Charge it: Procurement cards net government-wide savings

by Cathryn Landreth

Ten years ago, the Government of Alberta engaged in a pilot project for the procurement card and we’ve never looked back. Today, we have an all-purpose card that’s used for goods and services, including travel.

We have about 3200 cards and we process $27 million a year in transactions; the average value is about $180 per transaction, which puts us at over 147,000 transactions annually.

The procurement card has delivered some outstanding financial benefits for the government. The average administrative cost of buying a good or service with a traditional purchase order is approximately $89, while the average cost associated with that same transaction using a procurement card is estimated to be close to $22. We see a net savings of about $67 per transaction.

Our new contract with Bank of Montreal (BMO) Mastercard has also provided us a very attractive incentive opportunity. Not long ago, our rebates were less than $100,000 annually. They’re now up over a quarter of a million dollars. Obviously we’re very pleased with that incentive process. The more volume we can drive through the cards, the more attractive the incentive becomes.

If we were to look at where we are in the maturity curve with procurement cards, we’re mere toddlers. As part of its service commitment in the contract, BMO has determined we could do much more volume with the cards, but it’s not going to happen overnight – it will require an educational process internally. We have to take this new contract and its controls and undertake a comprehensive educational and marketing process within government.

Value added
It’s important to note that our motivation in going down this path was not control, nor was it an automated payment process, although we have achieved both of these. It was largely focused on recognizing that there was a significant amount spent on goods and services in the Government of Alberta, for which we had very little detailed information.

The procurement card is largely used for buying goods or commodities that are high volume, low dollar value, and that are low complexity purchases. We wanted as much information about those purchases so we could be more aggressive in our sourcing arrangements, ensuring we get the biggest bang for our buck

Prior to using procurement cards we would know that we bought $5 million worth of material annually from a vendor, but we could not tell what we bought from them. As part of our contract, the bank is responsible for identifying areas for improvement to both our procurement and our payment process. They are also responsible to encourage our vendors to provide detailed information of the transactions, or tier three data. In the past, I would go to a store and the invoice would indicate that I spent $36.45 but it wouldn’t say what I’d spent it on.

The bank is actively pursuing this tier three data that not only says that I spent $36.45, but also indicates that I bought three boxes of pens, two packets of post-its and a box of paper on a certain date. This allows us to do data mining to ensure that we can actively pursue sourcing arrangements for the right products.

That data also allows us to present information about spending to our clients. And it’s opening their eyes to opportunities to partner with each other. For example, when we pointed out to a ministry that there are two other ministries that also buy uniforms, they became more cooperative with each other and bought those uniforms together. In the end, the price is better for everyone. By getting more precise information on what we’re buying, recognizing common ground, and identifying additional commodity groups, we have far better opportunities to reduce the costs to government.

In some of our first steps in strategic sourcing, we’ve realized quite an attractive value proposition. We have an opportunity to market those value propositions; we need to make that information easily available, engaging and attractive so our people are intrigued, grab on to that information and use it. In another strategic sourcing initiative, we went from three vendors to two for an item, and we fought for years with the vendors who said the discount they gave us off their list price, which was at that point up to 48%, was as low as they could go. But when we went from three vendors to two, the discount went to 60% and then to 70% over two years. We believe that by having good spending information, we have the ability to really leverage commodity sourcing arrangements to our advantage. We just need to win strong commitment to use the sourcing arrangements across government.

Lessons learned
One of the things that we learned during the project was that when you have an enterprise contract in place, it’s vital to have someone responsible for it. Initially, when our contracts were put into place, no one felt they owned the project. There must be someone to provide oversight for how the card is to be used and how the vendor performs. One of our significant goals in the new procurement card contract is to embed within our contract more management discipline. We have also included in our automated processes with our clients and ministries a set of controls that would make any form of misuse virtually impossible.

Today, we have many more checks and balances on the management of the card at an individual user level, at a system level, and at a corporate level between the government and the bank. In a year and a half of implementation under this new contract, we have had very few incidents of improper use – nothing that has set off any alarm bells. If there were any problems, they were explainable and certainly not an indication of misuse on anybody’s part.

Communications is also an important issue. We found that maintaining contact with the key decision makers and having a well-developed communication strategy to support that contact was key.

The future
By all indications, procurement cards are here to stay. They are a convenient tool for people who are working in the field or people who travel significantly. And there are many possibilities for innovative procurement tools in the future. For example, if you are responsible for buying office supplies, you could have an e-procurement tool on your desktop where you can go in and say you want three boxes of pencils, two pads of paper and a box of post-it notes. You can enter that information and it is automatically sent to your standing offer vendor. You could have that coded directly to your procurement card or directly to your GL (general ledger) letter.

I haven’t seen anything in the market, a super e-procurement process or anything else, which would render the procurement card obsolete. It’s a great tool that has been used with great success in Alberta – and I’m sold on it.


Cathryn Landreth is Assistant Deputy Minister, Business Services with the Ministry of Restructuring and Government Efficiency in the Government of Alberta.