Many companies, especially larger ones with complex, multinational travel programs, in recent years have shifted to longer-term contracts with their travel management companies. Executives from mega TMCs confirmed the trend, and explained the reasons behind it: Complex client programs--including multiple components and expansion into more countries and more regions--take time to implement, and the results expected by the client take time to achieve. Moreover, TMCs benefit from the continuity of longer deals in terms of guaranteed business and workforce stability.
Generally, American Express, BCD Travel, Carlson Wagonlit Travel and HRG corroborated that three- to five-year client contracts have become the norm, replacing the typical one- to three-year deals. Many times, their clients sign three-year deals with the option to extend by another year or two.
"It's both with existing clients that are either expanding or renewing contracts, and it's with new contracts in the marketplace at large," said Tom Lacny, HRG executive vice president of global strategic sales in North America. "More than half of our contracts now are in the three- to five-year variety."
BCD Travel in 2007 and 2008 "saw lots of success in breaking the mold of three-year contracts, and doing four-, five- and, in some cases, even seven-year contracts with our clients," said North America division president Mike Janssen. "The attributes I saw of companies that were looking for the longer-term contracts were those that had more complex programs, looking to consolidate around the globe and looking to aggressively implement end-to-end solutions, from a front-end portal to back-end expense management. Those were the ones that really were ensuring they were with the right partner and ensuring continuity."
American Express Business Travel also has seen the standard move from three-year deals a few years ago to "closer to five these days. We have several seven-year contracts," said vice president and general manager for Americas sales and global accounts Lane Dubin. Amex officials even noted one nine-year deal.
"It is pretty simple," HRG's Lacny said of the client rationale. "Travel services now in large, global enterprises include a complex integration of travel systems and services, corporate systems and services, and financial systems and services. Once you mutually invest in that complex system, it is not something that anyone wants to change."
Lacny also said that creation and integration of various data feeds; implementation of online booking tools, traveler portals and meetings software; and use of "more clearly defined service level agreements," reporting tools and analysis "all envision a longer-term payback."
He added that "results-driven contracts" with multiyear savings plans and various procurement initiatives require "greater investment by all the parties'. Therefore, the need for a certain time horizon."
It starts with the request for proposal, which itself has become more complex. "The RFP becomes an outline of the initiatives," Lacny noted, and specifying all the details "requires a lot of discovery and interrelationships between the suppliers involved. You are not going to change it lightly, because it is delivering things that are tangible and can be tracked."
Added Janssen, "The perpetual process of rebids drains time and resources on both sides."
"Specifically for global clients, given the overall implementation typically takes six months to a year, it makes sense to have a lengthier contract," according to a CWT official. "Otherwise the client would have to re-initiate the RFP process a year or two after being implemented with their new TMC."
"Companies are looking at what opportunities may be available to them and what the trade-off is between trying to get at that opportunity against the cost of managing through that process and the time associated with managing through that process," said Amex's Durbin. "Every company probably goes through an assessment based on what it can accomplish and then makes that decision for themselves."
Durbin added that longer client relationships have "been part of our strategy for several years."
Locking up business for more years certainly appeals to TMCs--as it would for any supplier. "It allows us to have a better time anticipating the stability of our workforces," said BCD Travel's Janssen. "The travel industry always has been notorious for having a slightly higher turnover rate. This could have a positive effect on us as an organization."
But Janssen added the long-term deals are in BCD Travel's best interest only when "they have the right expectation and flexibility built into them. The worst thing that can happen to us as a supplier is if we enter into a contract that didn't give us an out any more than the client, or didn't give us the ability to adapt to the changes, and two years from now we find ourselves upside down. We need to ensure both parties build the right flexibility into the verbiage."
For that reason, in contracts with longer terms, "often you see a much tighter SLA or gain-share program that is going to ensure there is a baselining every year and a measurement every year of the program's success, whether those be financial success, service success or expansion and consolidation successes," Janssen explained. "You try to make sure you have better service around remedy. We are in a service business, and things evolve and change--and expectations change. As a supplier, you may need to change your delivery based on that, and make sure there is the client's ability to audit or the supplier's ability to change configuration with the client."
While Janssen said the trend toward longer-term TMC contracts became apparent in recent years, that trend in the past few months has hit "a little bit of a hiatus period because of the economy." He explained how there is "so much unknown" about the length of the recession, what each client company will look like after making moves to withstand the economic downturn and how stable the industry's suppliers really are. "Because of that unknown," Janssen said, "some procurement areas have reversed a little bit and are just looking at evergreen for one year or two years so they can start to get a better feel for what the future is going to look like before they start to go in for longer contracts."
Meanwhile, HRG's Lacny noted a "countervailing trend" in which "there is a degree of experimentation around electronic tools and systems. You'll see clients looking at some of the nontraditional providers and mixing and matching services. When clients go out on those experiments, they will typically do it on more of a short-term basis."