Using Procurement is a Mistake for Incentive Travel
Aug 14, 2015, Industry Education
Over the last 10 years there has been a noticeable rise in Procurement in the travel industry and if you don’t know how that affects a successful incentive program then please read on to understand the process of the entire chain of buyers and sellers in the travel industry.
With their trained and experienced staff, Procurement Departments can develop strategies and implement cost savings, profit maximization and compliance for large corporations, as well as for smaller corporations which are undergoing rapid expansion and need this expertise. Essentially, they are an extension of the trend to outsource skilled positions which either cannot be filled from within, or which don’t make sense to start and maintain within the corporation.
In a similar vein, Purchasing Departments are a corporate in-house sub-category of Procurement companies, but for both Purchasing and Procurement there are similar inherent issues which don’t benefit the corporate client in an incentive travel relationship, and also don’t benefit the DMC that is contracted to develop the incentive travel program.
Procurement companies will typically use Service Level Agreements (SLAs) with the corporation for whom they work. These commonly include segments which address the following issues: a definition of services; performance measurement; problem management; customer duties; warranties; disaster recovery; contract enforcement; and termination of agreement. In order to ensure that SLAs are consistently met, these agreements are often designed with specific lines of demarcation and the parties involved are required to meet regularly to create an open forum for communication.
SLA’s are, by their nature, "output" based – meaning the result of the service as received by the corporate customer is the subject of the "agreement." The (hopefully expert) service provider can demonstrate their value by organizing themselves with ingenuity, capability, and knowledge to deliver the service required, perhaps in an innovative way. But success is all about defining services and terms and meeting those definitions. Reading this far you may be wondering what does all this have to do with a DMC or Incentive House, and why is this a problem?
Well, a business owner (small, growing, or large corporation) looks at the performance of the incentive travel program, or at least they should! Their big-picture question is this: Did they receive their desired effect from the incentive program? And the answers to that question must include answers in these sub-categories: Did it drive market share? Do they understand the reason behind that shift in market share if it happened (ie: understanding the ROI of the program). Do they know what the competition is offering and did their program stand out from their competitors? What kind of results are required in order to see the program justify the expenditure (ROI again)? How engaged were the participants? How much mileage did they get and how will it change their reputation within the industry when a program is highly successful? How will this affect their employee retention which is a major cost consideration for large corporations?
All these factors are quite different from how a Procurement department views the incentive program, since they see through a lens which reveals risk, compliance, regulation, budget, cost, billing, reputation, contract terms and service level agreements with their client (if they are an outsourced supplier to the corporation) as well as internal justification for their position in their company (if in-house).
We believe Procurement is doing a disservice to everyone in the travel industry and to those corporations who are buying incentive travel programs. Their approach to their role is inherently contrary to how the actual players in the travel industry must work. Travel bookings are extremely time-sensitive now in this age of yield management from both airlines and hotels. Popular destinations require fast decisions from the corporate decision-maker and Procurement slows down that decision and interjects needless processes and delays. Rather it is corporate incentive project managers who understand the travel business and it is they who should be entrusted to make fast and important decisions.
Experienced travel professionals have the expertise to review the various proposals and determine which are offering the best value and the best program tailored to their exact needs. When Procurement gets involved then they are looking at the bottom line first, with zero understanding of the destination and little understanding of the difference in value between offers. There must be an “apples to apples” comparison. Without that there can be no valid comparison of value and if the low-cost option is deemed the best offer then you will get what you pay for from a DMC that doesn’t know better. Or in the end you get “scope creep” whereby the final product is gradually improved by adding more and better services with the end result being a higher final cost, but coming from that low-cost DMC who was not skilled enough to offer the higher (and appropriate) level of services that were ultimately required.
Entirely overlooked by Procurement are the effective working relationships and trust which experienced incentive project managers build with their suppliers (incentive houses), and the same between incentive houses and DMCs. In fact, experience has shown that distrust of suppliers is prevalent with the assumption that everyone in the chain must be gouging profit on every program, and that by putting each program out to bid to numerous incentive houses, who in turn put it out to bid to several DMCs, that the corporation will receive the best deal. This is the Procurement method and it is used even without divulging their known budget for the program, or other critical criteria which must be met in the proposal, as if the DMC can possibly guess what the corporation had in mind. What this causes is a massive waste of company time from Incentive House to DMC to final supplier, with duplication of offers and frustration all down the chain to the hotels, venues, etc. All of this leads to a possible increase in costs, not a decrease. Over-burdening the suppliers with multiple requests only hardens those employees and causes resistance to negotiation with the DMCs. Furthermore, when a DMC must work three times harder and longer on a proposal then they need to be compensated for all that time. Time is money and clients who don’t waste time are highly regarded and rewarded. This is human nature and part of the trust issue, with long-term relationships being rewarded with lower prices, better programs and a willingness to maintain those relationships at all costs. Everyone with experience in the travel industry understands it is relationships which are the most rewarding part of the business since it surely isn’t profits – travel business being one of the lowest-compensated industries in the world. The Procurement bid process eliminates the important industry relationships as it strives only to see the bottom line or irrelevant details.
Without Procurement involved what model will allow the DMC to offer the best possible services to their buyers, and ultimately to the corporation offering the incentive? For a start the DMC should insist that the incentive house demand very detailed information from the corporate client from the start of the process which will enable the DMC to bring all their experience to bear and thus feed back up the best value to the end-client. Or the corporation should even work directly with the DMC if they have an experienced in-house travel professional. Either way, give the experienced DMC some credit – they have years of experience not just in building successful programs but in actually observing participants of past programs, understanding what makes them excited, and seeing where the money is best spent for best effect. A good DMC will incorporate successful ideas from the past into the new programs and offer these during the proposal stage, as long as they know the important criteria. Their ideas will incorporate intangibles that are totally unknown to Procurement such as significant shifts in the local market pricing, including previous and present hotel occupancy rates and relative values, changes in contract demands or attrition policies, supplier stability, safety, risk, and governmental changes which create operational difficulties. All these things bring significant value from the DMC to the end-client and should not be ignored. This destination expertise can be just as valuable to the design of the program as the actual daily program details. Offering such comprehensive details to an incentive house client shows honesty, builds trust and guarantees a mutually successful operation. In other words, the DMC is doing their best to allow the incentive house to work to greatest advantage with the end-client. This approach to offering value to the end client is entirely different from Procurement because it comes from within the confines of the actual travel industry, and it produces respect for their expertise and their industry, which is sorely lacking when Procurement is involved.
If Procurement must remain a player in the Incentive Industry then they need to listen to the Incentive House as well as the DMC and everyone must communicate effectively for everyone to benefit. But with 30 years of experience in the travel industry our opinion is that Procurement has inserted itself into the travel industry in ways that negatively impact the effectiveness and success of the industry.