Saving money with credit cards
- By Julie Bort
- Aug 31, 1997
Credit cards have been nothing short of revolutionary as far as federal information technology procurement is concerned. They save time and money. They reduce frustration and empower end users. They allow agencies to manage cash better to keep more precise budget data and to automate much of the administrative tasks of IT procurement - all while ensuring that laws and policies are executed correctly.
"Procurement cards have come close to revolutionizing federal procurement procedures overall in absolutely a good direction " said Steven Kelman administrator of the Office of Federal Procurement Policy (OFPP).Users of credit cards call them a godsend.
"With the credit card we probably do 95 percent of our own procurement so I deal with procurement [staff] much less now and I get orders in a much more timely fashion " said John Garofolo a computer scientist at the Information Technology Laboratory of the National Institute of Standards and Technology Gaithersburg Md. "Because we've been empowered it saves us time money and it's good all the way around " he said.
Credit cards in the form of the International Merchant Purchasing Authorization Card (IMPAC) from Rocky Mountain BankCard System (RMBCS) were instituted about seven years ago. But only in recent months have agencies begun to shift entire purchasing programs around the cards' use particularly for IT purchases.
With this shift there have been increases in the number of workers who are authorized credit card holders the number of card transactions and the average price of items purchased. Credit cards are also enabling the development of online shopping malls which list items on various purchasing vehicles.
Card Usage Grows
More than 230 000 credit cards are now in use throughout the federal government according to Ashton Md.-based consulting firm Amtower & Co. Amtower estimates that agencies will rack up more than 11 million transactions with these Visa cards in fiscal 1997 for a total purchasing value of $5 billion.
That figure could double in fiscal 1998 to $10 billion if a Defense Authorization Act provision that mandates all purchases under $2 500 be done by credit card is approved company president Mark Amtower predicted. Also a proposal by OFPP to increase standard limits to $5 000 in fiscal 1998 and $10 000 in fiscal 2000 may cause credit card usage to balloon.
Either way these projections are a significant increase from the nearly $3 billion in transactions reported by RMBCS in fiscal 1996. Of that figure $200 million was for IT purchases RMBCS officials said with the most popular IT purchase being software. RMBCS officials said the average purchase with the IMPAC card is $400. The largest agency users are the Defense Agriculture and Interior departments.
Reliance on the cards is growing at DOD according to Marco Devris senior analyst for Input a Fairfax Va.-based market research firm and author of a recent study titled "The Impact of Procurement Reform on the Federal IT Market." Devris said DOD's growing credit card usage is indicated by the increase in the average purchase price per transaction. In fiscal 1994 the average credit card purchase for DOD was a mere $570. In 1996 that number jumped to $1 235 Devris said.
Agencies save about 4 percent or roughly $54 per transaction when using credit cards vs. other methods of payment Devris found. This number was verified by independent agencies such as the Internal Revenue Service. Agencies can also get rebates from the credit card company for volume purchases and for early payment.
"Savings occur in contracting logistics resource management and accounting when electronic accounting practices are used " Devris said.
Agencies Cite Drawbacks
Credit cards of course do have their drawbacks. If there is one criticism consistently leveled at credit card purchasing from all sides - including buyers procurement professionals policy analysts and vendors - it is that the standard $2 500 limit is simply too low for IT customers. (Some card users negotiate limits as high as $100 000 but most users have the standard $2 500 limit.)
"Twenty-five hundred dollars just is not enough. It's difficult to buy a state-of-the-art PC for that " said Garofolo whose work as a computer speech-recognition scientist requires higher-end components that often can't be found in the sub-$3 000 class of computer.
A second drawback is that in most credit card purchases bills must be manually reconciled - a potentially time-consuming process that lends itself to human error.
A third problem is simply that most agencies have yet to really cash in on the cards to their fullest ability even when the agencies lay claim to numerous cardholders. In fiscal 1995 the latest for which numbers are available credit cards accounted for a meager $1.5 billion worth of products purchased compared with the $25 billion to $26 billion the government spends each year on procurement Devris said.
One factor holding back credit card usage is that many cardholders mistakenly see the card as primarily for open-market purchases when in fact credit cards are an acceptable - even preferred - form of payment for many contract purchases. In the IT arena contracts that accept credit cards include the GSA Systems contract which is a desktop PC contract and the Federal Systems Integration and Management Center's multiple-award indefinite-quantity contract for IT services Kelman said.
However so many regulations entwine purchasing that cardholders may feel intimidated in using the cards - another reason credit cards account for so little of the government's overall IT spending. "We use the card to buy components replace a disk drive or modem or if we need a piece of software. We frequently go to local computer stores and simply pick our purchase up " said NIST's Garofolo who added that he has also begun to use the card more often for GSA-listed products. "I have to be careful lots of restrictions exist when it comes to purchasing. But I've had very few snags and we're able to get our needs met more efficiently."
Others add that despite many advantages credit cards remain administration-heavy.
"It's still too expensive to process " said buyer Gary Crowl director of policy planning and mission analysis for the Energy Department Washington D.C. "You still end up trying to track items state tax reconcile bills lost orders. It's involved. We [have] a full-time person that does nothing but process purchase cards " he said.
Vendors Target Card Limits
Despite these drawbacks agency buyers are showing with their increased usage of plastic that the positives far outweigh the negatives where credit card purchasing is concerned and the market is responding.
Most IT vendors accept credit cards and some - such as Dell Computer Corp. Government Technology Services Inc. BTG Inc. and Unisys Corp. - are pursuing credit card customers with a vengeance. For instance Unisys Federal Systems Division recently launched Select IT which is an electronic commerce site specifically for government buyers. More than 35 000 open-market products are available on Select IT from six of the largest distributors of IT equipment. Credit card payment is expected to be the primary payment method although not the only one Unisys officials said.
Although vendors do pay a stipend to RMBCS for each credit card transaction vendors say in the long run credit card payments save them money.
"For the most part agencies don't pay on a timely basis. It's more like 60 to 90 days. When someone buys $100 000 and I don't get paid for that length of time if you look at interest rates with my carrying costs I'm ahead with a credit card " said Mindy Palmer national accounts manager for finance at BTG a Fairfax Va.-based reseller. In contrast RMBCS typically pays within 24 hours to a few days vendors attest.
Still in order to attract credit card customers vendors have had to position themselves strategically. This means pricing products to fall under the $2 500 limit as well as offering electronic commerce sites.
"Twenty percent of orders are credit card orders but they account for 60 to 80 percent of orders year to year. It's huge. We're putting a lot of internal resources into how we can [improve our credit card offerings] " said John Campbell vice president of inside sales and customer operations for GTSI Chantilly Va.
Tips for Success
If you're planning to make your IT purchases with a credit card be sure to follow these tips from agencies using credit cards extensively:
* Budget for a dedicated procurement officer to oversee credit card purchases.
This was the route taken by NIST and DOE. Credit card holders must submit a purchase request to the procurement professional. That professional reviews the request and educates the user on restrictions. While such a system may negate the immediate reduced administration costs of credit card purchases over time the cardholders learn the ropes and the procedure can become a perfunctory phone call.
* Offer a training program.
The Agriculture Department provides a self-study course that all credit card holders must pass before they can use their cards. To make the process easier USDA just finished shooting a training video and is almost finished with a computer-based tutorial. The agency also provides along with the IMPAC card a plastic insert that lists mandatory sources of supply on one side and the dos and don'ts of purchasing on the other side.
* Lead with IT purchases.
IT purchases lend themselves to electronic formats because vendors and customers of IT products tend to be computer-literate. Additionally IT products have a much shorter shelf life than other types of products such as pencils or office furniture. In comparison IT purchases have fewer procurement restrictions according to some credit card holders. For these reasons IT customers make ideal candidates for credit cards and can help evangelize the cards' proper use throughout an agency.
* Build an internal shopping mall.
This is a cutting-edge approach to electronic commerce led by agencies such as the IRS the National Institutes of Health and DOE. The IRS recently launched the Treasury Department Acquisition (TDA) system which allows the IRS to offer credit card limits as high as $100 000. The system is actually a one-stop shop where cardholders can buy from all available government contracts. Developed by the purchasing department the system's goal is to take the benefits of credit card empowerment to the next level."We have a huge marketing push where we are trying to reach out to our customer base and show them what we have for them and how good our contracts are " said John Ely director of the Office of Information Systems Acquisitions at the IRS.
Furthermore TDA assists in record keeping and guides end users through complex regulations. Not only does such a system make equipment purchases faster easier and less expensive for end users it also frees procurement employees to spend more time negotiating bargains and less time performing routine purchasing.
Similarly NIH is on the verge of launching an internal electronic mall called IntraMall which was created through a cooperative research and development agreement. CyberSystem Technologies Inc. Towson Md. is the commercial partner. Like TDA IntraMall will be a one-stop shop for government buyers. It will track individual spending and credit card restrictions such as limits and it will even allow shoppers to send requests to the procurement shop when their needed item is not available electronically. IntraMall will automate reconciliation and will use rules-based algorithms to guide users through procurement regulations. It also will allow users to comparison shop between vendors. In fact vendors - not the agency - will shoulder much of the cost of IntraMall by paying to have their wares included. "The system is designed to enforce the rules right now using credit cards vs. manual transactions " said MaryAnn Guerra the project manager for IntraMall. "Under one of our executive orders we are supposed to move 90 percent of our orders to electronic commerce. We built this [system] to make it easy."
TDA and IntraMall are available to other agencies. In fact the IRS is currently offering educational seminars on their TDA system. In addition IntraMall is available for purchase from CyberSystem.
-- Bort is the author of Building an Extranet. * * * * *
USA System Tracks Transactions
One of the most aggressive users of the International Merchant Purchasing Authorization Card program is the Agriculture Department which has issued 16 000 credit cards so far and expects to reach 20 000 cardholders in the next year. More than 13 000 of those credit card holders are nonprocurement people who have limits of $2 500. Some procurement staff members however can use the cards for purchases up to $100 000.
Over the last two years USDA has encouraged the use of credit cards by streamlining the paperwork involved in these purchases. "Back in 1995 we started a project to look at why we weren't using the card to its fullest potential " said Sue Poetz the program manager for the USDA's purchase card implementation team. "Our old system was paper-based and too cumbersome. Lots of people would say `It takes longer with the credit card than [it does] to send a requisition.' "
Since then the agency has automated much of the process and has offered training programs that encourage card holders to use the cards. So far the agency's efforts have paid off. In fiscal 1996 the agency racked up 400 000 credit card transactions for a total value of about $100 million. The average transaction was about $250 according to Poetz.
Now the agency is rolling out an automated reconciliation and payment system that will have all the necessary oversight built-in. The Microsoft Corp. Windows-based system built with Oracle Corp.'s Developer 2000 features an alert system which will identify questionable purchases within 24 hours. The system also will allow agency managers to create reports on what types of items are being purchased or who are the most popular vendors.
"In the past we had to wait 30 days for a paper statement and another 30 days before we could get the purchase into our general ledger " Poetz said. "Now we get a record of the transaction and we can see it within 48 hours. The minute we get a record of the purchase it hits the general ledger as a commitment " she said adding that this system allows the USDA to better manage its money.
Poetz added that a team of accountants recently evaluated the system and said it would save the agency $130 million in administrative costs over the next five years. The system should be online for all the agency's cardholders within the next 18 months.
- Carolyn Duffy Marsan