More travel buyers this year for the first time are initiating reverse online auctions for car services, inviting suppliers to bid the lowest price on a market-by-market basis. The emerging trend mirrors the rise in hotel service procurement through reverse auctions
(BTN, June 3).
While suppliers might be expected to balk at a process they see commoditizing their services, none of the major car services companies has shunned the opportunity to participate in at least one auction, with one supplier having participated in at least a dozen already this year.
"We've seen more of these auctions this year than we've ever seen before," said Dav El president and CEO Scott Solombrino. "Now we're picking and choosing who we're bidding for."
"It is something companies seeking black car service might do, but since we're a premier service company, we've only done it once," said Cheryl Berkman, president of Los Angeles-based Music Express.
In a year when negotiating power continues to strongly favor the buyer, part of the problem is that buyers have too many suitors, said Chris Kane, vice president of marketing for Sausalito, Calif.-based hotel procurement specialist ProcurePoint Travel Solutions. ProcurePoint hasn't moved into car services, but Kane recognizes that buyer interest in auctioning car business is strong. "The two areas of travel spend that seem to be garnering the most interest is hotel, by a long shot, followed by car services," he said. "People are looking at our service and thinking, 'How else can we use this?' And car services comes up, because, like hotel, there exists a high volume of suppliers of equal quality."
In the case of car services, buyers must present complex data that can include a dozen or more frequently traveled routes within a single city, whether to the airport or point to point. In a tough market, suppliers have armed themselves with thorough rate sheets, so a bid can be created from a careful calculation of rates and percentage discounts, instead of slicing the total price in the hopes of a win.
Corporate buyers auctioning off business are pre-selecting which suppliers can bid in each market. Though some major suppliers argued that they have the reach to serve more markets, buyers eyeing the still-fragmented industry said an auction often can inspire significant consolidation on the local level.
Mary Bastrentaz, Accenture director of U.S. business travel, recently oversaw her first reverse online auction that bid out business for the firm's top 10 U.S. cities as a way to "test the waters" of the bidding process. By the time of contract signing, Accenture will have gone from 25 suppliers in Atlanta to one.
Dav El's Solombrino called market division "ridiculous. Just awarding me one in 20 cities doesn't give you the advantage of continuity of insurance or reservation systems. They call it cost savings, but wait until they realize how inefficient it is to work with 20 different companies. But you can't convince them. They only care about the bottom line and they'll all live to regret it when someone's president is left on the curb somewhere."
"Corporations are looking for ways to get consolidated reporting, and national networks can provide that service," added Mike Fogarty, senior vice president of BostonCoach.
Bastrentaz said the company's procurement process, which included an RFI, RFP and subsequent auction, simply served as another negotiation tool. "What made the whole process critical was all the prep work done upfront," she said
"The industry is well suited for an auction," Bastrentaz added. "Limo is very high touch, low-tech and has very few large national providers. Our strategy has been to use the local providers and backfill with a national program."
Though it is clear suppliers find the process distasteful at best and demoralizing at worst, they know it is a chance to develop a relationship with a corporate client, and that a single market can deliver substantial business over the course of a two-year contract. However, the blessing is a mixed one. For example, in New York the car service may need to absorb tolls and traffic time to win a single bid. Additionally, during a reverse auction observed earlier this month by BTN, one major supplier watched as anonymous bids in two valuable Northeast markets dropped the price to levels with which it could not compete.
Suppliers argue that third-party procurement companies don't understand their business and allow smaller black car services into the auction without discerning between the levels of service. Distrust of bidding process anonymity and low bids shot from cyberspace also were cited. "When a decision is made on price, another supplier can always do it for a dollar less, but that doesn't make for a long-term partnership," Fogarty said. "Rather, a partnership based on an understanding between the supplier and the purchaser is lasting, and I'd advocate that."
Buyers said unqualified companies are screened in the RFP process, through which a company earns a place in the auction. "There was a tremendous amount of work to be able to get to the auction," Bastrentaz said. "The auction itself was just the pricing, which they had already submitted, but we qualified it very much upfront and were comparing like with like. In this economy, we are trying to reduce costs as much as possible, but we are taking into consideration other areas of scoring, such as their capacity and our current relationship with them. And we were certainly discerning between black car services and limos."
Dav El's Solombrino said low bids from desperate suppliers still can tempt buyers away from service. "The chauffeured transportation industry has been so dramatically affected post-Sept. 11 that there are companies desperate to keep cash flow, even though they're losing money on each transaction," he said. "It's frightening to think that Fortune 500 companies are being caught in contracts with these people. The low bidders that are asked to participate have exaggerated their ability, will farm out the jobs and lose control over the training programs and insurance levels."
Yet, the process retains some subjectivity even after an auction closes: The company still hand-selects the preferred supplier after reevaluating their qualifications and fleet levels.
As emphatic as Solombrino is in confirming the trend, he is equally emphatic about predicting its decline. "We're already seeing reversals from selected vendors that might not have been at the right service level. Clients are coming back to us and asking for a contract after admitting they chose the wrong company. This is a trend we're starting to anticipate."