Conflicts of Interest in Your Contracts with TMCs & Suppliers

Every industry has buyers and sellers, and most have an additional network of partners that ease the pain points between the two. The business travel industry works similarly, but with airlines, hotels, transportation providers, technology companies, payment providers, global distribution systems, travel management companies and others, a travel buyer's supply chain is more complex than most. Though challenging for travel buyers to control, these interconnected relationships help them manage their category effectively.

Adding to the complexity is that these suppliers and partners don't have commercial contracts just with buyers but also with each other. Airlines and hotels have agreements with GDSs, GDSs have agreements with TMCs and TMCs have agreements with airlines and hotels—independent from each party's agreement with the buyer. It's an invisible stream of payments, incentives, commissions, bonuses, overrides, discounts, waivers and favors. And it poses a challenge to travel managers.

What if these agreements create dynamics that are harmful to travel buyers or create potential conflicts of interest for their suppliers and partners? Moreover, what if the buyer doesn't even know they're there? This is the hidden economy behind business travel. And the list of unresolved issues in this hidden economy continues to grow. Consider how the following conflict-of-interest scenarios affect travel buyers and their programs.

The At-Odds Pricing Structure

You've decided to manage your company's travel. In that single decision, you've already hit perhaps the most fundamental of conflicts in the managed travel industry: the transaction pricing model. Because a primary goal for most buyers is cost containment or cost reduction, transaction pricing puts the travel program's goals at odds with suppliers' revenue objectives. Simply stated, in a transaction pricing model, buyers benefit from fewer transactions and suppliers benefit from more transactions. A few suppliers—particularly TMCs like AmTrav Corporate Travel, Executive Travel and most recently Casto Travel—have experimented with subscription pricing, citing better traveler engagement with the TMC when travelers don't have to consider the fees associated with every touch. But research from The Beat, which like BTN is owned by Northstar Travel Group, showed that corporations have been slow to see the merits of such as approach, preferring what they consider to be the transparency of transaction fees.

Buyers need to be careful in the transaction pricing scenario because it may not be as transparent as it seems. Even with booking tools, GDSs, TMCs and suppliers pricing mostly per transaction, buyers need to look closely at how transactions are grouped—by inquiry, by segment, by trip, by record, etc.—to ensure that the net economics remain favorable. Buyers also must guard against pricing practices in which vendors group transactions to increase revenue, and they need to protect their programs from entities that fraudulently bill for nonexistent transactions.

The Diminishing Discount

You've hired a consultant to help negotiate a direct deal with a key supplier. Your consultant and TMC are at the negotiating table. You know that this supplier is already a preferred supplier to your TMC, but you feel that you could be achieving a greater "discount" because your expected volume with this supplier is high. Further, the consultant has reviewed comparable corporate discounts for this supplier with you, and you're confident you can achieve the additional savings you seek. After a few rounds, you don't know why the negotiation isn't progressing; the supplier seems to be dancing around the issues. Like you, your consultant seems irritated, too, pulling you aside to tell you the supplier's offers are significantly worse than those it has provided to clients of similar size and travel patterns. You wonder, "Where is the rest of the discount?"

Both the TMC and the supplier have conflicts of interest with the buyer because of the commercial agreement they have with each other. The supplier is not disclosing to the buyer or consultant that it can go no further on a discount because it is already providing the TMC with a higher-than-usual discount, a portion of which it expects the TMC to share with the buyer. Nor is the TMC disclosing to the buyer or consultant what its deal terms are with the supplier or that the buyer could receive a larger discount from the supplier if the TMC weren't already receiving such an attractive discount. The discount the consultant said was likely isn't materializing, not because the consultant had inaccurate data or was incapable of negotiating a better discount but because the deal between the TMC and the supplier is affecting the deal between the buyer and the supplier.

The Misaligned Mix

You've hired a consultant to help you negotiate a direct deal with "AirLudon," a supplier that has quickly become a primary provider for you and one with whom you expect to increase volume. You realize that AirLudon is not a preferred supplier of your TMC, but your anticipated volume necessitates a direct supplier agreement, and your TMC contract still has more than two years remaining. Your current supplier, "Nations Airline," has been your primary provider and is a preferred supplier to your TMC. Your consultant and TMC are at the negotiating table with AirLudon.

The consultant has reviewed comparable corporate discounts for this supplier with you. If you reach the discounts in the comp set, you will achieve financial metrics that surpass previous goals. Your TMC seems to be dancing around the issues.

After a short negotiation, you and AirLudon agree to a discount in the range your consultant had promised. You're thrilled. But incorporating AirLudon into the mix proves challenging before, during and after implementation. Your adoption numbers aren't happening on the time line you laid out. You wonder, "Why is everything moving so slowly?"

The TMC has a conflict of interest with the buyer because of the commercial agreement it has with Nations Airline. As you move transactions from Nations Airline to AirLudon, the TMC may fall short of the volume commitments—and consequent financial incentives—it has with Nations Airline. These incentives are often a major source of revenue for TMCs. The TMC is, therefore, not terribly motivated to accelerate your adoption on AirLudon because of the loss in supplier revenue it will experience. This misalignment can be costly to both you and your TMC.

Will Shifting Industry Dynamics Bring Solutions?

These are just a few examples of the unresolved potential conflicts of interest that may exist in a travel program. Yet they occur frequently, whether openly addressed or not. And they happen in other areas of the program, such as online and offline shopping, technology configuration, reporting and program consolidation, data transfer between third parties and consulting projects. Given that agreements between third parties likely contain confidentiality and nondisclosure clauses, the travel buyer's visibility and access to vital information may be limited.

Significant shifts happening in the business travel supply chain are creating new conflicts of interest, taxing the longstanding relationships to which buyers are accustomed. Suppliers continue to consolidate and reduce economic incentives to buyers and their TMCs, a dynamic that has played out in the air, hotel and car categories. Public distribution lawsuits are changing the nature of contracts, redirecting some of the economics among airlines, GDSs and TMCs. And suppliers—particularly airlines like Lufthansa, British Airways parent company IAG and American Airlines—are leading experiments with alternative technology and business models to create and distribute corporate travel offers.

The introduction of an International Air Transportation Association New Distribution Capability program by American Airlines, for example, does not just involve a new technology standard for distributing content. It also involves a new economic model. Under the proposed arrangement, American Airlines—instead of GDSs—would pay TMCs an incentive, and TMCs would likely pay—instead of be paid by—GDSs for usage of the services they consume. The proposal has received some positive feedback, but travel buyers have to weigh the benefits and drawbacks, of how a new economic model like this will flow through their travel supply chain.

New agreements are being crafted, new terms and conditions are emerging and economics are beginning to flow in new ways. By forcing transparency throughout the RFP process, having proper representation during negotiations and introducing disclosure and right-to-audit terms and conditions into final contracts, buyers could find hidden benefits in the hidden economy.