OP ED: Cos. Must Beware Of False Profits

T&E management is about purchasing non-core services cost effectively. Travel, pure and simple, generates costs and not profits. Costs can be controlled, reduced or avoided, but they cannot be transformed into "profits."

This seems basic, but the profit orientation remains one of the most persistent and prevalent illusions in the industry. Rebates, mostly from overrides and back-end air deals, have fathered this fallacy. Although the commission caps reduced the amount, net cash is still coming back after travel agency expenses and fees are paid.

So far, most corporate accounts have reluctantly accepted the hits from caps, but they are still "in the black," and some justify internal travel management expenses by pointing to "profits." Taking less is one problem, but taking nothing is a bigger one. Autonomous divisions of decentralized corporations often agree to consolidation only in return for their "take" from cash paid by the agency and preferred airlines flowing back to headquarters.

It's easy to be comfortable with cash, especially when it comes from suppliers as a tribute for your business. But there is a real price to pay for relying on and expecting cash back: loss of float on the cash due to delays in receiving (often six to nine months after the initial expenditure before a portion comes back in the form of overrides); and cost, time and resources to verify payments owed, received and calculated correctly. Auditors and finance people have better use of their valuable time than chasing travel agency and/or airline "revenues" long after travel occurs.

Selling preferred suppliers is tough enough without inflating front-end prices for cash back months later. Travelers gripe every time they learn the discount comes back to headquarters after the trip.

There is real irony in relying on cash flow to justify a program designed to control expenses. The old conflict persists between saving and spending to save. The T&E program can begin to take on the appearance of a frequent flyer "benefit."

If back-end cash makes little sense, why are net deals slow to take hold? A few answers:

* <B>Fear of the unknown. </B>It is easier to live with what you know than challenge all the bean counters, local office managers or others who like to get cash without understanding its true impact on the bottom line.

* <B>Loss of override points.</B> There is fear that net front-end discounting benefits the airlines more than the corporation-the old "all of mine is mine and half of yours is negotiable" syndrome. But what happens if airlines again look for ways to cut distribution costs and you have less to bring to the table? Partnering should produce mutual gains.

* <B>Internal service costs.</B> How do we charge back for the services that used to be paid or subsidized by cash on the back end? Most purchasing costs are absorbed as necessary support costs, but pro rata pass-throughs can work if this is a big issue.

* <B>Loss of share by the agency.</B> Agencies are concerned they will lose share on their override threshold with the same carrier offering you net pricing. Paying for value doesn't mean a subsidy. If the agency is helping you direct share on a net deal, possibly it should be paid.

* <B>Loss of management fee by the agency. </B>The management fee may be based on percentage of dollar sales. Net deals reduce the base and return just like a fare war beyond the agency control. This impact can be neutralized by formula, and in any case, why pay agencies more or less profit based solely on ticket value? Agencies measuring their margins solely on retail prices of what they sell are heading for extinction. Pay should be based on performance from a minimum base just for showing up.

The time has come to face the reality that cash return to the corporation does not mean "profit" but at best a delayed and costly offset to expenses already incurred on travel. In reality, travel departments are cost centers, not profit centers.

Not long ago, a travel agency argued that its corporate customer should simply balance "profit" on the deal against the agency's "profit." Of course, this approach would see greater "profit" from the highest possible gross dollar sales of travel. The higher the price paid, the higher the return. Anyone home?

<I>John Caldwell is president of Caldwell Associates, a travel management consulting firm based in Washington, D.C.