Strategic Sourcing: New Leverage for Lower Travel Costs

By aggregating their spending, rationalizing their supplier base, and negotiating contracts more aggressively, corporations are finally swinging th...
Jennifer CaplanDecember 1, 2002

Facing a dim near-term outlook for revenues, corporate managers are once again taking a good hard look at their travel and entertainment expenses. Although business travel declined significantly after 9/11, expenses for airfares, hotel rooms, and car rentals continue to make up a large portion of corporate budgets.

And travel costs are on the rise. The National Business Travel Association predicts that business travel costs will increase 5 percent in 2003. American Express Consulting pegs the increase somewhat lower, at 2 to 3 percent overall.

How to stanch the bleeding? Increasingly, companies are applying strategic-sourcing methods to travel purchasing. They are looking to reduce costs by aggregating spending across business units and regions, rationalizing their supplier base, and negotiating contracts more aggressively. That tack appears to make perfect sense: Why should a company buy seats on a plane or rooms in a hotel any differently than it buys paper clips?

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It shouldn’t, at least when dealing with suppliers. (Of course, businesspeople are much more particular about their travel arrangements that about their office supplies. For more on how companies are managing the demands of their business travelers, see “Travel Savings Start at Home.”)

Some companies have begun treating travel as a commodity, going as far as placing travel management under the purview of the procurement department.

U.S. Bank, a Minneapolis-based financial services company, for example, began merging its travel management program with procurement approximately five years ago. Kirk Ayers, corporate travel manager at the company, now reports directly to the procurement manager, who in turn reports to the CFO. “The transition has allowed us to focus our travel program more on expense control and leveraging volumes, which is part and parcel of procurement,” says Ayers.

Hanna Murphy, travel manager at Siemens Shared Services (a unit of the German electronics and electrical engineering group), echoes the importance of managing the travel supply chain more efficiently. “Sixty percent of my job as travel manager is procurement,” says Murphy. “It’s not just negotiations that are important, but also building and maintaining supplier relationships, and being able to respond to the rapidly changing nature of the business,” she notes.

Until recently, most travel managers spent much of their time managing travel demand. They designed strong travel policies, automated the T&E reporting process, and put mechanisms in place to monitor compliance. Relatively less focus was placed on the supply side of the equation, though not by choice; most companies simply didn’t have the capacity to synthesize and analyze massive amounts of disparate travel data.

That’s a major weakness in the procurement process, notes Stephen Mitlieder, procurement global travel manager at Pharmacia. He explains that T&E negotiating power depends on the ability to analyze travel needs and patterns at a very detailed level. “If you can’t do this,” notes Mitlieder, “you appear less credible to the supplier.” This (im)balance of power is most noticeable when companies deal with air carriers.

The airlines, equipped with advanced pricing models and better tools for evaluating contracts, held the negotiating advantage; they called the shots, and travel managers responded. “The carriers simply presented us with the figures, and we based our negotiations on those,” concedes Ayers. “Clearly, that put us in a disadvantageous position.”

The New Negotiating Leverage

That’s all beginning to change. With the advent of automated T&E reporting systems, more-centralized travel programs, and automated online booking tools, it has become easier for managers to consolidate, analyze and track travel data. Armed with more meaningful information, corporations are quickly becoming more aggressive during contract negotiations.

The emergence of travel procurement consulting companies, such as TravelAnalytics and Travel Procurement Solutions, has also gone a long way to help companies analyze data and craft cost-effective negotiating strategies for reducing travel costs. (The distinctions between consultants, T&E service providers, and T&E software providers are often hazy, but you can find listings for many companies in each of these categories on the main page of our special report on Travel and Entertainment Expense.)

Many of these companies use modeling software to provide corporate officers with a more comprehensive picture of total travel spending across business units and regions. Given a better understanding of their own travel needs, companies can better determine how offers from different carriers match up against those needs. Modeling software also helps managers think through different contract scenarios and assess how changes in their travel program might affect overall cost structures.

In the past, the complexity of these processes often prevented travel managers from delving deeper into travel sourcing. An exercise as apparently simple as comparing bids from different air carriers can be an exceedingly complex process in practice.

Take the case of two airlines that fly out of a given airport near a major metropolitan area. Carrier A offers a 10 percent on every fare for flights out of that airport; Carrier B offers 25 percent. At first blush, a company might conclude that Carrier B’s offer is more attractive. But if Carrier B offers flights to far fewer of the company’s destination cities than Carrier A does, those number could be turned on their head.

First, Know Thyself

“Before settling on a bid, it’s essential to have a consistent understanding of each airline’s capacity to serve your specific travel needs,” says Scott Gillespie, CEO of TravelAnalytics. That’s no easy task: Not only do you require a systematic grasp of travel needs across the entire organization, you also must be able to track those needs against frequently changing flight schedules. Comparing the bids of different carriers is further complicated when airlines restrict discounts based on fare class, country of purchase, and other shifting variables.

“You can’t just put two airline bids in front a travel manager or CFO and expect that person to eyeball it and determine what the best bid is,” maintains Gillespie. “There are just too many variables at work.”

Travel procurement providers make this process less grueling. TravelAnalytics’ software, for example, takes worldwide flight schedule information, considers each airline’s ability to serve any city pair in the world, and matches that information against a company’s particular travel patterns. It gives managers an idea of how well different two- and three-carrier combinations cover the company’s city pairs, and the extent to which each combination produces overlapping schedules, in order to evaluate cost-effective preferred-carrier combinations. TravelAnalytics then translates each airline’s bid into an average discount adjusted for different fare mixes, place of sale, and total spending, so managers can assess bids more consistently during negotiations.

“In the past, we had a very difficult time comparing apples to apples,” says Ayers. “We had a very limited ability to compare carriers consistently across routes.”

TravelAnalytics, Travel Procurement Solutions, and other providers also allow companies to analyze and compare different “what if” scenarios before they implement a strategy or finalize a deal. Travel managers can plug in different contract discount rates, vendor performance targets, shifts in carrier market share, and other key variables to map out the potential saving under each scenario before signing a contract.

Airlines, which have been caught in their own scramble to cut costs and boost sagging revenues, have imposed more-creative pricing structures. No surprise here: “The airlines are skilled at creating complex pricing,” notes Gillespie. They have excluded certain low-yield, economy, advanced-purchase fare classes, for example. Another airline tactic is to apply sliding-scale discounts based on a company’s market-share target — the commitment a company makes to an airline in exchange for discounts — or to impose a higher, more rigid target. “When carriers start asking for 80 to 90 percent of your market share,” says Bob Brindley, a vice president at Travel Procurement Solutions, “and you have two or three preferred carriers serving a particular market, things can get tricky.”

Indeed, now that airlines are enforcing market-share goals more rigorously, the pressure on corporations has increased. While negotiating an agreement, managers need a thorough understanding of their capacity to fulfill commitments to the airlines — or suffer the consequences later. “If you don’t move market share and fulfill your commitments, you can lose an agreement very quickly,” notes Hanna Murphy of Siemens.

In the end, negotiating power — and the ability to reach more-favorable agreements with suppliers — is directly correlated with a corporation’s ability to consolidate, command, and analyze its travel data. “If you can show a supplier that your travel program is consolidated and that you understand your situation at a granular level,” says Mitlieder of Pharmacia, “they will be more willing to put a meaningful value proposition in front of you.”