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White Paper Benchmark

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    White Paper Benchmark White Paper Benchmark Document Transcript

    • WHITE PAPER BENCHMARKING SAVINGS NOVEMBER 2008 travel © 2008, Nielsen Business Media 770 Broadway, New York, NY 10003
    • Coming To Terms Over Travel Management Savings As business travel management programs within companies mature, it becomes increasingly incumbent on business travel buyers to accurately define savings to more clearly communicate to senior management the value of such efforts. Corporate Travel This is hardly a challenge for new travel management programs, which quickly can yield 10 percent to 25 percent savings simply by consolidating and leveraging spending volume. Once the easily 100 Companies reached, ripened fruit has been picked, however, what is the person who is responsible for the function of travel management to do for an Pursue Consensus encore? At most companies, the answer is to continue to glean addi- tional savings on an annual basis. The challenge in many organiza- tions is that senior management is not always receptive to the ways travel buyers define savings. This white paper and the research efforts from which these findings A BTN white paper were drawn are the results of the need expressed by several of the 100 largest buyers of business travel services in the United States to sponsored by BCD attempt to determine a standard definition or definitions for travel management savings. Travel, Delta Air In fact, the impetus for this effort came directly from a question raised by Philips International vice president of global commodity management John Guarneri during BTN’s Corporate Travel 100 Lines, TPG Benchmarking Summit in May during the Association of Corporate Travel Executives/Corporate Travel World conference in Washington, Hospitality and D.C. While many in attendance that day were quick to respond to Guarneri’s call to seek a common definition, it was Philips controller Manhattan’s Tudor Hubert Cui who fully articulated the concepts that the Corporate Travel 100 buyers and Business Travel News, with the support of BCD Travel, Delta Air Lines, TPG Hospitality and Manhattan’s Tudor Hotel, Hotel attempted to define. Cui spelled out questions in four basic areas: How does your organ- ization define travel-related savings, audit such savings, differentiate savings efforts from changes in external conditions and determine the level of detail that it requires? Travel buyers from about two dozen companies that spent the most on travel from U.S. points of sale in 2007 responded to a survey that Business Travel News hosted online and/or attended a special day- long benchmarking summit at Manhattan’s Tudor Hotel in September. The organizations that were represented in this benchmarking effort included Bank of America, BearingPoint, Bristol-Myers Squibb, ConocoPhillips, Credit Suisse, Deutsche Bank, Ernst & Young, Honeywell, Johnson & Johnson, Marsh & McLennan, Merck, Merrill Lynch, News Corp., Oracle, Pfizer, Philips, PricewaterhouseCoopers, Reed Elsevier, Siemens, Thomson Reuters, the United Nations, Verizon and Wal-Mart. What follows are their efforts to reach some kind of consensus in defining these terms. 2
    • Savings: A Defining Moment Recent efforts by some of America’s largest corporate travel buyers to develop a standard definition of travel cost savings have proven elusive. While some commonality exists, it appears that different types of organiza- tions have very different views when it comes to defining these terms. Clearly, no single theorem exists, and what emerged from the benchmark- ing efforts of more than two dozen Corporate Travel 100 buyers, generally speaking, were two different approaches: a more multifaceted and granular one taken by those who report into purchasing or shared services organiza- I EP WBHNTHMARAIPER tions and the approach followed by those who report into other areas within companies. E C K NG The group of Corporate Travel 100 buyers who report to purchasing or SAVINGS shared-service organizations, but hailed from myriad industry sectors, recog- nized at least four potential factors in their cost savings measurements: incre- mental or year-over-year savings, cost avoidance—which factors in cost ver- sus market prices—soft savings or value-added services and potential future savings opportunities. While corporations apply different weights and measures to these factors, some are more straightforward in their calculations by applying an orthodox year-over-year expenditure reduction as their savings evaluation within each supplier category. The blurring of the lines One corporate travel buyer responding to the survey defined cost savings as “straight reductions from previously sourced or new sourcing areas based between sourcing and on relation to market,” cost avoidance as “avoidance of previously or tradi- tionally based costs either through negotiation or process/implementation travel management improvement,” and one-time savings as “savings that may be given as an incentive or is based on a one-time need or limited supply, not realized on an approaches, dire eco- annual basis.” Another buyer said all savings methodology is defined as an “action taken nomic conditions, rising by global procurement that results in a reduction against” one of three base- lines: “previous price paid, internal proxy or relevant external pricing for prices and decreased goods or services not currently purchased, or—for service-based contracts where no previous unit price exists—lowest competitive legitimate bid or best legitimate proposal as the relevant comparable pricing baseline.” transaction volumes For another company, the savings equation includes hard savings or those that have a direct impact on the bottom line, contract-based savings derived have complicated the from negotiated prices, project-based savings from supply-based and produc- tivity improvements and “one-off improvements” or soft-dollar savings, such cost-savings equation. as value-added services. Meanwhile, some of these long-held internal standards are in need of • • • • • • • • refining as measuring cost savings in today’s economic environment has become an increasingly cumbersome and troubling task for corporate travel buyers. The combination of several factors, including the blurring of the lines between sourcing and travel management approaches, dire economic market conditions, rising prices and, for many, decreased transaction volumes have complicated the cost savings equation. Even within companies, supplier category cost savings measurements vary. For U.S.-based companies, air programs not only represent the biggest por- tion of the T&E bill, they also can be the most complex area of savings eval- 3
    • Savings: A Defining Moment uation. At the heart of the evaluation are conventional year-over-year reduc- tions in spending. One buyer in response to the benchmarking survey charac- terized air savings measurement as the “gross cost of the fare subtracting actual cost after contract is applied.” Meanwhile, some companies build on top of that baseline by measuring savings associated with online versus offline average ticket prices, class of service, domestic average ticket prices, international average ticket prices and limiting analysis to top citypairs. Further obfuscating the issue is the pro- liferation of such ancillary charges as baggage fees, inflight purchases and seat upgrades. Travel buyers largely have yet to successfully net such fees out of the base volumes. In a time of rising airfares, during which many companies are scaling down their transaction volumes, new decision-making processes around savings definition and generation are emerging. One Corporate Travel 100 buyer provided the example of volume fluctua- I EP WBHNTHMARAIPER tions on a domestic citypair. “I bought 1,000 units last year at $100 a unit. This year, through negotiations, I am able to bring it down to $95 a unit, but I did E C K NG 1,200 units,” the buyer said. “Are my savings on the $5 difference on the SAVINGS 1,000 from last year or the 1,200 this year? By the most orthodox definition, we are not supposed to factor in the volume effect, so it would be the 1,000. On the other hand, they said to us that you could do the 1,200, but next year, if your volume drops to 800, you have to take it the other way and decrement your savings.” While this buyer’s company is using a conventional methodology, other companies choose the option of throwing the additional segments into a At one company, “cost-avoidance bucket,” breaking out the overall price differential. Others apply their own internally developed equations. One survey respon- dent said that for airline savings measurements, the sum is derived from the pooled volume is a gross cost of the fare subtracted from the actual cost after the contractually determined discount is applied. “religion” in order to While hotel and car rental savings performance metrics employ at least some level of commonality, such as average cost per rental day, companies account for unmanaged differ in these categories in the ways that they measure them when they break them down more granularly. spending and to deter- One axiomatic measurement of hotel savings is the year-over-year cost per night differential, but buyers are struggling with applying specific market con- mine the spending over ditions into the equation, including market demand, seasonal rate fluctuation and currency exchange rates. One Corporate Travel 100 buyer said he isn’t which they have influ- permitted to claim exchange rate differentials when presenting the savings performance, but providing this analysis gives senior management the view into “what is impacting the cost savings or increases.” ence, but the “level of Some companies drill down by zip code or region in order to get more spe- cific comparisons of year-over-year hotel savings, but others use a more religion changes with straightforward approach of applying the pooled volume, including preferred hotel bookings and bookings that go outside of preferred channels. At one the economy.” company, pooled volume is a “religion” in order to account for unmanaged spending and to determine the portion of the spending over which they have • • • • • • • • influence, but the “level of religion changes with the economy.” As travel buyers broaden their management roles by adding such cate- gories as meetings and events and remote conferencing management, the need to display savings for these categories also has wrought different sav- ings interpretations. One Corporate Travel 100 company travel buyer uses the first room rate received during the meetings request-for-proposals process as the savings benchmark. Another buyer takes a more liberal approach to meetings savings measurements by using the negotiated rate versus the “standard corporate” 4
    • Savings: A Defining Moment rate, which shows an inflated savings number because daily room rates in a group block often are lower than transient rates, and in some cases meeting packages that include food and beverage charges are negotiated to be includ- ed as part of the room fee. Others measure savings based on changes in the the cost per attendee for annual meetings, leaving out destination-specific price impacts as well as the impact of one-off and ad hoc meetings. Then, there is the question of when to measure meetings savings: during sourcing or after the meeting occurs. One buyer does so after the fact because of the potential for cancellations. According to one survey respondent, meetings cost savings is calculated on a budget versus actual comparison, “so if a meeting budget was $1 million and the meeting was negotiated at $500,000, then they would take the $500,000 in savings.” Just as volume reductions and rising costs affect travel supplier savings, they also affect corporate card program savings calculations. As volumes decline, so will rebates and/or incentives—considerable bonus revenue streams for many companies. I EP WBHNTHMARAIPER Yet, this is an area where buyers consider themselves able to exert some influence by pushing further compliance to the card. However, in this area E C K NG there also are myriad ways to measure the savings from the program, includ- SAVINGS ing breaking out the volume effects and taking out central management fees from the rebates. Savings can be measured year over year or over the life of the card program, which typically is a multiyear deal. In addition, rebates often are not received until more than a year after the calendar year in which the rebate is attached. Meanwhile, such nascent managed categories as remote conferencing are providing further headaches. With remote conferencing facilities costing hun- dreds of thousands or even millions of dollars, travel buyers are finding them- One buyer calculates selves attempting to measure the return on investment and the savings asso- ciated with the reduction of travel costs as well as to manage the cost avoid- savings on a budget ance factors when applicable. Using technological alternatives isn’t the only form of demand manage- versus actual compari- ment that can affect savings negatively by reducing volumes, undermining negotiated discount deals with suppliers. As buyers are pushing various son, “so if a meeting levers, such as sliding advance-purchase thresholds, altering business class threshold allowances and moving more reservations online, total program value measurement is paramount in the benefit equation of the managed cor- budget was $1 million porate travel program. As demand management rises in importance for many corporations in this and the meeting was economy, it also muddies the savings waters as companies focus on reducing trips to cut costs and battle rising prices. Thus, some Corporate Travel 100 negotiated at buyers are applying a new measurement: cost savings plus avoidance equals total benefit. This underscores the fact that straight cost savings or reduction $500,000, then they is not the only measure of travel program performance. Instead, an amalga- mation of all the benefits travel managers bring to the table is the truest form would take the of measurement. While there is no universal method or gold standard in applying any of these $500,000 in savings.” measurements, travel buyers are wrestling with similar issues in cost savings. Despite corporations’ disparate stances and varied methodologies and an increased focus on straightforward cost reductions—at least for some compa- • • • • • • • • nies—some common characteristics have surfaced. Travel buyers can wield these principal components to tailor a cost-savings equation that makes it eas- ier for senior management, suppliers and their travel-buying peers to under- stand the benefits of the managed travel program and the value the travel buyer brings to the table. 5
    • Auditing Travel Savings Once companies define savings, they employ a variety of methods to audit the savings that travel departments generate. Despite different methodolo- gies in the frequency of the audits, the type of data used, the metrics used and the authoritative level that is required to sign off on the audits, buyers agree that some sort of oversight on savings is necessary. Some buyers even said that their savings did not count until they were audited. “Our entire being is measuring what we save,” one buyer said. Part of the challenge in auditing travel savings is the transcendence of the I EP WBHNTHMARAIPER program’s effect in a given company. Its effects are seen across all sectors, divisions or units of a company, and each of those parts of an organization can E C K NG have varying percentages of employees who travel. What follows includes SAVINGS some of the best practices in handling audits, as employed by buyers manag- ing travel at Corporate Travel 100 companies. With all the data sources that are available, the two that travel buyers most often turn to in auditing their savings performance are corporate card data and booking/agency data. Many buyers use a combination of those two sources for auditing purposes when available. Both data streams have their strengths and weaknesses. Corporate card data gives a clear picture of actual expenses incurred but misses out-of-pock- et expenses—a particular problem if companies do not have strong compli- ance with their corporate card—and also can lack enriched data from certain supplier sources. Booked data, meanwhile, is immediately available but often According to some can differ from what is actually paid by the traveler. One buyer reported using an agency consulting group to measure air, car buyers, savings do not and hotel expenses, consolidating data feeds from four separate travel agen- cies. The company in turn takes that data and translates it to a procurement count until they are dashboard tool. The buyer uses agency data over card data because of the detail available audited. “Our entire compared with corporate card data. As a result, the buyer said air data is very good, car data is adequate but hotel data is understated because hotels often being is measuring are not booked through the agency. For now, the buyer is comfortable with the margin of error, but there are plans for an enterprise system to help get expense reporting data that can assist in filling in the blanks. what we save,” Another buyer said the company receives savings reports directly from the agency, supplemented by a third-party consulting company to support the one said. company’s global airline requests for proposals and quarterly audits. Corporate card suppliers, meanwhile, are working on enhancements to the • • • • • • • • data they can provide travel buyers. Detailed electronic hotel folio data, for example, now is available at many properties across most major hotel brands. One buyer said the current policy is to use corporate card data for airlines online, with agency data used for hotel and car rental costs. However, the buyer said that the company this year is switching to card data for hotel and car rental as well. Another buyer said that their company uses both agency data and bottom- line general ledger data to determine total T&E spending levels for savings audits. The general ledger data is the best indicator of savings, the buyer said. Once the data source or sources are determined, buyers have to determine how best to use them to audit savings. Raw data alone usually is not suffi- cient to show savings performance, particularly with global contracts. 6
    • Auditing Travel Savings “Unless we can trace it back to a cost center, we can’t count it as savings,” according to one buyer. “Now we have to trace it down to the penny at the cost center.” Buyers must determine a point of comparison to use in audits. One buyer reported using scripted input at the point of sale, for bookings through either the agency or the online booking tool, which compares the negotiated fare to what the cost would have been without the contractual discounts. Airfare savings are not inflated by using unrestricted airfares as a point of compari- son, the buyer said. When bookings are out of policy, travelers’ managers are alerted to the lost savings opportunities via e-mail. Another buyer reported using direct matching when possible to show sav- ings. For example, airfares are matched citypair to citypair. A third buyer reported using a scorecard to measure performance against the forecast for savings throughout the year. The information is reported monthly to management and subsequently is reported up the chain. I EP WBHNTHMARAIPER In terms of frequency, quarterly reviews of data for savings were popular for travel buyers. Some do so more often, however, particularly when moni- E C K NG toring the progress of new or high-savings-yield projects. One buyer, in lieu of SAVINGS external savings audits, said the policy was to review raw data weekly for a self-audit. The scope and frequency of audits can change within the lifespan of major projects. One buyer said their company’s policy, in the case of three- or five- year contracts, was to audit the savings for the first year and then to true up quarterly in subsequent years to ensure the savings were still on track. Internal happenings within a company also can change the frequency of audits. One buyer said her general policy was to audit savings annually. However, her company recently had completed a merger, and travel was part Buyers agreed that it is of the synergy savings that had to be reported to Wall Street quarterly. Therefore, for the three years following the merger, she also has to audit a best practice to have those quarterly synergy savings. Buyers agreed that it is a best practice to have an independent internal an independent internal team dedicated to project savings validation and approval. Various people or departments may bear the ultimate responsibility for signing off on travel sav- team dedicated to proj- ings audits. That responsible party will depend on to whom the buyer must report. While more buyers are reporting into procurement, the ultimate ect savings validation authority often is someone within the finance division. One buyer said she must take every new project before the finance group and approval. The ulti- prior to the onset to get approval of the savings methodology. “We have basic rules, but anything that is gray, we take it to them, especially if the savings are over $1 million,” she said. “They must sign off on it.” mate authority often is That approval can come from different levels in the finance organization. Some buyers have to report to financial controllers, chief financial officers or someone within the chief procurement officers. Others simply have a designated group within the department to whom they report. finance division. Some buyers have more intricate layers to sign off on auditing. One buyer reported multiple layers of required audits and review, going through demand- • • • • • • • • side business handshakes, the travel controller and an internal control officer for key projects. In many cases, these authorities do not micromanage every level of the audits. Rather, they sign off on the key metrics of the audits and only need to approve first-time methodology. Travel departments can be even more autonomous. A few buyers reported no direct audit process for savings outside of their own department. Still, managers will review reports for accuracy, even if not dictating each metric of the audit. “More often than not,” one buyer said, “our auditing department is concentrating on actual operation rather than worrying about whether I’ve done my calculation correctly.” 7
    • Factoring In Influences Because corporate travel buyers do not operate within a vacuum, a high portion of an organization’s travel spending is determined by factors outside of the travel department’s control, be those internal demand trends or exter- nal market forces. On the airline side, general industry fluctuations, capacity cuts, the entrance of low-cost carriers into a local market, newly introduced fees and other external forces can have a large impact on a company’s travel costs. Likewise, the hotel market can fluctuate against the buyers’ interest with high I EP WBHNTHMARAIPER occupancy or in their favor with sluggish market demand or new supply inject- ed into a city. E C K NG There is no consensus on methods a company should use to differentiate SAVINGS savings achieved through their own efforts against favorable or unfavorable external and travel industry events that drive or hamper savings. It’s a mixed bag for buyers: Some said they look at overall spending as one lump sum—regardless of whether cost fluctuations come from within or were manipulated by a market larger than them—while others attempt to examine only what they can achieve through contract negotiations and policy enforce- ment. “It’s anecdotal and finance people want hard numbers,” one buyer said. The rise of demand While some companies neglect to differentiate savings or losses derived from factors outside of the travel department’s control, others said the bean management principles counters upstairs put full responsibility for travel spending on the shoulders of the travel department. has empowered buyers One buyer said, “We are expected to mitigate changes in the industry with either additional discounts or reductions in travel. Cost avoidance is tracked with ways to alter inter- but is not truly considered savings.” Furthermore, some companies prefer to set comparable year-over-year nal consumption pat- baselines, attempting to construct apples-to-apples comparisons that strip out savings or losses not generated from within the travel department. Others, meanwhile, don’t care where cost increases or decreases originate, terns or steer travelers just that they are recorded and accounted. Though buyers are resigned to the fact that they manage travel—not con- toward cost-averse trol it—the rise of demand management principles has empowered them with ways to alter internal consumption patterns or steer travelers toward behavior. “We can’t cost-averse behavior. “We can’t control demand, but we can offer up cost- savings opportunities,” said one buyer. Though such practices offer further control demand, but we control, they come at the expense of elusive measurement opportunities. Meanwhile, buyers also diverge as to how they differentiate hard-dollar can offer up cost-sav- savings with a measurable impact on the balance sheet and soft-dollar sav- ings that drive cost avoidance or bestow difficult-to-monetize benefits upon ings opportunities,” travelers. As airlines continually add fees for previously inclusive services as checked baggage or seat assignments—benefits once characterized as soft-dollar— said one. now can have some measurable hard-dollar figures attached. For example, as elite holders of airline loyalty programs are shielded from some ancillary • • • • • • • • charges, the savings generated from such programs can be determined with a bit more ease. For others, it depends on the soft-dollar benefit in question and if there is a demonstrated cost associated with value-add items—for example, a con- tract with a hotel that waives parking fees or includes free Internet or break- 8
    • Factoring In Influences fast in the rate could count as negotiated savings. “If value-adds can be quantified and validated, the value can be counted as cost avoidance,” said one buyer. “If high-speed Internet access is a cost ordi- narily passed to the traveler but our negotiations include this access in the rate, applicable cost avoidance can be claimed.” While some have determined ways to record such soft dollars on balance sheets, many buyers—at the behest of the finance department—only report to the profit and loss statement what the CFO would consider validated sav- ings. This camp says soft-dollar savings fall into the cost-avoidance category, not true cost-savings. As such, many buyers measure soft-dollar savings sep- arately and treat their impact as an anecdotal footnote to the hard savings number on the balance sheet. As one buyer said, “Hard savings are reported as negotiated savings and soft savings are reported under categories known as cost avoidance, such as nonrefundable exchanges and waivers and favors.” I EP WBHNTHMARAIPER Regardless of how they are reported, many buyers do attempt to track soft- dollar savings, even if hard-line financial departments are inclined to disre- E C K NG gard or minimize those efforts in favor of what they would consider true cost SAVINGS savings. “Even though there are clear values added to the businesses if our rates are better than market rates,” one buyer said, “it remains a challenging task to get the savings recognized within the company.” “If high-speed Internet access is a cost ordi- narily passed to the traveler but our negotia- tions include this access in the rate, applicable cost avoidance can be claimed.” • • • • • • • • 9
    • Defining The Details While the level of detail required for reporting savings varies by company, Corporate Travel 100 participants in this benchmarking initiative generally were divided between those who break down reporting by region or business units and those who calculate savings based on citypairs. One participant’s company, which uses both measures, “requires projects to be reported by business sector, by region. When calculating savings based on citypair, we generally apply the 80/20 rule, where only the top 80 percent volume pairs will be analyzed.” I EP WBHNTHMARAIPER Another respondent said, “We do it by business unit, by country, by region and globally.” E C K NG However, for some, like pharmaceutical companies, reporting needs to be SAVINGS even more detailed. One such Corporate Travel 100 manager said, “Because we make pharmaceuticals, we have to have so much documentation about every single thing we do. We have an actual savings handbook of what we can do, what we can’t do, how to measure things and how not to measure things. It’s not perfect, but it does hit 90 percent of what we actually do. The savings handbook was probably written a lot more for direct materials than it was for indirect, which travel falls under, but we still have to adhere to those same rules.” That travel manager added, “Everything has to be documented. We have a “Everything has to be global procurement desktop and we actually record everything into this desk- top. Our management religiously looks at this, as do our stakeholders.” documented. We have Other companies use the concept of pipelines to break savings initiatives down step by step. One Corporate Travel 100 buyer’s company has four a global procurement pipelines to follow the savings initiative through its lifecycle. When someone gets an idea that could lead to savings, it is put into the “discovery” catego- desktop and we actually ry. The “identify” category is used to identify the necessary actions needed in order to realize the savings. An initiative is classified as “under development” record everything into when the company is on the way to realizing savings. The final pipeline cate- gory is “achieve.” this desktop. Our man- Another buyer said their company has five stages, and within each stage “you can be red, yellow or green.” One buyer uses a specific plan for any project, which they present along agement religiously with different stage reviews to management. “It chronicles exactly what we’ve done for this particular event so that when we move on to source some looks at this, as do our other commodity, somebody else can come along and actually know what was done the very last time,” the buyer said. stakeholders.” Some buyers said that a major focus in their company was to work with suppliers for the long term. • • • • • • • • “When we do get audited, that’s the first, middle and last thing they audit: how we are managing our vendors,” one buyer said. Another buyer added, “A lot of the time, we either have really long relation- ships with someone or very short ones. Instead of going out to bid all the time, the company is trying to focus on supplier value management and working with the supplier and really honing down the process. We’ve spent a lot of time looking at that.” Many Corporate Travel 100 buyers said the biggest opportunity for cost sav- ings lies in changing traveler behavior. “A lot of it is around how we get travelers to change their behavior and 10
    • Defining The Details what that can deliver. I think that’s our biggest cost-saving opportunity or not, depending on whether they take it or not. Ultimately, we can’t say what they’re going to do,” one buyer said. Some buyers said that they provide reporting tools and metrics to travelers and management, or that they have travel agents call travelers to show them the savings opportunities that are available when they use in-policy travel options. “We issue a report every month that is a scorecard that has six levels—for the CEO down five levels,” said one buyer. “For example, if one of my employ- ees didn’t follow policy, I’ll see it, my boss will see it and his boss will see it. We’re actually naming names and we’re actually showing in this report what they bought and what they could have bought. And even though we are giv- ing up lost savings opportunities for those particular trips, we’ve found this a lot more valuable by the way we’re able to document everything. People don’t like their names on lists.” I EP WBHNTHMARAIPER E C K NG SAVINGS “For example, if one of my employees didn’t follow policy, I’ll see it, my boss will see it and his boss will see it. We’re actually naming names and we’re actu- ally showing in this report what they bought and what they could have bought.” • • • • • • • • 11
    • BTNonline.com 770 Broadway • New York, NY 10003 • BTNonline.com 2008 Corporate Travel BENCHMARKING SUMMIT Defining Travel Management Savings And Value 100 September 16, 2008 Welcome and thank you for participating in Agenda this effort to define savings to accurately reflect the value of business travel management. 11:00 a.m.: Introduction: BTN editor-in-chief David Meyer • Welcome, introduction of sponsors During BTN ’s Corporate Travel 100 Benchmarking Summit session • Presentation of exclusive original survey data in Washington, D.C., in May, John Guarneri of Philips introduced the • Opening remarks from John Guarneri, topic of defining cost savings and travel management value. Several Philips Vice President, Global Commodity people in the group quickly agreed that this would be a worthy topic Manager, Travel for a longer conversation. John not only raised the issue, but also devised the questionnaire most of you filled out, which we will use as 11:30 Question 1: How does your organization define the framework of our discussions today. travel related savings? We are able to gather here today thanks to the Tudor Hotel New 12:30 p.m. Lunch York and TPG Hospitality, as well as additional support from BCD Travel and Delta Air Lines. 1:30 Question 2: How does your organization audit such savings? Attached are the responses to the questionnaire BTN received in time for this preliminary report from 11 of the 21 companies that con- 2:00 Question 3: How do you differentiate savings firmed their attendance today. Several more have since contributed from external events? data, and BTN will continue to collect data from others for a final report to share with you and publish as a white paper for the industry soon. 2:30 Question 4: What level of detail is required for savings reporting purposes? 3:00 Coming to Consensus: Converse in small groups travel 3:30 Coming to Consensus: General sharing and wrap-up © 2008, Nielsen Business Media
    • Corporate Travel 100 Benchmarking Summit Defining travel management savings and value September 16, 2008 Attendee questionnaire responses Ia. How does your organization define travel related One-Time Saving: Savings that may be given as an savings for airline, car rental, hotel, meetings, other? incentive or is based on a one-time need or limited supply, cost savings not realized on an annual basis 1. Cost avoidance, incremental savings, contractual savings, etc. 5. Savings include both hard-savings (direct impact 2. Savings are based on year-over-year reduction in to P&L) and value-added savings (indirect impact to total spend. That could come from reduction in the P&L, cost avoidance, savings on capex / cashflow) cost per transaction (e.g. increased discounts on air- Three major categories are used: fares or reduced hotel rates) and/or reduced demand Contract Based savings – hard-savings (EBIT 1 – (e.g. reduction in the number of tickets purchased or supply based price negotiation) room nights purchased). Project Based savings – hard-savings (EBIT 2 – 3. We base all methodology on our Procurement Supply based and productivity improvements; EBIT Savings Handbook and the “Gold Standard:” Global One Off improvements) 3. Project Based savings – Procurement savings are measured and defined as an indirect/soft savings (value-added / cash-flow action taken by Global Procurement that results in a improvement) reduction against one of the following baselines: 1. Previous price paid 2. Internal proxy or relevant exter- 6. Incremental - year over year. nal pricing* (for goods or services not currently pur- chased) 3. Budget Note: If #1 above does not exist, 7. Savings that are attributed to the efforts of our go to #2, then #3 * For service based contracts, dedicated team and result in lowering the net costs of where no previous unit price exists, use lowest com- travel when compared to having no program or efforts petitive legitimate bid or best legitimate proposal as in place. Our costs vs the walk-up costs the relevant comparable pricing baseline. However, Finance made some allowance with 8. Year-over-year cost comparison - from the unit regard to airline, card and meetings: level rolled up to total spend per segment; all absent Airline: Incremental Discount (as we cannot get to a of market conditions past price paid without blending averages) Hotel: Past Price Paid (Rate this Year vs. Last Year) 9. We calculate savings between preferred airlines, – we have one guarantee contract and if we manage and hotels on the same route/destination. Also non- to negotiate away the increase we can take the value preferred to preferred rates. Use of nonrefundable of what we negotiated away against what we would tickets that were cancelled. Value adds included with have paid. rates e.g. breakfast and or internet access. We work Car Rental: Past Price Paid (Rate this Year vs. Last with hotels when rates are booked over our negotiat- Year or term, we would also measure mitigated sur- ed rate and measure how often the rate is reduced. charges, fees or extras as savings) We also look at total trip cost savings when compar- Meetings: Budget vs. Actual Card: Hard Dollar ing flying vs. taking the train and finally with meetings Savings in Sign-on and Rebate when received (so and events we measure what the global relationship every year recognized) delivers to our event planners vs. the first quote 4. Cost Saving: Straight reduction from previously 10. We define them as incremental contracted sav- sourced or new sourcing area based on relation to ings. Savings are defined as being able to lower our market costs year over year. We define contracted savings as Cost Avoidance: Avoidance of previously or tradi- improvement over current agreements. Actual savings tionally based costs either through negotiation or are only reported when incremental spend is truly low- process/implementation improvement ered (i.e.: true savings) BTN’s Corporate Travel 100 2 Benchmarking Summit
    • 11. Airline: negotiated savings only: comparing fare lection from audits, settlement of contract breach, before the discount against fare paid. etc.) Meetings: benchmark corporate hotel rate against Project Based savings – value-added / capex sav- negotiated rate paid ings • Value-added: generally, the same calculation Hotels: contracted rate against first rate offered; methodology (old cost – new cost) apply. E.g., Travel negotiated amenities (ie, free breakfast, internet) ban for a certain period = average price per city pair * volume reduced for a certain period. • This category Ib. How does your organization recognize travel relat- may require pre-approval from the management ed savings for each of the abovementioned areas? before reporting. • Since there is not a 100% correla- (methodology /formulas) tion between the savings and Travel’s contribution, savings in this category may not be treated at “hard- 1. identification of a spend baseline -> sourcable savings”. spend baseline -> target sourcable baseline/cost avoidance, incremental savings, increased discount 6. Airline discount is 20% and is reduced to 15% - levels savings is 5% X est. annual volume. Car rental avg total rate paid is $50 reduced to $40 savings is $10 X 2. See above. est. annual volume Hotel avg room rate $120 reduced to $110 savings is $10 X est. annual volume 3. Air: Incremental discount = (old discount vs. new Meetings – very difficult to determine –if however there discount) * actual flight segment flown are like meeting any reduction would be. Hotel: Past price paid (rate this year vs. last year) Car Rental: Past price paid (rate this year vs. last 7. Airline - Savings % is gross cost of fare subtract- year or term, we would also measure mitigated sur- ing actual cost after contract applied. Divide diff by charges, fees or extras as savings) gross cost and % result is overall % of savings. Car Meetings: Budget vs. actual – so if meeting budget Rental not measured. Hotel is RAC rate less our rate - was 1 million and the meeting was negotiated at and difference is divided by RAC to result in % sav- $500k, then they would take the $500k in savings ings. Card: Hard dollar savings in sign-on and rebate when received (so every year recognized 8. In addition to the answer in question 1, we calcu- late savings as described above, notate ‘cost avoid- 4. “Go to Market” event, and subsequent negotia- ance’ based on market conditions, and add the two tion. Expansion of current or existing scope and rene- together to identify ‘total benefit’. gotiation. Reduction of cost for non-related but similar scope of business. Supplier “give back” or incentive. 9. It is a fairly manual process as we want the data Negotiation with existing supplier. Contract commit- to be as accurate as possible as well as the fact that ment with un-contracted supplier. Detailed documen- we are measuring multiple areas, e.g. the value of tation required of current costs vs. new costs required Internet access negotiated in the room rate or break- for validation of savings. fast. We do use the reason code reports from the 5. In general: agency to assist specifically with air and also manually Contract Based savings = (old price – new price)* calculate savings between carriers and usage. we new volume, with rebates/commissions incorporate also look at the impact of behaviour changes and for into the prices We also tried to calculate savings example staying in the lowest priced preferred hotel in based on comparison of new market price vs. new a city and what that would deliver company price. However, such market benchmark efforts are not recognized by the company in 2008 or 2009. Project Based savings – hard-savings = (old price – new price)* new volume • For brand new price/bid- ding, if historical average price is not available, savings = (lowest first quote of all vendors -/- final price) x actual year-to-date volume • It may also require man- agement’s approvals for special cases (e.g. fee col- BTN’s Corporate Travel 100 3 Benchmarking Summit
    • IIa. How does your organization audit such savings? 8. Quarterly reports that roll up for the fiscal year. (frequency of reporting / data of substantiation) 1. Monthly/quarterly project upload and review by a 9. We do monthly reporting to the business and dedicated global team; savings scope and potential have our own internal analyst who verifies the figures independently evaluated according to established pro- together with the analysts at the agency cedure and benchmark 10. We engage our agency to provide our savings 2. We have regular meetings with the finance group, reports and a third-party consulting company to sup- which validates the savings methodologies. port our global airline RFP and quarterly audits. We report on cost avoidance on how we manage to the 3. Agency consulting group measures air, car and program. On a quarterly basis for hotel and air we look hotel and reports it to us. We have four travel agen- at our purchased price paid as compared to contract cies feeding data to one agency for data consolida- rates tion. We take that data and translate it to a procure- ment dashboard tool. We estimate savings for the 11. No audit performed month, quarter and year and true up as we go. Air is very good – car is not bad but hotel is under- IIb. What are the key controls in your saving report- stated because hotels are not often booked through ing process, to ensure savings are accurate? the agency. We use booked as opposed to card data as we need detail. We are ok with the margin of error. 1. Independent/internal dedicated team responsible We have no way to get expense reporting data at the for project savings validation and approval, not sourcing moment – plans for an enterprise system are under- way. Air, card and agency fees are auditable. Online 2. We received agency data to determine the trans- booking segments are auditable. Most other things actions, average ticket price and hotel rate (among are not. Our meeting agencies report savings to us. other things) and also get the bottom line GL data to determine total T&E spend. The latter is the best indi- 4. Frequency – quarterly. Reporting from company cator of savings. records and/or supplier using approved methodology (see 1b. above) 3. Finance does spot audits of our initiatives. Procurement has fairly high standards. We are 5. Multiple layers of reviews/audits exist. All projects required to report this information monthly to our man- are reviewed /approved by: agement, who reports it up the chain. We are meas- Demand side business handshakes (business own- ured in our scorecard by how well we forecast our ers who benefits from the travel projects), and savings for the year. Coming in over forecast is not Travel controller Savings must be in compliance with valued. For the first time we are beginning to report pre-defined definitions. Data substantiation (invoices / out a variety of metrics with standards we have set in source of information) have to be attached/specified in place globally. We are not near where we need to be the project tracking tool. yet but it is a start. Key projects (top 80% in amount) also have to be reviewed / approved by: 4. See 2a above. Validate calculations and examine Demand side financial handshakes (finance person supporting documentation. from businesses which benefit from the travel proj- ects), and 5. See answers in 2a for the layers of controls in Internal Control Officer (compliance officer on behalf place. Three critical points of controls are: of management team) Travel controllers – as gatekeeper for all travel saving projects 6. Each buyer is responsible to ensure that savings Demand Side / business handshake – as approver are being realized. Spot audits are performed through- for project / calculation approach / forecasted savings out the year. Internal Control Officer – as ultimate gatekeeper for key projects. 7. Self-audits are done weekly by review of raw data. No external savings audits are performed. 6. They are linked, in our on line contract manage- BTN’s Corporate Travel 100 4 Benchmarking Summit
    • ment system, to the agreement 7. No one as savings are not ‘accountable’ to the corporation, however managers review reports for 7. Scripting, and report review same week to correct accuracy before internal savings are reported up. typos for any manually entered items. Working toward robotics to gather and document information without 8. The head of purchasing manual additions 9. Travel Services 8. Direct matching (i.e. city pair to city pair for air) where possible; minimize extrapolation 10. n/a 9. It is based on booked data and comparisons are 11. Worldwide Procurement. They have responsibili- conducted against the corporate card data, compar- ty for reporting savings up through the organization ing what was booked to what was actually paid for. 10. n/a 11. Agent and user scripted input at initial point of sale whether reservation is made direct with the agency or through our online booking tool, reported through the agency back office. Comparison is made between what travel would have paid without contractual discounts to the negotiated fare paid to report true savings – not inflated by comparing to unrestricted airfare. We send pre-trip out of policy emails to travelers’ managers to alert them of lost savings opportunities. IIc. Who needs to sign-off on the saving numbers in your organization before it becomes official? 1. Varies on level and scope; includes: category mgr, category director; category mgmt, benefit track- ing (independent/dedicated team), etc. 2. Finance. 3. Financial Controller for the Division we report to. Not all things need be signed off – if it is a first time methodology we get the approval. 4. Designated financial officer. Chief Procurement Officer presents the savings in summary form to oper- ating companies. 5. All projects are required to be approved by: • Project owner • Supply Market Manager • Demand Side: business handshake • Travel Controller Key projects also require the approval from: • Demand Side: financial handshake • Internal Controller Officer 6. Executive Director BTN’s Corporate Travel 100 5 Benchmarking Summit
    • IIIa. How did you differentiate savings due to the 7. Every record has a UDID for whether a savings is efforts by your organization, vs. favorable or unfavor- contracted or no savings exists. Savings due to con- able external and travel industry factors that lead or tracts is measured against those eligible for savings. hamper such savings? (e.g. how to differentiate reduc- Blended discount is all savings against all records, tion of airfare due to negotiation efforts from the where ‘actual’ discount is exclusive to contracted sup- Travel department, or due to a new LLC entering the pliers to show value of contracts. market and driving down fares.) 8. No differentiation at this time 1. Set comparable (equalized) baselines for apples- to-apples comparisons 9. We compare old airline/hotel rates to new rates when RFPs have been conducted and based on pre- 2. We don’t. We are expected to mitigate changes vious year data will calculate the savings figure if travel in the industry with either additional discounts or patterns remain the same and if we have been able to reduction in travel. Cost avoidance is tracked but is negotiate better rates. We also speak with our internal not truly considered a savings. analysts for air and hotel and get their sense on where the industry is going by region and benchmark our 3. For air it is fairly simple – we use incremental dis- rates against their predictions. counts YOY and not blended averages. So we can tell right off what our contribution is. We track against 10. We don’t do this forecasts but a good deal of what we log is cost avoidance. 11. Our policy is lowest fare of the day within our travel policy window. We validate our success 4. Currently no differentiation, and probably minimal through various sources (ie: agency reporting, third exposure for our company since unit travel costs are party audits, industry experts/benchmarking). It’s not going down and our key markets experience limit- incumbent upon the travel department to select the ed impact from LCCs. However, if there is an agree- right negotiating environment to conduct RFPs or ment negotiated with a previously non-preferred carri- revisit existing contractual terms. er, for instance, the differential of new fare and previ- ous fare would be captured as cost savings (see 1a IIIb. How do you differentiate projects with hard sav- above). Same would apply to all travel categories. ings (savings that have direct impact to your P&L), vs. Another area is demand management, which would soft savings (savings that may be cost avoidance, value- include consumption (less or more travel) and change added, which do not bring direct P&L improvement), of behavior (e.g., air class of service, advance pur- from scope and reporting perspective? chase, changing from deluxe to moderate hotels). Such calculations are on our company’s radar once a 1. All savings types (and potentials) are validated as consistent and enforceable travel policy is in place part of financial validation process for all projects and move to more to a consolidated TMC platform – currently, our company does not have reliable data to 2. Hard savings is what is reported. calculate these savings and/or cost avoidance oppor- tunities. 3. The chart below shows how we define Savings 5. Our CTA (cContract based) savings are all inclu- and Benefit. We enter all things in our Procurement sive. Therefore, external factors are lump-summed Desktop however only hard dollar savings are truly val- with internal efforts for saving calculations. ued. We need to prove the benefit and when we do For PTA (project based) savings, if there is no direct our businesses buy into our savings (and remove from / 100% correlation between Travel’s effort and ultimate their budget). The traditional savings measure that per- savings (i.e. other external factors may also con- mits these exclusions will be referred to as tributed to the savings), we may be required by the “Procurement Benefit”. The table below illustrates what management to report under “value-added” section is included in Procurement Savings vs. Procurement Benefit. 6. They are not differentiated any reduction is savings BTN’s Corporate Travel 100 6 Benchmarking Summit
    • 3. If value-adds can be quantified and validated, the Capital Capital Expense Expense Reduction Avoidance Reduction Avoidance value can be counted as cost avoidance. For exam- ple, for hotels, if high-speed Internet access is a cost Procurement Savings   ordinarily passed to the traveler but our negotiations Procurement Benefit     include this access in the rate, applicable cost avoid- ance can be claimed. 4. Labeled and validated in accordance with defini- 4. Value-added projects may or may not count tions in 1a above. towards savings. Pre-approvals are needed for the savings to be recognized. E.g., benchmark results 5. See answers for Question #1. We are reporting / (compare our contract rates with market rates) are not tracking value-added projects in a separate saving recognized for 2008 and 2009. category. Theoretically, separate saving targets should Travel is a matured business. Now that we are be set for hard savings and soft savings, respectively. experiencing increasing prices year-over-year and negative savings from contract negotiations (year 2 6. Soft dollar savings are documented but ARE NOT price > year 1 price), value-added savings are the considered real savings only area where large amount of potential savings could be achieved. Even though there are clear values 7. Hard Savings are reported as ‘negotiated savings’ added to the businesses if our rates are better than where soft savings are reported under categories market rates, it remains a challenging task to get the known as ‘cost avoidance’ such as ‘nonrefundable savings recognized within the company. exchanges’ and ‘waivers and favors’ 5. Travel is treated as any other commodity. Real savings. Programs that make sense and meet the 8. Again, we look at actual year over year costs for needs of the travelers. i.e.: balancing new airline hard savings, and notate cost avoidance to identify requirements – United’s “stay over” policy that was total benefit of the travel management program later rescinded. 9. We separate out cost avoidance versus hard sav- 6. They count toward internal (travel ings with year-over-year deal improvements department/team productivity metrics) which are reported up. 10. We haven’t been able to systematically capture and report on this 7. We don’t report on this at this time 11. We differentiate soft savings as cost avoidance (defined as management of the program). 8. Where there is a demonstrated cost for value added items (such as parking, internet, breakfast), III c. Do value-added projects (soft savings) count when we negotiate that in we count it as negotiated toward savings in your organization? If not, how does savings. your travel department justify their value to your corpo- ration? Respondents: 60% yes, 40% no 1. Reported but not considered important. 2. We measure it and report it but quite frankly, it is not valued. We argue that we bring value in cost avoiding almost $20M a year but we cannot recognize this as savings automatically. We are logging it in our procurement desktop and trying to educate not only our management but our stakeholders that this is the true value we bring along with our market knowledge but more work must be done. BTN’s Corporate Travel 100 7 Benchmarking Summit
    • IV. What level of detail is required in your organiza- 4. While we make every effort to report savings, tion (e.g regional/country/business unit) for saving where possible, by country and business unit, such reporting purpose? (With hundreds of city or city pairs calculations are extremely limited and inefficient at this that might be in scope, how did you efficiently calculate time due to the company’s multiple reporting systems, travel related savings without missing or generalizing use of multiple agencies and booking tools. Such the saving factors that might be regional/country-specif- reporting, where possible, is localized in nature. ic/or business specific?) 5. We generalize at the highest levels for summary 1. All: Region/country/applicable BLs or BUs/etc. purposes. At the business unit level more detail is pro- vided which brings into play the business units travel 2. Philips requires projects to be reported by busi- patterns including city pair shifts year to year as they ness sector, by region. When calculating savings impact Average ticket prices, mileage flown and cost based on city pair, we generally apply the “80-20 per mile. rule”, where only top 80% volume city pairs will be analyzed. In other cases (e.g. contract negation sav- 6. We match city pairs wherever possible, and ings), we may also allocate saving numbers based on extrapolate the balance of what doesn’t match historical spending allocations (by region, by sector, or by country). 7. We looked at the top 100 city pair information by country, which represented around 80 percent of total 3. We look at each individual city pair (to the point spend by country. that it makes sense) – domestically the top 75 – inter- nationally the top 25. Beyond that, savings are based 8. We report on high-level savings and not on detail on weighted averages. 9. Regional, country and business unit level is 4. Summary level detail is reported. Additional is required on all transactions booked through our desig- available upon request by the business unit. nated agency. We provide executive summary infor- mation to the businesses on a quarterly basis relative 5. We start at the operating company level (for some to overall spend and savings, as well as lost savings of our larger operating companies we go down to the opportunity. While we highlight spend in key markets division level), and roll up to the enterprise level on key carriers and at key hotel chains, we can report down to the individual traveler/transaction level when 6. We do by business unit, by country, by region required. and global V. With hundreds of city or city pairs that might be in scope, how did you efficiently calculate travel related savings without missing or generalizing the saving fac- tors that might be regional/country-specific/or business specific? 1. Identify region specific considerations and scope for a fair apples-to-apples comparison 2. We report at the business and regional level. 3. While we make every effort to report savings, where possible, by country and business unit, such calculations are extremely limited and inefficient at this time due to the company’s multiple reporting systems, use of multiple agencies and booking tools. Such reporting, where possible, is localized in nature. BTN’s Corporate Travel 100 8 Benchmarking Summit