Outsourcing Promise Unrealized

Procter & Gamble last month consolidated to a single global travel management company, Business Travel International, with the help of IBM, its business process outsourcing company. Even so, the industry jury remains undecided as to the value of outsourcing to such third-party travel procurement specialists. Though some of those firms can point to some big names among their clients, the trend that promised spectacular growth a few years ago has not materialized.

IBM handles travel for eight external clients with another two in due diligence, according to transformation outsourcing global travel services manager Mike Polosky. Although the list of clients, which includes Yale University, is small, the spending is large, with the smallest customer's travel volume weighing in at $10 million and the largest, P&G, rising to hundreds of millions of dollars. Polosky said IBM has 30 employees dedicated to handling travel for external clients.

Another outsourcing specialist is Ariba. "Last year, only two major companies outsourced their travel and we got one of them," said Barbara Rose, the company's senior manager for global travel management. "There are not a lot of Procter & Gambles out there."

More positively, Rose reports that the midmarket is warming rapidly to the idea of outsourcing, helping Ariba's managed travel volume to triple during the past two years. It now has 34 travel clients, although all of them outsource a varying number of non-travel service categories to Ariba as well.

Rose said interest in outsourcing in Europe is outstripping U.S. interest. U.K.-based Xchanging Procurement Services has doubled its travel volume during the past three years to $155 million and is set to double again next year, according to Corin McGrath, head of its travel team. That figure may be small by U.S. standards but, said McGrath, "it puts us in the top five buyers of corporate travel in the United Kingdom." New accounts this year include United Biscuits and the retail chain Boots. "We are growing exponentially, but from a very small beginning," McGrath said.

Tom Wilkinson, senior vice president with Partnership Travel Consulting, does not foresee outsourcing becoming the dominant strategy for corporate travel programs. "Eight clients for a company the size of IBM is not earthshaking; it's not a sea change," he said. "I am not surprised outsourcing has not dominated in the way some thought it would. Travel is a social, cultural and political issue within companies. It is not a truly rational purchasing activity."

"I have served as outsourced travel manager for companies with spends as high as $25 million and a lot of effort has to go into integrating yourself culturally. You have to become part of the client company and at some point you always hit a wall," Wilkinson said.

IBM's Polosky said that an outsourced company can attune itself to a client's culture, mainly by putting in the man-hours. "It's a question of being on the ground," he said. "One of our people is at Yale University every day, while I've done three or four trips around the world meeting P&G personnel."

Polosky stressed that it is essential for the client to continue to manage the relationship and ensure the outsourced company is meeting the expectations of the business and its employees. P&G has two employees working on travel: Debbie Gittinger, in charge of travel operations and the expense management tool, and Tom Schlau, responsible for procurement and governance. Polosky said the roles of the two people at P&G are to make decisions and communicate internally. "I do the sourcing work and make the recommendations," said Polosky. "At IBM, we are responsible for all the heavy lifting day to day. Debbie and Tom manage into P&G, I manage out."

IBM started work on P&G's travel program in January 2004. The latest fruition of the collaboration came last month with the consolidation to BTI in 35 countries. P&G previously used 19 different travel management companies. Until now, P&G's program was operated regionally. BTI will handle the account in North America, Western Europe and Asia/Pacific, covering more than 95 percent of the company's travel spending.

Polosky conducted the tendering process by drawing up a short list of three finalists for P&G. "We told P&G any one of the three finalists could service its business globally, then explained the pros and cons of each of them," he said. "We consider ourselves to be like a lawyer or accountant. We give the advice, but ultimately they make the decision." Once the decision was made to go with BTI, it was IBM's responsibility to oversee the implementation.

Unlike IBM's own travel program, which is rigidly mandated, P&G operates a policy of encouragement rather than compulsion. P&G retains control of the policy, leaving IBM to work within its constraints. IBM will, however, help to make the business case and provide the management information that will drive compliance, as well as advise on how changes in policy would impact savings. "We are identifying lost savings and getting better compliance through better information," said Polosky. "In many geographies, they didn't have the information."

IBM also is conducting on P&G's behalf a tender to choose a self-booking tool in six countries, including the United States, where it currently uses GetThere. Once the tool is chosen, IBM will take charge of introducing it. Other technological work IBM carries out for P&G includes operating a global profile tool, tracking e-tickets and providing online itineraries.

According to Polosky, the primary benefit of outsourcing travel procurement is not to leverage deeper discounts through aggregation of spend. Instead, it is the opportunity to tap into a wider resource of expertise and analytical tools. "Our value is saying: 'We have done this for other people,' " he said. "We have staff in many countries, so if a client wants us to work on ground transportation in New Zealand, we can put someone in there for them."

IBM does not usually aggregate its own spend with that of its clients, but Polosky said it happens on occasion. More pertinently, Polosky added, IBM can bring credibility to its supplier dealings on behalf of clients because of the track record of its own travel program.

Another area in which he reported the continued development of synergies between IBM and its clients is in coordinating processes, such as standardizing request-for-proposal formats.

Polosky argued that outsourcing to a procurement specialist is preferable to outsourcing to a travel management company or engaging the services of a travel consultant. The former raises questions about conflict of interest if the travel management company receives compensation from suppliers. The latter have less accountability because the relationships are more short-term—some of IBM's contracts are for as long as 10 years—and are less governed by service-level agreements. "We have skin in the game," he said.

IBM normally finds itself competing against other outsourcing specialists, such as Ariba. The main trend observed by Ariba's Rose over the past 18 months has been greater enthusiasm by clients for outsourcing their entire travel program instead of such parts as accommodations. Ariba also picked up the travel category from clients that already outsourced other spending categories to it.

"Procurement departments are seeing success with other commodities and now they are asking, 'What else?' " Rose said. "They have seen that the dynamics around commodities are not so different." Part of the reason for the increasing comfort levels, according to Rose, is that procurement tools are improving and suppliers are becoming less defensive about working with outsourcing specialists.

Xchanging Procurement Services' McGrath endorsed that last point. "More suppliers are willing to aggregate with us. We have deals with some big names," he said. Another recent trend observed by McGrath is for clients to outsource not only their sourcing, but also their processing. In the case of travel, this largely means sending payment of invoices out of house.