Consulting » Decisions – Outsourcing – Cost and effect

Managing business travel costs is a huge undertaking. In global companies, air flight bills alone can be in excess of £100m, and hotels can add tens of millions more to the bill.

Managing these costs requires one of two things: an investment in in-house management resource capabilities, or outsourcing travel management and developing a slimmed down management to oversee the outsourcer. Most large companies are doing the latter, much to the delight of travel management outsourcers such as Amex and Carlson Wagonlit.

However, what is not quite so pleasing for these outsourcers is that precisely because travel spend tends to be highly visible as a global, consolidated expense, it is thus being managed tightly. This can lead to the outsource suppliers finding themselves being ground to a pulp by hot-shot, bully-boy procurement executives who challenge the very notion of the supplier’s ability to add value, and whose main aim in life is to drive costs down.

To make things still more difficult for outsourcers, major airlines have been reducing their commissions to travel agents to zero. So, for the outsourcer, this has become a cost instead of a source of money back for the client company, according to Pauline Sneider, Carlson Wagonlit director of account management for North Europe.

“In the days of commissions, the client didn’t pay us and we returned some of the commission to the client. This meant they appeared to gain money directly by employing us, even though it was a concealed charge on their ticket. Now we are seen as a cost, and the challenge for us is to show that the client company derives a real benefit from using us,” she says.

One of the most immediate benefits an outsourcer brings to the party is its data-gathering capabilities. Since travel management at the bigger end of the scale is all about leveraging deals from the carriers and from hotel chains, clients have to know what they are spending if they are going to get into serious negotiations with the airlines. The outsourcer has the systems to give them this information.

For Stephen Etchells, Amex vice president and general manager of business travel for the UK and Ireland, this need to consolidate and secure management information relating to business travel is a fundamental thread going through all the company’s relationships with its corporate clients. “We can fine tune travel policy for them, but most organisations these days have been under cost pressure for some years and have sorted out a working travel policy. The area where we really add value is when it comes to information-gathering and analysis,” he says.

“We try to bring a comparative view. We draw on our experience across a range of companies to recommend best practice to the client,” he says. “One has to realise that for many companies, the total travel budget will be a significant expense, perhaps one of the most significant variable costs in any organisation’s expense profile. This makes it an inevitable target for corporate attention,” he explains.

On the subject of budget airlines, Etchells believes there can be no ‘one rule fits all’. The take-up of low-cost airlines is increasing all the time by business travellers, he points out, but obviously the airports of departure and arrival have to be in accordance with what any particular company’s travellers are looking for.

“There is no substitute for analysis here. We sit down with organisations and look at their league table of journeys, where their most heavily flown routes lie, and at their points of arrival and departure. Then we look at the potential for negotiation and consider which is the most appropriate carrier to fulfil their needs,” he comments. Where a low-cost budget carrier has something to offer, Amex will look to blend them in to the total solution.

One inevitable consequence of procurement and the head office finance function getting involved in the travel budget is a growing pressure to adopt common policies globally. Sneider argues that the best global travel policies tend to be those where the corporate interprets the policy regionally with some flexibility and allows additional flexibility (provided there is real business logic for this) at the local level.

“Business class for executives is becoming a global standard for longer flights and many companies are mandating economy travel for short haul anywhere in the world,” says Sneider.

There are wide variations in how companies interpret the meaning of short haul. Some will set four hours as the hurdle, above which executives can buy business class. Others raise the bar to six or even seven hours. Clearly for the outsource travel company, it makes little difference where the clients set the mark. What the outsourcer can bring to the party, however, is the ability to give the client a fairly accurate picture of what the savings would be to their consolidated global budget and regional budgets at each ‘mark’.

Armed with this data, the in-house travel manager should be able to tell the finance director exactly what the costs and savings equation will be for allowing travellers to go from economy class travel into business class travel at four, five, six and seven hours respectively.

This is not just a technical exercise, Sneider points out. The finance or procurement functions can then go to the company’s population of travelling executives and demonstrate what the savings to the company will be if people consent to doing longer economy class flights.

“Ultimately, you must have buy-in from your travelling executives, so you are not wasting time and energy having to police your travel policies. You want them adopted voluntarily, with a good grace because people see what the benefits to the company are,” she says.

Sneider says that while seven hours in economy sounds harsh, many UK corporates mandate using economy class to the US East Coast and business class to the West Coast.

The travel outsourcer’s global expertise can also be a big factor in avoiding friction between the company and its travellers. It will know, for example, the routes on which economy is really rather too grim to impose on Western business travellers. “Many companies, for example, fly business class to Moscow, but economy for the rest of Europe,” Sneider says.

Some companies may be tempted to think they can have their staff use the internet directly to book flights, and that they can dispense with the help of an outsource supplier. Such thinking misses some important points, Sneider says. “When your people are all getting on the internet looking for the right deals, that takes them time. Plus they tend to see only the deals which their particular trawl around the web reveals. Our systems already have all this information in them and the systems also hold all the client’s travel policy requirements. So the booking is far faster, the client knows it’s the best available on the day, and the client knows, too, that the booking conforms to its travel policy,” she says.

Roger Peters, UK group travel manager at aerospace and defence company Thales, believes his company runs an ‘open book’ policy with its outsourcer, Carlson Wagonlit. “We all have shareholders to report to. We don’t expect them to work for nothing, and we are happy to agree a level of profit with them that they can expect from the business. After that, we want a complete open book, so we can see exactly what all their costs are and how that profit is derived,” he says.

Peters, himself a senior procurement executive, believes that cost is in no sense his primary driving factor when negotiating with his travel outsourcer. “For me, the relationship is all about agreeing a level of service for our travelling population and working out the right price for that service,” he says. Neither component, the level of service nor the cost, can be thought about in isolation. Thales’ travel spend on air tickets globally is more than £100m and the company is keen to manage this spend closely.

For Peters, there is no question about what he considers to be the most critical aspect of travel management. “It’s information,” he says. “Without information, you’re dead in the water. You can’t even start to get into a discussion with a major carrier. When we go in to talk to carriers we know that the information we have on their routes, their average cost per seat, their market share versus their rivals, and what the competition are offering on the same route, is better than the carrier’s own information. That puts us in a great position and is one of the key things our outsourcer provides for us.”

Keith Mullineux, European travel manager for General Electric, believes that to run a properly managed travel operation in a large corporate such as GE, there is no choice but to outsource. “There is only one of us – me – to take care of the UK. There is a lady like me to take care of Asia and we have a small team in Europe. We deliberately do not want to employ a lot of people at GE with “travel” in their title,” he says.

For him, managing GE’s travel policy is about managing the outsource service providers. The company uses Carlson Wagonlit to run its travel shops, another to run its self-booking tool, and its reservations system is outsourced to Sabre. Payment is outsourced to Mastercard and emergency and security cover is provided by International SOS.

The value of outsourcing a service such as this latter example, Mullineux says, was graphically illustrated in the wake of the Boxing Day Tsunami. “We were able to satisfy ourselves within a few hours, even though it was Boxing Day, that we had no travellers in any of the danger areas at the time, from any of our offices anywhere in the world.”

The GE travel outsource mosaic of suppliers, Mullineux says, has taken some 10 years to put together and provides the means to execute a global travel policy. Negotiations with suppliers, including the major carriers, are handled by GE’s corporate procurement.