In my opinion, that would be a mistake.
First, given what we have seen in 2009, I do understand their rationale, as most of us went through a lengthy RFP season during 2008 to secure negotiated rates for 2009 that, some of which rates, proved to be higher than what the economy dictated. As the economical situation continued to deteriorate early this year, hoteliers found no alternative to combat the hostile environment and gain market share except to cut their rates significantly. We have seen rates dropping to 2006-2007 levels in some cases. This enticed many business travelers, looking for bargains, to bypass the negotiated corporate programs, and book directly online. In some cases, travel managers, who realized that some of their negotiated rates were far higher than what the hoteliers were actually willing to accept, have returned to the negotiation table and re-negotiated their rates with the hotels.
As the world is still waiting for a decisive financial recovery, and all signs are indicating that the economy will not be turning around any time soon, business travel prospects for 2010 is still dismal. This environment is positioning both suppliers and buyers in a potentially confrontational situation. On one hand, suppliers are hesitant to lower their rates further, as they have reached low levels not seen in years. Any further drop in rates would not only jeopardize their profitability, but survival. On the other hand, corporate travel buyers are sharpening their knives for more rate cuts and aggressive negotiations during this season.
Other corporate buyers; however, are flirting with the idea of taking a different approach this year away from the normal hotel sourcing rituals. They are considering saving the time and effort (and money) usually spent during hotel negotiation season, and go online to procure travel directly. They believe that since the economy is not kind to travel vendors these days, hoteliers have no choice but to lower their rates during 2010. Hence, by not committing to a negotiated rate, they assume that they could benefit from the price-slashing spectacle they are expecting to see. They are betting that hotel rates will continue to drop as a falling knife in 2010.
As I mentioned earlier, I disagree with that approach. There are many reasons why corporations should have negotiated rates and reliable hotel programs in place for 2010. The following are seven main reasons why you must go through with your RFP this year:
1. Uncertainty. No one knows for sure when the economy will actually turn around. If we follow the analysts, they were predicting oil to hit $200 a barrel in mid-2008, and had no clue when the financial meltdown occurred. However, what we do know is that as soon as the economy turns around, hotel rates will be poised for a rapid increase, due to supply restrictions in 2008 and 2009, and the financial fatigue experienced by major chains. I would also add to the mix the impact of a lower US dollar on inflation in general. You may find online travel portals’ offers to be very attractive in a sliding economy, but they will not be that attractive when the economy rebounds.
2. Leverage. When you book online at a property, you are losing any leverage with that property. You are simply agreeing to whatever they are offering you at that time, and you are no different than Mr. Joe Random who is booking for his next vacation. Leverage will always enable you to get better deals, as you will be recognized by the property for all your business and room nights you are booking at its location.
3. Benchmarking. A critical component of any successful RFP for a hotel program is benchmarking bids and rates. How could you tell if the deal you are getting is actually a good deal or not? You need to go through the methodological process of benchmarking to understand the markets, and how rates are trending in each sub-market.
4. Amenities. You may have a very good rate online; however, negotiating deals with properties would give you the opportunity to include pertinent amenities to your travelers with the rates, like breakfast, internet access, parking, late cancellation, and so on. It is true that you may be able to get very cheap rates online, but if you read the fine print and restrictions, your traveler may end up paying far more than the asking price on a normal business trip.
5. Flexibility. Even though last room availability (LRA) negotiated rates seem to be flat fixed rates, many chains are actually offering dynamic pricing and the negotiated rate is simply a cap rate. For example, a property would offer you a $150 flat rate; however, if the corporate rate at the time of booking is lower than the negotiated rate, they will offer you the lower rate. Therefore, corporate travel buyers will not miss out on any opportunity should the rates fall below the negotiated rates; however, they will be protected should the rates creep higher.
6. Budgeting. Having a solid hotel program with clear and established reporting mechanisms and compliance will enable you to make better budgeting decisions and enjoy a better financial transparency. You need to be able to have room nights and rates projections for the year ahead. Something you will never have should you opt out of regular RFP process.
7. Relationships. Finally, it is always about building strategic relationships with your main vendors. Having a corporate hotel program will allow you to forge and nurture strategic partnerships with hotel partners that could prove to be beneficial during times that favor the sellers.
In conclusion, in a world full of uncertainty, you need to be able to control your second largest controllable expense item - that is T&E spend. The cornerstone of that is to adhere to best procurement practices in sourcing travel commodities.
Other corporate buyers; however, are flirting with the idea of taking a different approach this year away from the normal hotel sourcing rituals. They are considering saving the time and effort (and money) usually spent during hotel negotiation season, and go online to procure travel directly. They believe that since the economy is not kind to travel vendors these days, hoteliers have no choice but to lower their rates during 2010. Hence, by not committing to a negotiated rate, they assume that they could benefit from the price-slashing spectacle they are expecting to see. They are betting that hotel rates will continue to drop as a falling knife in 2010.
As I mentioned earlier, I disagree with that approach. There are many reasons why corporations should have negotiated rates and reliable hotel programs in place for 2010. The following are seven main reasons why you must go through with your RFP this year:
1. Uncertainty. No one knows for sure when the economy will actually turn around. If we follow the analysts, they were predicting oil to hit $200 a barrel in mid-2008, and had no clue when the financial meltdown occurred. However, what we do know is that as soon as the economy turns around, hotel rates will be poised for a rapid increase, due to supply restrictions in 2008 and 2009, and the financial fatigue experienced by major chains. I would also add to the mix the impact of a lower US dollar on inflation in general. You may find online travel portals’ offers to be very attractive in a sliding economy, but they will not be that attractive when the economy rebounds.
2. Leverage. When you book online at a property, you are losing any leverage with that property. You are simply agreeing to whatever they are offering you at that time, and you are no different than Mr. Joe Random who is booking for his next vacation. Leverage will always enable you to get better deals, as you will be recognized by the property for all your business and room nights you are booking at its location.
3. Benchmarking. A critical component of any successful RFP for a hotel program is benchmarking bids and rates. How could you tell if the deal you are getting is actually a good deal or not? You need to go through the methodological process of benchmarking to understand the markets, and how rates are trending in each sub-market.
4. Amenities. You may have a very good rate online; however, negotiating deals with properties would give you the opportunity to include pertinent amenities to your travelers with the rates, like breakfast, internet access, parking, late cancellation, and so on. It is true that you may be able to get very cheap rates online, but if you read the fine print and restrictions, your traveler may end up paying far more than the asking price on a normal business trip.
5. Flexibility. Even though last room availability (LRA) negotiated rates seem to be flat fixed rates, many chains are actually offering dynamic pricing and the negotiated rate is simply a cap rate. For example, a property would offer you a $150 flat rate; however, if the corporate rate at the time of booking is lower than the negotiated rate, they will offer you the lower rate. Therefore, corporate travel buyers will not miss out on any opportunity should the rates fall below the negotiated rates; however, they will be protected should the rates creep higher.
6. Budgeting. Having a solid hotel program with clear and established reporting mechanisms and compliance will enable you to make better budgeting decisions and enjoy a better financial transparency. You need to be able to have room nights and rates projections for the year ahead. Something you will never have should you opt out of regular RFP process.
7. Relationships. Finally, it is always about building strategic relationships with your main vendors. Having a corporate hotel program will allow you to forge and nurture strategic partnerships with hotel partners that could prove to be beneficial during times that favor the sellers.
In conclusion, in a world full of uncertainty, you need to be able to control your second largest controllable expense item - that is T&E spend. The cornerstone of that is to adhere to best procurement practices in sourcing travel commodities.
Bill,
ReplyDeleteI agree with your rationale for going through the RFP process. In the end the result becomes a benchmark data point versus the spot market/travel portal approach. Just this morning the CEO of Starwood noted that lodging rates will lag the economy and the return of the corporate traveler. Thus lodging occupancy will need to see a rise and maintain high, near full status before the larger chains will edge prices up. Lodging is the same as many other commodities in a falling market; the spot market will exceed the contracted rate. So while your advice is good for establishing a data point it will probably fail to achieve immediate savings.
The biggest risk for corporate travel people in spot market buying is losing travel history i.e. negotiating leverage and potentially recognition for loyalty.
It will be interesting to watch as the market turns how it will emerge.