Op-Ed: TMCs Face Strengthening Buyer's Market

Traditional travel management companies are about to be severely tested by a perfect storm of market conditions. Many travel buyers will do well to reevaluate their TMC contracts in light of this attractive sourcing environment. The key question is, how well will the TMCs respond to the challenge of differentiating their value?

Eight factors are converging to create a strong buyer's market in the travel management company space. Taken together, they will put significant downward pressure on agency fees.

These factors are:



1. Expansion of Low-Cost Carriers. LCCs are getting more adept at getting travelers to book directly via their Web sites. Travel management companies are seeing transaction volumes bleed away, particularly when the traveler is charged a significant fee (some would say tax) for booking via the company's approved agency. TMCs must reduce their fees—or ask buyers to charge travelers less and eat the difference. Buyers generally prefer the first option.



2. Uncertainty of Content and Incentive Payments. The expiring content contracts between airlines and global distribution systems put travel management companies in a difficult position. TMCs need GDS incentive payments to subsidize their corporate transaction fees, yet they also need access to the widest content—content that may not be found in traditional GDS channels. The more corporate accounts that a travel management company has, the more bargaining power it has. Down come the fees to win more corporate business.



3. Devaluation of Managed Programs. A major result of airfare simplification is the reduction in airline discounts—and the size of the negotiated savings in many programs. Holding everything else equal, the value of a managed program has been reduced. Savvy travel managers are looking at their biggest cost, which is the travel management company's invoice. Reducing this big line item will go a long way to improving the return on investment of the manager's program. TMC executives who point to their costs as being only 3 percent to 5 percent of the total program cannot ignore the fact that these same costs are about 85 percent of the travel manager's budget—which is the budget that is used as the denominator in the managed program ROI equation.



4. Agency Sourcing Tools Are Getting Better. Agencies typically have not been easy to source. New tools in the market are making the sourcing job much easier. As buyers get more experience with these tools, agency bids will be easier to manage and more contracts will be put out to bid. If the market as a whole is not growing, the result will be more competition on price.



5. ITMCs Are Slowly Improving Their Program Support. The main bottleneck to Internet-originating travel management companies winning larger corporate accounts is their lack of strong program support, i.e., spend and policy analysis and vendor negotiations. Several of the ITMCs are making progress on this front. As ITMCs close this gap, traditional travel management companies will be forced to compete further on price.



6. TMCs Are Taking Costs Out. Nearly four years after 9/11, travel management companies are still scrambling to reduce their costs. The biggest cost is labor, so offshoring is being tried around the world with mixed results. TMCs are under pressure to forward-price corporate accounts, meaning they price according to their expected costs. Smart travel buyers are using this to their advantage.



7. Card Data Is Getting Better. A major reason for agency consolidation is the benefit of travel data consolidation. If companies could get the same—or better—spend data from their corporate card, agencies would have to compete harder on price. Given the recent developments in card data benchmarking and hotel folio detail, this day is coming sooner than most expect.



8. There Are Four Mega TMCs – For Now. Many industries settle into some form of equilibrium when there are three major players left. The travel management company category has four major players and until one is acquired buyers can expect to benefit from significant price competition. Buyers would do well to lock in favorable rates and make sure these survive any change in control of their supplier.



For any player in an industry facing downward price pressure, the key is to demonstrate a clear and compelling value proposition. Without a distinctive difference, buyers rightly view TMCs as a commodity. Given the complexities of providing travel management services, the market should expect sharp differences between the suppliers.

How much difference really exists between the large travel management companies? There appears to be no easy answer to that question. An equally important question is, how easy is it for buyers to confidently identify these differences—and then quantify the value of those differences? Unless buyers are able to do this, travel management companies will have no choice but to compete on price—something only the low-cost supplier would want to do.

The challenge is clearly up to travel management companies: How will they prove—and improve—the value they bring to the buyers? Corporate buyers ask this question with every request for proposals they issue. It will be fascinating to see how the traditional TMCs respond to the coming storm.

Scott Gillespie is CEO of Cleveland, Ohio-based Travel Analytics.