Contracts may be won on price but does any buyer truly know the total cost of their travel management company?
How hard should it really be to negotiate a financial agreement between a corporate and a TMC supplier – and then accurately manage it throughout the contractual period?
It obviously depends on the scope of work – including the size (spend and transaction volumes) and geographical scope of the travel programme, but it shouldn’t be that difficult, should it?
As we all know, the travel management category has a complexity level undeniably higher than that of others. But how much more complex is it in reality, and should there not be a way to somewhat simplify it?
At the end of the day, corporates are looking for a reasonably priced, reliable and good quality online and offline travel booking service for their travelling population which directs compliance to the rules of their company travel policy. TMCs unquestionably deliver this day-in, day-out so why are so many corporates suspicious of their TMC when it comes to the financial arrangements?
For a TMC to succeed and stay in business it must deliver, maintain and grow a solid business proposition to its client base whilst making a profit. All businesses have to make a profit to endure, and it is in the interest of the market to have a sustainable supply chain in which TMCs and suppliers are able to survive the undulations of the market conditions. So, what is the issue?
Opaqueness of money flows
The opaqueness of the money-flow cycle in the travel industry can cause a soupçon of concern for the corporate clients. TMCs are paid by their clients for services rendered but they also receive income from suppliers. Some see this as a conflict but TMCs do not and will not share all the supplier income with their clients. That is the way it is, and we might as well all just accept that fact and move on.
The real issue is how can a corporate travel manager ensure that they are negotiating the best financial deal for their business – and how can this be measured/managed throughout a 3-5-year contractual term?
Here’s a question: how many corporates can truly state with 100% certainty the total of how much they paid their TMC last year – not just the statement of transaction fees, but all charges made by the TMC both centrally and to individual travellers, and in each country within a multinational agreement? My experience tells me – not many, if any.
What is the true total cost of travel and how can it be measured?
As I’ve previously mentioned, the demise of commissions combined with the involvement of procurement in the travel management category has led to a stark focus on the cost of transaction fees. This has led to TMCs having to submit attention-grabbing ‘headline’ transaction fees in their RFP responses to win new business, backed up by a plethora of ‘financial notes’ to mitigate the commercial risk to their business.
I empathise with both sides – corporate and TMC – of the RFP process fence. I know just how difficult it is to get an apples-to-apples comparison of the TMC offers on the table.
Getting the calculations correct is difficult when TMCs are not totally transparent. ©VikZa/iStock
The only real solution in a travel procurement process is for corporates to use a travel-specific template, restricting the TMCs to providing the fee information required for comparative evaluations. However, on the TMC side a restricted template does not provide the opportunity to explain the complexity which lies behind their offer.
So the reality of the outcome in an RFP process is that TMCs are judged upon the competitiveness of their transaction fees because it is the most measurable factor to evaluate.
There are of course many other factors which must be included in the overall evaluation of selecting a TMC supplier, but so many are subjective or not as easily measured - such as the amount of savings the TMC can deliver in air/rail/hotel spend etc.
We all know that the amount of travel programme savings will be significantly greater than any RFP negotiation of transaction fees but the TMC cannot guarantee to deliver the savings because so much of it depends upon the behavioural activity of the client. In the larger volume RFPs, TMCs do regularly offer a Savings Guarantee (which is the only part which can/should be measured in the evaluation) but this will be a conservatively small percentage of their estimate of the overall savings level which could be achieved because they do not have control over whether the savings offered are taken by the end user. When offered a Savings Guarantee, always read the small print to ensure parity of offers.
Ongoing management of the deal you have negotiated
A fundamental reason why it is hard to track the total cost of all TMC services is that TMCs’ management information reporting systems containing the booking data differ from their financial systems.
This makes it very challenging for the corporate clients to be able to confidently and accurately reconcile their TMC’s financial statements. I have first-hand experience of working with a client to diligently pressure their TMC to deliver a financial statement which mirrors the number of transactions in the TMC reporting data. Otherwise how can it be possible to validate and reconcile the number of transactions in the financial statement?
It should be a very simple equation:
X number of transaction fees multiplied by €X fees = € total cost charged to client
However, if the basic information of the number of chargeable transactions cannot be validated by the client in any way, how can there be the trust and confidence in their TMC which is critical to the success of the contractual relationship?
In the client example above, the TMC was able after one year finally to track and identify to the client why there are differences between the transactional data in the MIS reports and the financial statements. But it cannot be fixed. There is now an agreed general principle of difference and an accepted percentage of tolerance in the numbers is now in place.
Additional (ancillary) TMC fees
Additional ancillary fees can have a major impact on the total cost of travel. However, they mostly remain under the radar within RFPs and are not generally included in the TCO (total cost of ownership) calculation and budget because the usage levels are variable.
Some of these ancillary services, such as a 24-hour emergency service, can actually be critical to supporting a holistic travel programme. This is paid for on a per-usage basis (for which the TMCs tend to charge ‘per call’), but how is this monitored and tracked and what data is provided to substantiate the charges made to the client?
An RFP must contain a full list of ALL potential ancillary fees and these MUST be included in the financial evaluation between suppliers. I would strongly suggest that a certain amount of estimated usage must be included in the TCO calculation in the RFP process and for ongoing management the usage levels must be concretely produced by the TMC and validated by the client.
Also, there are high impact additional fees which are not included anywhere in the RFP financial templates but are written in the small print of the financial notes. Let’s take booking modification fees as a shining example to highlight.
Don’t go changing...
Let’s say for example that within an RFP process there are three TMCs bidding and each quotes an offline international air transaction fee: TMC 1 quotes €20, TMC 2 quotes €25, and TMC 3 quotes €30.
If using a restricted RFP template, the financial evaluation of the RFP would identify TMC 1 as being the most competitive. However, within the small print in the financial notes TMC 1 has an innocuous-looking clause which states there is a booking modification fee of €10, charged every time a booking is changed before ticketing. So, if the RFP evaluator knows that the booking modification level is very low for this type of booking then it can be confidently stated that TMC 1 is definitely the most competitive offer. If, however the nature of your business is such that when your travellers are booking complex international trips (not eligible for online booking), they are generally travelling to visit clients and this means that three itinerary changes regularly happen, then TMC 1 would in fact be charging you €50 per transaction. It is entirely fair that the TMC charges for the services they provide as there are applicable resource costs for each client interaction, but it needs to be clearly understood by both parties when evaluating the TCO in an RFP process.
Here is one further point about booking modifications. Booking modifications after ticketing are more than likely going to mean a ticket re-issue, and with some suppliers this could mean three transactional charges to the client.
- Original transaction fee charged
- Refund of original ticket – refund fee charged
- New ticket issued, so new transaction fee charged
The moral of the story
It makes financial sense for travellers to stick to their travel plans whenever possible. Not only does it make savings in the cost of an air/rail ticket to book a cheaper restricted fare with penalties for changes/cancellations – it also has an impact on the costs charged by the TMC.
A travel manager’s knowledge of their programme is critical to RFP process success.
Here is my mantra for TMC RFPs – the devil is in the detail!