Set against the flash promises of sophisticated global e-procurement systems, purchasing cards can seem like a poor relation.

Many companies simply switch them off when the new solution is in place. As part of a drive to source and buy most items online, British Airways has pretty much done just that, lumping the cards in with all of the traditional paper-based ways of buying and transacting. Procurement director Silla Maizey recently branded them “old-fashioned” and ineffective.

But is such a separation wise? After all, if you’ve already invested in purchasing cards and trained your organisation in using them, can’t they be adopted as a reliable payment method for the new system?

Myths circulate

This remains a divisive issue, thanks partly to the myths that continue to circulate about both tools, says David Eakin, director of professional services at the government-backed BuyIT

E-Procurement Best Practice Network, which recently published new guidance on integrating purchasing cards and e-procurement.

“Among our 40 members, there’s a 50:50 split between those who keep using purchasing cards once they’ve begun e-procurement and those who see them as a ‘quick fix’ for bad processes such as off-contract spend,” says Eakin, a former purchasing director at telecoms firm Ericsson.

“For the latter, cards justify the business case for e-procurement, but spend migrates to the new system,” he adds. “It’s ultimately a trade-off between higher costs and organisational demand for better purchasing information, coupled with improved ease of used thanks to the number of procurement methods.”

Eakin estimates only one-quarter of the organisations that have installed e-procurement systems have integrated purchasing cards. “It’s a low figure, but it’s changing,” he says. “Many companies want to automate back-end processes but few have done it. The benefits of an e-procurement system only really kick in once you’ve integrated automated payment.”

E-procurement systems increasingly account for the use of cards by having “virtual” embedded card numbers, working with cards to handle ordering, payment and management reporting.

Pierre Mitchell, vice-president of research at e-business analysts AMR Research, agrees that the use of purchasing cards within e-procurement systems will become more prevalent.

“It’s a myth that purchasing cards are the antithesis of a good e-procurement programme,” he says. “On the other hand, companies have sometimes gone purchasing card crazy and ended up with lots of bits of plastic. We’re starting to see more consolidation to single cards or the use of ‘ghost’ cards that summarise spending on different types of card, with one number linked to an e-procurement system.”

Purchasing cards and e-procurement are both parts of the purchase-to-pay cycle, and although the common view remains that purchasing cards are a useful migration tool to e-procurement (whether one continues to use them afterwards or not) companies should be encouraged to take an overview of each part of that process and see what fits for them. In theory, there is nothing to stop them introducing cards after an e-procurement system is in place, says Paul Phythian, a senior manager in Accenture’s supply chain practice.

Icing on the cake

“As a building block of e-procurement, purchasing cards are a great way in for medium-sized companies, but are also the icing on the cake for large firms,” he says. “The three parts of the purchase-to-pay process - the front-end procurement portal, the back-end purchasing card and the e-procurement system in the middle - can stand singly or in any combination. We’ve seen clients who went with e-procurement first, then bolted on the portal and purchasing cards.”

James Power, head of corporate purchasing cards, Europe, at American Express, says the two technologies are naturally complementary. “Companies increasingly realise that e-procurement won’t do everything and they need something to mop up the rest, which can be a substantial chunk of spend - up to 20 per cent,” he says. “And getting suppliers on to e-procurement systems is not a quick process, so the technology is still only addressing a small but growing element of their supplier base.

“We like to deal with companies that have the longer objective to take X amount of spend out of their supply chains and a real business objective.”

Eakin agrees that organisations have to look at the bigger picture. “It helps, as companies such as Ericsson, Reuters and BAE Systems have done, to take a process view of this cycle,” he says. “In the past, purchasing cards were typically driven by finance and e-procurement by the purchasing team. This needs to change and they need to be brought together.”

The only thing that really stands in the way, Eakin argues, is the fee structure for purchasing cards.

“There’s a lot of talk that purchasing cards should become the de facto method of payment, and certainly some precedent exists in the consumer sphere on websites such as Amazon and eBay,” he says. “But typically these are one-off, low-value payments. Fees have to come right down.”

Combination costs more

On top of this, research from Accenture and American Express suggests combining e-procurement with purchasing cards actually costs more than purchasing cards alone.

A recent survey of 50 major companies found that transactions using only purchasing cards cost $19 (£12) each to process, compared with $26 (£17) when e-procurement was involved.

Cards do, however, come into their own in the processing of invoices, which typically cost $5 (£3), compared with the $33 (£21) cost associated with paper invoices. As a result, Accenture predicts a 6 per cent growth in purchasing card order processing in 2003 and a 9 per cent drop in paper invoices over the same period.

Eakin believes that cost remains a barrier to integrating the systems. “The overheads make it more expensive,” he says. “However, only about 20 per cent of the savings driven by e-procurement come from improving payment processes; most come from compliance and better sourcing.

“And the advantage of integrating purchasing cards is that you then have a single system handling all transactions, so when senior management wants to know how much the purchasing team is spending, they can get all the information quickly.”

Paul Phythian believes process costs are starting to take second place to cost reduction and management control. “Since the e-commerce boom, organisations are much more focused on output achievement and the reduction of total costs,” he argues. “With the global downturn in IT spending, there’s a much greater focus on the deeper use of existing functionality. With purchasing cards integrated into e-procurement systems, management can re-use the information that emerges.”

But Paul Hampton, director of product marketing for Europe, the Middle East and Africa at e-procurement software vendor Ariba, believes e-invoicing will become the preferred method of online payment, simply because it cuts transaction costs more effectively.

“Purchasing cards are fine for indirect spend, but as companies extend their use of e-procurement to more services and travel spend, they are less useful because of the fees involved,” Hampton says.

“The more commodities people use e-procurement for, the less appropriate purchasing cards will become. There’s also no cost to suppliers for e-invoicing and they still get early reconciliation,” he adds.

Ultimate test

One area many believe will prove the ultimate test of whether purchasing cards and e-procurement have a future together is the growing field of mobile technology, such as hand-held computers. Purchasing cards, in particular, have won popularity among organisations at which a lot of buying is conducted offsite in remote locations. Once the computer technology that enables this becomes more widespread, the appeal could be even greater.

Phythian reckons this is a natural path for both buying mechanisms. “Organisations with field-based personnel have been the best adopters and integrators to date,” he says. “A lot of interesting developments will come with the mobile use of technology, either as an integrated mobile e-procurement system, based on web services technology, or the more mobile use through PDAs and purchasing cards.”

AMR’s Pierre Mitchell agrees that off-premises buying will be “the crux”, but he sees further divergence of the processes. “It could be that it is only for such purchases that purchasing cards continue to be used. Or else, once everyone’s wired up to PDAs, it could be that no e-procurement at all will use purchasing cards.”

Robin Parker is a former news reporter at Supply Management

More information

The latest BuyIT guidelines on e-procurement and purchasing cards are available for free at www.buyitnet.org

Case study

BAE Systems

Defence contractor BAE Systems’ experience of implementing both purchasing cards and e-procurement offers a salutary lesson for any company.

Towards the end of 2002, the group realised that its plan to make 80 per cent of all its purchases electronically by December 2003 was unrealisable. The roll-out of the e-procurement system was complicated by a concurrent attempt to launch a purchasing card programme.

Realising the twin initiatives were treading on one another’s toes and draining resources to the detriment of the entire organisation, in February this year BAE radically rethought the projects and brought the two teams together.

The combined team now sells both concepts to the rest of the company and its suppliers, with the result that 90 per cent of all transactions on the e-procurement system are now made with the purchasing card.

Karen Mason, programme manager for the two projects, says the team has faced a learning curve in joining up the processes.

“When the initiatives were originally launched, we didn’t have a complete picture of how much they would overlap and be a natural fit for each other,” Mason says. “Control, compliance and process efficiencies are the biggest wins for purchasing cards and e-procurement, taking huge numbers of transactions out of the back office.”

Six times as many suppliers currently accept the purchasing card than are on the e-procurement system, for which the target is likely to be revised yet again. BAE is now looking to standardise the supplier adoption process so that suppliers can automatically join both schemes if they want to.

Since the part of the business dealing with older military aircraft has been using purchasing cards for several years, getting them to add on e-procurement now is an uphill struggle because they see no reason to change a successful process, Mason says. Conversely, in parts of the business less used to cards, the joined-up sell is more straightforward because the team can focus on the combined benefits.

Around 2,500 staff are now trained to use the e-procurement system and 2,000 of these have purchasing cards. Mason describes the training and change management process as “a long, hard sell”.

“We’re getting people multi-skilled and training them in processes and systems that are the opposite of what they’re used to,” she says. “It’s taken longer than I anticipated - around four to five months just to get the skill-sets so that I can be comfortable I have individuals going out to sell both systems to the organisation and to customers.”