Cost-efficient travel procurement is becoming increasingly tricky for corporate executives, particularly those who are encouraged by their travel management companies (TMCs) to focus on the cost and not the efficiency of the service they provide.
With budgets tightening and competition intensifying, many TMCs are discounting fees to unrealistic and sometimes even absurd levels, just to get the business. Once they have secured the account, they have to scramble to recover their shortfall from the client in other ways and cannot afford the manpower costs required to put in place the policies and procedures required to manage the total travel costs.
Procurement managers need to be aware of this common practice, which manifests itself in various forms. The TMC can mark up the accommodation cost, or can charge for different classes of fares in order to sustain their business.
The fact of the matter is that, globally as well as in South Africa, the travel management industry operates on paper-thin margins: a profit of 2% on total sales value is regarded as the norm.
There is a misconception that a TMC can supplement its fee income with commissions and overrides, and corporates often ask to share in these. However, a professionally managed TMC will already have factored those into its fee calculation. This is how it works. The TMC calculates the total cost, mainly manpower, of servicing the account. Overrides and supplier revenues are then offset against this. Finally, the TMC proposes a management fee which should deliver that 2% margin. So when a customer takes away the overrides or commission, the TMC in order to sustain itself, must increase its fees.
As a rule of thumb, any management fee which amounts to less than 4% of the total travel programme should ring a warning bell. At that level, the TMC will simply not be able to provide the client with an effective service, let alone add value to the client’s bottom line.
Of course, the end goal should be to keep a tight rein on costs and make savings where possible. But squeezing the TMC on its fees is counter-productive because inevitably the total cost of the programme will rise as the TMC will not be able to perform the level of service required to resolve the total travel spend.
It’s worth noting that a TMC’s online system can be the most cost-effective way of managing travel with its ability to extract all airline, car rental and accommodation options and compare these to the client’s preferences. The TMC’s recommendation – which will highlight potential savings, for example by taking an earlier flight – are communicated electronically to the client’s travel approver, who authorises it electronically, after which all vouchers are also issued electronically.
The key focus of partnering with a TMC should be on value delivery and not cheap fees. A properly conceived programme will give the client total cost control over its travel programme, thanks to the TMC’s ability to deal with all vendors, negotiate discounts, handle the daily operation of the programme, develop travel policies and controls, and manage data and credit card usage.
These services all add value which extends beyond the management fee, which is why companies should look past the lure of a low fee, which will prove unsustainable in the end. Instead, they should take into consideration the very real contribution a good TMC, with the right skills and services, can make to the efficient overall management of their travel programme and spend.