Strategic Sourcing and Procurement based Travel Management: The New Model

This session is presented through the generosity of:

Strategic Sourcing and Procurement-based Travel Management: The New Model

Presented by

Scott Gillespie Principal Travel Analytics

Scott Gillespies Background

A.T. Kearneys expert in strategic sourcing of travel suppliers from 1994-1999 Founded Travel Analytics in January 1999
Developed TANGO for airline sourcing projects Analyzed in excess of $3 Billion of annual air spend Named by BTN as one of the travel industrys most influential executives

MBA, University of Chicago

Todays Agenda
Strategic Sourcing and Travel
What is strategic sourcing? Readiness test for travel managers Ten Commandments for successful travel sourcing

The procurement model for managing travel

Travel is not a commodity - right? Solving the Travel Management dilemma Old problems, new solutions whats working?

Q&A Appendix: 10 Cs, Work Plans, Business Cases

Strategic Sourcing and Travel

Strategic Sourcing is a cornerstone for travel cost reduction

Demand Management (fewer trips) Groups/meeting management Strategic Sourcing Transient transaction management Travel policy

How does Strategic Sourcing work? Buyer

Buyer

Suppliers

Consolidate the spend Control the spend Tighten supply relationships Find ways to cut costs

Strategic Sourcing seems too good to be true

100% ~ 60% ~

Purchased goods and services can be more than half of a firms total revenue Reduced spending falls right to the bottom line 25% without layoffs 10% 5% 8%
Profit After

Total Revenue

Purchased Goods and Services

Salaries, Wages and Benefits

Taxes, Depreciation and Interest

Profit Before

Strategic Sourcing is sold at the CEO Level

High Value and Big 5 firms have strong credentials
Boardroom name recognition Global resources Multiple category experts

Fees can run into the millions of dollars Consultants promise big savings to justify the fees Consultants promise fast results Consultants often have little travel experience Travel managers have little say in the decision

Characteristics of Strategic Sourcing

Effective method for reducing supply costs
Awards larger volumes in return for better pricing Maximizes competitive tension Undermines relationship-based price premiums Can trigger new ways of doing business

Rigorous and objective procurement process

Well-defined supplier criteria Requires some quantification of quality Balances loyalty and switching costs

Characteristics of Strategic Sourcing

Political powder keg
Sponsored by senior management Often driven by external consultants Threatens many parts of the organization Procurement Engineering, Manufacturing, Service delivery Sales and other frequent travelers A major investment of time and money and therefore a risk

Industry dynamics invite new approach to travel management

Airline Commission Caps
Rationale Match commission fee to agency cost, not ticket price Adoption Rate Nearly universal Consequences Smaller commission pool

Strategic Sourcing
Rationale Reduction in purchase costs goes straight to bottom line Adoption Rate Significant and growing Consequences Travel suppliers are targeted

Dwindling Revenues

Pressure to Reduce Costs

More Sophisticated Management of Travel Costs

Applying Strategic Sourcing to Travel

Strategic Sourcing Technique
1. Consolidate expense data 2. Determine specifications 3. Enable concentrated purchases 4. Motivate the suppliers 5. Obtain best prices 6. Enforce new supplier agreements 7. Track and measure savings

Application To Travel
Consolidate agency/card data Set travel policy Enforce travel policy Show incremental gain/loss Calculate total costs and negotiate aggressively Enforce travel policy Use data warehouse tools

The Role of External Consultants

Quickly show significant savings opportunities
Consolidate and analyze data Help tighten travel policies Apply rigorous RFP processes Neutralize biases toward/against suppliers Build senior management support for change
Big fees are justified with big savings

Setting Goals for Travel Sourcing Projects

Set stretch goals, e.g. 5-20% savings Base savings only on sourced spend Define savings
Which years prices? Which years volume?

Make savings conditional upon new travel policies Allow 4-5 months per category

Likely Consequences of a Sourcing Project

New policies, processes and technologies Suppliers are shaken up Significant savings Travelers accept the changes Increased senior management attention Travel managers career is boosted or busted

Readiness Test for Travel Managers

Strategic Sourcing readiness test

Use the scale to answer each question below A. Cost reduction is a high priority for our senior management team B. Our senior management team is interested in strategic sourcing C. Our firm has a centralized management style D. Our travel management team is well respected by at least one member of our senior management team E. Our major city pairs have adequate airline competition F. We can move room nights between properties in most of our key hotel markets G. Our firm is not overly concerned about turnover (i.e., retention) among our frequent travelers Add total points

1 = Strongly disagree 2 = Disagree 3 = Neutral/dont know 4 = Agree 5 = Strongly agree

= Score

Is your firm ready for strategic sourcing?

Score: 29-35 23-28 19-22 15-18 7-14 High probability of success Moderate probability of success Low probability, but still possible Likely to fail Do not start Not all firms are ready, but you may not have a choice

10 Commandments for successful sourcing

I. II. III. IV. V. VI. VII. VIII. IX. X. Create a righteous travel policy Punish the sinners Pray for good guidance from senior management Reach out to the non-believers Covet thy data Look deeply into the value of quality Know thy own heart prior to seeing bids Speak the truth to all bidders Judge thy bidders fairly Honor thy commitments

I. Create a righteous travel policy

The price paid by a corporate traveler Is determined by the suppliers willingness to negotiate Which is based on the companys ability to move market share between suppliers Which depends on the companys travel policy and its enforcement

Companies with weak travel policies will never get the best prices

VII. Know thy own heart prior to seeing bids

Be honest within the sourcing team about supplier preferences and prejudices Define cost, quality and savings
Be objective and rigorous Do this early in the project Avoid extensive detail Decide how to decide before the bids come in

Create if/then decision rules

If Supplier B comes within 10% of our incumbents quality, and offers a cost savings of at least $100,000, then switch to Supplier B.

Travel Sourcing 101 Summary

Strategic sourcing is here to stay A strong travel policy is required Not all firms are ready Select suppliers fairly Honor your commitments

The Procurement Model for Managing Travel

Travel is not a commodity right?

Common Points We Could Be Talking About Travel or Health Benefits or Advertising or Enterprise Software or I.T. Consulting

Its a significant expense category. The spend is very hard to control. It touches most employees. You cant just switch suppliers like you can with office supplies. It really affects sales and/or productivity but you cant quantify it.

Travel isnt as different as we might think

Is Strategic Sourcing the final answer?

No! Strategic sourcing has several weaknesses Heavy focus on cost savings Projects are done but not done-done Travel managers are left holding the commitment bag Senior management remembers the projected savings but forgets the travel policies needed for success Suppliers are left to sink or swim Strategic sourcing principles are not integrated with travel operations

Managing major expense categories

Sourcing Supplier evaluation Price negotiation Contracting Cost reduction Supplier development Control Quality standards Purchase orders Budgeting Analysis Payment Operations Order fulfillment Problem resolution Data collection and reporting

Travel fits this model

Recent changes are driving a new travel management model

Loss of commission and override revenue makes travel another cost center Travel industry has become more complex Growth in travel-specific B2B technologies Strategic sourcing works in the travel category
Senior managements conclusion:

Travel can be managed like other categories

The procurement-based travel management model

Travel Manager Sourcing Team Buy the specified quality of travel Set guidelines for purchasing Evaluate supplier quality and cost Manage selection process Negotiate contracts Quantify potential savings Operations Team Manage travel agency Implement new programs Implement new technology Manage supplier performance Manage travel policy compliance Resolve traveler problems

Each team has very different goals

Operations and procurement models

Operations Model Strategy Leverage Win by executing well Travel policy compliance Reservations operations Traveler behavior Are the travelers happy? Procurement Model Win by controlling the spend Travel policy compliance Spend and data consolidation Contract performance Can we move the business?

Major focus Major concern

The travel management dilemma

Where are the savings?

Control
Promise big volumes to get big savings.

Operations
Dont promise what we cant deliver. Wheres the volume? or Wheres the threat?

Sourcing

Suppliers

Solution: The D/P Dashboard

D/P = Delivered to Promised % (e.g., market share, room nights, segments, rental days, etc.)
Airlines AA CO DL D/P Score 77% 115% 105% Too Little Too Much About Right

Ideal D/P score is 100%

D/P Dashboards are informative

The best D/P score is 100%
Delivered exactly what was promised

D/P scores above 100% mean money left on the table D/P scores below 100% are red flags
Overly aggressive sourcing promises? Traveler resistance? Travel policy compliance issues? Supplier quality issues? Supplier contracts in jeopardy?

D/P Dashboards are powerful

Sourcing teams make more realistic commitments
Seek more input from Operations
Supplier reputation and capabilities Traveler perceptions Travel policy implications

More likely to challenge suppliers volume targets Eliminates over-commitments to suppliers

Operations performance can be clearly measured

A key responsibility is to meet contracted goals Some factors will be outside the teams control

Old problems how do you:

Minimize transaction costs? Control purchases at point of sale? Maximize suppliers price competition? Maximize buyers purchasing volumes? Enforce travel policy compliance? Make faster decisions about supplier bids? Agree to realistic supplier goals? Predominantly procurement problems

Good

Moderate

Poor

Solution
Self-booking Direct connections Online RFPs and auctions Airline Sourcing software Consortias Agency consolidation Expense reporting systems

Problem
Minimize transaction costs Control at P.O.S. Minimize transaction costs Maximize price competition Faster selections Maximize price competition Faster selection Realistic contracts Price/volume leverage Data consolidation Influence at P.O.S. Data consolidation Purchasing compliance

Near-Term Benefits Air Hotel Car

N/A

N/A

Implications for travel managers

More stakeholders: travel councils, sourcing committees Additional procurement resources More rigorous supplier evaluation and selection More business cases
Supplier recommendations Year-over-year savings Travel policy costs and benefits

Tighter travel policies More technology E-RFPs, auctions, sourcing software

Implications for travel suppliers

Greater account volatility Stronger travel policies More pressure on price Must reduce internal costs Need to show clear differentiated value Continued industry consolidation Requires more sophisticated selling

Procurement-based travel management: Summary

Senior management thinks travel can be managed like other expense categories Many key trends in travel are procurement-related Strategic sourcing is not the final answer The procurement model emphasizes:
Aggregation and point-of-sale control to keep prices low Rigorous and objective supplier evaluations Aligning sourcing and operations with supplier goals

Appendix: Work Plans 10 Commandments Building Business Cases

For a copy of this presentation:

Please visit the Free Tools section on our website at

www.travelanalytics.com
Or send an e-mail to scott.gillespie@travelanalytics.com

Strategic Sourcing and Procurement-based Travel Management: The New Model

Presented by

Scott Gillespie Principal Travel Analytics

Ten Commandments for Successful Sourcing

10 Commandments for successful sourcing

I. Create a righteous travel policy II. Punish the sinners III. Pray for good guidance from senior management IV. Reach out to the non-believers V. Covet thy data VI. Look deeply into the value of quality VII. Know thy own heart prior to seeing bids VIII. Speak the truth to all bidders IX. Judge thy bidders fairly X. Honor thy commitments

I. Create a righteous travel policy

The price paid by a corporate traveler Is determined by the suppliers willingness to negotiate Which is based on the companys ability to move market share between suppliers Which depends on the companys travel policy and its enforcement

Companies with weak travel policies will never get the best prices

I. Create a righteous travel policy

Find an executive sponsor Build the business case
Cost Savings Traveler Productivity And Retention

Write the strongest policy acceptable to senior management Define appropriate sanctions

II. Punish the sinners

Be firm but fair
Some exceptions will always be warranted Too many exceptions cripple the program

Create an intimidating exception approval path Apply appropriate sanctions Use public hangings selectively Strong travel policies need teeth

III. Pray for good guidance from senior management

Is the priority cost savings or traveler satisfaction? Are all suppliers to be treated equally? Who gets to make the decisions? Who can veto? Is there an achievable goal? Is there a realistic time frame? Are there no other major distractions?

IV. Reach out to the non-believers

Establish a cross-functional Travel Council Use a cross-functional sourcing team
Travel Human Resources Procurement Sales Finance Operations

Build support for change with HUBBS

Hearing Understanding Believing Bettering Supporting

V. Covet thy data

Information is power
Accurate Timely Consistent Meaningful

Know what data is worth coveting

Historical travel purchase patterns Travel policy compliance rates Supplier performance

VI. Look deeply into the value of quality

Place a value on key elements
Nonstop flights On-time arrivals Business class service Airport lounges Counselor retention Waivers and favors Electronic folios In-room internet connections Room service Fitness centers Upgrades Account management Fast check in, check out

Dont ask if you wont score the answers

VII. Know thy own heart prior to seeing bids

Be honest about supplier preferences and prejudices Define cost, quality and savings
Be objective and rigorous Do this early in the project Avoid extensive detail Decide how to decide before the bids come in

Create if/then decision rules

If Supplier B comes within 10% of our incumbents quality, and offers a cost savings of at least $100,000, then switch to Supplier B.

VII. Speak the truth to all bidders

Provide more, not less, information
Total spend and bidders share of spend Travel patterns and likely significant changes Travel policy and likely enforcement

Insist on ethical procurement practices

Treat all bidders equally Hold each bidders information in confidence

Use a single point of communication

Distribute questions and your answers to all bidders Strive to eliminate back door and over-the-top conversations

IX. Judge thy bidders fairly

Apply well-defined criteria Bids should be graded by each sourcing team member Brief senior management regularly
After the decision criteria has been set After the bids have been evaluated Before the final selections have been made

Dont surprise senior management!

X. Honor thy commitments

Set realistic goals
Market share, Segments, Room nights, Rental days, etc. Allow for unexpected business conditions

Make every effort to meet your goals

Educate the travelers Enforce the travel policy Uphold your implementation duties Understand a suppliers need to renegotiate if the goals are not met

Work Plans and Key Success Factors

Travel Policy Development

Month Task 1. Get senior management sponsorship 2. Gather data 3. Benchmark existing policy 4. Build the business cases for each major plank 5. Seek Travel Council endorsement 6. Modify language and sanctions as needed 7. Educate and communicate 1 2 3 4 5 6 Resources Travel Manager Analyst 15 40 days 25 50 days

Key Success Factors Senior management support Travel Council endorsement Solid business cases Traveler communication and education New Tools/Methods Valuation of traveler productivity and retention Benchmarking Involvement of Travel Councils

Airline Sourcing
Month Task 1. Gather city pair and point of sale data, contracts 2. Prepare and publish RFPs 3. Analyze existing contracts 4. Select and test likely supplier scenarios 5. Receive and evaluate RFPs 6. Conduct negotiations 7. Implement new contracts 1 2 3 4 5 6 Resources Travel Manager Procurement Analyst 30-45 days 30-45 days 45-75 days

Key Success Factors Strong travel policy Global/Regional strategy Credible incremental gain/loss projections by airline Rigorous contract and bid analysis Realistic market share goals New Tools/Methods What if simulation models Electronic RFPs Policy-driven self-booking tools

Travel Agency Sourcing

Month Task 1. Gather travel data 2. Create cost model for analyzing pricing 3. Define RFP criteria and weightings 4. Obtain Travel Council endorsements 5. Prepare and publish RFP 6. Evaluate pricing and service capabilities 7. Finalize configuration and implementation plans 8. Notify counselors and travelers 1 2 3 4 5 6 Resources Travel Manager Procurement Financial Analyst 50 100 days 30 60 days 20 40 days

Key Success Factors Clear service configuration (e.g., res center, implant, outplant, etc. Minimal number of service configurations Focus on service differentiators Pricing clarity Airline/Agency/GDS alignment New Tools/Methods Net fee to cover overhead and profit regardless of number of transactions or air sales CTD (U.S. only)

Hotel Sourcing
Month Task 1. Gather room night data - Agency - Card - Expense reports 2. Build hotel market profiles 3. Translate travel policy into potential hotel suppliers by market 4. Prepare and publish RFPs 5. Determine amenity values, target room rates 6. Negotiate room rates 7. Publish hotel directory 1 2 3 4 5 6 Resources Travel Manager Rate negotiator(s) Analyst RFP administration 15-25 days 10 days/100 hotels 25-75 days 30-75 days

Key Success Factors Strong travel policy Good data Logical market definitions Property-level negotiations Room rate targets prior to negotiations New Tools/Methods Electronic RFPs Online auctions Policy-driven self-booking tools

Rental Car Sourcing

Month Task 1. Gather rental car data 2. Prepare cost model for analyzing bids 3. Determine selection criteria and method 4. Prepare and publish RFPs 5. Analyze bids 6. Conduct negotiations 7. Implement new contracts 1 2 3 4 5 6 Resources Travel Manager Analyst Procurement Key Success Factors Robust cost model Rigorous bid analysis Clear decision rules Agency point of sale New Tools/Methods Electronic RFPs Online auctions Cost versus quality decision models 15-25 days 20-50 days 15-25 days

Building Travel Business Cases

Know how your policy compares to peers

Number Of Peer Companies Policy Plank Class of air service Our Current Policy Language Must use coach for all flights of five hours or less. Business class permitted for all flights longer than five hours. The cost of upgrades will be reimbursed for any domestic flight so long as the cost does not exceed $150. Travelers are encouraged to consider using alternative airports whenever possible to reduce airfares. Our Language Rating Loose Loose 2 Mod. 3 Tight 3

Airline upgrades

Loose

Use of alternate airport

Loose

Senior management wants objective reference points

Focus on the important policy planks

Category Key Planks
Entertainment policy

7% 8% 10% 20%

Misc. Parking Mileage Taxis Meals

Limos Cell phones Entertainment

Spending guidelines Alcohol policy Use of preferred rental company Use of preferred hotels Upgrade policy

Rental cars Hotels

55%
Air travel Use of preferred airlines Use of preferred agency Lowest logical fare parameters Class of service restrictions Use of advance purchase/restricted fares

Make it easy for senior management to support the new policy

Use benchmarks and savings estimates to build support at each level of the political pyramid Use a cross-functional Travel Council to review, modify and endorse new policy language get everybody behind it Establish the negative consequences of noncompliance for senior management endorsement Ensure that policy violations can be tracked and reported

Show how strong policy benefits your company and its preferred suppliers
Loose Travel Policy Number of airlines under contract Air spend under contract Discount range Estimated annual savings Benefit to the company 7 $15 million 5-12% $1.2 million Tight Travel Policy 3 $18 million 10-20% $2.3 million $1.1 million

Spend on United Airlines Corporate discount Benefit to the supplier

$6.4 million 12%

$8.7 million 18% $2.3 million

Potential savings cant be captured without strong compliance to policy

Six sure ways to limit policy effectiveness Make the travel policy an obscure document Dont offer any rationale for policy elements Apply different standards of enforcement throughout the organization Make it difficult to track and report policy exceptions Let routine offenders off the hook Let senior managers routinely flaunt policy exceptions

Key elements of a good travel business case

Current Language Travelers are encouraged to use the designated corporate travel agency. Proposed Language Travelers are required to use the designated corporate travel agency for all business-related travel. Implementation Issues Must add three full-time travel agents to handle additional reservations Compliance Measurement Perform sample audits of expense reports Potential Annual Savings $300-500K Benchmark Findings 6 of 8 peer companies use language similar to our proposed language Negative Consequences 1st: Verbal reprimand 2nd: Written reprimand 3rd: Non-reimbursement

Example: Savings from consolidating preferred carriers

Airline Consolidation Opportunity
Before Consolidation Last Years Spend Net of Discounts (000) $ $ $ $ $ $ $ $ $ 4,500 1,600 2,500 900 6,500 400 350 500 17,250 Average Systemwide Discount 10% 3% 5% 0% 12% 10% 20% 0% After Consolidation Expected Spend Net New of Discounts Discount (000) $ $ $ $ $ $ $ $ $ 1,500 2,300 3,400 450 8,200 250 100 150 16,350 0% 10% 10% 0% 18% 0% 0% 0% Carrier Gain Or Loss (000) $ $ $ $ $ $ $ $ $ (3,000) 700 900 (450) 1,700 (150) (250) (350) (900)

Carrier AA CO DL NW UA US TW AC TOTAL

Consolidation is expected to save this firm nearly $1 million per year

Note: Discounts are for illustrative purposes only

Example: Savings from new cabin and fare policy

Change The Fare Mix
Fare Class First Business Coach Economy TOTAL Old Spend (000) $200 900 6,200 3,500 $10,800 Old Fare Mix 2% 8% 57% 33% 100% New Fare Mix 0% 2% 50% 48% New Spend (000) $0 200 4,500 4,300 $9,000

Savings = $1,080