On Business: Maximizing Value Through Strategic Sourcing
Welcome to the first installment in our series where we’ll be discussing the fundamentals of successfully managing a corporate travel program. As your company and travel program grow, eventually the time will come when you need to start thinking more strategically about sourcing. When you partner with a Travel Management Company (TMC), they should bring a full suite of relationships with preferred supplier partners to the table (an overview of our preferred partners and how we chosen them will be the topic of a future post).
For example, the smaller companies we work with typically rely exclusively on our relationships and preferred partners because they don’t have the volume or ability to concentrate their spending that would be required to realize benefits similar to those we already have in place.
As a company grows, however, there will be opportunities to engage with suppliers directly, usually to ensure that the benefits received from consolidating travel spending with a preferred partner are aligned with the company’s overall business goals. This process typically begins with a rental cars, then expands to individual hotel properties, and then finally to national hotel chains and airlines.
For example, our car rental programs are primarily focused on accessing preferential rates which are below the best available published prices. But what if your company doesn’t have a blanket insurance policy in place to cover travelers’ car rental activity? In that case, you may be more interested negotiating insurance benefits with a preferred partner instead of focusing on rate concessions.
Air, hotel, and rental cars make up the top three travel spending categories for most companies. The approach for developing preferred relationships (and if having a preferred supplier makes sense in the first place) is unique for each category.
The goal of consolidating volume with preferred suppliers is often to reduce costs through negotiated discounts based on volume commitments. As your business, and travel program, grow, your ability to realize the benefits of consolidating your travel wallet will largely depend on how fragmented your trip destinations are, as well as your overall travel spend.
The ability to successfully benefit from consolidating your travel spending is one of the key benefits to having a great travel policy that your employees actually follow.
If your company’s travelers often rent cars, this is usually the first category where you can realize the benefits of consolidation. Unlike with air and hotels, the three main rental car groups are available at almost every destination and the volume required to get a corporate level contract is the lowest. Once you reach around 300 rental per year, you’re likely to be able to benefit from selecting a preferred rental company and negotiating a contract with them to realize chain-wide preferred pricing and extras like included insurance and CDWs or free rentals. Where your rentals take place is less important in this category.
If your company’s travel is focused on a more concentrated number of cities, you should be able to start selecting and negotiating contracts with a preferred hotel in your most frequented destinations. Unlike with rental cars, companies typically start with property specific hotel contracts and move on to brand-wide contracts as they scale. Individual hotel properties will usually start to have conversations around putting a contracted rate in place once you can commit to around 75 to 100 room nights per year at their property. The two primary benefits companies usually try to achieve from contracting with preferred hotels are a stable fixed rate which is lower than the average best available published rate and having that rate available with last room availability (LRA). For smaller room night commitments, hotels will usually try to protect their revenue management strategies by adding utilization restrictions (how many rooms you can have at your negotiated rate at one time) and excluding LRA (for example, the negotiated rate wouldn’t be available if the hotel was booked near capacity).
Once you can commit to around $1m in revenue with an individual hotel chain, it is time to start considering shifting your hotel acquisition strategy to include a brand-wide contract (for example with Hilton, Marriott, etc.).
Contracts for air are the most complicated and typically the last of the three to become a relevant component of a company’s travel sourcing program. Every airline takes a different approach and the revenue levels required to pique their interest vary as widely from market to market as they do from airline to airline.
While we help our clients optimize and manage all of their preferred partner programs and contract negotiations, many companies are able to successfully negotiate and manage rental car, property specific hotel, and even to some extent brand-wide hotel contracts, on their own if they prefer. These are all relatively standardized and to some extent you essentially just get what you get based on your volume. The landscape for air contracts, on the other hand, is much more fragmented and complex. There are many more variables that go into account and many more levers to pull and tweak during the negotiation process.
While the major US airlines typically will start a conversation around $500k to $750k in revenue commitments for a group wide contract, you may be able to secure concessions for specific regions or city pairs based on how competitive the market is and how it fits into each airline’s different growth and revenue management strategy. Certain international airlines may be interested in a conversation at significantly lower levels (especially if your volume include a decent amount of long haul flights in premium cabins), and you may be able to secure some concessions with just a $75k - $100k revenue commitment.
While some large companies with in house travel departments manage and negotiate air contracts on their own, almost all more modestly sized companies rely heavily on their travel management company to take the lead with air. In the meantime, however, all three major air alliances have corporate rewards programs where benefits can be accrued at the company level (with no impact to individual traveler’s frequent flyer point accrual) once you have around 5 regularly active travelers.
The Bigger Picture
At then end of the day, the benefits from consolidating your travel suppliers is realized when you evaluate your travel program at a high level, not necessarily on an individual booking-by-booking basis. They become available only by achieving the revenue and market share targets you agree to with each supplier. In some cases, this will mean paying a little more to use your preferred supplier on an individual booking in order to unlock the larger benefits that come from consolidation.
Again, this is where a great and well communicated travel policy come into play. In order to be successful, travelers need to be incentivized and guided towards using your preferred partners and communicating the benefits and the bigger picture is often a key factor. For example, if you state the goal of your policy is to reduce costs and then your travel policy simply states that travelers must book preferred partners when available, it would be hard to fault a well-intentioned employee who violates the policy and books a non-preferred hotel because the rate is slightly cheaper (thus undercutting your broader consolidation goals).