How do you "keep what you source" or ensure that the hotel savings you so diligently negotiate actually fall to the bottom line? For a growing number of companies, the answer lies with audits that close the loop in the procurement process.
"You've gone out and negotiated a great rate. The question is, are you actually paying that great rate?" asked American Express vice president and chief procurement officer David Peraino during a February Institute of Supply Management webinar, as he shared his six best ways for companies to save money. "Everybody believes they are. They think they are, but nobody really knows. From my experience, and now from what facts have told me, anywhere you have multiple price points in a contract and significant transaction volume, you will see non-compliance."
[PULL_1]To minimize such non-compliance, American Express has automated and controlled about $8 billion in global purchasing of indirect goods and services, but also created a process with a team in India to evaluate four types of non-compliance: billing errors and use of the wrong vendor, specification or price. "Our team in India, through a systematic review of all our spend, has reclaimed over $40 million in anomalies, but more importantly, taken all of these anomalies to improve our spending going forward. The closed loop process has also worked to improve our spend optimization [and ensure that] the spend has been purchased through the right channel with the right vendors at the right price," Peraino said.
Over the past couple years, hundreds of other corporations have been closing the loop by auditing hotel bookings and billings. They have embraced this leading practice as a means to curtail sharply rising hotel costs, which can now represent as much as half of total travel spending. Initially, the focus was ensuring that negotiated rates were properly loaded into global distribution systems. Half the time, negotiated rates were not loaded, various studies reported. Today, audits extend to check that the rate is "available at the point of sale and is available at consumption," said Maria Chevalier, vice president of business intelligence for Advito, the consulting unit of BCD Travel. At consumption, Chevalier sees errors that cost $7 to $15 per night, sometimes due to traveler decisions to upgrade.
The ultimate check is at "consumption, where hotel folio will be the silver bullet" for validation, Chevalier said.
Travel management, technology, consulting and other companies have introduced services to help companies ensure that negotiated rates are loaded and booked. Travelocity Business even added a tool to help clients, particularly its largest, Lockheed Martin, avoid use of unapproved or "squatter" hotel rates that may appear as company discounts in the GDS. Most services focus on auditing rates.
More than a dozen large corporations have outsourced the auditing of their hotel use to Fare Audit Inc. "We're finding that 15 to 20 percent of the time, they're charged a higher rate than the negotiated rate," said president Marty Morrison. Many companies and agencies verify that negotiated rates are loaded in their GDSs at the start of each contract, but that's not enough. "Is it being applied? That's the key," Morrison said.
Fare Audit verifies that the rate is in fact loaded into the database at the point of sale, and verifies that the negotiated rate is booked at preferred properties. When clients don't get the preferred rate, Morrison said it's usually due to one of three reasons: the rate wasn't loaded; the rate was loaded, but the hotel didn't make it available for booking; or the agent applied the wrong rate-such as the agency's negotiated rate, rather than the corporation's. Traveler behavior is also a factor. Travelers may book at non-preferred properties when preferreds are available, he added.
How much is at stake? Perhaps $500 million a year, Corporate Lodging Consultants said in 2005. The firm estimated the extent of this issue for all corporate hotel bookings, based on $820,000 in overcharges it found on receipts for 624,606 room nights booked by its corporate customers. The company negotiates hotel rates and audits receipts for 13 million room nights a year for over 300 corporations. "The base rate may be different, tax is charged when it shouldn't or room nights billed when they shouldn't be," said Kyle Rogg, Corporate Lodging Consultant senior vice president of business development. "I don't think it's anything devious on the part of hotels. When you look at the pipe from contracting to billing, there are just a lot of links in the chain that can be broken."