Health Net Wields Hotel Scalpels

Health Net, a national managed care company, has used all of the latest techniques to surgically remove nearly one-fifth of its hotel spending. The midmarket firm took advantage of trading down, rate compression, property consolidation and the controversial practice of reverse online auctions, employing the open bid format for 40 percent of its top destinations.

Health Net's 19 percent savings in negotiated rates from 2002 to 2003 significantly was higher than the average 2.5 percent savings that 123 travel managers reported in a UBS Warburg survey that was released last month.

With travel managers under magnified pressure to show cost savings, trading down can be a particularly risky proposition, if travelers, accustomed to full-service amenities, resist the more limited services available at midprice hotels. Yet, as in Health Net's case, mandates built into the corporate travel policy and senior management's vocal support help buyers by ensuring high compliance.

Health Net corporate travel manager Jill Stinson expects to book 20,000 room nights this year with a total hotel spend of about $2 million. Health Net uses hotels in suburban locations outside mostly second-tier cities—destinations where the company maintains offices. This made the transition to midprice properties easier because there's been a surplus of new hotel development at this price point in many of these markets, including Sacramento, Calif., Tacoma, Wash., and Trumbull, Conn., as well as its headquarters city of Woodland Hills, Calif.

Stinson this year also chose to concentrate only on the company's top 20 destinations and to negotiate a rate at only one hotel in each market. "If the preferred hotel is sold out on a given night, there'll be a back-up hotel travelers can book," she said, "but there won't be a negotiated rate at the back-up because we don't have sufficient volume to warrant it."

In opting not to invest valuable time in negotiating rates at the back-up hotels, Stinson said she was cognizant of the current buyer's market. "Hotels in these locations generally are not sold out these days, so there is less need for a negotiated rate." Typically, Health Net travelers—of which there are approximately 3,000—get the corporate rate in these situations. Travelers also visit such first-tier destinations as Chicago and New York, though on a much more limited basis. "Much of this travel is to attend industry conferences, where travelers usually can do better with the negotiated meeting rate," she said.

For Stinson, focusing on 20 hotels in 20 cities made for a more easily managed program, leaving her time to build relationships with the preferred hotels and making sure the quality standards travelers expected were in place.

As a result of trading down, one-third of the hotels changed from 2002 to 2003. "This was more than double the turnover in a typical year and a lot of change for people to deal with, but overall it's gone very well," she said. "If a hotel can meet our travelers' needs for a great price, that works. Often, the hotel exceeds our people's needs, and that works too."

In one city where a lot of new supply had come into the market, switching from full-service to midprice saved the company 70 percent. In another instance, a full-service hotel came down in price to match a midprice competitor's rate, an example of rate compression other buyers have seen in this economy as well. "They wanted our business so badly, they were willing to do what it took," she said.

Through 2002 and into 2003, midprice hotels without food and beverage service have benefited across the board from such trading down. Bjorn Hanson, head of the hospitality and leisure practice at PricewaterhouseCoopers, credited the segment's "relatively new room stock and new business-oriented hotel brands for positioning these properties favorably during a period of restrictive corporate travel budgets."

For Stinson, using reverse auctions helped "open our minds to different level hotels. Properties we never would have considered in the past have become preferred hotels, not just on the basis of rate, but in terms of overall value, including the services and amenities they were prepared to provide." In the open bid auction format, hotels can see which other hotels have been invited to bid. "At the end of the day, auctions keep hotels on their toes in terms of knowing there's competition for our business," she said.

An incentive for hotels to pursue the firm's business was the fact that mandates are built into its travel policy. "They knew they'd see the room nights that were promised," Stinson said. "Now they're seeing sold out nights."

For many travel managers whose companies' policies don't include mandates, compliance remains a serious concern. "Buyers have had to manage compliance either monthly or quarterly," said Karen Richard, managing partner at Eclipse Advisors, in a hotel Web-cast in April. "Focus on the top markets where you've got 80 percent of your spend."

A second incentive for hotels to go after Health Net's business, though one they wouldn't necessarily be aware of, was how vocal the company's senior executives were in supporting the new choices. "The CFO and the controller, for example, stayed in these properties and gave us their buy-in. If an individual traveler then had a problem with a hotel, we could mention that the CFO thought it was quite acceptable and ask that they give it another try."

Cost savings aside, Stinson said the reverse auctions also provided significant time savings. "Whatever the dollar savings in the auction, you save tenfold in terms of time, which allowed us to concentrate on the relationship aspects of running the program."