Refigure The Agency Equation

<B> Refigure The Agency Equation</B>

By Sarah Welt

Many companies this year are finding themselves paying out-of-pocket for the first time to cover the expense of their travel agency--and having to figure out where to find the money. It's all thanks to the continuous decline in commission and override payments back to corporations as a result of the series of cuts to the revenue stream during the past several years.

That has led many travel managers to more carefully scrutinize the way they operate their travel departments and the services offered by their agencies in order to streamline operations and get the best bang for the buck--including revisiting their agency contracts and changing fee-based relationships, negotiating more net fares with preferred suppliers and leveraging technology.

"A number of clients are looking at very discouraging numbers. Everyone thought standard commissions would come in at 6-7 percent and in fact the numbers are in the very low 6s or the high 5 percent range," said Travel Management Group president Tom Wilkinson. He noted that over the past year, despite good management and negotiation practices, clients are being forced to "make actual net hard dollar payments to travel agencies. The fact that a statistically weighted average of my client base is now paying net fees is a significant change. But the amount of net payment to the travel agency I would characterize as generally less than 1 percent."

According to Management Alternatives president Carol Ann Salcito, "Some organizations still receiving commissions and overrides have cut their operating costs so low that they are still receiving moneys to pay for agency services. But we are really seeing a trend not so much that companies can't pay but that they are looking more wisely at what they are paying for. They are having a lot of difficulty projecting their budgets, but there are many seasoned travel managers that are doing a fine job."

At Phoenix-based The Finova Group Inc., travel manager Beverly DuPont is in the midst of switching from a management fee to a transaction fee after reviewing the numbers last quarter and seeing, she said, that the agency "was going to start costing us money unless we changed contracts. We want to be able to position ourselves so that it is not going to cost us any money or if there is a cost involved, it is going to be minimal. This is the first year commissions are not offsetting the price of the operation.

"From day one we never had to 'budget' for the travel agency. We had a revenue agreement and received a certain percentage, and once commissions started going down we switched to a management fee and received what was left over." Luckily, the company has been socking away its revenues for years in a travel accrual account, which will get Finova through year 2000 if any costs are incurred that are not covered by revenue.

DuPont noted that while switching to a transaction fee will save money, one nice thing about having a management fee was the ability to control the caliber of agents on staff by being responsible for their salaries and benefits. A transaction fee is going to be a better scenario for Finova financially, but "our agency is going to have to be able to document and continually prove to Finova that the services we are paying for under a transaction fee are worth it," she said.

Meanwhile, the Bridgewater, N.J.-based Hoechst Marion Roussel is in the midst of a merger with pharmaceutical company Rhonepoulenc of Collegeville, Pa., so budgeting for 2000 is a difficult process, noted director of travel procurement Armande LeCompte. However, Hoechst has been operating under a management fee and pays for the agency by accruing it as part of its facility costs.

The company switched to a fee environment for the first time Jan. 1, LeCompte said, but up to then had still had a revenue share. "Before the airlines cut commissions there was enough money that we met our costs and had money left over," he said. "We split up (commissions) between WTP and us. Now we are getting a fee coming back here and are really lumping it in with site facility charges and overhead expenses. Before, it wasn't there. We were a profit center and it was all paid for by the airlines, in effect, so it's a new environment."

Those changes have no doubt prompted the company to look at ways to reduce operating expenses. For example, Hoechst is beta testing ResAssist, which LeCompte believes has the potential to reduce overhead costs and agent headcount. However, he said "while it may be shown as saving in the travel department, someone's time is being spent making reservations elsewhere."

Hoechst also began implementing net fares in February. Currently, 35 percent of its air contracts are net, compared with zero a year ago. "Next year we are going to be at 75 percent," LeCompte said.

Ball Corp., a manufacturing and aerospace company based in Broomfield, Colo., has chosen to go to net-net fares in an effort to get commissions and overrides out of the picture altogether. Currently, 85 percent of its airline deals are net. "Before, we paid our travel agency expenses from the commissions we received," said travel services analyst Janet Lykins. "It just doesn't work that way anymore. It's always an expense now.

"I pay for our travel agency out of my budget," she added. "So I budget for the amount I think it is going to cost me for them to do our business. With fewer commissions, we don't have that much to offset our expenses. However, we are saving more up front on our airline tickets." Because of the airlines' commission cuts, Lykins sees a net deal as the best option. The company budgets for the cost of its agency by allocating expenses back to its divisions depending on the amount of transactions each one completed.

Teachers Insurance and Annuity Association College Retirement Equities Fund of New York expects costs to go up about 10 percent next year, but that's because of projected growth of 20 percent. Costs only are expected to rise to 10 percent because they are being offset by savings measures implemented during the past year--improved air and hotel programs and maximized use of non-refundables. This year will mark the first time TIAA-CREF has had to pay back to the travel agency net out-of-pocket expenses, according to corporate travel manager John Hintz. Reducing costs is important, but not at the expense of diminished service levels with Maritz Travel. "We elected to maintain the service level, we just budget more money to cover it," Hintz said. TIAA-CREF has not opted for net fares at this time. For now it is getting money to pay the agency by absorbing it centrally. "If costs continue to deteriorate, then we may wind up charging back to the users," he added.

Meanwhile, companies still managing to stretch their commission revenue know their days are numbered. "We are still covering with commissions and overrides," said Ralph Davis, manager of travel services at Pittsburgh-based H.J. Heinz Co. "The next fiscal year will be a situation where we will not be able to do that. We will reevaluate for 2001." The company has gone 40 percent net with one carrier and plans to try to make all deals net-net.

American Express Consulting Services has created a Performance Assessment Model in February to help travel managers report how expenses are trending to senior management. That approach involves a more quantitative assessment and the use of risk scenarios, said vice president and general manager Rusty Carpenter. Because it's difficult to anticipate variables such as commission cuts, mergers and acquistions, or changes in the economy, his group works to develop different plans with each individual organization and assesses the biggest risk factors associated with T&E budgets. "We are also encouraging them to find the biggest opportunities in non-traditional areas of savings--technology integration, process reengineering, change management and utilizing e-commerce more intelligently."

Understanding how to budget more effectively is important, but it won't cover the bills when it is time to pay up.

Salcito said that in addition to getting money to pay the agency through company funds, some corporations are getting it "from other supplier deals they have. They may have rebate agreements with their CRS and probably have them with corporate cards. They may be taking those rebates and applying it against whatever they have to pay the agency."

Wilkinson said that corporations are getting the money to pay for the agency by going to the treasurer's office and telling them to issue checks. "The minority," he noted, are "rebilling the cost of travel services, usually to cost centers, travel departments. It is a tricky accounting issue. I regard it as a best practice, however, because it gives special visibility to travel costs and frankly adds visibility to the fact that online bookings are significantly cheaper than the traditional."

He added that reduced commissions not offsetting costs has led to an interest in self-managed options, such as "finding ways that corporations can take over all or part of services agencies provide or unbundle the costs of service: look for lower cost automation and look at CTDs. The total cost of the agency process is much more visible. For all these reasons, we are going to see rapid migration to online booking and more corporate self-management of the travel process.