Under pressure to negotiate hotel rates more aggressively to further reduce costs, travel buyers have begun experimenting with reverse online auctions, in which select hotels in a market are invited to bid prices down for a corporate account, unlike traditional auctions where prices are bid up. The technique is encountering stiff resistance from hoteliers who are concerned about reducing their product to a commodity. However, if the experiments prove successful for buyers, auctions likely will grow in number as the negotiating season for 2003 rates gets underway in the coming months.
Charles Schwab Inc. recently conducted a pilot reverse auction for hotel rooms in two of its most frequently used cities and expects to expand the approach for 2003. General Electric and Bayer Corp. also have used reverse auctions, while Pharmacia Corp., expects to conduct its first auction in the third quarter, following an extensive review of the process.
"As a result of the pilot auction, we increased the value we were getting. The rates we negotiated were very competitive and the quality of the properties was equally high," said Curt Mattos, Schwab director of travel services, based in San Francisco. Mattos estimated that Schwab saved an additional 10 percent by using the auction channel, compared with relative rates it would have gotten through a normal RFP negotiation. "The time savings as well as the savings in effort were dramatic," he said. "What had been a process that took weeks was compressed into a matter of days."
In the evolution of negotiating rates from paper requests for proposals to electronic RFPs, reverse auctions, seem to many, the inevitable next step. "Buyers will always be looking for different avenues to achieve cost reductions," said Jack Lever, Bayer travel services senior representative, based in Pittsburgh. According to Lever, Bayer's experience with auctions overall has been successful. Similarly, it was the time savings—coupled with potentially lower rates—that appealed to Pharmacia manager of global travel sourcing Stephen Mitleider. "We believe the auction channel can reduce bid cycle time by 50 percent from an onerous four to five months, down to a more manageable timeframe," he said. Like Mattos, Mitleider is seeking to gain an additional 10 percent in incremental savings. Pharmacia booked more than 76,000 room nights in its 10 top U.S. cities in 2001.
For 2002, Schwab negotiated for hotel rooms in 21 cities in four countries. But for the purposes of the pilot auction, Mattos identified Indianapolis and Los Angeles as the two most appropriate for the trial. Schwab has a call center in Indianapolis and expects to use 350 room nights there in 2002. Los Angeles is in Schwab's hotel program for the first time this year as the result of an acquisition. The firm expects to use 900 room nights there this year. In the actual auction, participating hotels had the opportunity to negotiate value-added amenities as well as rate. "Winners were defined by the best overall value they presented, not just the lowest bid," Mattos said.
While formats differ, the approach employed by Schwab informs participants upfront of other hotels in the auction. "But during the actual online session, hotels are only identified as paddle number one, paddle number two and so on as they adjust their bids," said Chris Kane, vice president of marketing for Procurepoint Travel Solutions in Sausalito, Calif., which provided the technology for the Schwab pilot.
For many suppliers, this lack of transparency at the final stage is at the heart of their objections to the process. "Hotels don't have a problem with a bidding auction per se. They just feel they're being kept in the dark about exactly who they're bidding against in the crucial time the actual auction is underway," said Joe Carino, president of the Carino Collection, a hotel representation firm based in New York.
It is the last minutes that can be most critical. "All the significant activity is compressed into the last 15 minutes of the transaction. There's no time for any real back and forth at this point," said Tom Chevins, senior vice president of sales and marketing for Omni Hotels, who said Omni already has participated in a number of auctions.
For the auction to be successful, buyers need to be sure that the hotels participating are at roughly the same price point and service levels. "This is where it takes legwork on the part of the buyer," said consultant Scott Gillespie, CEO of Travel Analytics in Solon, Ohio. "In a city like Chicago, a buyer may use 10,000 room nights a year, but they won't all be at the same location or price point. So that means breaking the block into lots—with each lot being a different auction. For buyers and suppliers both, you only want to have smart lots."
With the actual auctions lasting anywhere from 30 minutes to three hours, maneuvering room is limited. "When the stakes get raised during the auction, often there just isn't time to get a decision on, say, offering a value-added extra when there's no more room to negotiate on rate," Carino said.
Accordingly, the process for buyers can be unexpectedly time intensive. "The pricing part of the process will be fast, but you can spend more time upfront, developing the request for quotes," said Bayer's Lever. "These RFQs are intended to make sure the lot is apples to apples, that is, that only comparable hotels are included in the auction. To do otherwise is unethical."
Ironically for hotels, the process can end up validating a property's pricing strategy. "Even if you don't end up getting the business, you can come away validated because you'll have seen the other bids and know your prices were appropriate," Chevins said.