Travel Managers Need Their Microscopes Too

<B>Travel Managers Need Their Microscopes Too</B>

In reponse to Andy Menkes' article (BTN, Oct. 2), Management Alternatives suggests that "travel Managers keep using your microscopes in order to make the best use of your telescopes." The following are our reasons behind these words of advice:

Today there are many travel agency pricing options from which to choose. And, yes, Andy made a very good point that the corporation should compare bottom line costs of competing agency proposals, and let the agency worry about the details. However, some pricing proposals require--no, demand--that a travel manager manage the service configuration, staffing levels and overall line-by-line cost items to ensure the agency is operating efficiently. Thus, in accepting these types of offers, travel managers must concern themselves with details.

In an effort to justify pricing increases, as well as to transfer all of the operating risk, some travel agencies have introduced various proposals. They include agency profits that are a percentage of direct operating expenses in lieu of the more traditional percentage of airfares--truly no longer a viable measurement--or some other yardstick based on anticipated revenues or number of transactions.

An issue that was put to rest when the agencies returned commission to clients and charged an identifiable fee will again emerge. The former question of the agency securing a higher than necessary fare to inflate commissions will change to "Did the agency need to spend as much as it claimed to provide the required services?"

The newest wrinkle is the agencies charging a percentage of direct operating expenses as an estimate of required profit margins. Since most of the larger agencies are moving clients to a call center environment, the client is totally at the mercy of the agency to achieve operating economies.

This type of pricing provides no incentive for the agency to control operating costs. As profits increase when the costs of providing services go up, any efficiencies or cost-containment an agency might achieve is counter to its own interests. The more effective the agency is in reducing operating costs, the lower its profits.

Cost plus pricing works in many industries, particularly those with clearly identifiable costs that can be reduced as units increase or manufacturing productivity is enhanced. Its application to a service business is questionable. The U.S. Department of Defense fought a decade-long battle with aerospace industry suppliers to move away from cost plus pricing, for exactly this reason&shy;there was every motivation to allow costs to escalate, rather than to contain them.

Pricing pro-forma bids are only estimates of anticipated costs. A corporation faces a double risk if agreeing to any pricing option without doing a thorough, microscopic, comparison. Actual operating costs undoubtedly will increase during the contract period.

If you are looking at the direct operating expenses approach, consider that the agency's profit margins based on direct expenses will rise in lock step with all other costs. Also, keep in mind that the direct operating expenses approach is only one new option. There are many to be looked at, examined, negotiated and explored, hopefully, taking you into a long-term and comfortable relationship with your travel agency.

<I>Carol Ann Salcito is president of Management Alternatives, the travel management consultancy based in Stamford, Conn.