Strategic Sourcing and Procurement based Travel Management: The New Model

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Strategic Sourcing and Procurement - based Travel
Management The New Model
This session is presented through the generosity
of
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Strategic Sourcing and Procurement-based Travel
Management The New Model
Presented by Scott Gillespie Principal Travel
Analytics
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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

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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

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Strategic Sourcing and Travel
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Strategic Sourcing is a cornerstone for travel
cost reduction
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How does Strategic Sourcing work?
Buyer
Buyer

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

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Strategic Sourcing seems too good to be true
Purchased goods and services can be more than
half of a firms total revenue
Reduced spending falls right to the bottom line
without layoffs
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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

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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

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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
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Industry dynamics invite new approach to travel
management
Dwindling Revenues
Pressure to Reduce Costs
More Sophisticated Management of Travel Costs
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Applying Strategic Sourcing to Travel
Application 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
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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
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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

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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

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Readiness Test for Travel Managers
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Strategic Sourcing readiness test
1 Strongly disagree 2 Disagree 3
Neutral/dont know 4 Agree 5 Strongly agree
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 Score
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Is your firm ready for strategic sourcing?

• Score
• 29-35 High probability of success
• 23-28 Moderate probability of success
• 19-22 Low probability, but still possible
• 15-18 Likely to fail
• 7-14 Do not start

Not all firms are ready, but you may not have a
choice
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10 Commandments for successful sourcing

• 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. II. III. IV. V. VI. VII. VIII. IX. X.
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I. Create a righteous travel policy
The price paid by a corporate traveler
Companies with weak travel policies will never
get the best prices
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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
• 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.

Decide how to decide before the bids come in
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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

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The Procurement Model for Managing Travel
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Travel is not a commodity right?
Common Points
We Could Be Talking About
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
or Health Benefits
or Advertising
or Enterprise Software
or I.T. Consulting
Travel isnt as different as we might think
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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

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Managing major expense categories
Travel fits this model
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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
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The procurement-based travel management model

• Buy the specified quality of travel
• Set guidelines for purchasing
• Evaluate supplier quality and cost
• Manage selection process
• Negotiate contracts
• Quantify potential savings

• 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
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Operations and procurement models

• Win by executing well

• Win by controlling the spend

• Travel policy compliance
• Reservations operations

• Travel policy compliance
• Spend and data consolidation

• Traveler behavior

• Contract performance

• Are the travelers happy?

• Can we move the business?

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The travel management dilemma
Wheres the volume? or Wheres the threat?
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Solution The D/P Dashboard

• D/P Delivered to Promised (e.g., market
  share, room nights, segments, rental days, etc.)

D/P Score 77 115 105
Airlines AA CO DL
Ideal D/P score is 100
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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?

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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

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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
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Solution
Problem
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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

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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

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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

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AppendixWork Plans 10 CommandmentsBuilding
Business Cases
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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_at_travelanalyti
cs.com
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Strategic Sourcing and Procurement-based Travel
Management The New Model
Presented by Scott Gillespie Principal Travel
Analytics
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Ten Commandments for Successful Sourcing
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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

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I. Create a righteous travel policy
The price paid by a corporate traveler
Companies with weak travel policies will never
get the best prices
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I. Create a righteous travel policy

• Find an executive sponsor
• Build the business case
• Write the strongest policy acceptable to senior
  management
• Define appropriate sanctions

Traveler Productivity And Retention
Cost Savings
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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
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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?

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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

Supporting
Bettering
Believing
Under- standing
Hearing
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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

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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
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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
• 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.

Decide how to decide before the bids come in
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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

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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!
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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
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Work Plans and Key Success Factors
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Travel Policy Development
Month

• Resources
• Travel Manager 15 40 days
• Analyst 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

Task
1
2
3
4
5
6
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
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Airline Sourcing
Month

• Resources
• Travel Manager 30-45 days
• Procurement 30-45 days
• Analyst 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

Task
1
2
3
4
5
6
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
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Travel Agency Sourcing
Month

• Resources
• Travel Manager 50 100 days
• Procurement 30 60 days
• Financial Analyst 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)

Task
1
2
3
4
5
6
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
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Hotel Sourcing
Month

• Resources
• Travel Manager 15-25 days
• Rate negotiator(s) 10 days/100 hotels
• Analyst 25-75 days
• RFP administration 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

Task
1
2
3
4
5
6
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
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Rental Car Sourcing
Month

• Resources
• Travel Manager 15-25 days
• Analyst 20-50 days
• Procurement 15-25 days
• 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

Task
1
2
3
4
5
6
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
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Building Travel Business Cases
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Know how your policy compares to peers
Senior management wants objective reference points
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Focus on the important policy planks
Category
Key Planks
Misc. Parking Mileage Taxis Meals Rental
cars Hotels Air travel
Limos Cell phones Entertainment

• Entertainment policy
• Spending guidelines
• Alcohol policy
• Use of preferred rental company
• Use of preferred hotels
• Upgrade policy
• Use of preferred airlines
• Use of preferred agency
• Lowest logical fare parameters
• Class of service restrictions
• Use of advance purchase/restricted fares

7
8
10
20
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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
  non-compliance for senior management endorsement
• Ensure that policy violations can be tracked and
  reported

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Show how strong policy benefits your company and
its preferred suppliers
Loose Travel Policy
Tight Travel Policy
Number of airlines under contract Air spend under
contract Discount range Estimated annual
savings Spend on United Airlines Corporate
discount
7 15 million 5-12 1.2 million 6.4
million 12
Benefit to the company Benefit to the
supplier
3 18 million 10-20 2.3 million 1.1
million 8.7 million 18 2.3 million

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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

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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.
Potential Annual Savings 300-500K
Benchmark Findings 6 of 8 peer companies use
language similar to our proposed language
Implementation Issues Must add three full-time
travel agents to handle additional reservations
Compliance Measurement Perform sample audits of
expense reports
Negative Consequences 1st Verbal reprimand 2nd
Written reprimand 3rd Non-reimbursement
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Example Savings from consolidating preferred
carriers
Airline Consolidation Opportunity
Before Consolidation
After Consolidation
Last Years Spend Net of Discounts (000)
Expected Spend Net of Discounts (000)
Average Systemwide Discount
Carrier Gain Or Loss (000)
New Discount
Carrier
0 10 10 0 18 0 0 0

1,500 2,300 3,400 450 8,200 250 100 150 16,350

(3,000) 700 900 (450) 1,700 (150) (250) (350) (900
)
AA CO DL NW UA US TW AC TOTAL
10 3 5 0 12 10 20 0

4,500 1,600 2,500 900 6,500 400 350 500 17,250
Consolidation is expected to save this firm
nearly 1 million per year
Note Discounts are for illustrative purposes only
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Example Savings from new cabin and fare policy
Change The Fare Mix
Fare Class
Old Spend (000)
Old Fare Mix
First Business Coach Economy TOTAL
200 900 6,200 3,500 10,800
2 8 57 33 100
Savings 1,080