Transaction Fee Contract The Way To Go For Level One

<B> Transaction Fee Contract The Way To Go For Level One</B>

By Sarah Welt

<I>Sacramento, Calif.</I> - As a way to solidify the agency relationship, Level One Communications Inc. switched from a management fee to a transaction fee contract that allows it to share in its agency's back-end discounts. If it moves at least 30 percent of its market share to the agency's preferred carrier, Level One could yield up to a 3 percent return on its total revenue.

Level One, which Intel Corp. acquired in August, soon plans to allocate travel costs back to individual departments and charge a substantially higher fee for travelers who go out of policy. Additionally, it selected IBM's automated expense reporting software, which it anticipates will save an added $48,000 to $55,000 a year.

Booking the agency's preferred carrier was the brainchild of travel manager Bill Amaral, who heads the $2.9 million rent-a-plate operation. He said it conveniently worked out that Level One already had a preferred relationship with that airline, so booking on it to please the agency was hardly a stretch.

"The only way we could be in a partnership was if we could reap the benefits on the back-end. The biggest problem I had is we don't trust our suppliers, and I don't want to work that way. I want to be able to share a common goal, and pushing market share to their preferred was a common goal." Amaral noted that the agency, Travel Store of Brentwood, Calif., never had done anything like this before with its other corporate clients, but now, "they are using this as a template for their other corporate agreements."

While Travel Management Group president Tom Wilkinson said that the deal sounds like a slight modification on what most companies are doing, it's "a good intermediate step toward aligning" both the agency and the corporation's goals. However, "it might be ultimately better to negotiate an open-book arrangement and create dialogue without a formal disclosure that would violate override agreements. Corporations would be more aware of where their financial benefits would lie."

Because all commissions and overrides cease to go back to the agency, it seems odd that this type of arrangement could continue since Level One switched close to 80 percent of its business to net fares in August.

However, Amaral said that by going net, "the airlines will subtract that net amount out, but it could possibly push our agency up into a higher threshold where they could see a higher override agreement." For example, he said that if the agency gave an airline $2 million in business and got a 3 percent override, and if "my revenue is going to push them over $2 million to get 4 percent, then they are going to share that with me."

Meanwhile, the company decided to bill individual departments for travel because "we were never set up to be a profit center and we don't want to keep pumping money into the travel department. Most other departments do this and we shouldn't be any different," he said.

While the revised policy, is fairly traveler-friendly--offering checks in the amount of $750 net for voluntary downgrades and allowing business class travel for trips over eight hours (<I>BTN</I>, Jan. 25), employees must make travel requests via e-mail, use their American Express corporate cards for business expenses and use electronic tickets when available. The result could be paying as little as $8 for staying in policy or up to $22 for not following the rules. "We are going to make out-of-policy hurt," Amaral said.

Both of these initiatives are part of a larger consolidation and improvement program that has been in place at Level One since Amaral came on board a year-and-a-half ago. Prior to his arrival, the company didn't require a travel manager, but rapid growth created the need for someone to take charge.

Amaral wanted to get his arms around data to begin vendor negotiations, so he simultaneously went after agency and corporate card relationships first. When he came on board, about 39 American Express cards had been issued, but "we are probably over 500 now."

The company had been using a dozen different agencies but signed with Travel Store in August '98 to get consistent service levels. "That was the number-one most important thing about doing the configuration--our ability to go in and move market share within 24 hours," Amaral said. "If I had been unable to do that, the suppliers wouldn't have taken us seriously and not come back and renegotiated." He noted that on the car rental side, daily rates have been reduced from the mid-$40s to the mid-$30s "by being able to move market share and letting vendors know we are serious."

The same holds true on the airline side. The company was finishing air negotiations when the international cap hit. After he got word, Amaral wrote to the airlines "to make me whole on the back-end. A couple of the airlines we had agreements with didn't respond, so we moved market share to alternate airlines and were still receiving international commissions through our host agency. They saw their revenue drop considerably and they came back in and asked us what they could do to get the business back." Amaral estimated that since Level One began tracking data in January and with the newly negotiated nets, the company is saving 25 percent off its air volume.

While consolidating with one agency was a positive step, Level One wanted more control. A month after the agency selection was complete, Amaral began switching the outsourced program to a rent-a-plate. To sell the program to senior management, he staggered hiring, bringing on a V.I.P. agent first to handle executive travel and taking it one department at a time. "We took on the executive office first and wouldn't bring on any other departments for three months," he noted.

The company in July negotiated with hotel commission clearing houses to have its ARC number "separated" so that "all checks would come directly to us," Amaral said. "I decided I didn't want to have to worry about the travel agency intercepting checks and doing accounting stuff. It would be easier if that went directly to me."

On the technology front, Level One recently selected IBM for automated expense reporting, after evaluating nine other vendors and finally narrowing the list to InterPro, IBM and Extensity. Not only will automating the process save money, but it will save time as well. Previously, "60 percent of expense forms were returned for corrections" and "there was a lot of room for keying errors," Amaral said.

Next on the horizon, the company is looking at automated booking tools, including Sabre BTS, Xtra On-line and GetThere.com, and hopes to have a decision by 1Q00. As for the impact of the acquisition by Intel, Amaral noted, "We currently operate as a wholly owned subsidiary. As far as we are aware, it will remain that way.