BENEFITS OF e-PAYMENTS

Delivering the Benefits of ProcurementCards in the UK Public Sector

In collaboration with Appropriate Fit Procurement

P U B L I C S E C T O R

1 Introduction 2• Delivering Public Services in Today’s Economic Environment 2

• The Challenges Facing Procurement Today 3

• The Role of Procurement Cards in Procurement and 3

Purchase-to-Pay Strategy

2 Programme Management 6

3 Segmentation 7• Segmentation by Customer Characteristics 7

• Segmentation by Commodity 8

• Selling the Concept and Delivering Benefit 9

4 MasterCard® Products 12• inControl 12

• Smart Data OnLine 12

• Information Hub 12

• MasterCard Optimiser 13

• VAT Recovery Service 13

5 Conclusion 14

Table of Contents

1

1.1 Delivering Public Services in Today’s Economic Environment

Public sector organisations in the UK are under increasing pressure to

provide better services to stakeholders in terms of quality, value, prompt

payment, security, transparency and personalisation. In addition, there

is a clear requirement to improve efficiencies to support a high level of

sustainable service delivery and, in the current economic climate,

organisations are expected to do this with fewer resources in real terms.

The Operational Efficiency Programme (OEP) report, published

alongside the Budget for 2009, forms a key part of the Government’s

drive to achieve greater efficiency savings across public spending. The

report suggests potential savings of £15 billion by 2013-14 compared

with 2007-08 spending, of which £6 billion is to come from collaborative

procurement.

Previously, the European Union’s 2010 eGovernment Action Plan called

for improvements in integrated eServices provided by governments to

the public. The Plan states that electronic procurement and invoicing

can result in savings in total procurement costs of 5% and reduce

transaction costs by 10% or more.

The importance of procurement in driving public sector improvements

can also be seen from the Procurement Capability Reviews (PCRs)

carried out by the Office of Government Commerce (OGC). The PCRs

have been used to assess how far UK government departments meet

the demanding procurement standards required to deliver value for

money services, now and in the future. The reviews highlight the need

for an overarching procurement strategy, especially where organisations

are decentralised and fragmented. The OGC also advocates the use of

procurement cards within government departments as a step towards

achieving process efficiency savings.

Procurement cards were originally developed to modernise and improve

the efficiency of an organisation’s low-value procurement process.

However, they should now be seen as part of a solution that goes

beyond low-value orders.

In addition to fulfilling purchasing and payment requirements,

procurement cards bring optimal benefits when used as part of an

overall procurement and payments strategy.

Providing world-class public

services in a challenging

economic climate

In the current economic

environment, an efficient

procurement process can be

instrumental in driving efficiency

improvements and reducing cost.

Delivering the Benefits of Procurement Cards in the UK Public Sector 2

1 Introduction

1 Operational Efficiency Programme: Final Report, April 2009, p282 2010 eGovernment Action Plan: Accelerating eGovernment in Europe for the Benefit of All, Commission of the European

Communities, April 2006

1.2 The Challenges Facing Procurement Today

The OEP report states that whilst the UK public sector has ‘the potential

to become an extremely powerful purchaser,’ in general procurement of

common goods and services is fragmented; management information on

government expenditure is regarded as poor; and the procurement

environment as a whole is seen as complex and uncoordinated.

Public sector organisations are also seen to be challenged by a lack of

skilled resources and a lack of structure in strategic supplier relationship

management processes.

Despite these challenges, with a non-pay expenditure in excess of £200

billion, the UK public sector holds tremendous potential for improvement

using procurement card services. A key element of success is to

establish a clear and overarching procurement strategy that takes into

account market and category segmentation and in which procurement

cards are viewed as an important component of the overall

purchase-to-pay (P2P) strategy.

Procurement cards enable an organisation to achieve process

efficiencies, provide better management and accounting information,

enhance supplier relationships and contribute to a sustainable

procurement environment. Rather than merely a low-value order tool,

procurement cards are seen as having an important role within a suite

of P2P tools directly contributing to an organisation’s efforts to achieve

the efficiency savings targets set by the public sector agenda.

The e-payments and smart payments arena has dramatically changed

with exciting new products that can contribute significantly to the

percentage of payments processed electronically. Physical cards no

longer require to be issued. A step change has taken place through the

development of limited controlled payment numbers. Compliance - a

major contributor to the delivery of savings from procurement - can now

be driven through e-payments.

1.3 The Role of Procurement Cards in Procurement and

Purchase-to-Pay Strategy

Procurement cards have been around for over 15 years – the first

purchasing card was used in the early 1990s in the UK – and they have

been used traditionally to improve efficiencies in an organisation’s

low-value procurement process.

The original Government Procurement Card (GPC) framework

agreement was launched in October 1997 by HM Treasury for use by

Central Civil Government, its agencies and non-departmental public

bodies. The rationale behind the GPC was to enable authorised staff to

conduct low-value transactions quickly and to consolidate large numbers

of invoices from multiple suppliers into a single monthly invoice, thus

removing process costs and improving management information,

resulting in a saving of £28 per transaction.

Procurement cards have a role

to play in the end-to-end

procurement process

Procurement cards are not just

about low-value order processing

but are an important contributor to

overall efficiency and

effectiveness.

‘(The) GPC III complements thee-Procurement process andshould not be regardedseparately. Maximum benefitsavailable through using GPC willbe more quickly realised andmaximised if you treat the projectas a re-engineering of thepurchase to pay process.’– GPC Best Practice Guide,

Buying Solutions online

3

Although GPC usage has risen over the last ten years, the capacity for

growth remains high. The GPC ‘is the most sustainable and successful

procurement solution in use by government today’3 and there is still

room for improvement. Buying Solutions’ new frameworks (GPC III)

represent a major increase in possibility.

Following the initial implementations of ERPs, e-marketplaces and

e-procurement there is now a greater maturity across the UK public

sector on purchase-to-pay solutions. Having invested substantially in

ERPs and e-procurement, public sector organisations are now looking

to secure greater efficiencies from their investments by integrating with

other ‘eSolutions’.

Procurement cards can be a beneficial tool in addressing many of the

key focus areas in the UK public sector agenda. For example, the

Glover Review states that, in ‘Accelerating the [Small and Medium Sized

Enterprise] SME economic engine’, there is a need for public sector

organisations to work in an innovative, inclusive manner for a more

transparent procurement process. SMEs constitute more than 99% of

businesses in the UK, employ 59% of the private sector workforce and

make up 52% of business turnover4. A critical issue for SMEs is

cash-flow and liquidity: across the UK, they now face a £26 billion late

payment problem – a 40% increase from 2008 figures – and a

staggering additional £7.4 billion of overdue late payments5.

Procurement cards make a difference as a speedy payment

mechanism.

New research from commercial credit reference agency Graydon UK

suggests that the government pledge to ease the cashflow problems

faced by small firms through the payment by government departments

of trade invoices, in 10 rather than 30 days, is taking longer than

expected to take effect. The survey, conducted in March 2009, reveals

that just 1% of small businesses questioned, which are currently

supplying government agencies, are now receiving payments due to

them within the pledged 10-day period.

With the average payment in the UK currently standing between 30 and

60 days, these results indicate that the majority of SMEs consider that

government departments are still no different to others in the market, in

terms of payment procedures.

Further afield, European businesses spend a minimum of €25 billion on

chasing late payments from consumers and businesses each year.

Research by leading credit management services company Intrum

Justitia shows that European governments could provide a €65 billion

stimulus to their home economies by simply paying invoices owed to

suppliers in full and on time. This could prove a real lifeline to European

businesses and in particular SMEs, who are fighting for survival in these

challenging times.

Procurement card benefits

The procurement card is a

strategic tool that provides clear

benefits to customers, suppliers

and the economy.

Process efficiencies

• Faster delivery of goods and

services, consolidated invoices,

improved cycle times

• Better information – automated

audit trail for accounting and

procurement systems; timely

and accessible management

information

• Improved cashflow and liquidity

for SMEs through prompt

payment

• Increased compliance with

contracts

Cost reduction

• £28 saving per transaction of a

procurement card payment over

a traditional invoice payment

• Cashable savings from

negotiated pricing and rebates

• Discounts to customers in

return for early payment

• Reduced procurement costs

from using the Buying Solutions

Framework Agreements

In addition

• Economic benefits – prompt

payment can be equivalent to a

cash injection to kick start the

economy

• Sustainability – an efficient

procurement system ensures a

sustainable procurement

environment.


3 Focus on e Procurement – Purchasing Power, Government Opportunities Magazine June 20074 Glover Review: Accelerating the SME economic engine: through transparent, simple and strategic procurement,

November 2008, p75 Independent research conducted by Continental Research

The social care system in the UK has also recently been under scrutiny,

with increasing demands for more effective and efficient service delivery.

One response to the challenge of consistent and fair funding for social

care has been the advent of personal budgets and the personalisation

of care in the health sector would involve paying the individual budget

onto a prepaid card, rather than into a bank account. Analysis of prepaid

opportunities suggests potential time savings of up to 135 days per year

and cost savings of up to 21%.

The case for using procurement cards in an overall P2P strategy is

strong but the take-up has been disappointing. Despite the rise in

usage of procurement cards since they were first introduced and their

potential to improve efficiency, the real benefits have rarely been

maximised. The secret to a successful implementation is to adopt three

key strategies – an implementation approach grounded in effective

programme management, segmentation in launch and roll-out and the

deployment of the right products for the right outcomes. MasterCard’s solution to the

SME issue

MasterCard provides an effective

solution as a global e-enabled

payment platform to accelerate

prompt payment, cash-flow and

liquidity for UK SMEs.

MasterCard can facilitate

payment to SMEs in two to four

days – exceeding the UK

government commitment of 10

days – thereby improving

cash-flow and liquidity, and

reducing the administrative costs

of chasing late payments whilst

providing time savings to SMEs.

5

For a procurement card implementation to be successful and

sustainable, it is crucial for there to be strong programme management

from the outset. Criticism of some e-procurement implementations is

that they are ‘perpetual pilots’ that never fully infiltrate into the

organisation as a whole.

A solid programme management approach involves clearly defined

plans, milestones, target benefits and risk management and regular

review of performance.

An example of a successful P2P programme management approach to

implementation can be found in the eProcurement Scotl@nd

programme:

Figure 1: Best Practice Case Study: eProcurement Scotl@nd


2 Programme Management

The eProcurement Scotland (ePS) programme is an example of a successfulprocurement transformation programme that focuses on three key elements:

• A transformation approach: The implementation of the eProcurement Servicehas been deployed as a large scale change programme with the eProcurementtechnology as the enabler.

• Collaboration: The eProcurement service has been used as a vehicle forcollaboration that began with the sharing of supplier adoption resources andcatalogue content. This has developed into organisations working together andexploiting opportunities of ‘better buying’. This will be enhanced further by theintroduction of the ePS collaborative catalogue management system currentlybeing introduced to allow content to be easily shared nationally and acrosssectors.

• Sustainability: Focus has always been on the delivery of long-term benefits andnot on quick fixes.

“eProcurement Scotl@nd is one of the most comprehensive and successfule-government initiatives in the world.”

John Swinney, Finance Minister, February 2008

The UK public sector is fragmented and varied in terms of size,

expenditure and ambition, therefore the need for market and commodity

segmentation is important in the effective use of P2P solutions. There is

no ‘one-size fits all’ strategy and different organisations with varying

levels of expenditure and varying procurement strategies will need

different routes to market. It is therefore necessary to perform a market

and commodity segmentation analysis to develop different methods of

implementing a procurement card system to find the best fit for an

organisation.

3.1 Segmentation by Customer Characteristics

Figure 2 below illustrates the role of segmentation in identifying the

most effective method of implementing procurement cards within an

organisation’s procurement strategy. This has come out of a number of

workshops held with issuing banks that see segmentation as follows:

The horizontal axis shows the ambition of an organisation in terms of

investment in e-procurement, high-level sponsorship and support

services, whereas the vertical axis shows the size of expenditure.

Traditionally, as a purchasing tool, procurement cards have featured in

the bottom left quadrant despite having applicability across the board.

Procurement card users can be segmented into the four quadrants as

shown in the diagram. An organisation with large expenditure but low

ambition (Quadrant 1) will require senior level sponsorship and a strong

business case for a procurement card implementation.

7

3 Segmentation

Figure 2: Performance and development framework

1High

Expenditure

Level of Ambition

Low

Low High

2

3 4

With greater ambition, an organisation with high levels of expenditure

(Quadrant 2) should build procurement cards into its overall P2P and

e-procurement strategy. This type of organisation would advocate

continual improvement and have an ever-increasing interest in

purchase-to-pay solutions, making it an ideal platform for an optimal

roll-out of a procurement card strategy.

When an organisation has a smaller level of expenditure and low

ambition (Quadrant 3), it would initially be looking for simplicity, ease of

implementation and a self-service product. Therefore a more traditional

or basic procurement card implementation will be of benefit.

However, low expenditure need not be a barrier to organisations with

high ambition (Quadrant 4), as they could collaborate with other

organisations to optimise benefits from a procurement card strategy.

3.2 Segmentation by Commodity

An organisation typically has a mix of low- and high-value orders and

contracts and procurement cards have generally been used for

low-value order processing. Whilst these will bring quick savings, the

real benefits will be seen from looking at the overall return on

investment of implementing a procurement card system as part of a

sourcing strategy.

To maximise the benefits of procurement cards, a clear purchase-to-pay

channel strategy has to be in place, making effective use of both

procurement cards and other e-Procurement solutions for different

categories of expenditure.

By characterising and prioritising commodities according to volume and

expenditure, an organisation can identify the areas in which

procurement cards can be most beneficial.

The Spikes Cavell and MasterCard e-enabled payment Information Hub

allows for detailed spend and supplier analysis, which can help with

deploying procurement cards within an organisation, and this will be

discussed in more detail in Section 4.

The way in which goods and services are bought can also affect the

procurement strategy deployed by an organisation. For example, some

goods may be purchased by users in remote and variable locations,

such as maintenance engineers, TV production crews or social workers.

In these cases, procurement cards can be allocated with specific

budgets and preferred suppliers, to eliminate bureaucracy and save

time.

There is benefit to be derived from using a procurement card as a

purchasing tool in the bottom left hand corner of the grid amongst other

P2P tools as illustrated in Figure 3.

There is even more to be gained in taking a channel management

approach, which is commodity based and places the purchasing card

as part of both the overall P2P strategy and the individual category

strategy as illustrated in Figure 4.


3.3 Selling the Concept and Delivering Benefit

Procurement cards can be successfully implemented within public

sector organisations regardless of size and ambition. The flexibility of

procurement cards means that organisations can use different

implementation strategies to find the best fit.

With a basic or traditional implementation, an organisation can roll out

procurement cards in isolation for specific categories of expenditure.

Typically used for low-value orders, this type of implementation will

reduce the number of invoices and cut transaction costs.

9

Figure 3

e-Collaboration

Strategic

High

High

Low

Market Complexity

Bottleneck

LeverageRoutineBusiness Impact

Marketplaces

Buying Consortia

Punch-Out

e-Tender

e-Catalogue

e-AuctionP-card

Internet Buying

Figure 4

Sourcing Tools Potential Suppliers

Identify Best Value

Secure Best Value

Contract with

Suppliers

Deliver Best Value

e-Auction

e-Tender

Major Projects

Buying Channels Order from Suppliers

P Cards

e-Procurement Non-catalalogue

e-Procurement Catalalogue

ERPCat

egor

y M

anag

emen

t

Sus

tain

able

Bes

t Va

lue

For a commodity-focused implementation, procurement cards are built

into the sourcing strategy of an organisation. Where there is a high

volume of transactions, procurement cards can reduce the number of

purchase orders and invoices in the procurement process.

The benefits of procurement cards will be optimised when introduced as

part of an organisation’s overall purchase-to-pay strategy alongside

other e-procurement solutions. Procurement cards integrate well into

e-procurement systems and financial back-end systems, and this

feature means that the benefits will translate into all areas of the

procurement strategy. An important factor to note is that each of these

strategies has to be underpinned by strong programme management to

ensure a successful, sustainable implementation.

Figure 6: Collaborative implementation in Wales


Figure 5

Programme Management

Collaboration

Increasing Benefits

BasicImplementation

Commodity Implementation

Silver

Strategic Purchase-to-Pay

Gold

Sil

Go

Bronze

Value Wales Procurement launched the Welsh Purchasing Card (WPC) programmeto provide the Welsh public sector with an alternative purchase-to-pay process,designed to deliver significant cost savings by removing the need for purchaseorders and processing of invoices.

The WPC was successful not only because it was managed as a programme, butalso due to the understanding of segmentation. Value Wales Procurement had auniquely strong focus on growing the scheme’s supplier network, which hasincreasingly enhanced its appeal with public sector organisations. For example,while the programme was initially only used for low-value, high volumetransactions, such as procurement catering or office supplies, as the suppliernetwork has grown, the card can now be used to procure higher value items aswell, such as tarmac and stone for highways maintenance.

Another key element to its success was the deployment of the right product –MasterCard:

“All public sector organisations in Wales that have adopted the WPC scheme overthe past two and a half years have specifically chosen the MasterCard solution.”

Alan Oram, Value Wales Procurement

Whilst the ideal for procurement cards is to move away from

transactional buying, organisations may choose to implement one or

more varying strategies depending on size, ambition and commodity

type. Thus an eco-system with a complete suite of solutions is critical for

flexibility and to encourage uptake of the product.

An organisation should build elements of collaborative procurement into

its strategy, regardless of the type of implementation. By working

together with other organisations to reduce the cost of implementation

and to maximise savings and benefits, it can achieve efficiencies

through economies of scale, better contract management and standard

processes.

11

The right products are crucial to a successful implementation.

MasterCard provides two innovative services – inControl and Smart

Data Online, as well as a shared Information Hub. These products meet

current government requirements for control, security, traceability,

flexibility and personalisation as well as for supplier and spend

information.

4.1 inControl

MasterCard® inControl™ is an innovative platform that offers an array

of advanced authorisation controls, intelligent transaction routing

capability and robust alert functionality designed to enable issuers to

provide enhanced levels of security, control, data capture and

traceability on every purchase.

inControl also provides the capability for limited-use account or virtual

card numbers, which reduce the risk of primary-account fraud.

4.2 Smart Data OnLine

MasterCard®Smart Data OnLine™ service provides users with 24/7

on-line access to all transactions for complete security, as well as

on-line management of card purchases. This also includes detailed

transaction information, which can be delivered through both standard

and customised reporting. Smart Data OnLine can be specifically

configured to the requirements of each user organisation thus allowing

them to create their own review/authorisation workflow, account coding

capability and data file exports suitable for loading into local accounting

systems.

4.3 Information Hub

The Spikes Cavell and MasterCard e-enabled payment Information Hub

provides detailed purchase-to-pay transactional analysis by UK regions,

sectors and by commodity category and services spend. This analysis

assists in identifying where the various procurement card products can

be applied, through which business cases for payment card deployment

can be produced.

Importantly we are now able to analyse core or common suppliers

across the 12 regions of the UK and foster collaboration amongst public

sector organisations to enable a more focused merchant acquisition

activity.

The Information Hub will provide information with which to identify

opportunities for further performance improvement and maximise the

investment in the P2P programme.

MasterCard has the right

products to address the

current and future needs of the

market


4 MasterCard Products

4.4 MasterCard Optimiser

The MasterCard Optimiser is an intuitive web-based diagnostic tool that

allows organisations to identify and measure strategies for improving

new or existing corporate and P-card programmes. It takes only 20

minutes to use and produces a customised report including an analysis

of current usage patterns and opportunities to expand the roll-out and

increase the delivery of benefits.

4.5 VAT Recovery Service

In partnership with Meridian, the MasterCard platform provides the

ability to identify easily how much VAT has been paid and estimate how

much might be recovered. It provides a simplified process to handle the

VAT recovery on behalf of organisations. The reports provided are

HMRC certified.

13

In the current climate, numerous government initiatives have been

launched to drive public sector improvements. Procurement is seen as a

key area in which these improvements can be manifested.

Procurement cards are a robust, proven tool and can bring significant

benefits to public sector organisations regardless of size or ambition.

Procurement cards need to be deployed as part of the overall

procurement strategy; to maximise benefits organisations need to focus

on the end-to-end business process and to view procurement cards as

a tool within the procurement eco-system and not just as a purchasing

or payment mechanism.

The time is right to consider

implementing procurement

cards. They can play a

significant role in improving

efficiency in today's difficult

economic environment and in

line with public sector

budgetary constraints.

Procurement cards deliver most

when they are part of an overall

P2P strategy and plan that

positions the right products in the

right segment of the process.


5 Conclusion

For further information please contact:

Laurent VrevenBusiness LeaderGlobal Commercial ProductsMasterCard EuropeTel +32 2 352 50 88Email: [email protected]

Contributors:

Seetha NambiarCapgemini

Laurent VrevenMasterCard

Tom WilsonAFP

Capgemini Consulting is the strategy and transformation consultingbrand of Capgemini Group

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About Capgemini

Capgemini, one of the world's foremost providers of consulting, technology andoutsourcing services, enables its clients to transform and perform through technologies.Capgemini provides its clients with insights and capabilities that boost their freedom toachieve superior results through a unique way of working, the Collaborative BusinessExperienceTM. The Group relies on its global delivery model called Rightshore®, whichaims to get the right balance of the best talent from multiple locations, working as oneteam to create and deliver the optimum solution for clients. Present in more than 30countries, Capgemini reported 2008 global revenues of EUR 8.7 billion and employs90,000 people worldwide.

More information is available at www.uk.capgemini.com

Capgemini Consulting is the strategy and transformation consulting division of theCapgemini Group, with a team of over 4,000 consultants worldwide. Leveraging its deepsector and business expertise, Capgemini Consulting advises and supportsorganizations in transforming their business, from strategy through to execution.Working side by side with its clients, Capgemini Consulting crafts innovative strategiesand transformation roadmaps to deliver sustainable performance improvement.

More information is available at www.uk.capgemini.com/consulting

®

About MasterCard Worldwide

MasterCard Worldwide advances global commerce by providing a critical economic linkamong financial institutions, businesses, cardholders and merchants worldwide. As afranchisor, processor and advisor, MasterCard develops and markets payment solutions,processes approximately 21 billion transactions each year, and provides industry-leading analysis and consulting services to financial institution customers andmerchants. Powered by the MasterCard Worldwide Network and through its family ofbrands, including MasterCard®, Maestro® and Cirrus®, MasterCard serves consumersand businesses in more than 210 countries and territories. For more information go towww.mastercard.com

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BENEFITS OF e-PAYMENTS