U.S. DEPARTMENT OF DEFENSE

When using p-cards, size counts: the more times you can multiply individual transaction savings, the larger the benefit that will be derived from a program. And on the basis of scale, there is almost no program that can outpace the Department of Defense's, which now tops $7.18 billion a year in card-based spending. That's close to half of the $16 billion of annual card charges made by the entire U.S. government, the world's most enthusiastic and compelling user of p-cards.

The General Services Administration (GSA) has estimated that every time a card is used instead of a standard purchase order, the government saves $60. With 10 million transactions a year, DoD alone saves $600 million.

MIGHT MAKES RIGHT

While the DoD's program continues to show strong growth (up from $6.8 billion a year ago), the biggest gains came with the initial conversion, when the vast bulk of micro-purchases–defined by the government as anything under $2,500–were switched to the card. Defense now puts about 95% of those purchases on the card, reports Dennis Hudner, deputy director of the DoD purchasing card program management office. The reasons for this success are not complex or subtle: If you want to sell to the government in that price range, you have to accept the card and pay the discount rate.

Exceptions are rare and require high-level approval, Hudner notes. Another benefit of size is the large rebate to DoD from the card-issuing banks: now in excess of $40 million a year after Defense negotiated in 1998 for a more generous rebate schedule and quicker payment, Hudner reports. It could be even bigger if DoD would pay its banks more frequently than once a month, he acknowledges. But in this case DoD's size becomes a drawback, he admits.

The DoD program is not just big; it's also respected as smart throughout the industry. As a result of rebidding and negotiating in 1998, the business is now split between U.S. Bank-issued Visa cards and Citibank-issued MasterCards. Both banks won by promising and delivering sophisticated electronic reporting services. The DoD's high-tech achievement is its online certification process, Hudner indicates. "It's unique to the Department of Defense. Card accounts are established and maintained electronically. Cardholders can go online through Citibank or U.S. Bank and see, reconcile and approve or dispute charges. All approvals are done online."

The DoD program took a black eye of sorts when a Government Accountability Office (GAO) audit uncovered examples of misuse and even fraud that added up to some numbers that looked high. "They found weaknesses in our control environment, which we have moved to fix, but we aren't going to spend $100 to ferret out $1 of fraud," Hudner says. But not all p-card users are working for scale.

UNIVERSITY OF PENNSYLVANIA

The p-card program is not growing at Penn, and that's good news for Ralph Maier, associate director of purchasing services. Why? Because the p-card has a modest role to play in the university's sophisticated purchasing strategy. "When we rolled out our initial p-card program in 1993, we, like so many others, rushed to put as many cards in as many hands as possible. We were enabling end users to buy what they needed and eliminate the high cost of administration and paperwork. Now, we've come full circle, and we want to move many transactions away from the cards," he explains.

LESS IS MORE

That's because Penn's preferred purchasing channel for frequently used commodities is its electronic Penn Marketplace, which now accounts for 70% of the university's transactions, all done with 80 contract suppliers who host online catalogs in that marketplace. None of those purchases are paid for with p-cards. "We've taken a close look at the commodities we buy in quantity, where we can leverage our spending and negotiate discounts, and we've set them up in our electronic marketplace, where we use EDI for settlement and not p-cards," Maier explains.

"P-cards are most effective for what they were originally designed to do: Settle small-dollar purchases with vendors that are used infrequently," Maier says. "A very high percentage of the merchants we pay with the p-card will have fewer than five purchases a year from us. It's a complement to our primary purchasing channel, which is our electronic marketplace. "While our volume has levelled off, we have improved cardholder training, tightened guidelines on card use and streamlined the back-end reconciliation, so the program is working better than ever even if it's not growing," he concludes.

In contrast, other users have decided to cut out the cards.

HALLMARK CARDS INC.

At greeting card maker Hallmark, p-cards are disappearing entirely, but that doesn't mean the company is abandoning its p-card program. In fact, just the opposite is the case. Up from $2 million to $24 million over the past four years, Hallmark's p-card program essentially is being replaced by an electronic p-card program provided by GE Capital, called the v-payment service. The GE Capital program clears transactions through the MasterCard network, but not at all in the traditional p-card way. "We're using an Ariba e-procurement system, and individual cards have become redundant," notes Charlie Howe, disbursements manager in Hallmark's Global Services subsidiary.

GOING PLASTIC-FREE

No plastic is presented at the time of purchase. Instead, Hallmark uses its Oracle ERP system to connect to GE when a transaction is initiated. GE provides a credit card number unique to that transaction and tied to a purchase order number already in Oracle. That makes reconciliation simple and virtually automatic. Instead of being paid in 48 hours, the merchant waits for payment according to standard terms but then is paid by GE through MasterCard. The supplier does not get prompt payment but still accepts the discount rate. Naturally, Hallmark picks up a lot of float as well as process efficiencies like automatic reconciliation, Howe says. "Once we cut a check, we own that liability. With a MasterCard v-payment transaction, we don't own that liability for another 80 days," he explains.

Hallmark will continue to use ghost cards for the time being, but v-payment is the way of the future, he insists.

For some companies, p-cards are essentially about control.

W. R. GRACE & CO.

At W. R. Grace, the name of the game is information management. Grace has pushed the envelope with American Express to get sophisticated, up-to-the-minute reporting that gives the company exquisite controls. Those controls prevent card misuse, of course, but, more significantly, they stretch Grace's spending dollars by making sure they go to preferred vendors with which Grace has negotiated its best prices, explains Lorraine Rostanzo, director of global travel and support services. "We're in a mode where we're trying to do more with less," she observes.

A TOOL TO KNOWLEDGE

Grace moved its nine-year-old p-card program to American Express three and a half years ago, Rostanzo says, to get sophisticated reporting tools. Now, it uses those tools to the max. "We've done some special things with their reporting system, using it not only for compliance and vendor negotiation but for management reports. We're able to do more in-depth analysis of the data and to do it more often," she says. "We're pretty aggressive in how we manage data."

The card program has also cut significantly the number of purchase orders and invoices, which would otherwise burn up overhead dollars. However, acquisitions and divestitures make it pointless to try to chart those numbers or make year-to-year comparisons, Rostanzo says.

The Grace strategy is to consolidate frequent small-dollar purchases with select vendors and put those transactions on the card. The 900 cards outstanding are almost all in the hands of end users. Annual spending on the card has plateaued at around $10 million a year now that overall spending is flat at cost-conscious Grace, Rostanzo reports.

One product–the p-card–is used in four very different strategies by DoD, Penn, Hallmark and Grace. Such diversity is a result of better strategic thinking, insists Chris Pieroth, senior vice president for product and marketing operations at Minneapolis-based U.S. Bank, the largest bank issuer of p-cards. "The p-card has moved from being a self-contained program to being a piece of a broader strategy," he says.

And while such radical p-card strategy diversification bespeaks a coming of age, it's still a young market, far from reaching saturation, argues Richard Palmer, Lumpkin Distinguished Professor of Business at Eastern Illinois University and the preeminent measurer of p-card trends. "Our studies indicate that about half the companies could improve their spending performance four- or five-fold if they simply behaved like the top quartile of their industry. They still need to find a disciplined approach to controlling that loose spending," he says.