Corporate travel managers are renegotiating or reevaluating travel management company contracts as recent airfare reform, imminent distribution changes and further industry consolidation appear to be taking a toll on agency pricing.
Adjusting the TMC deal is a logical next step for business travel buyers, who earlier this year revamped their airline agreements following airfare restructuring led by Delta Air Lines and followed by other major carriers. Deep reductions in business fares and discounts by the airlines changed the equation for calculating TMC economics.
"The typical company that has a lot of domestic airline spend may have been getting discounts that averaged around 20 percent, now those companies are getting discounts averaging in the single digits," said Scott Gillespie, CEO of Cleveland-based Travel Analytics
(see story). "The return of the typical travel program has gone down and that that's going to lead travel mangers to search for ways to improve their return on investment."
Gillespie estimated that roughly 85 percent of a company's travel management budget may be soaked up by TMC fees, though most TMCs claim that transaction fees typically do not exceed 5 percent of total travel spend. "The TMCs are not putting themselves in the travel manager's shoes when they say that. For a TMC to say, 'Don't worry about our fees, we're only 2 to 5 percent of the overall program,' it's not addressing the overall ROI of the travel program," said Gillespie, noting that the annual sum of TMC transaction fees typically dwarf all other budgetary expenses, including the internal costs of staffing a travel program. Once savings have been optimized, both internally and externally, travel managers must drive out existing costs to prove a program's ROI.
"It's really a perfect storm of a lot of things," said Michael Steiner, executive vice president of Ovation Corporate Travel. "There's certainly been a pick-up in business travel where people are traveling more and spending more and saying 'it's time to take a look at this again.' With all the changes in the industry on the airfare side and hotel rates going up, people are taking another look at their numbers."
Those assessments, whether cyclical or event-driven, combined with the impact of rapidly evolving booking, fulfillment and sourcing technology, have yielded significant downward pressure on TMC pricing. Still, until another sea change, such as distribution reform, shakes industry financials, argued Steiner, travel management companies may not be able to drive much more cost out of a transaction. "Everyone's pretty much sharpened their pencils as much as possible, from what I can tell," said Steiner. "Ultimately, clients have to ask, is there a better approach than using a TMC? At least in the midmarket where we operate, most of our clients have come to the conclusion that they don't want to do this themselves and that this is the best approach right now."
Tom Barrett, global strategic sourcing director for supply chain/material management at New Jersey-based American Standard Cos., agreed that TMC fees consume the lion's share of his travel budget, but said he will focus on his global travel strategy rather than the TMC transaction fee. Without taking a "scorched earth approach" and pushing all his travelers online, he added, that cost must remain fixed in favor of high quality service.
"I have to justify what I'm doing every year. If the service is terrible, it's a lot harder to justify that money, but if everybody's happy, and you leverage up all your resources to manage all the parts of this program to create such a value proposition, it becomes, 'which arm do you want me to cut off?' " he said. "Are you going to get the bang for the buck, or are there unintended consequences? Your employee dissatisfaction goes up, and you have more leakage that goes over the rail.' "
Barrett said he has adopted other strategies to drive out travel management company costs. He recently pulled out $8 per transaction by moving his agency from an offsite rental location to an onsite facility near the company's reservation center and has built language into his TMC agreement to ensure annual agent productivity growth. "Our contracts call for a 6 percent productivity increase annually. How do we get to that 6 percent? We are prepared to look at every option and technology that's available to keep our costs low," he said. "We have, in some contracts, made it as part of a penalty that they'll refund us 6 percent in cash if they don't meet the requirement."
Barrett's approach to maintaining a consolidated, long-term agency relationship has taken hold among large, multinational corporate travel programs, but some travel managers, like Yasuo Sonoda of San Francisco-based tech firm Macromedia, have adopted a wait-and-see approach to contracting TMC services, looking not only to drive out cost, but also to maintain flexibility by signing shorter term agreements.
"I don't negotiate any of these contracts for more than two years. A year or two commitment isn't going to change your pricing that much, but it gives you a way to focus your program and your negotiations," said Sonoda, who this year again will embark on the TMC selection process. By reevaluating his travel management company agreement every couple of years, he said, "I make them jump more, by saying here are some of the areas where I want to see the costs go down. I've never really had a problem. Everything that I ask for is reasonable for my TMC to match, and if they weigh the cost of getting a new client, it's a lot cheaper to meet my demands."
Travel managers who choose to seek greater long-term stability, sometimes risk the leverage that comes with short-term contracts. "I don't always like to be in negotiation mode, I'm definitely not looking for shorter term," said Ellen Hanzl, director of corporate travel for New York-based Computer Associates, acknowledging that industry dynamics have proven more influential in determining the length of a contract than any mutually determined agreement. "What is the term anyway, and does it really mean anything? My airline contracts that weren't even up for renewal have been completely changed," she said, noting that TMC agreements, though less volatile, can be even more fluid. "Travel management is not something you look at once a year on the first of the year. We work with Travelocity every single day. This is a process that you live and breathe 24/7 and you're constantly tweaking it. I would never wait until the end of the year to renegotiate with them."
Hanzl contracts with Travelocity Business for agency services, an online booking tool and a pay-as-you-go e-fulfillment model to drive down transaction fees, and while such a consolidated approach has gained significant traction, industry uncertainty and the drive to lower pricing has reinvigorated the debate between purchasing bundled product suites or going best in breed.
"TMCs have some pretty excellent data management and online booking products to bring to the table. Now they're really viewed as strong competencies rather than add-ons," said Will Tate, vice president of Connecticut-based consultancy Management Alternatives. "On the other hand, what's the additional streamlined value that you get from those advantages over getting a best-in-market approach? We're somewhat split in our client base on that. Some agree with those pros, others agree with the idea that competition spurs better supplier management."
Macromedia's Sonoda said an unbundled approach has helped him maintain significant leverage in TMC negotiations. "I tend to put things together device-independent to make my program less reliant on any one company. I don't consolidate into one company to manage everything," he said. "At the flip of a switch I can switch TMCs. That keeps the TMC in line, because I can just skip out in no time once my contract is up."
In today's unpredictable distribution environment, said Gillespie, adopting an easily integrated, best-in-class approach to peripheral product management, and drafting shorter-term agreements for those services may best serve travel managers. "Most companies would be better off reducing the lengths of their contracts. Those GDS incentive fees could be turned upside down in the next 18 months," he said. "It's the old idea of having one neck to choke or having lots of necks. There's a false sense of confidence in consolidating globally to a single TMC. I can't see inherent advantages to it other than that there's one neck to choke."
Still, said Gillespie, changes to the current distribution model may counteract travel manager's efforts to drive out cost. "It's clear that the TMC fees will end up going up, not down. Right now, the big subsidies that TMCs get are GDS incentives and overrides. If the TMCs have to pass those back, then the fees will most definitely increase."
Barrett said that the American Standard team is preparing for such a change. "In mid-2006 there will be a consequence to doing business under the conventional GDS models," he said. "If, in fact, that comes to pass, the question is at what point are there either negotiations in the contracts that drive market share or different opportunities for us to try to mitigate the impact of those fees as we go forward?"