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STRUCTURE

        While other structures exist, transaction fees remain the dominant method through which travel buyers compensate agencies for travel management services.

      Airline commission cuts in the mid-1990s gave rise to this model. As agencies’ revenues from airlines dried up, they transformed into travel management companies and increasingly began charging clients directly for their services. Often, that took the form of a fee per airline ticket issued, and the amount paid depended on the transaction type.

      As is the case with a dominant 88 percent majority of survey respondents, The Advisory Board Co. vice president of information systems Steven Mandelbaum opts for transaction pricing. “It’s like toll roads,” he said. “You pay every time you go across the bridge. You want to pay on usage.”

TRANSACTION FEES DOMINATE TMC PRICING
What is the primary way your organization compensates your TMC for agency services?
TRANSACTION FEES DOMINATE TMC PRICING
What is the primary way your organization compensates your TMC for agency services?

      It prompts the question, though: What is a transaction?

      “The universal definition for a transaction is a ticket issued,” said GoldSpring Consulting partner Will Tate, who consults with companies on TMC bidding and selection.

      While that most often means one airline ticket, there also are models for hotels or other travel transactions.

      Indeed, the very definition of “transaction” and what its related fee includes is subject to the agreement between the TMC and the client.

      “The definition of a transaction is a critical foundation of the agreement,” said Partnership Travel Consulting founder Andrew Menkes, an industry consultant and former travel buyer. He’s not surprised it is the most dominant pricing model. In fact, he advocates for transaction-fee structures, because transactions can be counted, independently verified and audited.

      Yet, when a company pays for each ticket issued, what do they get with that? A few basics often are included. Tate said the transaction fee often covers “anything that is required to book travel, facilitate travel and report on travel.” Menkes said it’s “soup to nuts,” including booking, mid-office services—like quality control, file finishing and document delivery—and back-office accounting and core reporting.

      Tate said some agencies include basic account management services in transaction pricing, especially for smaller clients. Yet, as the specifics of account management grow more complex, they get more expensive and may be separately priced. “If you need a full-time account manager in the United States and a part-time account manager in Europe, the Middle East and Africa and in Asia/Pacific—those are typically done at cost,” said Menkes. “At cost” could mean “whatever the salary and benefits of that account manager are and a percentage of their time,” he said.

      In addition to services covered by a transaction fee, many TMCs have a suite of unbundled offerings and services. TMCs could—and many do—charge discretely for access to proprietary technologies, consulting services, supplier sourcing support, benchmarking and deeper data analysis, among sundry other things, Tate said.

      “There’s the whole a la carte menu,” noted Menkes. This adds to complexity when comparing TMC pricing in bids, as some agencies bundle ancillary services that others unbundle. “As far as what’s in the transaction,” Menkes said, “you decide on a core set of services that the TMC provides and what’s included in the transaction fee.”

      Beyond the dominant transaction fee, other pricing models are in practice—though to a limited extent.

      In an annual report released last year, publicly traded HRG gave a glimpse at the pricing models its client base uses. While 86 percent of its client revenue “is predominantly transaction-fee-based,” the TMC also had implemented management-fee models, which represented 12 percent of HRG client revenue.

      In this model, clients pay travel management companies operating costs plus an agreed-upon profit for their services. The management fees are negotiated at regular intervals, perhaps annually, and are settled at agreed-upon times, perhaps quarterly or monthly.

      While only 4 percent of respondents to The Beat’s survey have adopted such a model, some agencies and clients prefer it to transaction fees.

      About 60 percent of Raleigh, N.C.-based TMC Travel Management Partners’ clients are on a management fee structure, said CEO John Lewis. At TMP, the management fee is set annually and paid monthly, he said. “We basically have an open-book program with a number of companies,” Lewis said. “They know where we make money, where it comes from. They understand [global distribution system] revenue; they understand airline overrides, hotel commissions and car commissions and so on. So, they know what we’re earning as far as gross, and then they look at what a reasonable return on investment is.”
      If there are significant fluctuations in transaction volume—if transactions rise or fall by, say, 10 percent, “then we can sit down and renegotiate what that fee structure will look like. We’ve done that a couple of times, but not very often,” said Lewis. He said clients like the visibility into spend and ability to budget under this model, as month-to-month pricing does not ebb and flow on the number of transactions.

      Meanwhile, very few respondents deploy the savings/incentive model, through which agencies are compensated based on actions they take to reduce or optimize client T&E spend. It’s a similar story with the subscription model, in which agencies charge clients based on, for example, a per-employee, per month metric.

      Mega travel agency BCD Travel has “tried other pricing models, but without almost any exception, our customers continue to migrate back to the current pricing models,” CEO John Snyder said last year during The Beat Live conference.

      Salesforce.com was one client that explored subscription pricing with BCD, in conjunction with the cloud computing company’s exploration of ways to compensate for transactions booked outside the traditional TMC channel.

      “The whole concept of a subscription-based model came up around five years ago when we started taking a look at our own [software-as-a-service]-based licensing model and the whole conversation came up around open booking,” Salesforce.com senior manager of global travel Dorian Stonie said. “If we have reservations outside the traditional TMC or online booking tool, how could we compensate the TMC to be able to support those reservations? At that time, the SaaS model for us looked to be a viable option.”

      Yet, Stonie said, “The open booking models, technology and practice have not been as fast as we had originally anticipated, so we to a certain degree have had to pace ourselves with change in the industry.”

      While subscription pricing is “conceptually still on our radar screen,” Salesforce.com continues to use transaction-based pricing, said Stonie. “You take a look at five different companies and five different TMCs, and you’ll see various versions of even transaction- based fees,” said Stonie. “We see this on a global basis, where in some regions your fee is based on airline reservations only or ticketed [passenger name record] numbers, where in other regions, depending on the pricing models, they include hotel-only bookings and a whole potpourri of ancillary-type fees.”

      Other TMC pricing models also exist, including some hybrids. A few respondents have deployed transaction-fee pricing in addition to management fees to cover account management. For example, some respondents noted that they cover direct operating expenses for their TMC services in addition to some transactional pricing.

      And sometimes … well, it’s just complicated. One respondent described the structure with their TMC as simply a “complex financial relationship.”

AVERAGE TRANSACTION FEES FOR TMC TRANSACTIONS
What is the average fee your organization pays your primary TMC to book an airline ticket from the U.S. point of sale?
By Telephone Per U.S. Transaction
$26.38
Online With Agent Assistance Per U.S. Transaction
$17.94
Online Without Agent Assistance Per U.S. Transaction
$8.30

SOURCE: The Beat survey of 143 corporate travel buyers who have per-transaction pricing with their primary TMC and have at least $500,000 in annual U.S.-booked air volume, conducted June-August 2016

AVERAGE TRANSACTION FEES FOR TMC TRANSACTIONS
What is the average fee your organization pays your primary TMC to book an airline ticket from the U.S. point of sale?
WHAT IS ‘AVERAGE,’ ANYWAY?

Not all transactions are created equal—nor are they priced as such. In general, the more human support a transaction requires, the more TMCs charge. There are other factors that dictate the per-transaction rate companies pay, as fees could factor in anything from the cut an agency takes of supplier or intermediary revenues, such as hotel commissions, to the bundle of TMC services a company chooses to include in their agreement.

SOME BUYERS GRAB A PIECE OF SUPPLIER AND INTERMEDIARY REVENUES
Which party keeps the following revenue streams?
SOME BUYERS GRAB A PIECE OF SUPPLIER AND INTERMEDIARY REVENUES
Which party keeps the following revenue streams?
Agency
My Company
Shared
Don’t Know
Not Applicable
Agency
My Company
Shared
Don’t Know
Not Applicable
Airline overrides and/ or commissions
44%
31%
6%
11%
8%
Hotel commissions
43%
38%
4%
5%
11%
Car rental commissions
36%
33%
5%
6%
20%
Global distribution system incentives
62%
13%
4%
14%
8%
SOURCE: The Beat survey of 160 corporate travel buyers with at least $500,000 in annual U.S.-booked air volume, conducted June-August 2016 Totals may not add up to 100 due to rounding.

While the average fee for an online transaction untouched by a travel agent landed at $8.30 and the average full-service fee was $26.38, the service fees paid by respondents comprised a wide spectrum.
Several consultants and agencies noted that price competition is as strong as ever amid a highly competitive TMC set along with the influence of cost-minded procurement professionals in sourcing agency services. Some pointed to online transaction fees as low as $5, $4 and even $3. A few respondents even indicated a full-service transaction fee of $0—a bit of a misnomer even to call it a fee.
At least one agency, Lincoln, Neb.-based Executive Travel, has made $0 transactions part of its proposition for some of its small and midmarket clients—even for agent-handled transactions.
How can an agency live on that?
Executive Travel offers a $0 full-service program for companies that commit to “a strong online program,” and hit targets on a negotiated online/offline ratio of bookings, said CEO Steve Glenn. Such clients also must drive hotel bookings, for which the agency keeps commissions.
"Especially on the hotel side, we have very high adoption rates,” Glenn said. “We work very diligently on that. Obviously, that’s a revenue stream for us. We do require our customers to source their hotels through us, and what we've been able to do is prove with real, live metrics that we can lower their costs.” In essence: “We generate more hotel revenue than we do transaction-fee revenue,” said Glenn. “That's how we’re able to afford an offer of $0 online transaction fee and a $0 full-service fee. We don’t do it at zero cost; we just get paid by someone else.”

While $0 is an extreme, some agencies—especially for small and midsize clients—have looked to extract greater revenue from suppliers than from clients. Several sources, including consultants and competitors, noted that American Express Global Business Travel has been less willing to share hotel commission revenue with smaller clients, for example, but has been aggressive on transaction-fee pricing. The company declined to discuss client pricing.

Given all that can be bundled or unbundled into a transaction fee and all the other costs and revenues that may or may not be associated with a client’s business, it’s hard to put too much emphasis on the “average” transaction fee.
Or, as managing director of consulting firm Corporate Travel Buyer Resources Don Swartz said, “Anybody who is comparing and benchmarking transaction fees is wasting their time. So many things could be bundled or unbundled. Some companies get commissions back; some don’t. Some companies buy into a lot of commissionable transactions, so their agency can offer a lower fee.”

MOST COMPANIES USE OFF-SITE TRAVEL AGENTS
What best describes how travel agents support your organization?

SOURCE: The Beat survey of 160 corporate travel buyers with at least $500,000 in annual U.S.-booked air volume, conducted June-August 2016

Hotel commissions are just one example of the revenue streams TMCs can extract beyond client transaction fees and that could impact the financial flow between client and TMC. Airline overrides, car rental commissions and global distribution system incentives are others. Yet, depending on the client’s contractual relationships with those suppliers and intermediaries, there are various arrangements as to which party hangs onto various revenue streams—the agency or the client.
AGENTS ASSIST
Although the share of less costly online transactions has grown relative to agent-assisted transactions amid the sustained rise of corporate self-booking tool use, travel agents continue to be a key part of the TMC value proposition.
For the most part, the travel agents that serve corporate accounts have migrated off-site—often working from call centers or virtually either in a shared, dedicated or designated capacity. There are hybrids of service structures, of course, as some companies have dedicated agents who are supplemented by designated agents when peak demand warrants.
The on-site, dedicated agent set-up represents just a 9 percent minority of the respondents, though quite a few indicated they continue to use at least some dedicated agents off-site.
GoldSpring Consulting’s Tate said the more dedicated a client's agents are, the more expensive the proposition.
The dedicated service structure lends itself to larger clients with enough internal travel demand to warrant their own pool of agents. It's costly, especially for smaller clients who may not have enough agent demand to sustain the expense.
“If they’re large enough, they’ll be dedicated, but for everyone who moves out of that large bucket they may be designated,” Tate said.
Several respondents confirmed such a structure, noting that, even if they use some dedicated agents, they revert to designated or call center agents when peak demand hits.
“If you’re going to have a dedicated group— they're only serving your corporation—then you can't have overflow,” Tate said. “So, you have to staff for the peak times. If you’re large enough, you can sustain that, but when you're not, then it's problematic, and you have to pay for the peak productivity.”
Further, Tate noted that TMCs often promote use of call center or pooled agents, who often get the first crack at the TMC’s newest point-of-sale or support technology. “What TMCs tend to sell and try to focus on is that they’re going to release their latest and greatest technology in their call centers first, because they can impact the most customers in the least amount of time,” he said.
Some respondents use hybrid models or a combination of support structures. One respondent had dedicated agents operating on-site and off-site. Another used off-site shared agents, supplemented by “dedicated agents for our VIPs.” Another noted that TMC “agents are used for back-up only.”
A RULE OF ONE?
Nearly half of survey respondents indicated they have one contract with a single TMC provider for managed travel services worldwide. On the other end of the spectrum, 16 percent of respondents maintain contractual relationships with at least five TMCs.
Based on discussions with buyers, consultants and agency executives, there is an effort among many managed travel organizations to consolidate their agency partners, in some cases down to one. The overarching trend, they said, is one of further consolidation, not fragmentation in buyer/agency relationships.
IN TMC RELATIONSHIPS, MONOGAMY RULES FOR NEARLY HALF
With how many TMCs worldwide does your company have contracts for managed travel services?

SOURCE: The Beat survey of 160 corporate travel buyers with at least $500,000 in annual U.S.-booked air volume, conducted June-August 2016

Proponents of a consolidated TMC framework cite benefits, including pricing power from leveraging spend with one provider, greater consistency in data, reporting and service as well as a reduced administrative burden by having one agency relationship to manage worldwide, among others.
Even so, some organizations, especially multinational companies who value local expertise in select markets, choose to maintain relationships with multiple agencies.
“A common theme is a sensitivity to local nuances and the challenge of making the business case that one TMC is superior to any other TMC in each and every market,” said Menkes. “That’s a tough argument.”
Menkes said that the number of TMC providers a company uses is a means to an end—that end being the optimal management of their travel program. He suggested companies start by globalizing data, then address policy and compliance and then look for consistency of service. “If coincidentally, that can be fulfilled with one or two TMCs, that’s great. But you don’t start by saying, ‘I’m going to globalize with one TMC.’ “
Such is the case for San Rafael, Calif.-based software company Autodesk, which is preparing to go out to bid next year for TMC services on a worldwide basis, said director of global travel and meeting services Bruce Finch. When Autodesk last bid for TMC services, it settled on three separate agencies: one in the United States and Canada; another in the Europe, Middle East and Africa region; and another in Asia/Pacific. “Then we had some smaller, country-specific agencies that were affiliates of the larger agency,” Finch said.
Next, he noted, “we’re going to go out in midyear next year to bid for the entire globe—all our countries and all our spend,” he said.
A single provider would be nice, but is not essential. “Our philosophy is, the Holy Grail is to get one company, so you have one rep to deal with, one email you send out for any policy changes,” he said. “That’s really, from a travel manager’s perspective who has a global program, the way to go. But it’s never happened before. We’ve gone with a bestin- region approach and have been fairly successful doing that and just having one of our agencies consolidate the data globally.”
Indeed, critics of a singular TMC structure argue that even the biggest TMCs work with local partners or franchises in select markets. Those may use different technology and reporting systems and offer inconstant service from brand owner. Lucie Harrison, an executive with U.K.-based Click Travel, contested the concept of one global TMC, noting that “under the skin, a mish-mash of different technologies, processes, cultures, management teams, reporting infrastructure, service levels and contractual agreements results in a fragmented service delivery.”
Some companies, such as Osaka, Japan-based financial services firm Nomura, even have deconsolidated their agency structure from a single provider to several to better meet local needs. Even so, not every corporate client that uses multiple TMCs does so intentionally. As companies merge or acquire, they may find themselves with a set of providers they may look to rationalize—or not.

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