The State of the P-Card

Given the current economic situation, cities and counties are looking for technologies to reduce administrative costs and improve the efficiency of their operations. One technology tool is purchasing cards (p-cards), which many cities and counties are using to streamline operations and reduce costs associated with the procurement function of government. Since p-cards arrived on the market in the early 1990s, many governmental entities have reported significant benefit from their use, such as reducing or eliminating the paperwork associated with requisitions, purchase orders and invoices for thousands of small-dollar transactions. The General Services Administration(GSA), for example, estimates that federal government use of p-cards generates cost savings ranging from $54 to $92 per transaction (U.S. GAO 1996) and reduces the time required to process paperwork transactions by two to six weeks (U.S. GSA 2006). More recently, market surveys have indicated that use of p-cards yields savings of about $70 per transaction (Palmer, et al. 2007). [Reference sources are listed at the end of the article.]

The ability of p-cards to reduce administrative costs reflects a re-thinking of the value of various processes and controls over low-value purchases. Analyses have indicated that the cost of managing low-value purchases in the traditional paper-based, purchase order-driven format is disproportionately high in relation to the cost of the goods purchased. In other words, organizations are finding that the cost to process a low-value transaction often exceeds the cost of the good or service itself. Furthermore, if left unchecked, the blizzard of low-value purchase paperwork can lead to lost discounts, late fees, excessively long wait times for goods and poor supplier relations due to concern over payment.

This article will present survey research findings to identify current and future trends and the economic impact of the use of p-cards in city and county government.

Benchmark norms

Exhibit I shows the organizational and p-card spending norms for both small (less than 1,000 employees) and large (1,000 or more employees) city/county respondents to the 2009 survey. [Survey methodology described on page 56.] Exhibit I indicates that average (median) monthly p-card spending at large cities/counties is $545,023 ($350,484) compared to $151,383 ($100,000) at small counterparts. However, because large cities/counties have significantly more employees, monthly p-card spending per employee is higher at small cities/counties ($318) than at their larger counterparts ($145). In part, the higher spending per employee at small cities/counties reflects more liberal distribution of cards to employees. And, while p-card spending as a percentage of municipal budget averages 1.4 percent across all respondents, small city/county p-card spending averages 1.76 percent of the municipal budget while large city/county spending averages 0.94 percent of the municipal budget.1

Large and small cities and counties are modestly different in terms of average monthly spending per card ($1,016 at small and $1,324 at large cities/counties), driven by a higher average transaction amount at large cities/counties ($297, versus $242 at small cities/counties). Monthly transactions per card, however, are similar across the two groups (4.21 at small and 4.45 at large cities/counties). On average, about 43 percent of transactions under $2,500 at small cities/counties, and about 50 percent at large cities/counties, are paid by p-card. Among transactions of $2,500 or greater but less than $10,000, small cities pay for about 25 percent of their purchases with p-cards, compared to 19 percent at large cities.

Past and future trends

Notwithstanding a severely challenging economic situation in North America, 65 percent of small cities and counties (and 72 percent of large cities/counties) reported an increase in p-card spending in the 2007-2009 time frame. Across all city/county respondents, the average p-card spending growth rate over the two-year period from 2007 to 2009 was 22.9 percent.

Going forward, survey responses indicate that 72 percent of small cities and counties, and 75 percent of large cities/counties, expect higher p-card spending by 2012. However, while most cities/counties expect to increase p-card spending over the next three years, the growth rate will be significantly lower than in the 2007-2009 time frame. Across all cities and counties, p-card spending is expected to increase by only 3 percent in 2010 and, on average, about 7 percent per year through 2012.

Impact on efficiency and service

The most widely recognized benefit of p-card use is cost savings per transaction. Exhibit II shows that the average administrative cost of procuring and paying for a good or service via the traditional purchase-order process is reported by city and county respondents to be about $111 per transaction. In contrast, the average cost associated with a p-card transaction is estimated to be $29 — a net savings attributable to p-card use of about $82 per transaction (a 74 percent cost reduction). To put the transactional cost savings into the larger context, consider that in 2009 an average large city/county organization spent $6.54 million on 22,000 p-card transactions.2 Considering the respondent-reported savings of more than $82 per transaction, one can conclude that p-cards generated overall transaction cost savings of about $1.8 million for the large city/county, which equates to about a 28 percent price reduction. At the macro-economic level, if all U.S. cities and counties paid for 1.25 percent of their budget with p-cards (the average for all cities/counties), then about $6 billion in transaction cost savings would accrue to the benefit of local taxpayers.3

For most cities and counties, another key benefit of the p-card is a reduction of 15 days (from 19.4 to 4.4 days) in the procurement cycle time (the time elapsed from the placement of an order to the date goods are received).

P-card data also plays an important role in an organization’s ability to obtain discounts. Almost 18 percent of city/county respondents report that their organization uses p-card spending data to obtain a higher discount for goods or services from a vendor.

Best practices for city/county agencies

A principal goal of this survey is to gain insight into the drivers that push transactions to the p-card in order to generate cost savings and improvements in efficiency for the card-using organization. To better understand these drivers, we identified “best practice” p-card programs as those that have reported at least one top quartile (and no bottom quartile) metric across four key p-card program performance measures, including:

A second “needs improvement” group is also assembled from city and county respondents. This group is the reverse image of best practices, specifically p-card programs in which at least one of the four performance metrics is found to be in the bottom quartile and none in the top quartile. The activities of this group will be used to define underperforming city and county p-card programs.

Exhibit III reveals that, despite being similar in terms of headcount and age of p-card program, best-practice p-card programs report:

Other recommendations

In addition to card distribution policies and internal guidelines that may limit card use, other decisions and policies within a local government differentiate best-practice (BP) from needs-improvement (NI) programs. By engaging in specific activities, BP local government entities get greater value from their p-card programs. Let’s look at those activities.

Increasing spending limits. BP city/county p-card programs provide cards to employees with notably higher per transaction and monthly spending limits than NI organizations. The average per transaction spending limit at a BP city/county is $2,880, but only $1,382 at NI counterparts. Similarly, the average monthly spending limit at BP city/county is $7,875, which compares to $3,923 at NI counterparts.

Purchasing a wider variety of goods and services. Employees in BP city/county p-card programs use their p-card to pay for a wider variety of goods and services and, within every spending category, purchase a relatively higher amount of the good or service. This implies that NI cities/counties are unnecessarily limiting the types of goods and services that can be bought with p-cards.

Use of innovative p-card accounts. BP city/county p-card programs are more likely to use a variety of p-card options to meet their spending needs, such as “ghost accounts” and “electronic accounts payable” (EAP) accounts, and are able to use them in a more flexible manner.5 Survey responses indicate that 23 percent of NI but 32 percent of BP organizations use ghost accounts; further, only 3 percent of NI but 21 percent of BP program use EAP accounts.

Management support and communications. BP city/county p-card programs are more likely to indicate that a strong “business case” had been made to employees about the benefits of p-card use and that a top management sponsor gives vocal support to the p-card program.

Assessing potential and optimizing p-card program. BP city/county p-card programs are more likely to take steps to assess organizational potential for card spending, including to:

Strategies to optimize p-card spending. BP city/county p-card programs are more likely to craft strategies to optimize card spending including to:

Training and communications policies. BP city/county p-card programs are more likely than NI counterparts to:

Fraud and misuse

The occasional misuse of p-cards continues to be fodder for news reports. In reality, the loss due to p-card misuse and policy violation is on average 0.006 percent of total p-card spending.6 For an average large city/county organization that spends $6.54 million annually, the average annual dollar loss is $392 (0.006% X $6.54 million). In contrast, as discussed earlier, the administrative cost savings of an average large city/county organization attributed to p-cards is $1.8 million.

Conclusion

Survey responses indicate that, although the economy has been in a downturn over recent years, city/county p-card spending has increased by about 23 percent in the two-year period between 2007 and 2009. Going forward, most cities and counties expect higher p-card spending, although the growth rate will be less impressive. Across all cities and counties, p-card spending is expected to increase by only 3 percent in 2010 and, on average, about 7 percent per year through 2012.

Survey responses also indicate that the average city/county transaction cost savings from procuring and paying for a good or service with p-cards is $82. In addition, cities and counties report that use of p-cards reduces the average procurement cycle time by 15 days, a savings that will reduce the need to incur the costs associated with high levels of inventory. Importantly, there is no evidence in the survey response indicating that the benefits of p-card use are negated by excessive policy violations, fraud or employee misrepresentation of p-card spending. Indeed, the financial impact of policy violations, fraud, and employee misrepresentation is insignificant in relation to p-card spending, and the vast majority of respondents believe that, in comparison to other payment methods, p-card spending is associated with a similar or lower likelihood of unwelcome incidents.

Survey methodology

In October of 2009, a 40-page web-based “2009 Purchasing Card Benchmark Survey” was released to 6,774 purchasing card program administrators at organizations that were either customers of one of 19 major card issuers or members of the National Association of Purchasing Card Professionals or the National Institute of Government Purchasing. A total of 1,915 responses were received for a response rate of 28.3 percent. Occasionally, one or more respondent may have given an incomplete response resulting in a different number of responses for different questions. Analysis of any given question is based on usable responses to each question. In addition, unusual “outlier” responses to specific questionnaire items when appropriate have been purged to facilitate a meaningful understanding of the data. All major purchasing card issuing brands are represented in the survey response.

A breakdown of survey respondents by organizational type is as follows: 24 percent are public corporations, 23 percent are private corporations, 16 percent (or 306 respondents) are city or county governmental units, 11 percent are universities, 6 percent are federal and state governmental agencies, 11 percent are school districts, and 9 percent are not-for-profit organizations.

Related Stories

About the authors

Mahendra Gupta is Virgil Professor of Accounting and Management at Washington University, St. Louis, Mo.; Miljan Markus is senior research associate for RPMG Research Corp.; and Richard J. Palmer is chair, Department of Accounting and MIS, Southeast Missouri State University, Cape Girardeau, Mo.

Endnotes

References

Gupta, Mahendra, Richard Palmer and Christoph Sprenger, “The Progress of P-cards in North America: Current Data and an Historical Perspective,” Cost Management, Volume 21 (No. 1), January/February (2007), pp. 22-28.

U.S. Gen. Accounting Office. (1996). Acquisition Reform: Purchase Card Use Cuts Procurement Costs, Improves Efficiency. GAO-96-138.

U.S. General Services Administration. 2006. How did it all get started?, http://www.gsa.gov/gsa/cm_attachments/GSA_DOCUMENT/How-started_17_R2E-cJ-k_0Z5RDZ-i34K-pR.htm (last visited Oct. 1, 2006).