strategic sourcing acte tampa
TRANSCRIPT
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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
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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
VII. Know thy own heart prior to seeing bids
VIII. Speak the truth to all bidders
IX. Judge thy bidders fairly
X. Honor thy commitments
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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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I. Create a righteous travel policy
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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VII. Know thy own heart prior to seeing bids
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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