Effective Use of Purchasing Cards: A Lesson from the UK's Public Sector
We typically think about the transfer of best practice between private and public sectors as being a one-way street. But that’s not always the case. The government procurement card (GPC) is one such example that provides us with lessons useful to many businesses.
Earlier this year, the chief executive of the Office of Government Commerce, John Oughton urged the public sector to make full use of the card scheme. He sees the scheme as “undoubtedly one of the easiest routes to deliver increased efficiency” in public sector financial administration.
The GPC is a purchasing card for the public sector that provides a payment and data delivery system. First introduced in 1997, the scheme has played a significant role in helping central and local government bodies to improve the efficiency of their procurement practices.
The Government’s efficiency drive, initiated by Sir Peter Gershon, aims to make £21.5bn of savings from the administration of public services while maintaining the quality of the services. The Gershon Review helped highlight the importance of the GPC scheme and the benefits it offers the public sector. The programme is provided through member banks, each of which tailors the service package they offer their customers. Visa administers the programme, which is endorsed by the UK Treasury, the National Audit Office and the Office of Government Commerce. It is a good example of the public and private sectors working effectively together, and shows how a purchasing card can help many businesses improve the way in which they handle their financial administration.
In the nine years that the scheme has been running, it has been a huge and widely recognised success. Today, there are more than 89,000 cards in circulation and over 750 active programmes around the country across the UK public sector.
Rather than being a tool solely for procurement managers, many GPC programmes are set up and run by the very departments that are at the frontline of service delivery. A scheme might be paying for building conservation projects in one area or paying for the delivery of domiciliary care in another or addressing many other applications. The common theme is that those people who need to make purchases are empowered to do so by a system that reduces bureaucracy and provides spending control mechanisms.
When the scheme first launched it was used for low cost, high volume purchases such as office supplies. Spending limits are still sometimes used to manage expenditure in new programmes. For example there might be a policy of using the card for one-off purchases up to a value of, say £1,000 at first. But looking at the national picture, the scheme has grown in both value of spend and types of procurement it is used for. This growing understanding and confidence in GPC can be seen in the usage figures. For example, the average transaction value in the first 12 months of the programme showed fairly conservative use, around £100 per transaction. Fast-forward nine years and the real power of GPC becomes clear as savings continue to rise and transactions can often exceed £10,000. At these levels, GPC usage can represent well in excess of 90% of all accounts payable transactions.
There are many reasons why the GPC is a success story for the public sector, most importantly, the savings generated. These are achieved through changes in the way the procurement process is handled, which allow more time and energy to be focused on delivering the service the organisation is responsible for.
To date GPC has generated more than £350m savings for the public purse, based on National Audit Office reports that the GPC programme saves £28 per transaction – money that can be re-directed to service delivery. The National Audit Office is also confident that the GPC is good for the planet. So far, the scheme has meant over 118 million pieces of A4 paper haven’t become invoices, credit notes or payment paperwork.
Looking at two real life examples, the Scottish Executive’s programme delivers annual savings of £125,000 in process costs alone. It also saves an additional £10,000 because information about one-off suppliers is fed into the Executive’s accounting system, helping the Executive negotiate more effectively and manage its expenditure.
In a business context, savings of this nature could easily be channelled into initiatives to drive new business, product development or simply fed back as profit for a company as financial administration becomes more efficient.
Kent County Council pays professional carers to provide domiciliary care for those in need. The council wanted to find a way to save money through greater efficiency and needed to ensure its relationships with suppliers – here carers – remained strong. Through the GPC scheme, the council’s financial administration costs were immediately reduced and the relationships with carers improved. Thanks to the GPC, suppliers and care providers are guaranteed to receive payment within four days without affecting the council’s cash flow.
Looking at trends in the private sector, we see that e-procurement – making all transactions online and paper free – is seen as the future of purchasing. It allows the sorts of efficiency savings GPC offers and reduces the administration and management time involved in traditional procurement systems. In this area again, UK councils are leading the way and GPC is a key element. Take Swindon County Council as an example. It wanted to improve the way it procured goods and services right across the council’s £115m a year expenditure. It also wanted to make the entire process online.
The council already had financial packages from Oracle in place and decided that a GPC scheme, for non-capital expenditure, would suit their needs. Once the e-procurement strategy had been implemented, the benefits of e-procurement working hand in hand with the GPC scheme were clear. Swindon achieved in excess of £800,000 in procurement savings in just three months. In fact, in its first 12 months it helped to deliver verifiable savings of over £1.2m.
Where purchasing cards, and by extension, e-procurement programmes, benefit public (and private) organisations is the clear, useful management information made available. This can then be integrated into either a GPC management information system or another software system. The benefit to organisations of this approach is that it allows managers to review not only the products being purchased and their price, but also who is buying and where.
Information this rich is useful because it allows centralised purchasing policies to be monitored and, more importantly, allows better price negotiation with suppliers. Today, management can see all transactions and secure deals that reflect this higher realised volume of business going to specific suppliers. That’s useful for the public purse but it’s also something every business would like to be able to do more effectively. Once again, the public sector is already applying some smart business methods. In addition, the suppliers benefit from much-improved cash flow, reduced credit control issues and the potential to remove the need for paper invoices through the VAT-accredited solutions available through accepting purchasing card payments.
This article has touched on the many benefits of a purchasing card programme. The public sector’s focus is providing quality services for those in need and, therefore, isn’t driven by commercial pressures. It’s about value for money more than margin but the Gershon review demanded leaner organisations that still delivered high quality services. The review also drove interest in programmes like GPC and helped unlock purchasing cards’ potential.
Could purchasing cards work for companies? Without a doubt – they have been used by thousands of private sector organisations across Europe for more than a decade. And no manager could refuse the appeal of savings on such a scale. It’s unlikely that any business person could argue about the value of reduced overheads, improved relationships with suppliers and management information that is of real use.