More Corps. Partaking In Online Hotel Auctions

After experimenting tentatively with reverse online auction technology during the past few years, travel managers at Xerox, Lockheed Martin, Dell and Hewlett-Packard this year are using the technique to negotiate for a more significant portion of their 2004 hotel programs.

For as much time and money that such auctions may save, however, none of these buyers views it as a sure thing. In each case, they are aware of the tools' limitations and do not foresee them fully replacing the traditional request for proposals process. They also do not anticipate using auctions for their entire programs any time soon. Yet, they described the rate reductions they have received up to now as "substantial."

"For 2004, we're going to double the number of reverse auctions we conduct to roughly 25. This does not necessarily mean 25 cities, since in certain markets we plan to do auctions for both full service and limited service properties," said Tracey Wilt, Xerox purchasing consultant for travel and meeting services.

In a reverse auction, select hotels in a market are invited to bid prices down for a slot in a travel buyer's program, unlike traditional auctions where prices are bid up. The process has proven most effective in markets where hotel competition is stiff. "We've succeeded with auctions in markets where Hewlett-Packard can drive the business and come out with a better rate," said Audrey Hemphill-Gold, HP global hotel and corporate card supplier manager who conducted 34 auctions this year and expects to do more for 2004, though as of late-July the final number had not been determined.

Typically, favored markets are major downtown or airport locations. "If there are 10 hotels at the airport, for example, and we emerge from the auction with two preferreds because the rates were right, we'll be successful—assuming we can deliver the projected volume to these properties," Hemphill-Gold said.

Hewlett-Packard will not conduct auctions in smaller markets where it has operations, such as Boise, Idaho, or Corvalis, Calif. "There isn't a lot of hotel competition in these cities. We're already getting the deepest discount, so there isn't a lot of room for further reductions," she said.

For Claudia Bonetti, business travel manager for hotels, meetings and groups at Lockheed Martin, auctions have become a way of achieving one of her program's larger goals. "We're consolidating the number of hotels we use in our key cities to be able to move marketshare and thereby increase our negotiating leverage," she said. "By limiting the number of hotels that participate in an auction, the tool lets you see the benefits of this strategy very clearly." In the seven auctions that Lockheed Martin conducted for 2003, the minimum number of room nights per city was 10,000, giving hotels an incentive to participate and bid aggressively.

Auctions also have proven more successful when they are broken down clearly by industry price point. "In such a city as Austin, Texas, which is near our headquarters, we've conducted three separate auctions—for full service, limited service and extended stay—because we use the three types frequently," said Jo Ann Gallardo, Dell hotel/meeting coordinator for the Americas.

Gallardo conducted a few auctions last year and expects to increase the number for 2004 to approximately 15. "A lot depends on the market. In larger cities, such as New York and Chicago, where we have significant volume, we're basically only using full service hotels, so a single auction suffices," she said, noting that the minimum criterion for conducting an auction in a city is 1,000 room nights.

For the 2002 and 2003 bid seasons, reverse auctions elicited considerable resistance from hotel sales managers, who objected to hotels being procured like a commodity. "Hotels were concerned precisely about this matter of price point, that they weren't being grouped in the right competitive set," Gallardo said. "Once we showed them that we understood their concern and moved to rectify it, they became much more comfortable."

A related concern was how much advance knowledge hotels had going in. With most auction tools, hotels know upfront which other hotels are participating. Yet, during the auction itself, they only are identified by paddle numbers. "Still, when you factor in location, most hotels are going to recognize which of their competitors they're bidding against," Hemphill-Gold said. "They're pretty savvy. Unintentionally or not, hotels tend to disclose who they are by their value-adds or messages they send during the session."

A concern on the buyer side has been how great a role national account managers should play in the auction. "This year, we're trying to do a better job engaging the NAMs. If they're onboard, they coach the individual hotels and thus help keep the auction on track," Wilt said.

In the short time since auctions emerged as a procurement tool, hotels have become more sophisticated about the psychology involved. "They seem to be learning that in an auction, you don't have to react. Rather, you need to know what you want to get out of it, how far you're willing to go on rate, value-adds and so on," Hemphill-Gold said.

One myth these buyers debunked is that auctions are an across-the-board timesaver. "In fact, auctions turned out to be more work upfront, collecting data and building it into the auction tool," Gallardo said. "But at the back end, you don't have to go back and forth with hotels to renegotiate rates, whether this means a one-on-one meeting or frequent phone calls." There are subsidiary time-saving benefits. "With the tool we're using, everything is tied in, including acceptance letters and rate loading instructions, so it makes those parts of the process less time consuming," Gallardo said.

While they are enthusiastic about auctions' potential for 2004, these buyers are realistic about their long-term viability. "From our perspective, the use of auctions is growing, but won't ever become the way we source all hotels," Bonetti said. "In other words, the traditional RFP process isn't going away. There are just some cases where auctions won't work, whether it is because of the volume we bring to a particular city or the competitive set of hotels in the particular location we need."

The decision to use an auction tool is still made on an annual basis. "We'll continue to look at it as an option," Wilt said, "but it's a mistake to think of auctions and the traditional RFP as mutually exclusive. Even when we do auctions, we still need information that's included in the traditional RFP, especially the module affecting pricing for databases that feed the agency and online booking tools."

One large hotel program, which embraced reverse auctions in the past, but only sporadically, is PepsiCo. "We've conducted nine events over the past three years, starting in 2000 for the 2001 bid season, when we conducted auctions in two markets, but it's a year-to-year decision," said Eric Boulter, senior industry manager for travel. The company chose not to conduct any for 2002, but reversed course for 2003 and conducted seven. "Right now, it's unclear how we're proceeding for 2004. There continues to be cloudiness about the hotel industry and the state of the economy, so we may be able to negotiate as aggressive rates through the traditional tools."