Tobias Ragge, CEO of HRS, spent a lot of time on stage at the recent ACTE Paris Global Summit and Corporate Lodging Forum talking about the benefits of outsourcing corporate hotel programmes. BBT caught up with him at the event to find out why procurement managers are increasingly looking to outside help when it comes to sourcing hotels
Why is the outsourcing of hotel programmes gaining traction?
I think people have realised that in order to get over the biggest challenge, which is leakage and adoption, they need to change because something hasn’t worked. If you look at the stats, there’s a 72 per cent adoption rate for air, but only 42 per cent for hotels on average. The major drivers for this have been fragmentation and complexity in the industry. There are about 600,000 to 700,000 properties across the world, but only about 25 per cent of them are affiliated with chains that would traditionally operate on the Global Distribution Systems (GDSs). The rest are what can be called ‘independent’, which comes with a different set of challenges.
In a market like China – the biggest business travel market today – only 7 per cent of its available hotel supply is available in the GDS. In India it’s about 12 per cent. If the content isn’t available on those systems, the GDSs can’t really help corporates because they are lacking the resources to get these smaller hotels on board – you have to have a lot of boots on the ground in those tertiary markets to sign deals.
That is the foundation of the discussion that people are having today. They’re asking: ‘If neither my suppliers nor I can solve this problem, how can I deal with it?’ Because of the complexity and variation in solutions, they realise that if there’s somebody out there who can handle it for them and take away the pain of delivering results, why not outsource it?
I think it’s also being driven by the fact that procurement is becoming much more strategic. There’s an emergence of people running procurement categories rather than just travel. These people rightly don’t want to know why hotel sourcing is so complex, or how to fix it, because they don’t have the time. The whole industry is facing the same problem – trying to do more with fewer resources. You can do one of two things – you work 24/7 and say goodbye to your family to try to fix it, or you work smarter and find somebody who can help you become much more of a strategic procurement manager.
Our recent contract wins with Airbus, Siemens and Crown Commercial Services are testimony to the effectiveness of the outsourcing strategy because people can see what we can deliver using our expertise. We’re not trying to take out the TMC – we have a completely different function. Our focus has been on accommodation for 46 years and we’re very much specialised in this area.
What does your model mean in terms of costs for those independent hotels that might have a small budget?
Here’s the historic value chain for hotels – they had to have a connection to a property management system, which connected to the central reservation system, which connected to Switch Pegasus or Disco, which connected to the GDSs, which finally connected to the online and offline booking agents. Overall, this value chain represents a 25 per cent cost to the hotels because everyone along that chain obviously needs to make money, including the agents. If you have a negotiated rate, you take out the agent commission, but you still have a cost of 15 per cent for the remaining chain just to complete a transaction.
What we’ve done for the independent hotels is given them a web-based solution, which then directly distributes through HRS. So we’ve cut out many of the steps on the value chain. This is why when you have a non-commissionable negotiated rate we can sometimes reduce that cost down to zero. When they’re serving a commissionable rate, we take about ten to 15 per cent depending on the market.
In the future, I think we’ll see greater differentiation in prices – there will be one price for the GDS and one for direct bookings. In fact we’re already seeing this in some form today. The direct rates are on average 6 or 7 per cent cheaper than the GDS because they’re taking out that cost.
We’re investing in the technology bridges – this means a lot of cost on our end – and trying to help hotels achieve lower distribution costs. By doing this we’re asking for some favours because we obviously want to see ROI. Properties are becoming more and more understanding of how this fits together.
Where does your call for greater transparency fit in all of this?
The industry is still based around an ecosystem that was created 50 years ago. Over time the industry started a downward race in terms of competing for income. This forced a lot of players to create other buckets of income, which at some point became hidden revenues and fees. Through the transparency the internet brought with it, people are catching on, which is creating this trust issue.
Ultimately, it’s the customers who need to demand transparency and force the suppliers to make changes. But they also need to honour and reward transparency.
Where do you see HRS in the future? Will the practice of outsourcing hotel programmes continue?
Obviously, we’d like to see more of these big contract wins. We’re in discussions with companies now and we’re talking about deploying this strategy on a global scale. We’ve noticed the outsourcing of hotel categories on every continent; for instance, we’ve signed on a major bank in Brazil and big clients in the Asia Pacific region.
We also want to make sure we’re providing the hotels with the right data. After all, it’s a marketplace model where everyone needs to get their fair share. The hotels are committing to rates and some amenities, but on the other hand they also want volume. A big problem in the past was that customers would promise volume but couldn’t always deliver. I’m not saying HRS is perfect at that yet – we still have room to improve. There are a lot of reasons why the volume you thought you could give is not being delivered; sometimes the traveller just doesn’t play the way you want them to. But we’re putting a lot of effort into working with hotels to help them understand why customers can’t always deliver the volume they want.