Consider P-Cards to Directly Enhance the Bottom Line

The economic environment is driving a healthy review of cost structure and process across all industries, and law firms are not exempt. In our industry, reduced acceptance of pass-through expenses by clients, staff reductions, and revenue/profit pressure are catalysts for change in how law firms interact with their suppliers. In efforts to increase transparency, manage demand, and streamline back-office operations, law firms are looking at automation opportunities within the procure-to-pay cycle. A well-defined Purchasing Card (“P-Card”) program is one tool available to law firms which requires little or no upfront investment, yet yields many of the controls, efficiencies, and transparencies that law firms and their clients seek.

P-Cards are a form of a corporate credit card that provides organizations with flexibility and convenience to purchase goods and services with greatly enhanced control and reporting capabilities. Law firms may use P-Cards as the payment method for all types of expenditures, including court room services support, courthouse fees, office supplies, IT hardware, travel, and other overhead expenditures. P-Cards streamline purchasing and payment, automating traditional paper-based purchase order, invoice, and check creation without loss of visibility or control.

Process Efficiency

U.S. companies continue to pay a price for failing to automate the payment process. In spite of significant efforts to move commercial payments to more efficient electronic methods, nearly 80% of payments within the United States are still made via paper check. [See "Top Trends in U.S. Wholesale Payments, Much More Than Process Efficiently"; Aite Group; 2006.] When taking into consideration the entire procure-to-pay cycle, including requisition of goods, purchase approval, generation of purchase orders, receipt matching, and payment workflows and processing, companies are often spending more money to complete the payment process than the actual expense of the materials or service purchased.

A study completed by the RPMG Research Corporation in 2005 ["2005 Purchasing Card Benchmark Survey Report"; RPMG Research Corporation; 2005] demonstrates that the traditional procurement method using purchase orders costs a company an average of $89.21. The same study reflected an average cost of $21.83 for purchases made using P-Cards. If an organization is procuring $50 worth of office supplies, it seems nearly impossible to justify a process expense greater than the tangible goods received.

Procurement and accounts payable processes tend to follow the spirit of the 80/20 rule. In one recent sample from an AmLaw top 10 law firm, 75% of A/P vouchers over the course of a year represented only 4% of spend. [Data analysis performed by Huron Consulting Group.] This is a significant back-office cost to manage only 4% of disbursements. In this example, 63% of vouchers were for less than $500. Using the data from above, the cost to process these vouchers using traditional methods would represent 20% (or much more) of the cost of the product or service purchased. By identifying low-value, high-volume remittances to transition to P-Cards, organizations can quickly recognize improved employee efficiency, reducing unnecessary paperwork in accounts payable and the overall procure-to-pay expense.

A 2006 study completed by Aite Group ["Top Trends in U.S. Wholesale Payments, Much More Than Process Efficiently"; Aite Group; 2006] anticipates a reduction in business-to-business payments made with checks from 80% of the market to 68% by 2010. Automated Clearing House (“ACH”) and wire transfers will account for a portion of the transition to electronic payments; however, it is anticipated that P-Cards will have the most notable gain, more than doubling the total B2B payments processed via that channel.

Visibility and Spend Control

A common objection when considering implementing a P-Card program is the incorrect notion that giving cards to employees equates to providing staff with an open-ended policy on procurement.

However the reality is different than perception. RPMG's 2005 Purchasing Card Benchmark Survey Report shows that employee misuse of P-Cards is rare, with only 0.023% of total card spend reported as misused, and only 0.03% of transactions involve employees using the card inappropriately. [See Data analysis on current HSBC Purchasing Card accounts performed by HSBC Bank USA, N.A.]

Why is employee misuse on P-Cards so rare? P-Cards offer the ability to manage employee spending capability across a wide array of criteria. This may include total spending, purchase frequency, types of goods or services, transaction size, and many others. Many card issuers now offer the ability to restrict transactions to specific merchant locations and even the time of the day the card can be used. In addition, employees are aware that the company has access to complete, detailed spending information, making employee abuse/misuse unlikely. With the increased visibility offered by the P-Card system, in many ways there is greater scrutiny on P-Card transactions than on the detailed purchases reflected in paper invoices.

The improved visibility on the micro level can translate to cost savings at the macro level. Rolled up P-Card purchase history provides detailed spend information that law firms can analyze to identify opportunities for supplier consolidation, product consolidation, and price management. Moreover, the P-Card system controls allow firms to restrict suppliers and buyers, driving spend through preferred supplier channels, accelerating consolidation efforts, and ensuring preferred pricing.

The invoice data collected are not only used to enforce the above controls, but are available for reporting in order to analyze and manage financial data from card and cash transactions. P-Cards offer the ability to run standard reports, create custom queries, and run ad hoc reports to provide transaction-level information. Furthermore, law firms can create custom data fields, such as client charge codes or G/L cost centers, to capture information required to charge back expenses to clients as applicable. The data collected are utilized for both the G/L and A/P reconciliation process, as well as for review to control spend and ensure compliance with contract pricing.

Advantageous for Both Buyers and Suppliers

Some organizations hesitate to use P-Cards, thinking that suppliers will resist the discount fee associated with card transactions. Contrary to that notion, many suppliers prefer P-Cards to speed cash flow. The traditional P.O./invoice/check payment process is just as laborious and costly for suppliers as for buyers. Often the supplier will wait 45 to 60 days for a buyer to remit a check payment. With a P-Card transaction, a supplier is paid within three days of the transaction being submitted. So in addition to significantly reducing a supplier's internal receivables workflows, P-Cards place suppliers in a much improved cash management position. Additionally, by accepting P-Cards, suppliers are meeting the needs of their customers, differentiating themselves from competition, and keeping lines of communication open. Openness to accepting P-Cards allows suppliers to better service their clients, continue to build relationships, and improve their own bottom lines.

At the same time, buyers continue to receive the advantage of the P-Card issuer floating the payments for an average of 45 days from transaction date to the date the organization remits payment to the bank. [Data analysis on current HSBC Purchasing Card accounts performed by HSBC Bank USA, N.A.]

And as card issuers typically do not charge fees for P-Cards, except late payment charges, the buyer is utilizing a free payment method.

Many issuing banks offer rebates on a sliding scale, generally in the range of 0.25% to 0.75%. Eligibility and percent of rebates may depend on spend thresholds, timing of payment, and usage of electronic billing. However, professional services firms may have questions regarding accepting rebates given they pass some charges through to clients when incurred. To offset this potential challenge, issuing banks can track expenses per client when charge numbers are entered to allow forwarding of the allocated rebate to the client at year-end. Additionally, professional services firms may decline the rebate on client expenses to avoid any perceived improprieties.

P-Cards appear as normal credit cards to vendors and, therefore, those that accept consumer cards can also accept P-Cards. In addition, courthouses across the country have begun accepting credit cards for fees, allowing for efficient payment tracking and client charge-back. Many additional vendors with high transaction volume and low transaction value, commonly used by law firms, accept P-Cards as well, including Corporation Service Company (“CSC”), CT Corporation, and many other litigation support and deposition services providers. In most cases, these vendors will then offer consolidated monthly invoices in a format requested by the firm.

Challenges to Adopting P-Cards

As with any change, there are challenges to the adoption of P-Cards. A P-Card program will require resources to manage the implementation and ongoing use of the P-Card. This will include managing P-Card policies and users, and integration with existing financial systems. However, the resources required to administer the implementation and ongoing program are likely to more than offset inefficiencies via a reduction of paper invoices and checks.

Also, while payment processing may be efficient using P-Cards, the overall payment cycle may be shorter for P-Card transactions than traditional means. However, utilizing the data from above, 75% of processing represented only 4% of spend. An adjustment to the payment cycle on 4% of spend is unlikely to have a material impact on a firm's cash flow.

Conclusion

The transformation of commercial payments in the United States is underway. Many large and mid-size corporations are now aggressively seeking ways to adopt accounts payable automation in order to improve efficiency, cut operating costs, and improve expense visibility.

Most major banks are now offering P-Cards as an integral part of their suite of products and have invested to integrate P-Cards into their overall payables solutions. This investment is an indication that these institutions expect P-Card use to have a significant role going forward. The well-developed and secured infrastructure of card transactions makes P-Cards a natural fit to address automation and operating cost goals, and should be considered as a possible tool to address firms' short- and long-term spend management and operating cost reduction goals.

John H. Hutchinson, a member of this newsletter's Board of Editors, is Managing Director and Leader of Huron Consulting Group's Law Firm Management group. His team, which includes contributor Fraya Lynn Hirschberg, focuses on helping law firms achieve a competitive edge in the marketplace through cost reduction and financial management process solutions and technologies. Contributor Thomas Kelly is the Vice President & Commercial Card Product Manager for HSBC Bank USA, N.A., a provider of a full-range of banking products and services to individuals, corporations, institutions, and governments through its personal financial services, private banking, retail bank, commercial banking and global banking and markets segments. Hutchinson can be contacted at [email protected]. Kelly can be reached at [email protected].

The economic environment is driving a healthy review of cost structure and process across all industries, and law firms are not exempt. In our industry, reduced acceptance of pass-through expenses by clients, staff reductions, and revenue/profit pressure are catalysts for change in how law firms interact with their suppliers. In efforts to increase transparency, manage demand, and streamline back-office operations, law firms are looking at automation opportunities within the procure-to-pay cycle. A well-defined Purchasing Card (“P-Card”) program is one tool available to law firms which requires little or no upfront investment, yet yields many of the controls, efficiencies, and transparencies that law firms and their clients seek.

P-Cards are a form of a corporate credit card that provides organizations with flexibility and convenience to purchase goods and services with greatly enhanced control and reporting capabilities. Law firms may use P-Cards as the payment method for all types of expenditures, including court room services support, courthouse fees, office supplies, IT hardware, travel, and other overhead expenditures. P-Cards streamline purchasing and payment, automating traditional paper-based purchase order, invoice, and check creation without loss of visibility or control.

Process Efficiency

U.S. companies continue to pay a price for failing to automate the payment process. In spite of significant efforts to move commercial payments to more efficient electronic methods, nearly 80% of payments within the United States are still made via paper check. [See "Top Trends in U.S. Wholesale Payments, Much More Than Process Efficiently"; Aite Group; 2006.] When taking into consideration the entire procure-to-pay cycle, including requisition of goods, purchase approval, generation of purchase orders, receipt matching, and payment workflows and processing, companies are often spending more money to complete the payment process than the actual expense of the materials or service purchased.

A study completed by the RPMG Research Corporation in 2005 ["2005 Purchasing Card Benchmark Survey Report"; RPMG Research Corporation; 2005] demonstrates that the traditional procurement method using purchase orders costs a company an average of $89.21. The same study reflected an average cost of $21.83 for purchases made using P-Cards. If an organization is procuring $50 worth of office supplies, it seems nearly impossible to justify a process expense greater than the tangible goods received.

Procurement and accounts payable processes tend to follow the spirit of the 80/20 rule. In one recent sample from an AmLaw top 10 law firm, 75% of A/P vouchers over the course of a year represented only 4% of spend. [Data analysis performed by Huron Consulting Group.] This is a significant back-office cost to manage only 4% of disbursements. In this example, 63% of vouchers were for less than $500. Using the data from above, the cost to process these vouchers using traditional methods would represent 20% (or much more) of the cost of the product or service purchased. By identifying low-value, high-volume remittances to transition to P-Cards, organizations can quickly recognize improved employee efficiency, reducing unnecessary paperwork in accounts payable and the overall procure-to-pay expense.

A 2006 study completed by Aite Group ["Top Trends in U.S. Wholesale Payments, Much More Than Process Efficiently"; Aite Group; 2006] anticipates a reduction in business-to-business payments made with checks from 80% of the market to 68% by 2010. Automated Clearing House (“ACH”) and wire transfers will account for a portion of the transition to electronic payments; however, it is anticipated that P-Cards will have the most notable gain, more than doubling the total B2B payments processed via that channel.

Visibility and Spend Control

A common objection when considering implementing a P-Card program is the incorrect notion that giving cards to employees equates to providing staff with an open-ended policy on procurement.

However the reality is different than perception. RPMG's 2005 Purchasing Card Benchmark Survey Report shows that employee misuse of P-Cards is rare, with only 0.023% of total card spend reported as misused, and only 0.03% of transactions involve employees using the card inappropriately. [See Data analysis on current HSBC Purchasing Card accounts performed by HSBC Bank USA, N.A.]

Why is employee misuse on P-Cards so rare? P-Cards offer the ability to manage employee spending capability across a wide array of criteria. This may include total spending, purchase frequency, types of goods or services, transaction size, and many others. Many card issuers now offer the ability to restrict transactions to specific merchant locations and even the time of the day the card can be used. In addition, employees are aware that the company has access to complete, detailed spending information, making employee abuse/misuse unlikely. With the increased visibility offered by the P-Card system, in many ways there is greater scrutiny on P-Card transactions than on the detailed purchases reflected in paper invoices.

The improved visibility on the micro level can translate to cost savings at the macro level. Rolled up P-Card purchase history provides detailed spend information that law firms can analyze to identify opportunities for supplier consolidation, product consolidation, and price management. Moreover, the P-Card system controls allow firms to restrict suppliers and buyers, driving spend through preferred supplier channels, accelerating consolidation efforts, and ensuring preferred pricing.

The invoice data collected are not only used to enforce the above controls, but are available for reporting in order to analyze and manage financial data from card and cash transactions. P-Cards offer the ability to run standard reports, create custom queries, and run ad hoc reports to provide transaction-level information. Furthermore, law firms can create custom data fields, such as client charge codes or G/L cost centers, to capture information required to charge back expenses to clients as applicable. The data collected are utilized for both the G/L and A/P reconciliation process, as well as for review to control spend and ensure compliance with contract pricing.

Advantageous for Both Buyers and Suppliers

Some organizations hesitate to use P-Cards, thinking that suppliers will resist the discount fee associated with card transactions. Contrary to that notion, many suppliers prefer P-Cards to speed cash flow. The traditional P.O./invoice/check payment process is just as laborious and costly for suppliers as for buyers. Often the supplier will wait 45 to 60 days for a buyer to remit a check payment. With a P-Card transaction, a supplier is paid within three days of the transaction being submitted. So in addition to significantly reducing a supplier's internal receivables workflows, P-Cards place suppliers in a much improved cash management position. Additionally, by accepting P-Cards, suppliers are meeting the needs of their customers, differentiating themselves from competition, and keeping lines of communication open. Openness to accepting P-Cards allows suppliers to better service their clients, continue to build relationships, and improve their own bottom lines.

At the same time, buyers continue to receive the advantage of the P-Card issuer floating the payments for an average of 45 days from transaction date to the date the organization remits payment to the bank. [Data analysis on current HSBC Purchasing Card accounts performed by HSBC Bank USA, N.A.]

And as card issuers typically do not charge fees for P-Cards, except late payment charges, the buyer is utilizing a free payment method.

Many issuing banks offer rebates on a sliding scale, generally in the range of 0.25% to 0.75%. Eligibility and percent of rebates may depend on spend thresholds, timing of payment, and usage of electronic billing. However, professional services firms may have questions regarding accepting rebates given they pass some charges through to clients when incurred. To offset this potential challenge, issuing banks can track expenses per client when charge numbers are entered to allow forwarding of the allocated rebate to the client at year-end. Additionally, professional services firms may decline the rebate on client expenses to avoid any perceived improprieties.

P-Cards appear as normal credit cards to vendors and, therefore, those that accept consumer cards can also accept P-Cards. In addition, courthouses across the country have begun accepting credit cards for fees, allowing for efficient payment tracking and client charge-back. Many additional vendors with high transaction volume and low transaction value, commonly used by law firms, accept P-Cards as well, including Corporation Service Company (“CSC”), CT Corporation, and many other litigation support and deposition services providers. In most cases, these vendors will then offer consolidated monthly invoices in a format requested by the firm.

Challenges to Adopting P-Cards

As with any change, there are challenges to the adoption of P-Cards. A P-Card program will require resources to manage the implementation and ongoing use of the P-Card. This will include managing P-Card policies and users, and integration with existing financial systems. However, the resources required to administer the implementation and ongoing program are likely to more than offset inefficiencies via a reduction of paper invoices and checks.

Also, while payment processing may be efficient using P-Cards, the overall payment cycle may be shorter for P-Card transactions than traditional means. However, utilizing the data from above, 75% of processing represented only 4% of spend. An adjustment to the payment cycle on 4% of spend is unlikely to have a material impact on a firm's cash flow.

Conclusion

The transformation of commercial payments in the United States is underway. Many large and mid-size corporations are now aggressively seeking ways to adopt accounts payable automation in order to improve efficiency, cut operating costs, and improve expense visibility.

Most major banks are now offering P-Cards as an integral part of their suite of products and have invested to integrate P-Cards into their overall payables solutions. This investment is an indication that these institutions expect P-Card use to have a significant role going forward. The well-developed and secured infrastructure of card transactions makes P-Cards a natural fit to address automation and operating cost goals, and should be considered as a possible tool to address firms' short- and long-term spend management and operating cost reduction goals.

John H. Hutchinson, a member of this newsletter's Board of Editors, is Managing Director and Leader of Huron Consulting Group's Law Firm Management group. His team, which includes contributor Fraya Lynn Hirschberg, focuses on helping law firms achieve a competitive edge in the marketplace through cost reduction and financial management process solutions and technologies. Contributor Thomas Kelly is the Vice President & Commercial Card Product Manager for HSBC Bank USA, N.A., a provider of a full-range of banking products and services to individuals, corporations, institutions, and governments through its personal financial services, private banking, retail bank, commercial banking and global banking and markets segments. Hutchinson can be contacted at [email protected]. Kelly can be reached at [email protected].