Peter C. November, C.P.M.
Peter C. November, C.P.M., Consultant, Runzheimer International, and November Associates, L.L.C., Wethersfield, CT 06109, 860/571-8582.
Travel and entertainment typically ranks as the third largest corporate expense. Senior management, aiming to reduce travel expenses while improving service levels, is more and more asking Purchasing to utilize its skills to reduce the cost of travel. How can purchasing departments unschooled in travel management, meet this new challenge? I will first discuss the current environment surrounding cost reduction efforts. Second, I will describe the major service supplier team: travel agencies, charge card, rental car companies and hotels. Third, I will present the critical elements of a corporation's travel requirements profile. The paper concludes with a model of how these elements can be integrated into a successful customer-focused travel management program, one which meets the ultimate challenge: to balance the company's needs with those of suppliers in creating a customer-focused partnership.
Current Environment: The industrial sector has generally preceded the travel industry in redefining its roles and processes. Industries have focused on defining their core business and have embraced concepts of process improvement and Kaizen. Process mapping, spaghetti diagrams, process costing and benchmarking have become norms for standardizing processes and increasing efficiency. Malcolm Baldrige Award criteria and ISO 9000 certification are recognized as key ingredients to achieving cost and customer satisfaction goals. Least total cost of ownership concepts underlie cost reduction, improved service and productivity. However, major travel service companies are only now beginning to embrace these concepts.
Generally, corporations do not consider travel to be a core competency; therefore, travel is subcontracted to others. Subcontracts typically have focused on the financial arrangements between the company and travel agency, with the agency sharing its commissions from airlines, hotels and car rentals. Process and vendor costs have been secondary to traveler comfort. Travel agencies shared commission income to attract corporate clients, and corporations enjoyed getting what they thought were the lowest fares plus a cut of the commission revenue.
In February 1995, the playing field changed. Delta Airlines announced commission caps, a revolutionary change in travel agency compensation. Commissions were limited to a maximum of $25 on one way fares and $50 on round trip fares. Travel agencies quickly projected 30% revenue losses and immediately sought relief through added transaction and management fees from their corporate clients. Transaction fees are charged for a range of services rendered, e.g. looking up alternatives, making reservations, ticket processing , obtaining visas, meet-and-greet services, etc. Management fees are overall assessments based on a percentage of projected air sales, usually 2%.
Corporations consequently asked for justification of the new fees and thus began the cost analysis of the fee basis. Both parties - corporations and travel agencies alike - were now faced with rationalizing their methodologies, a process which is ongoing. Corporations have to justify the costs they are imposing on agencies such as multiple ticket changes, demanding on-site agents, unreasonable answering time standards, newsletters, hotel directories, etc. Agencies must scrutinize the cost and efficiencies of their reservations agents whose salaries represent between 60% and 70% of commission income. The travel industry is now implementing process improvement principles. However, only the largest travel agencies can afford the cost of process improvement initiatives.
Hotels and car rental companies have also instituted major process initiatives to improve profitability and customer satisfaction. In lieu of commission caps they also have adopted a strategy of negotiating non-commissionable "net" deals. Fees are imposed for early hotel checkout and there are new car rental surcharges for Tuesday and Wednesday rentals. Reductions are given for using on-line booking services. In one case, a car rental company provides an extra discount if its corporate client uses a bank's credit card instead of Diners Club or American Express.
Airlines, hotels and car rental companies are independent suppliers in a supply chain that varies with each trip. Getting them to work together to reduce total trip and process costs is an unanswered challenge. A prime example: separate traveler profiles are required in each supplier's system instead of a standard profile acceptable to all. Although each supplier takes responsibility for its own actions, too much opportunity exists for finger pointing. If the airline is late, no cars are left because of your late arrival and the hotel re-sells the room, who is responsible? Who should fix the problem? Who does fix it? In most cases it is the traveler, often with the help of the travel agency.
Service Supplier Team: A multitude of travel service suppliers seek corporate business. A company's selection process requires a clear understanding of travel agencies, charge card suppliers, airlines, car rental companies and hotels, and their respective roles in the travel marketplace. How does each supplier understand and meet your company's needs? To arrive at answers you need to understand the segmentation within each of these supplier groups.
The travel agency is the central supplier - it integrates your travel team. Business Travel News lists the top 100 travel agencies that move over $25,000,000 in air sales. Obviously there are more, many of which may be servicing your company and doing it well. However, only larger firms have the financial resources to develop independent streamlined processes and utilize the latest technology. Most larger firms, by themselves or through consortia, provide domestic and international business and leisure travel programs. Their critical cost-cutting approaches include: e-mail, FAX, Internet/Intranet capabilities, voice mail, and touch-tone systems. A current strategy is to work with credit card and software development companies to bring expense reporting products to market. Hence larger agencies are becoming better at deciphering total process/service costs. However, because technology tends to level playing fields, smaller and more agile travel agencies can compete effectively in today's market.
Process/service costs are covered by a host of financial relationships with travel agencies. Transaction or management fees were explained previously. "Rent-a- plate" or "co-managed" are two other alternatives. Rent-a-plate is an on-site office staffed by the corporation's personnel to make reservations through the Computerized Reservations System (CRS) and issue tickets. The corporation pays all costs plus a fee for using the agency's "plate" to validate transactions, and the company gets all commissions and overrides. In the co-managed relationship, all income including commissions and overrides are combined. Both agency and company expenses are combined. The resulting positive balance (margin) from income less expenses is split between agency and corporation through a reasonable share ratio that allows the agency a reasonable profit under most situations.
Co-management is based on partnering to reduce costs and increase profitability. Partnering arrangements provide both parties with a clear understanding of the cost structure on which fees can be based - in the probable event that rebates/commissions/overrides are further reduced or disappear.
In evaluating a prospective travel agency, consider the following five points: 1.) agency's philosophy and approach to servicing travelers; 2.) CRS system(s) used and why; 3.) primary carriers, hotels and car companies they deal with; 4.) training and development of the agency's staff and 5.) process improvement and technology development initiatives.
The credit card company is the next critical player in structuring a travel program. Charging all travel expenses to the card creates a central database to identify actual travel costs with specific airlines, hotels, restaurants, car companies and other ground transportation suppliers. Agency-generated data is merely booked data, whereas actual spent charge card data is critical to a negotiation process.
Originally, the main reason for using a credit card was to ensure a record of actual cost. Now credit cards actually expedite the payment process through providing cash advances, replacing letters of credit, and reimbursing travelers for travel expenses. Using the credit card with electronic funds transfer and teaming with the corporation's bank further improves cash flow. A coming advantage: companies will tie their credit card computerized expense reporting system to an agency's booking system so an expense report can be pre-populated with booked airline, hotel, and car data. On his or her own personal computer the traveler makes corrections, adds costs for meals and incidentals, and generates a completed expense report. Payment and reimbursement is through the credit card company. This raises issues of central billing, where the company pays the bill directly, versus the traveler paying the credit card bill themselves (with reimbursement based on an approved expense report), or the company paying the bill directly based on the card holder's verification of the bill and processing of an approved supporting expense report. Of course, charge card companies will be happy to accept scenarios where personal cardholder liability is assured, even when the company actually "pays" the bill through electronic funds transfer.
When evaluating a prospective credit card company, consider six critical areas: 1.) the card companies which are supported by your corporation's bank, 2.) card acceptance at places your travelers frequent, 3.) a charge card company's alignment with your company's travel expense management plans, 4.) integration with your company's and the travel agency's business systems, 5.) a credit card company's ability to provide supplier data in a manner to support automated expense reporting, and 6.) technology development/funding plans.
Rental cars are a major ingredient in the ground transportation segment of the travel program along with alternatives such as bus, limo, train and complimentary hotel van service. Travelers tend to rent cars even when other modes of transportation may be easier and more economical. They also fail to rent cars when this might provide a flexibility that would reduce overall travel costs, e.g. allowing use of less expensive accommodations in a perimeter location instead of downtown
In the United States, preferred supplier agreements for cars are generally made with a selected supplier on a daily rate for each class of car. However, franchises do not always honor corporate agreements; certain cities may be excluded and special "surcharges" may be applied. Further, your selected car provider may not be present in every city. In cities where your company has a major presence, better deals sometimes can be made locally with either your selected car company or with a local supplier. Although the trend is to consolidate with one supplier, negotiating on a local level where justified may be more prudent. Insurance remains an issue. Some corporations have excluded insurance, covering it under their charge card or self insuring. Be sure to involve your insurance department in these discussions.
International car rental programs are complicated by different country rules concerning insurance, credit transactions and taking cars across certain national borders. Agreements may have to be negotiated on a country-by-country basis.
Your company's domestic versus foreign car preference, as well as your need for special vehicle types, should influence the car provider's fleet make-up to satisfy your special needs. It may not be appropriate for your traveler to drive a Ford when she is attending a meeting at Chrysler to finalize a deal. Advance planning for van, station wagon and truck rentals helps to avoid time-consuming transactions. The use of vehicles for vacations in conjunction with business trips complicates insurance negotiations and billing procedures. The use of vehicles by under-aged employees and interviewees must be dealt with up front.
When selecting rental car company the corporation should consider: 1.) availability of cars when the traveler arrives; 2.) simplicity of checkout and return processes; 3.) car performance; 4.) cities served domestically and internationally; 5.) insurance programs; 6.) fleet management practices per city; 7.) brands of cars /vans/station wagons/trucks in the fleet per city; 8.) special rate /frequent flyer programs/franchise pricing; and 9.) marketing and account service programs.
Establishing a hotel program is a challenge for a variety of reasons. To begin, up to 75% of hotel reservations are booked by travelers and travel arrangers outside a company's travel agency program. Even if corporations negotiate an agreement with a hotel chain, franchises aren't always willing to go along. Moreover, all hotels in a hotel chain are not of the same quality since local hotel managers have bottom-line financial responsibility for their property. Local hotels often provide more favorable rates and amenities. Thus, hotel chain deals are not always the best strategy at frequently traveled destinations.
Hotels offer a range of rates including rack, corporate, agency-negotiated, corporate-negotiated, AAA, and AARP. All of these rates come into play when trying to structure a hotel program, however, hotel room rates are only one element. Charges for breakfasts, office services, phone access, van pickup services, parking and personal services such as newspaper, cleaning, and shopping services are all negotiable. Hotels have segmented themselves into full-service hotels, long term stay hotels, intermediate service hotels and economy facilities. Each segment is designed to meet the needs of a particular traveling population. When creating a program to balance the needs of senior management, middle management, field personnel and sales reps, you need to clearly understand both the expectations of travelers and the particular elements provided by each hotel segment. The proximity of hotels to where business is being conducted is crucial, as are travelers' personal preferences.
Hotels complicate the expense management process. Hotels are reluctant to break out cost elements, such as room, meals, movies, and liquor for separate identification in the credit card transmission. This requires a traveler to enter this data into the expense report in lieu of it being entered automatically.
In establishing a hotel program, start by selecting properties currently used by your travelers. Conduct on-site property surveys. Adapt your current supplier survey to the hotel selection process. Ask your travelers and your quality department to perform on-site visits.
Company Profile: Understanding the traveler services' supplier base is necessary but not enough to put together a company travel program. Most important is to understand your own firm's profile: its culture, business/business process plans and current/future travel requirements. Current data indicates what is happening and how contractual commitments are being met today. However, the travel program and the profile also must address future needs!
To understand your company profile, gather a team and involve them in the project from start to finish. Include on the team the travel manager, travelers, travel arrangers, senior management, finance and MIS personnel, to name a few. The accurate documentation of your company's needs and your company's requirements for running a successful travel program requires employee participation from every level and from every department of the organization which touches the process.
The basic ingredients of the profile are: management philosophy/operating style, travel pattern/cost data, technology interfaces with business processes, and the company's travel policy. Be sure to include the following: 1.) define your management philosophy or style. Is it a permissive style wherein people agree to an end objective and are charged with accomplishing the task as they see fit? Or is management based on mandated goals along with suggested guidelines for achieving those goals?; 2.) determine most effective communications style within the organization. Is it written, verbal, or visual?; 3.) describe process improvement initiatives, supplier partnership strategies, teaming concepts , training and career development philosophies as they apply to both your corporation and your suppliers; 4.) describe how travel is perceived, planned, budgeted, booked, accounted and expensed, and 5.) identify the measures which are currently used to manage travel and the critical measurements that will be used in the future.
Trend analysis, reporting exceptions, and accomplishments against goals are some modern measurements being used in lieu of transaction reporting. However, transaction data are still important in viewing travel patterns and demonstrating fulfillment of commitments to suppliers. Attachment I includes a partial list of key profile data needed to create a customer-focused program. It is not meant to be all-inclusive, but to stimulate your thinking. Ask suppliers what they need to know to define a customer-focused program for you.
Your company profile is the cornerstone for your travel policy. Make the policy simple and direct. One page works best, stating company travel philosophy. Direct travelers to use and support: 1.) your preferred suppliers; 2.) mandated use of the selected credit card for business travel only; 3.) submittal of travel expenses within a specified period of time after the trip rather than monthly submittal; 4.) established travel management processes; and 5.) the stated travel program objectives and goals.
Your company profile, along with supporting process maps, accompanying cost models, and performance measurements become the basis of contract Statements of Work, incentive/financial packages, as well as the basis for supplier selection. Base your supplier selections on those candidates that best meet your company's critical corporate needs rather than on popular vote.
Operating model: The ideal travel management model consolidates all travel under the auspices of one travel agency, one which implements travel policy in conjunction with participating airlines, hotels, car and credit card companies - and travelers - to provide a customer-focused, responsive program. Remember, the credit card company is a critical component for data and expense reporting. In multi-divisional or multi-location firms, a travel council of travel managers is formed to work with the designated suppliers to implement and market the program using newsletters; focus groups; video-tapes; web-sites for travelers' destination profiles; and incentives which encourage travelers to use the program. A few tips: 1.) before launching a new program, train everyone in the travel process. This is fundamental in establishing a world class program; 2.) help travelers sign up for the frequent flyer programs of your preferred suppliers; 3.) provide different levels of service for experienced versus new travelers and for travelers from different organizational levels with differing needs; 4.) check the pulse of your program through quarterly financial reviews, customer feedback forms after every trip, and customer roundtable discussions by a cross section of frequent travelers; and 5.) inform management through quarterly reports about how successfully you've achieved your travel budget targets, opportunities for correcting negative trends (with proposed get-well plans), and how well your suppliers are meeting their commitments to your program.
Conclusion: The Purchasing professionals of most organizations already possess the necessary skills to determine the company's travel needs, to assess the marketplace, to formulate these requirements into good working agreements with suppliers, and to asses/manage suppliers' performance. Purchasing professionals are already experienced in dealing with various organizational levels within their customer base and are familiar with good team purchasing practices, least total cost of ownership models, and effective marketing techniques. The Purchasing organization is in the ideal position to negotiate and manage travel service contracts, to successfully run cross-functional travel teams and to construct an integrated traveler/supplier travel management process.
O'Connor, Steffani C., "Agencies Renegotiate Relations, Rush to Automate", Business Travel News, 1996 Business Travel Survey, May 27, 1996, Issue 347, pp. 4-10.
"Structuring A Travel Management Program" Business Travel News, The 1996 Business Travel Buyer's Handbook, March 25,1996, Issue 342, pp. 1-12
Grateful thanks to Rolfe Schellenberger, Senior Consultant of Travel Management for Runzheimer International, for his editorial comments.
Best In Class Integrated Travel Services Supplier Team
Travel Program Company Profile Data
Program Participants (List)
Training/ Meetings/ Group Travel (List of dates and attendees for past and future)
Local Travel ( List trips where personal or rental cars were used)