The Value of Transparency

HRS CEO Tobias Ragge talks:

• GDS incentive structures
• The problems with commissions
• Inadequate RFP tools
• Getting people to listen

HRS signed more than three times as much business in the first seven months of 2018 as it did in the entirety of 2017. The hotel solutions provider—which sits at the crossroads between hotels, distribution, travel management companies and corporate buyers—may have seemed like an extra piece of the travel management puzzle five years ago but has found its niche in driving transparency through data. The company expanded to Dallas this year and will establish its third North American office by October in San Francisco. CEO Tobias Ragge sat down with BTN editor-in-chief Elizabeth West to talk about how transparency has built HRS's business even as it has created industry tension.

BTN: As little as four years ago, I was unclear on HRS's position in the market. A lot has changed in that time. What's driving the momentum?

Ragge: We've been working with global customers for a while, but they were usually not from the U.S. You only get to really hit the market when you work with local movers and shakers. To be honest, we had a clear vision of where we wanted to go, but there were a lot of things we still needed to work on. It's not like everything's working Day One. We work in quite a complex industry with a lot of different tools, different stakeholders and organizations, and it took us a while to maneuver through that jungle. We're at this point where we have proven we can do certain things and we have a different business philosophy. People are saying, "That's what I need." There's a desire for change.

BTN: Do you have a sense of what's behind that desire for change?

Ragge: We live in a data-driven economy. Hospitality industry DNA hasn't really been in data and tech, but it needs to move in that direction. At HRS, we're trying to build a model around data. We're building process and services around the data we create, or the data we're getting access to. When we have the proof point that we are working with global technology goliaths—that are experts in data models—then it's a real big proof point for us. People begin to think, "If it's good enough to work with Google … maybe it's also good enough for us," and they start to get more interested in what we bring to the table.

BTN: Transparency is a central part of your value proposition.

Ragge: When I think about my conversations with corporations, they are saying, "Listen, if I have a partner who's reliable, who gives me a guaranteed price-value ratio, with quality, I'm willing to commit to that partner." They want to shift share or maybe move small meetings business to those transient partners. This is how business is done, right? But this is where the industry has been a little bit shortsighted. [Hotels worry about] yield management or losing opportunity. I'm saying, "No, the customers have a problem with the lack of transparency." There was a big debate at ACTE Europe where the buyers said they would pay two bucks more on the rate if hotels could guarantee the negotiated deal 100 percent of the time. So why not invest in giving them that? At that same conference, hoteliers were saying, "We've been doing it this other way for 20 years, and if my competitors are not investing, why should we?" As an entrepreneur, I was like, "Listen, that is the moment I double down my investment."

BTN: HRS's recent announcements on Rate Protector and Rate Filter speak to that investment.

Ragge: Rate Filter started with auditing [corporate rate delivery] on a frequent basis. That was the Rate Protector piece. We ourselves were amazed how big the problem was. When we were using this with the first customers—and I think Google was one of them where we beta-[tested] the tool—we went back [to the hotel partners] and there was complete denial of the data. After we ran all the data, not just one customer, we found, in like 22 percent of the cases, the search return in the [online booking engine] was not the face value that was negotiated, and the average deviation of price was 14 percent.

BTN: I can see how your hotel partners might feel a little exposed.

Ragge: These are just the facts we see, and we may be policing but only because we believe in negotiated hotel programs and we want to police what's being negotiated. Ultimately, our goal is to connect the two sides of the [corporate hotel program] market to say, "If you're a part of that corporate market club, we want to do anything in our power to create a better experience for the traveler so they don't go maverick at the end and the hotel gets the room nights."

BTN: The hotel sourcing and RFP process is a huge focus for HRS, as well. Is Lanyon the competition? Cvent is looking to invest considerably now that they have control of that transient RFP tool.

Ragge: It's obvious for me that [Cvent's] core strength is in larger meetings. When that's your DNA and you globalize that business, as they're trying to do now, top management will have less focus on something which is a completely new topic, like transient RFP management. But ultimately, it's not about the tool anyway. [Anybody] can build out [a tool] in India with 10 people for cheap money. Also, it's not difficult to do RFP management in the U.S. You go to Brazil, you go to India, you go to China … that's difficult. Do you have fulfillment in these markets? You need to speak the languages. You need to have people on the ground. The tool itself—it's just the transmission engine. We're working on a fully automated data suite where basically the RFPs or auctions are just the messaging component. We are looking at realized pricing. We bring in meta data, reviews and other marketplace data to give full transparency on quality. We can calculate morning and evening traffic conditions. In cities like Bangkok, that's important. When you get all of that coming into the platform in real time, it shows you the best decision to make against a certain quality target and a savings target. That's why I'm not too concerned about Lanyon investing or not investing. The question was not, for me, whether the industry needed a better tool. The question was, "Doesn't the industry need a new approach?"

BTN: Other transparency issues come up when I talk to HRS customers: distribution fees and commissions. These touch travel management company commercial models, where HRS clearly has stirred the pot.

Ragge: When you move from GDS-protected inventory to direct connect on the hotel side, distribution savings is somewhere between $5 for the biggest chains and probably $10 for a smaller non-well-negotiated [distribution] deal. What we did with some of our pilot customers in their RFPs—we said [to the hotels], "OK, give us two rate points. Give us a GDS and a direct connect rate point." The average was 6 percent cheaper rates being offered [for direct connect] because, for the hotel profit and loss sheet, it's all the same. Top chain executives have told me for years that they've tried to talk to TMCs to do direct connect because it's much better P&L for the hotels. The TMCs never wanted it. Why? Because the TMC ecosystem lives off the GDS incentives. They're hooked onto this because when you think about it, the TMCs are getting a 50 percent pass back on the segment fees from the GDS. TMCs are always talking about, "Efficiency of the GDS, blah, blah, blah," but it's really this monetary investment.

BTN: What about commissions?

Ragge: First, the distribution systems don't care if anyone is getting the commission or not because the incentive model is around the transaction itself. That's why the GDS never built their own commission-collection [functions]. They outsourced it to third parties: WPS, Onyx, what have you. A third party has one big challenge: They have no way of forcing the hotel to pay the bill. HRS, on the other hand, can say, "If you don't pay us the bills, we'll cut off the distribution channel." It's like a utility bill; we shut off the lights. Second, the [third-party] commission collection process has not been very professional. Somehow, [the third parties] were not able to say, "OK, this confirmation invoice X, is tied to that payment check Y." A lot of times the TMCs just receive checks. They don't know which of the bookings was paid for, which was a no-show, cancel, etc. [As a result], TMCs may only be getting 50 or 60 percent of the commission [volume] back. That obviously impacts the percentage they pass back to clients. The U.S. market is different … but it's hard globally with 10,000 independent properties. We created a transparent approach because we needed to follow it for our own stuff. We need to know who arrived, who was a no-show, who canceled. We provide that transparency and because we control a continuous revenue stream for the hotels, we collect [more than] 99 percent of commissions owed.

BTN: What about momentum on the hotel side? Does the hospitality market understand what your role is?

Ragge: That's really the next big thing that we are working on—to get the hospitality market to understand the benefit [of] this end-to-end [solution]. We're using all the data we have to work on all of this process change, to define the benefits, then to realize the promise of negotiated room nights. It would be easier to put us in a bucket like, "Oh, you're an online travel agency." But we're not an OTA, so they don't really know where to put us because we don't fit into how they've already organized their buckets. We have not invested as much time on this [because] first it was about creating demand. Otherwise, you may have a great story, but if there's no customer, nobody wants to listen to you. People are listening to us now.