Strategic Sourcing and the New Procurement Model by keara

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									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 Gillespie’s Background
• A.T. Kearney’s 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 industry’s most influential executives

• MBA, University of Chicago

Today’s 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 – what’s working?

• Q&A • Appendix: 10 C’s, 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


• Suppliers • • •

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

Strategic Sourcing seems too good to be true

~ ~ 60%

Purchased goods and services can be more than half of a firm’s 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

Application To Travel
Consolidate agency/card data Set travel policy

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

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 year’s prices? – Which year’s 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 manager’s 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/don’t 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 supplier’s willingness to negotiate

Which is based on the company’s ability to move market share between suppliers
Which depends on the company’s 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 incumbent’s 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

―It’s a significant expense category.‖ ―The spend is very hard to control.‖ ―It touches most employees.‖

―You can’t just switch suppliers like you can with office supplies.‖ ―It really affects sales and/or productivity— but you can’t quantify it.‖

… or Advertising
… or Enterprise Software … or I.T. Consulting

Travel isn’t 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
• • • • • Control Quality standards Purchase orders Budgeting Analysis Payment Operations • Order fulfillment • Problem resolution • Data collection and reporting

Sourcing • • • • • Supplier evaluation Price negotiation Contracting Cost reduction Supplier development

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 management’s 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 • 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?‖

―Promise big volumes to get big savings.‖

―Don’t promise what we can’t deliver.‖ ―Where’s the volume?‖ or ―Where’s the threat?‖



Solution: The D/P Dashboard
• D/P = Delivered to Promised % (e.g., market share, room nights, segments, rental days, etc.)
Airlines D/P Score


77% Too Little
115% 105%

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 supplier’s 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 team’s 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




Self-booking Direct connections

• 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

Near-Term Benefits Air Hotel Car

Online RFPs and auctions
Airline Sourcing software Consortias Agency consolidation Expense reporting systems



• Data consolidation • Influence at P.O.S.
• Data consolidation • Purchasing compliance

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

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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 supplier’s willingness to negotiate

Which is based on the company’s ability to move market share between suppliers
Which depends on the company’s 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

Don’t ask if you won’t 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 incumbent’s 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 bidder’s 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 bidder’s 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

Don’t 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 supplier’s 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





Use of alternate airport





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 • Use of preferred airlines • Use of preferred agency • Lowest logical fare parameters • Class of service restrictions • Use of advance purchase/restricted fares

Rental cars Hotels

Air travel

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 can’t be captured without strong compliance to policy
Six sure ways to limit policy effectiveness • Make the travel policy an obscure document • Don’t 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 Year’s 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)


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

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