Strategic Sourcing ACTE Tampa

8/6/2019 Strategic Sourcing ACTE Tampa

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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: TheNew 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 mostinfluential 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

andTravel


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Strategic Sourcing is a cornerstone fortravel cost reduction

Transienttransaction

management

Strategic Sourcing

Groups/meetingmanagement

Travel policy

Demand Management(fewer trips)


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How does Strategic Sourcing work?

Consolidate the spend

Control the spend

Tighten supply relationships

Find ways to cut costs

Buyer Buyer

Suppliers


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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

without layoffs

~ 60%~

Purchased

Goods and

Services

25%

Salaries,

Wages and

Benefits

10%

Taxes,

Depreciation

and Interest

5%

Profit

Before

100%

Total Revenue

8%

Profit

After

Reduced spending falls

right to the bottom line


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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

E

ngineering, Manufacturing,S

ervice 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

Rationale

Match commission fee toagency cost, not ticket price

Adoption Rate

Nearly universal

Consequences

Smaller commission pool

Airline Commission Caps

Rationale

Reduction in purchase costsgoes straight to bottom line

Adoption Rate

Significant and growing

Consequences

Travel suppliers are targeted

Strategic Sourcing

More Sophisticated

Management of Travel

Costs

Dwindling Revenues Pressure to Reduce Costs


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Applying Strategic Sourcing 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

Application To Travel

Consolidate agency/card data

Set travel policy

Enforce travel policy

Show incremental gain/loss

Calculate total costs and negotiate

aggressively

Enforce travel policy

Use data warehouse tools


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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 TravelManagers


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Strategic Sourcing readiness testUse 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 sourcingC. 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

1 = Strongly disagree

2 = Disagree3 = Neutral/dont know

4 = Agree

5 = Strongly agree


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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 sourcingCreate 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 bidsSpeak 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

Companies with weak travel policies will

never get the best prices

The price paid by a corporate traveler

Is determined by the suppliers willingness to negotiate

Which is based on the companys ability to move

market share between suppliers

Which depends on the companys travel policy

and its enforcement


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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

IfSupplier B comes within 10% of our incumbents

quality, and offers a cost savings of at least $100,000,

then switch toS

upplier 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/orproductivity but you cant

quantify it.

Travel isnt as different as we might think

or Advertising

Travel

orHealth Benefits

or I.T. Consulting

or Enterprise Software


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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

Quality standards

Purchase orders

Budgeting

Analysis Payment

Control

Travel fits this model

Supplier evaluation

Price negotiation

Contracting Cost reduction

Supplier

development

Sourcing

Order fulfillment

Problem resolution

Data collection and

reporting

Operations


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The procurement-based travel managementmodel

Sourcing Team Operations Team

Travel Manager

Buy the specified quality of travelSet guidelines for purchasing Evaluate supplier quality and cost Manage selection process

Negotiate contracts Quantify potential savings

Manage travel agency Implement new programs Implement new technologyManage supplier performance

Manage travel policy complianceResolve 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?

Strategy

Leverage

Major focus

Major concern

Operations Model Procurement Model


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The travel management dilemma

Dont promise whatwe cant deliver.

OperationsPromise big

volumes to get bigsavings.

Sourcing

Wheres the volume?or

Wheres the threat?

Suppliers

Where are the savings?

Control


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About RightToo Much

Too Little

D/P Score

77%

115%

105%

Solution: The D/P Dashboard

D/P = Delivered to Promised % (e.g., market share,

room nights, segments, rental days, etc.)

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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Good Moderate Poor

Solution Problem Air Hotel Car

Near-Term Benefits

N/A N/A

Price/volume leverage

Minimize transaction costs

Minimize transaction costs Control at P.O.S.

Maximize price competition Faster selections

Maximize price competition Faster selection Realistic contracts

Data consolidation Influence at P.O.S.

Data consolidation Purchasing compliance

Direct connections

Self-booking

Online RFPs and

auctions

Airline Sourcing

software

Consortias

Agency consolidation

Expense reporting

systems


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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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Appendix:Work Plans

10 Commandments

Building 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

[email protected]


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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


VIII. Speak the truth to all bidders

IX. Judge thy bidders fairly

X. Honor thy commitments


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Companies with weak travel policies

will never get the best prices

The price paid by a corporate traveler

Is determined by the suppliers willingness to negotiate

Which is based on the companys ability to move market

share between suppliers

Which depends on the companys travel policy

and its enforcement


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Find an executive sponsor

Build the business case

Write the strongest policy acceptable to seniormanagement

Define appropriate sanctions

Cost Savings

TravelerProductivity And

Retention


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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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SupportingBetteringBelievingUnder-

standing

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

HUBB

S

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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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

IfSupplier 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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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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Task 1 2 3 4 5 6 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 ofTravel Councils

Month

1. Get senior management

sponsorship

2. Gather data

3. Benchmark existing

policy

4. Build the business cases

for each major plank

5. SeekTravel Council

endorsement

6. Modify language and

sanctions as needed

7. Educate and

communicate

Travel Policy Development


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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

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

MonthAirline Sourcing


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Task 1 2 3 4 5 6 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)

Month

1. Gather travel data

2. Create cost model foranalyzing pricing

3. Define RFP criteria and

weightings

4. Obtain Travel Council

endorsements

5. Prepare and publish RFP

6. Evaluate pricing andservice capabilities

7. Finalize configuration

and implementation plans

8. Notify counselors and

travelers

Travel Agency Sourcing


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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 amenityvalues, target room rates

6. Negotiate room rates

7. Publishhotel directory

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

MonthHotel Sourcing


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Building Travel

Business Cases


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Class of air

service

Airline

upgrades

Use of

alternate

airport

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 considerusing alternative airports whenever

possible to reduce airfares.

Loose

Loose

Loose

Number Of Peer

Companies

Loose

2

1

4

Mod.

3

1

3

Tight

3

6

1

Our Language

RatingOur Current Policy LanguagePolicy Plank

Senior management wants objective

reference points

Know how your policy compares to peers


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Misc.

ParkingMileageTaxis

Meals

Rental cars

Hotels

Air travel

LimosCell phonesEntertainment

55%

10%

20%

8%7% Entertainment policy

Spending guidelinesAlcohol 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

Category Key Planks

Focus on the important policy planks


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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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Current Language

Travelers are encouragedto use the designatedcorporate travel agency.

Proposed Language

Travelers are requiredto use the designatedcorporate travel agency for all business-relatedtravel.

Benchmark Findings

6 of8 peer companiesuse language similar toour proposed language

Potential Annual

Savings

$300-500K

Implementation IssuesMust add three full-timetravel agents to handleadditional reservations

ComplianceMeasurement

Perform sample auditsof expense reports

NegativeConsequences

1st: Verbal reprimand2nd: Written reprimand3rd: Non-reimbursement

Key elements of a good travel business case


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Airline Consolidation Opportunity

Before Consolidation After Consolidation

Consolidation is expected to save this firm nearly $1 million per year

Note: Discounts are for illustrative purposes only

Example: Savings from consolidating

preferred carriers

Carrier

Last Years

Spend Net of

Discounts(000)

Average

SystemwideDiscount

AACO

DL

NWUA

USTWACTOTAL

$$$$$

$$$$

4,500

1,6002,500

900

6,500

400350

500

17,250

10%

3%

5%

0%

12%

10%20%

0%

Expected

Spend Net

of Discounts(000)

NewDiscount

Carrier Gain

Or Loss(000)

$$$$$

$$$$

1,500

2,300

3,400

450

8,200

250100

150

16,350

0%

10%

10%

0%

18%

0%0%

0%

$$$$$

$$$$

(3,000)700900

(450)1,700

(150)(250)(350)(900)


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Strategic Sourcing ACTE Tampa

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