Profiles In Travel Management: BAE Outsources Travel To Third Party

British defense and aerospace manufacturer BAE Systems is one of a select number of companies worldwide that has handed over to a third party the entire travel management role, including control of the travel agency relationship.

Travel at BAE—which has an annual U.K. travel spend of $72 million—is managed by a London-based outsourced procurement specialist, called Xchanging Procurement Services. XPS handles just over a dozen indirect purchasing categories for BAE, including marketing, stationery, desktop IT and telecom. The relationship is not entirely independent, however. BAE owns a 50 percent stake in XPS, which is a subsidiary of a larger outsourced services company, Xchanging, that also handles human resources and services claims.

XPS, which launched in October 2001, manages travel for BAE plus Xchanging and three other aerospace companies: MBDA, AMS and Novar. BAE is a shareholder in AMS and MBDA. XPS also handles car hire for Airbus. The total travel portfolio is more than $90 million and although it was only introduced in summer 2003, it has become the largest spending category for XPS.

XPS has five-to-10-year contracts with its clients. Apart from Airbus, it has exclusive rights to supply travel services to its other customers. None of its clients have any of their own air or hotel deals, although one of them does not use Carlson Wagonlit Travel, which is XPS' preferred travel management company. "The client chose to remain with its incumbent," said Corin McGrath, who runs the four-strong travel team at XPS. "We have therefore offered the client lower savings targets because it made a conscious decision to reject some of our savings opportunities." Although XPS does some work on a fee basis, most of its remuneration is based on what the outsourcing industry calls "gainshare," a phrase that means taking a share of the savings it produces.

According to Jim Robinson, purchasing director for BAE, XPS has averaged low double-digit savings for his company. Robinson is pleased with what he has seen so far.

"We have seen our air and hotel deals improve," he said. "XPS has also managed the introduction of the KDS booking tool for us. If we had continued to manage travel ourselves, we would have gone down that road anyway, but this has accelerated the process for us."

There are various reasons why companies choose to outsource their procurement, such as addressing a scarcity of resources in-house. However, the main reason, according to McGrath, is to "spin-dry" the spending program to extract even more value out of it.

Although the most obvious benefit of using a third party might be its ability to aggregate the spend of clients, McGrath maintains that bigger savings are achieved through entrusting purchasing to specialists who also can offer economies of scale. "We have specialists for air, hotel, car hire and technology solutions," McGrath said. "Not many companies are big enough to provide that internally."

McGrath places aggregation at the top of a pyramid that starts with travel policy at the bottom, then rises through preferred suppliers, compliance, spot buying and technology. He admitted a mixed reception for aggregation from travel suppliers: Some treat it warily by confusing it with consortium buying. "Aggregated and consortium buying are different animals," McGrath said. "With XPS, suppliers are contracting with the decision maker, and customers cannot have other air or hotel deals."

Meanwhile, suppliers are not dealing directly with the client. "Our relationship with XPS is fine, but it is a very unusual situation we are having to get used to not having any contact with BAE," said Jim Tweedie, northern European vice president for Carlson Wagonlit.

Looked at it from the client view, McGrath said XPS works hard to ensure the supplier program fits the needs of all its internal customers, building in scaleability to cope with expansion in client numbers. XPS consults customers before changing major supplier contracts but, as the owner of the contractual relationship, he said, XPS has the final say.

Another potential objection to the XPS model is whether remunerating it solely on achieved savings could tempt it to stint on service responsibilities to travelers. According to Robinson, this is avoided through a series of checks and balances. An implementation steering group agrees to the structure of the relationship with XPS. A service review board meets monthly to analyze financial and service metrics, including a series of detailed key performance indicators. If standards are not being met, XPS is expected to fix the situation quickly. Otherwise there are what Robinson called, "normal contractual remedies."

McGrath also claimed to achieve balance through a tight definition of what constitutes savings. Downgrading class of travel, for instance, does not represent a savings from which XPS would benefit. There are also definitions for the lowest logical fares that XPS is authorized to find. "Sending a traveler via Timbuktu is not the lowest logical fare," McGrath said. "We jointly agree what is reasonable in the policy."

Yet, the hardest challenge XPS faces is that a third party never can properly tune into the culture of the client. McGrath agreed that "Knowing the ins and outs of an organization is of value. We put significant amounts of effort into delivering that." In most cases, XPS appoints a full-time relationship manager for each customer. "The decision to outsource to XPS is usually taken at board level, so we have very good sponsorship within the organization," he said. "That can give us significantly more access to decision makers than a stand-alone travel manager."

McGrath's background consists of various roles at American Express and then as an independent consultant for five years. He advised XPS on setting up its travel function and, ironically, was insourced by the organization in October 2003. Two of his team members moved across from travel roles at BAE. Although travel is the biggest category at XPS, McGrath said it was tackled later than others because the program at BAE already was mature and because the subject is complex and emotive.

"Our typical target customers would look for us to handle a portfolio of categories, not just travel," McGrath said. "We would never say never to doing only travel, but it is unlikely we would take on a small travel category unless it were part of a large portfolio."