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PurchasingB2B

Hotel contracts 101

Tips for getting a better deal on your hotel spend


December 18, 2012
by By Jacob Stoller

Hotel accommodation doesn’t come cheap, especially in major business centres that are the most frequent destinations for business travellers. A recent study by travel technology firm TRX Inc, found that hotel bills can account for as much as 50 percent of the total travel spend.

Hotel costs, however, are much more complex than airfares, the other major travel cost component, and the details allude many travel managers. The default arrangement for many companies is to put out an RFP to major hotel chains that asks lots of standard questions, but provides very little information about the organization’s requirements and expected volumes. While this arrangement is better than nothing, it does little to provide any bargaining leverage.

“Without having a basic knowledge of what volumes they can commit to, how can they demonstrate their attractiveness as a client?” says Yon Abad, director of hotel solutions at Carlson Wagonlit Travel (CWT) in the Americas.

What companies should do, he says, is formulate an overall buying strategy backed up by their travel data.

“If you don’t do this preliminary work, you go to the RFP without any knowledge,” says Abad.

Here are five tips for gathering content for an RFP that will attract serious attention from providers, and result in significant savings on the hotel spend:

Know your travellers
Cutting a deal with an accommodation provider is useless if travellers don’t comply. Hotel accommodation touches the personal lives of employees who sacrifice time with their families to represent the company in distant cities, and productivity is a major concern for travellers and their managers. Amenities, therefore, aren’t merely a matter of personal comfort—78 percent of respondents, according to a recent BTN Group survey, agreed that a comfortable working environment in a hotel enhances their productivity.

Traveller preferences should be surveyed on a regular basis. Asking standard questions by email or web portal may not be sufficient, as the most important issues may be unknown to the surveyors. Some qualitative research, through focus groups or open-ended questionnaires, will give a better sense of which factors have the most impact on productivity and personal comfort.

A good knowledge of key preferences helps ensure high compliance and gives the purchasing manager added options when considering choices, including tiering down from full-service to limited-service hotels. According to a recent survey from Business Travel News, free high-speed Internet and a free hot breakfast are the two most important amenities to business travellers, both of which can be easily found at lower cost facilities.

Gather your data
In the above-mentioned BTN Group survey, 39 percent of travel managers conceded that at least 25 percent of their hotel spend is unaccounted for. The same study found that on the average, travel managers underestimated the hotel proportion of the travel spend by as much as 18 percent.

Hotels are a volume business, and capturing the numbers outside of those readily available from the preferred travel agent or travel management company can make a significant difference in bargaining power. Going through the corporate credit card bills and expense reports is a time-consuming but necessary step in getting close to 100 percent.

In addition to overall volume, length-of-stay data can also be valuable, as chains often give preferred pricing when travellers will be staying over on weekends where demand is lower.

Look at the end-to-end picture
The right hotel choice can reduce ancillary costs such as ground travel, meal expenses and business services. It’s important, therefore, to capture information such as cab fares, restaurant bills and miscellaneous costs, which should be tabulated along with hotel data. Conversely, it’s important to be aware of extras creeping into hotel bills, such as wi-fi that is no longer free.

Where possible, negotiate at the property level
Hotels are largely a franchise business, and consequently, the chains have limited discretion when it comes to pricing. The best hotel deals, therefore, are those that are negotiated at the property level. Companies that accommodate a high volume of travellers in a particular location may be in the position to take advantage of this. The threshold where property owners will negotiate, according to Room for Savings, a report by CWT, is $10,000 in annual spend.

Of course, when negotiating with a property owner, it also makes sense to survey the local market to ensure that the offering is competitive in terms of both rates and amenities.

Know the hotel business
Hotel contracts are full of limitation clauses, industry terms and thresholds. Understanding how the business works can reduce risk and open up options. Many companies, for example, insist on a last room available (LRA) clause that guarantees that the rate will be honoured even it the traveller is occupying the last room available of the specified type. This prevents unexpected surcharges during peak periods. Many hotels also have blackout periods—typically 30 to 40 nights a year—where the special rate won’t be honoured.

Another issue that travel managers and procurement professionals should be aware of is flat rate versus dynamic pricing. Because hotel costs are strongly influenced by fluctuations in labour rates, providers may suggest a dynamic pricing arrangement. The CWT study found that the approach can result in lower costs. But there is risk involved, and the actual pricing has to be monitored. In any case, 12 months is the standard commitment for hotel agreements.

Industry data is available from organizations like the Global Business Travel Association (GBTA) website: http://www.gbta.org/canada/Pages/default.aspx

The CWT study Room for Savings can be downloaded at: http://www.carlsonwagonlit.com/en/global/premium_pdf/etm/hotel_en.pdf.

Getting help
Getting the information lined up properly can be a major chore, and the purchasing manager may want to have outside help, at least at the initial stage.  Travel management firms that offer comprehensive services often have the data management tools to help tabulate and sort information. Working long term with such an organization can also make it much easier to collect and stay on top of this information on an ongoing basis.

Some organizations acquire their own software for travel management purposes. One caveat is that many purchasing management systems don’t have the features to cover the many variables around hotel spend, so it’s important to consider a specialty tool such as TRX Travel Analytics.

The bottom line is that reducing the hotel spend is not as straightforward as trimming other expenses like air fares, and requires an upfront investment in information gathering. The rewards, however, are not only better rates, but travellers who are happier, more productive and willingly compliant with corporate travel policies.