit executive, a vice president of finance, controller, chief financial officer, chief procurement officer or chief operating officer. Today s corporate financial executives are being driven by the tough economy to find better and more efficient ways to manage their cash, improve liquidity and maintain working capital. Buyer-supplier relationships In a difficult economic environment, improved purchase terms become a high priority for buyers and better payment terms take on added importance for suppliers. Because of the flexible functionality of card programmes, the needs of both buyers and suppliers can be much more easily met than with traditional paper-based payment and reconciliation methods. 2
As a buyer, your company wants the assurance that key suppliers stay in business. Therefore, you may be increasing your focus on these strategic relationships to make sure your suppliers get paid in a timely manner to help them better deliver the goods and services you need. In addition, data available through electronic reporting from card issuers helps you better analyse what you re buying and from whom. This allows you to more easily consolidate purchases with a smaller number of key suppliers. Your suppliers can benefit from this increased loyalty that may translate into greater business revenue for them and you could enjoy higher levels of strategic sourcing and more favourable negotiated pricing. Card programmes can help benefit your key suppliers because they may get paid sooner and in a more consistent manner, thus reducing the cost of funds. Suppliers are relieved of the stress associated with determining credit worthiness of a buyer, risks that accompany cheque acceptance and the costs of tracking late payments or a collections process. In a difficult economy, the value proposition of a reliable payment process may be changing supplier perspectives on the perceived costs associated with card acceptance. 3 Key buyer-supplier best practices include: Institute a supplier management programme A centrally-administered, corporate-wide supplier management programme is intended to guide the selection, optimisation and on-going management of suppliers across your organisation. These programmes enable negotiation of increased supplier discounts due to consolidated spend and improved process efficiencies through increased supplier alignment with efficient order and payment methods. Establish supplier key performance indicators Monitoring the performance of your suppliers can help ensure better adherence to negotiated contract terms and pre-established service level agreements (SLAs) with key suppliers. To objectively track performance, companies typically establish key performance indicators (KPIs) based on the terms and SLAs that are established in the contracting and negotiation process. Common KPI categories include: price, speed, accuracy, quality, billing and customer service. Because of the flexible functionality of card programmes, the needs of both buyers and suppliers can be much more easily met than with traditional paperbased payment and reconciliation methods. Incorporate commercial card acceptance into supplier contract terms Incorporating card acceptance into your contracts with suppliers can help achieve efficiency-driven cost savings by increasing spend on commercial cards while also offering significant benefits to suppliers such as faster and more consistent payments. Best practice companies track suppliers contract renewal terms to incorporate card acceptance into upcoming contract negotiations. 3 Association of Financial Professionals, Minding Both Sides of Balance Sheet, 2008. 3
Communicate commercial card benefits to non-accepting suppliers Successful strategies to increase supplier acceptance of commercial cards include effective methods to identify, prioritise and communicate with non-accepting suppliers. When engaging suppliers in discussions on card acceptance, providing a clear explanation of the benefits of card acceptance is important to successful negotiations. These benefits include: prompt payments, consistent cash flow, streamlined accounts receivable process, reduced credit and collection expenses, and reduced credit risk. Develop a contract lifecycle management process Active management of suppliers and contracts is critical for your company, especially if you have a large number of contracted suppliers. Leading organisations develop an approach that utilises automated tools to develop contracts and helps ensure that suppliers adhere to the contracted pricing, terms and pre-established service level agreements (SLAs). Best practice companies formally manage the six-stages of the contract lifecycle: contract drafting, negotiation, approval, contract storing and repository, compliance and administration, and contract renewal and optimisation. Optimise use of ghost cards or virtual accounts Ghost cards are virtual purchasing accounts that do not require a physical card and are associated with a single department, supplier or spend type regardless of the individual making the purchase. Examples of procurement spend categories that are typically handled through ghost cards include: recurring charges or bills, office services, event planning expenses and expenses for special needs or projects. Ghost cards can be an effective and efficient payment method for e-procurement purchases because they eliminate the manual reconciliation and payment steps associated with invoice and cheque processing. Visibility into spend During a difficult economy, enhanced visibility into company spending and the ability to better analyse expenses can contribute to cost reduction and more efficient operations. In order to run a business at the highest levels of efficiency, it s important that you have a clear, detailed and more holistic view of what employees are buying, from whom they are buying and at what price. Key to this process is the assurance they re making approved purchases from preferred suppliers and that the company is taking full advantage of negotiated pricing and payment terms. During a difficult economy, enhanced visibility into company spending and the ability to better analyse expenses can contribute to cost reduction and more efficient operations. Commercial card programmes are valued for their ability to deliver a high level of spending visibility by means of detailed purchase information from suppliers who provide enhanced transaction data. Many financial institutions that issue commercial cards have improved their reporting technologies to provide real-time access to key reports and electronic data feeds that seamlessly integrate with your company s spend analytics. In addition, card issuers are helping companies by conducting spend analyses to identify Visa-accepting suppliers in an effort to move more payments to cards instead of costlier and less efficient paper-based transactions. All of this can add up to better management of company payables and measurable cost savings that migrate to your bottom line. 4
Key best practices to improve spend visibility include: Utilise enhanced data from commercial cards Enhanced commercial card transaction data is an invaluable resource in improving your reporting and analytic capabilities, monitoring spend policy compliance and facilitating reconciliation processes. Capturing enhanced data helps you track spending by supplier type while providing invoice-level detail with line item descriptions of each purchase. Consolidate spend data and conduct spend analysis Spend data analysis can help your company better understand purchases with top suppliers while enabling better negotiation of supplier terms and pricing. Leading organisations commonly use consolidated spend data to conduct analyses by spend category, commodity type, business unit, payment method and transaction size. Third party providers offer on-demand spend management solutions, including applications for sourcing, spend analysis, contract management and e-procurement. Analyse enterprise-wide travel spend data Travel spend data can be used by a centralised travel management function to track your company s overall travel spend, analyse spend by individual travel supplier, monitor compliance with travel policies and identify improvement opportunities for your travel programme. Consolidated commercial card data, such as spend category, transaction volume, policy compliance and user satisfaction among employees, can be used to generate monthly travel reports that track travel programme savings and policy compliance. Designate a commercial card for meetings spending To more effectively manage a centralised event planning function, your company should consider using a designated card for meetings and event purchases. A meetings card is a commercial card with higher than normal individual and monthly transaction limits to allow for larger volume transactions when paying for meetings and event-related expenses, such as airfare, hotel rooms, facilities and banquet charges. These cards can be issued as declining balance cards so an entire meeting or event budget can be allocated to one card account with a set amount of funds that declines as purchases are made. Key benefits can include improved visibility into event and meetings spending, better control over spending, and cost savings through consolidated purchasing and negotiated discounts with suppliers. 5
Integrate commercial cards with e-procurement technologies An e-procurement system can help you achieve efficiency-driven cost savings by streamlining and automating a manual, multi-step purchasing process. These savings can be increased even further by utilising a commercial card to automate the payment of electronically-ordered products or services. 4 Best practice companies have found that card integration is more efficient than cheque payments because process steps such as invoice receipt and processing, manual reconciliation and cheque printing can be eliminated. Expand commercial card usage into new spending categories Best practice organisations use a variety of creative methods to grow their commercial card programmes and maximise returns on investment. Expansion opportunities into other spend categories include: Recurring payments, such as phone, utility and rental payments Temporary services and contract labour Direct materials, such as raw materials, operating supplies and components Maintenance, repair, and operations (MRO) Professional services Mail, packaging, and courier services Optimise card programme performance with the use of analytical tools Commercial card programme analytical tools and reporting solutions offered by your card issuer or card provider can help enhance the performance of your commercial card programme. These tools facilitate optimisation of your card programme in the following key areas: Achieving greater control over company payables and increasing compliance with both company and regulatory requirements take on added importance during difficult economic times. Spend analysis Programme benchmarking Best practices comparison Return on investment (ROI) Control and compliance Achieving greater control over company payables and increasing compliance with both company and regulatory requirements take on added importance during difficult economic times. Since a high percentage of your company s indirect spend may be in the hands of employees, increased employee accountability is vital. Card programmes can play a significant role in this area by providing the controls, reporting, tracking and audit visibility required for financial officers to demonstrate that their payables are within company control guidelines. Enhanced transparency through better data reporting and analysis may also help improve compliance with external regulatory requirements such as Sarbanes-Oxley (SOX). 4 Forester, The Forrester Wave : eprocurement Solutions, 2007. 6
Key control-related functions of commercial cards that can foster greater employee accountability include: Merchant category code blocking Monthly spend and individual transaction limits Integration with company-wide manager approval hierarchies Customised usage reports provided by card issuers Additional control-related best practices can help reduce fraud potential and can increase employee compliance with company spend and payment strategies. These include: Create a controls and compliance strategy for the procure-to-pay process Implementing a well-controlled procure-to-pay process can increase both internal and regulatory compliance while helping mitigate organisational risk within your company. Best practice organisations define a controls and compliance strategy that aligns with their overall procure-to-pay strategy that includes compliance with procurement and payment policies, reduction of maverick spend and mitigation of fraud. An effective controls framework will encompass the five key areas outlined below. Controls Framework Procure-to-Pay Ownership Policies Procedures Technology Audit Procure-to-Pay Programme Ownership Roles and responsibilities Procedures to support policies Technology to automate processes Audit to ensure control compliance Create a controls and compliance strategy for the commercial card programme Establishing an integrated system of corporate controls not only minimises the risks associated with operating a commercial card programme, but can also help you increase overall procure-to-pay compliance as well as meet the requirements of regulations such as Sarbanes-Oxley (SOX). An effective controls strategy for commercial cards helps to increase visibility into spending, minimise non-compliant behaviour and cut costs by reducing the time and resources needed to enforce compliance. Develop procedures for commercial card account management Develop procedures for various aspects of card account management and maintenance to include changes in cardholder profiles, employee transfers, card cancellations, changes in employment status and card renewals. This ongoing review provides increased visibility into cardholder activity and allows your company to adjust card accounts to minimise card misuse. Establish audit procedures for the commercial card programme Best practice organisations have well-defined audit processes in place to evaluate compliance with commercial card programme policies. Audits typically fall into three categories: Ongoing programme reviews to identify any misuse indicators that may highlight anomalies in purchasing behaviour Ensuring compliance with your card programme s documentation and retention policies Confirming adherence to purchasing policies and the existence of the required supporting documentation 7
Define issuance criteria for optimum commercial card distribution Leading organisations develop issuance criteria for distribution of cards that are consistent with procurement and payment requirements, company culture, policies and procedures, and spend parameters for card eligible purchases. Optimising issuance criteria not only puts cards in the hands of appropriate cardholders, but also helps to ensure that eligible purchases are paid by cards while reducing the transaction costs associated with purchase orders, cheques and petty cash. Your company may benefit from Visa s Practical Guide to Control and Compliance in Commercial Card Programmes. This guide contains numerous examples and anecdotes from companies that have successfully implemented commercial card controls. In addition, the guide contains sample policies and procedures that companies can use when developing their control strategy and metrics. Process efficiency and cost savings As the economic downturn puts increasing pressure on company profitability, expense management professionals may feel corresponding pressure to reduce costs. Despite this challenge, a weak economy provides an opportunity to look for new ways to transform your business and improve performance. Corporate financial professionals can provide leadership to help improve internal process efficiency that can result in both immediate cost savings as well as long-term value for your organisation. Transitioning from paper-based payment and reconciliation methods to electronic payment and reporting can be a key source of new process efficiency and cost savings. A commercial payment card programme that is fully integrated and automated within your accounts payable function can be one of the most effective ways to achieve this. Corporate financial executives cite the reduction of administrative and process costs, as well as process streamlining leading to cost reduction, as leading benefits of commercial cards. 5 Also, industry research reveals that the fully-allocated costs when using a commercial payment card versus traditional paper-based payment and reconciliation methods are reduced by 78 percent, resulting in an actual average cost savings of US$69 per transaction. 6 When considering the number of individual purchase transactions your company may make on an annual basis these savings can add up quickly. In addition, issuing financial institutions may offer incentives to encourage optimisation and greater use of their commercial card programmes. Corporate financial professionals can provide leadership to help improve internal process efficiency that can result in both immediate cost savings as well as long-term value for your organisation. 5 Visa Inc., 2008 Global Cash Management Survey. 6 RPMG Research Corporation, 2007 Purchasing Card Benchmark Survey Report. 8
Key best practices that can lead to improved efficiency and cost savings include: Develop a procure-to-pay end-to-end automation strategy This strategy should encompass a holistic view of your company s key procure-to-pay process functions of sourcing, order placement, payment and settlement, reconciliation, control and audit, and reporting. For example, implementing an e-procurement system, and integrating a commercial card programme with that system, would cover all six functions within the procure-to-pay process and contribute to end-to-end automation. Benchmark the performance of the procure-to-pay process Best practice companies benchmark their procure-to-pay performance periodically to identify key success areas and improvement opportunities. Organisations typically benchmark quantitative and qualitative items, such as cost metrics, efficiency metrics, supplier base metrics, customer service metrics, implementation of best practice processes or technology, and the adoption of innovative practices. Set performance goals for procure-to-pay and card management employees Establishing specific performance goals for employees who play a key role within your company s procure-to-pay process and commercial card programme can help better align employees performance metrics with company business goals. Performance evaluation criteria may be based on department and cost metrics as well as personal development criteria. Mandate use of commercial cards for eligible expenses Requiring the use of a commercial card for all eligible purchases can help minimise transaction processing costs at your company by decreasing resources dedicated to invoice and cheque processing. Mandated card usage also creates better centralised visibility into company-wide spend data and supports effective reporting for audit and control purposes. Integrate commercial cards with e-procurement solutions technology An e-procurement system can help generate efficiency-driven cost savings at your company by streamlining and automating a manual, multi-step purchasing process. Best practice companies have found that card integration is more efficient than cheque payment because process steps such as invoice receipt and processing, manual reconciliation and cheque printing can be eliminated. Integrate the commercial card programme with green initiatives As global warming and the adoption of environmentally friendly practices receive increasing public attention, leading companies have begun to develop green initiatives to demonstrate their corporate social responsibility. Incorporating green initiatives into commercial card objectives at your company can encourage cost savings and process efficiencies by further reducing paper usage and automating processes. Evaluate accounts payable automation solutions A key component of an accounts payable automation strategy is the reduction of paper in the invoice receipt-to-pay cycle. Evaluating, selecting and implementing a solution to automate your accounts payable process can help you to make more timely payments while improving your ability to take advantage of early payment discounts. 9
Integrate commercial cards with enterprise-wide cost reduction initiatives Best practice companies view their commercial card programme as an important source for achieving cost savings and they develop card goals and objectives that align with a broader cost reduction strategy. Clearly establishing, communicating and monitoring card programme goals and objectives that support the overall cost reduction strategy encourage compliance with card programme policies and procedures. Measurable results from best practice implementation In addition to the best practices highlighted in this white paper, many more best practices with details for implementation are available from your Visa issuing financial institution. Many companies have put the best practices to the test by applying them to their procure-to-pay processes and commercial card programmes to achieve measurable results. These results are quantified in documented process improvements and actual bottom-line cost savings. Following are just a few examples of what best practice companies in a range of industries were able to achieve: A US$30+ billion global media and entertainment company achieved over US$100 million in annual cost savings by strategically sourcing direct and indirect spend categories. An US$800 million global manufacturing company was able to reduce its supplier base 70 percent from 4,500 to 1,300 through rationalisation and formal supplier management. Of the 1,300 remaining suppliers, the top 100 suppliers represented over 80 percent of the company s total spend. A US$2.5 billion global technology company established a goal of moving all suppliers to electronic forms of payment, including EFT and purchasing card. In just over one year, the company had shifted 85 percent of its payments to electronic methods. A US$7.5 billion global manufacturing company realised over US$350,000 in process savings by moving non-purchase order transactions under US$1,500 to the purchasing card. 10
Study Scope and Methodology Methodology for the 2008 Visa Global Procure-to-Pay and Commercial Card Best Practices Study was designed for a wide reach covering several global regions and representing a broad spectrum of industries. Visa commissioned Deloitte Consulting to conduct 90 in-depth interviews with more than 60 global/multinational, mid-size and large corporations as well as federal and local government agencies across the world. Interviewees included regional controllers, chief procurement officers, directors of strategic sourcing, procurement managers, accounts payable managers, global/ regional/local commercial card programme managers and travel managers. Study participants had a range of commercial card programmes in place, including purchasing card, corporate card and commercial one card programmes with each of the top three card providers: Visa, MasterCard and/or American Express. Study Participants by Industry Study Participants by Region Communications 5% Others 7% Canada 8% CEMEA 2% Transportation 7% Public Sector 7% Asia-Pacific 20% EU 13% Financial Services 7% Manufacturing 27% LAC 5% Technology 9% Energy and Utilities 9% Consumer Products 12% Healthcare 10% U.S. 52% Note: Survey results, research and practice recommendations are intended for informational purposes only and should not be relied upon for marketing, legal, technical, tax, financial or other advice. When implementing any new strategy or practice, you should consult with your legal counsel to determine what laws and regulations may apply to your specific circumstances. Visa is not responsible for your use of the information, including errors of any kind, or any assumptions or conclusions you might draw from its use. Much of the information contained in this document applies internationally, but a certain amount of information applies only to certain countries or regions. Although Visa tries to mark all country- and region-specific information with a country indication, it does not warrant or represent that all information without indication applies internationally. You should check the applicability of any information in this document to you or your organisation. 2010 Visa U.S.A. Inc. All rights reserved. Visa.com/commercial V9067801-0309-WP