September 2009 - One of the industry's open debates centers on how to pay for travel management services. There is a set of generally accepted options, and travel buyers and travel management company executives have myriad opinions about the details. It's not a new discussion, but industry leaders in the United Kingdom this
year addressed the issue head-on with both deep analysis and banter on Web forums and at conferences.
What the Brits produced--by and for both buyers and TMC execs--offers guideposts and talking points for travel procurement specialists in any market. The crux of the issue, and a source of mistrust, is that as the TMCs' traditional supplier revenues dwindle, they turn to clients to fund the services they provide. This transition is easier said than done, and many buyers worry that without a clean break, agents do not have their travelers' best interests in mind regarding which vendors to support.
What sparked the British review was a March 2007 survey by the Institute of Travel & Meetings, which found that 42 percent of buyers believed incentive commission (override) agreements "influence which airline/hotels, etc., are being offered to your travelers." Presumably, it should be only the corporation's relevant policies and preferred vendors that influence the traveler's options. Following this initial research, ITM and the U.K.'s Guild of Travel Management Companies in August 2008 formed a working group of TMC and buyer representatives to study agency remuneration, and in May they produced part one of a report on the topic. Part two is expected next year.
The 37-page Exploring Transparency in Travel Remuneration Part One document by all accounts is the most detailed publicly available study of the topic. In short, it called on corporate buyers and TMCs to attempt to build greater trust through added transparency. It suggested "a better way" of paying for TMC services through "time-based charging or touches per booking." The authors acknowledged this "activity-based costing" may be too difficult to establish, but they argued for advantages of assessing activities based on their true use of resources--illuminating both high- and low-cost processes and supporting planning with benchmarking data.
The report came at a time when TMCs and their clients may be busier than ever in creating new contracts. Nearly half of the 159 mainly U.S. buyers
Procurement.travel surveyed in July said they already had or would issue requests for proposals to TMCs this year. But the buyers largely rejected the ITM/GTMC report's idea. Asked whether they would "favor paying a TMC based on hourly billings, as with accounting, law and other professional services firms," 84 percent said no.
Tempest In A TMC Pot?
The ITM/GTMC report listed the challenges to such billing--"can be time consuming if all activities are to be costed; may provide too much detail, obscuring the bigger picture"--and acknowledged the potentially more substantial issue of barriers to change. Not everyone is screaming for innovation in TMC pricing. Of 112 buyer respondents to the Procurement.travel survey, 38 percent do not investigate TMC revenues as part of their solicitation processes. Though sounding reasonable enough, their comments could make some buyers and other experts cringe:
• "That's their revenue; that's how they provide services. We should have our own contracts if we qualify, and they should keep what little they earn and support us the way we expect. The more we take from them, the less service we get or they just pass us more costs. Their margins are small enough."
• "If I'm getting value for money, I don't need to know if my TMC has negotiated a good deal for themselves. Quality matters more than price."
• "We were advised that the lowest/best fares/rates would always be available, and that no bias would exist."
• "We assume it was factored in when they gave us their best bid."
Many travel professionals share the aforementioned sentiments. Essentially, they believe that the TMC market is competitive and providers will offer their best possible transaction or management fees, factoring in whatever revenue they expect to get, and the buyers can stay or go depending on how satisfied they are with the value they're getting.
"I think that asking a TMC to share overrides, which are completely unreliable because the buyer has real control over what gets booked (or at least they should), is like telling a software consulting contractor to share in their volume discount they get from Microsoft on licenses," according to Turtle Creek Travel and Primal Purchasing consultant Charles Brossman.
"As an industry, we sometimes spend too much of our energy and focus on the revenue shell game and, as a result, don't always consider measures of value received and implement contractual obligations based on these measures," noted Quadrant Travel Management consultant and former American Express Business Travel and Expedia Corporate Travel executive Peter McLeod on TheBeat.travel's LinkedIn group page.
Menno Travel Service co-owner and president Doug Risser responded, "One of our frustrations in working with potential clients is that they worry so much about the difference between a $29 fee and a $37 fee but don't consider value; i.e., 'you get what you pay for.' Some agencies charge a lower fee but the 'cash register' rings more often, or they may not effectively manage unused tickets--a real money loser. Some companies find that using a new TMC that appears to offer a cost savings at first ends up costing them in the end. Though difficult to track, the best fees are linked to real savings achieved."
The ITM/GTMC task force contemplated the idea of linking TMC payment to savings as a potential "new" remuneration model, but acknowledged it requires clear definitions up front. It concluded the model is problematic because "the TMC carries all of the risk," although it might be used to calculate the agency's profit to align client savings with provider earnings.
The Problem With Modern Models
Most models of TMC compensation in use today are characterized by some form of fee--be it transaction-based, management-based or a combination--that may or may not include an assessment of costs and/or agreement on profits. Some of the options call for supplier revenues to be passed through to clients.
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"One of our frustrations is that clients do not consider 'you get what you pay for.' "
— Doug Risser, Menno Travel Service co-owner and president
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In the
Procurement.travel poll, 74 percent of those buyers who said they investigate TMC revenue streams also seek to share in those revenues. The problem there is trusting TMCs to open their books.
"There are known rebates, commissions, kick-backs, but clients don't have a clear view of these and, therefore, don't have a clear view of the drivers," said WS Atkins category manager Monica Dingwall in June at the Business Travel Market conference in London. "We don't mind that there are commissions at play, but let's not deny that they do have an influence. And that's where clients get annoyed--if they think the TMCs are being unduly influenced."
"It is a money-go-round that includes hotels, hotel booking agencies, airlines, etc.," said JPMorgan Chase head of international travel Bernadette Basterfield at the same event. "We know that the sales and marketing agreements exist, and that it is a revenue stream. We know that the global distribution system revenues exist. It is about how those revenue streams are transparently given in negotiations with your corporates. There is a bit of smoke and mirrors, and from the get-go there is a lack of trust between the TMC and the corporate buyer."
According to ITM/GTMC, "overrides and sales and marketing agreement payments made to TMCs accounted for anywhere up to 2 percent of total revenues, but the actual percentage will depend on the product and many other factors. Revenues in this instance include the overall cost of the ticket." Also according to the report, "There is a need to consider the fees/costs paid to self-booking tool providers by the TMC and/or corporate and where these feature in the process. In some instances fees are paid by the corporate in a transparent fashion through direct or indirect relationships with the [booking tool] provider. In other instances, especially for small and medium enterprises, such fees are included in the transaction fee and should be considered part of the distribution costs."
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"We don't mind that there are commissions at play, but let's not
deny that they do have an influence."
— Monica Dingwall, WS Atkins category manager
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The
Procurement.travel poll found that 39 percent of 102 buyers hold their own online booking tool contracts, as opposed to 54 percent sourcing the technology directly from TMCs; for global distribution systems, those figures were 29 percent and 69 percent, respectively.
Solutions Elusive
The trust issue particularly frustrates TRW Consulting's Tom Wilkinson: "TMCs admit to very little. All the 'overrides' (defined as a secret commission that varies by supplier market and TMC) are very hush-hush to prevent corporates from negotiating effectively for them. TMCs and some other observers seem to believe that it's wrong for customers to try to manage TMC profitability. However, when suppliers will tell you over drinks about airline overrides pushing or exceeding 10 percent, and hotels paying north of 20 percent, then customers have a legitimate interest in knowing how much are they paying for air and hotel services, and how much are they paying (at least indirectly) for TMC services. Unfortunately, since both the suppliers and TMCs have a huge interest in buyers not finding any of this out, you probably won't either."
Academy of Business Travel consultant Russell Hart on LinkedIn wrote: "I cannot ever see there being a meeting of minds. Agency profit is a buyer's expense. My advice is for buyers to keep competitively tendering. TMCs hate it, but it's the only way for buyers to be assured they are not being ripped off. It is up to buyers to fully understand how the supply chain works. Only then can they reduce the risk of contributing to TMC profits at their own company's expense. That's how the free market works."
To which De Novo Ventures travel purchasing consultant Dennis Bailey responded: "Not an easy one to solve. From my own experience and perspective, the industry is paying lip service to the concept of open book pricing/costing/accounting-- whatever you want to call it. In a previous role, I offered to pay the agent a significant 'profit' on the basis of full transparency and that all commissions, overrides, GDS revenue, 'sales and marketing' revenue, etc., or a proportion thereof, were returned to me. In order to validate the numbers, I wanted our internal audit team or an independent outside auditor to visit, but this request was declined."
~ Lauren Darson contributed to this report 
