Feature
Footing the bill
Bob Papworth looks at who is really picking up the cost of buying corporate travel
Should you happen to be in the feather-ruffling business and in the company of Hillgate Travel's Andrew Burch, your luck's in. The business development manager may come across as imperturbable, but there are chinks in that carefully cultivated carapace of benignity.
First of all, any suggestion that his beloved Grimsby Town are anything but sorely underestimated Premiership contenders sparks an immediate and uncharacteristically intemperate response.
Second, try suggesting that "by and large, travel management companies (TMCs) have made a decent fist of overcoming client scepticism surrounding the management fee model..." Skies darken and tumbleweed rolls.
A decade-and-a-half may have passed since management companies and buyers alike were dragged kicking and screaming into the commission-free age, but most clients - Hillgate's perspicacious portfolio excepted, of course - still haven't grasped the commercial reality that travel actually costs money.
"In the old days," says Burch, "you used to get 9 per cent commission. The cost of funding the business was set at seven per cent, and you then passed the remaining two per cent back to the client.
"Whatever you think of the ethics of that, it engendered a feeling that travel cost nothing."
But surely, when British Airways (and others, to be fair) pulled the commission plug, the clueless corporates were brought up to speed PDQ? Not a bit of it, says Burch. "TMCs were not bold enough to explain the true costs of travel. It's our fault, as TMCs, in that we have allowed things to go unchecked."
Because business travel agencies, as they were then known, desperately needed income from corporate revenue streams that hitherto simply hadn't existed, they took the easy route and fudged the entire issue.
Transactions have a basic cost, and therefore command fees - which include a profit margin. However, transactions need to be managed, and management costs money, too. If you take those costs out of the profit margin built into the transaction charges, you don't last long, so you build a profit margin into the management fee as well.
When the transaction management begins to get over-complicated, it is not in the TMC's interest to negotiate the management workload downward, because that would impinge upon the new inbuilt profit margin, and/or detract from the transaction profits, so you negotiate - at the very least - for the status quo.
However, that process of negotiation costs money, which has to be found from somewhere: ladies and gentlemen, say hello to consultancy fees.
And while Burch lays the blame for this primordial soup of a system fairly and squarely at the door of the travel management community, corporate clients cannot be allowed to get off scot-free.
Because they had never had to pay the costs of their intermediary, most companies had no method of doing so. They had paid the air or rail fare, or the room rate, of course, and that cost was tracked back to the business unit responsible.
The intermediary's cost, however, had always been met by the supplier; now, in a brave new world where kickbacks had mysteriously metamorphosed into invoices, no-one knew where to send the bill, or how to divvy it up with any degree of fairness among the business units.
Which is basically how, unwanted and unloved, travel ended up, along with bog rolls and paperclips, in the lap of the procurement people. Delightful though these people may be - some of my best friends are in purchasing - they generally know everything there is to know about buying 'things', and very little about buying services.
So on the one hand you have a travel management industry which never had to know how much to charge, nor what to charge it for, up against a bunch of people who had never had to pay for something they could not see or touch, and had no idea whether the bills they were being asked to settle - and, by negotiation, reduce - bore any resemblance to the going rate. Not least because there wasn't, and never had been, any such thing as a going rate.
So the question now has to be: what exactly is the true cost of service provision, and have corporate clients even begun to understand what it is they're being expected to pay for?
Stewart Harvey, client management director of HRG, reasons: "To some degree, I would have to concede, the answer is 'no'. It's still a high-profile topic, it's still under scrutiny, and the degree of scrutiny has become much sharper."
Similarly, BCD Travel's UK and Ireland director of sales Tony McGetrick reckons some clients haven't grasped - or don't want to grasp - the management fee concept.
"I think you have to accept that this failure to recognise what goes on behind the scenes is continuing," he says.
"That is possibly being reinforced by the nature of the purchaser today, who may not be that interested, frankly, in how the figures are arrived at. Travel is seen by most purchasers as a fairly simple requirement and process, so any attempt by the travel management company to explain otherwise can fall on deaf ears. There is a strong desire by corporates to commoditise travel, and move away from management fees to transaction fees."
McGetrick acknowledges that in some instances, there is a perfectly simple, structural reason for this. "There is an increasing trend whereby companies don't want a central invoice coming back to a central function - they would much rather be able to bill it back to the end-user. It's very industry-specific, and in some cases client-specific, but it has the advantage of not placing an additional burden on a central accounting function."
In short, if the management element is bundled with the transaction cost, the whole lot can be billed back to the appropriate business unit; if the travel cost can be billed back, but the management element has to be settled centrally, it gets a little more complicated.
HRG's Stewart Harvey contends that corporates do at least accept that there is a cost, and that they have to bear that. Not unreasonably, they want to reduce that cost as much as possible, but increasingly they are looking for 'in-house' savings, and are relying on TMCs to work with them to achieve that.
He cites the case of one organisation whose employees book an inordinate number of taxis. The client has always accepted that the cars have to be paid for, and that HRG has to be paid for booking them; now, however, the TMC is being asked to provide more detailed data so the company can see, for example, where individuals are taking separate cabs to the same meeting.
"I believe more and more corporates are seeing that it is worth paying for that type of information, to control costs, to manage risk, to control suppliers," says Harvey.
In this need-to-know environment, clients are also asking TMCs to put their money where their mouth is - to invest in a cost reduction programme, and then share in the benefits that result.
Clients decide what is, or will be, of value to them, define what they want, and then work with the TMC to establish a business plan with an agreed timeline and a fixed deadline, and then treat the project as a joint venture.
The other TMC ploy is to offer extra, or fine-tuned, services while keeping fees at the same level.
"There is always a degree of resistance to that," says Harvey. "However, I think some of that is a procurement angle - a healthy testing process by the client putting us through our paces: 'What are you doing to reduce your costs? This is what you cost last year; you must be generating some efficiencies.'
"Depending on circumstances, some [clients] are definitely saying: 'I want a lower fee and I want it now,' while others are saying: 'What more can I get for my money?' They want other services or different services."
Nigel Turner, director of public sector and industry affairs at Carlson Wagonlit Travel, shares - to some degree - Andrew Burch's view that it is incumbent on TMCs to explain where they, and their mysterious charges, are coming from. "It is down to us to prove our value to customers," he says. "They shouldn't have to pay any fees if they don't think they are getting value." However, he draws the line at the suggestion that intermediaries are entirely to blame for any uncertainties that may exist.
"It's a little bit unfair on our industry," he protests. "The important thing about value is that it's not one simple message - value to a purchasing manager is one thing, value to a travel booker is another, and value to the traveller is very different to the value to the accounts department.
"Yes, we could all do more, but it's not always that easy or straightforward."
The bottom line, says Turner, is that corporates will only pay if they think they are getting something worth paying for. "They pay us to manage the policy, and they pay us to report on how successful we have been - and that last bit is probably more important now than it has ever been," he says. "If companies try to do it themselves, the most difficult thing to do is to get people to change their behaviour, what they have done in the past, and then to measure the results.
"That's before you get on to things like access to the best rates in the marketplace, and then add on things like 24-hour emergency service, traveller tracking, crisis management and so on."
Corporates know what they want, he implies, and are prepared to pay to get it. The real issue for TMCs is that their clients are reviewing the 'what they want' bit.
"Of course clients are cutting back on what they spend," says Turner. "I think we would be sticking our heads in the sand if we pretended otherwise. We are seeing people spending less, and looking for more return on what they do spend."
BCD's Tony McGetrick agrees. "They [clients] are cutting what they are spending, and it is not uncommon at the moment for corporations to come to us to tell us categorically that they need to reduce their travel costs by such-and-such a percentage.
"The encouraging news is that they are calling us for help. We are spending a lot of time at the moment in helping a whole host of companies to find innovative ways to reduce their overall travel expenditure."
In this penny-pinching day and age, it would seem that travel buyers have less, or are about to have less, to spend - their shopping lists are necessarily becoming shorter. For the TMC, the conundrum is whether to offer more at cost in the hope of rebuilding fee income at a later stage, or sticking religiously to existing price structures and running the risk that clients discover they can do without the bells and whistles they were previously happy to pay for.
Right now, to use a football analogy, travel managers appear less concerned about accumulating points than they are with not losing too heavily. Grimsby Town know the feeling...
