COVID-19 and Managed Hotel Programs: Determine Your Program Strategy
By Laura Kusto, Global Hotel Practice Leader
In the third entry of our five-part blog series on COVID-19 and managed hotel programs, we will be diving deep into the strategy for your hotel program.
When we consider all of the work that goes into managing hotel spend, travel managers have traditionally spent all of their time on the preferred hotel program. In addition to that, the steps that are taken each year to update that program fall into a predictable routine that spans 4-7 months of the year, depending on the size and complexity of the program.
All of that is about to change. And it’s about time, right?
Re-thinking the RFP
Let’s think about the traditional RFP process for a moment. What is really happening here? Once a year, companies release RFPs to hundreds or thousands of individual properties, all at the same time. Properties scramble to reply and participate in multiple rounds of negotiations. The companies trust the hotels will value their business and participate thoughtfully in their RFP. They trust the rates offered will be competitive and loaded correctly. They trust the hotels will make the rates available to their travelers 100% of the time. And last, they rely on the hotels to come back again the following year and do the same thing all over again.
Aren’t companies relying on hotels a little too much to drive savings? We think it’s time for travel managers to take back the wheel and drive their own savings.
And because of COVID-19, if you don’t start doing more for yourself, you will not be successful. Hotels are not going to meet you at the negotiation table unless there is good reason to do so. They have never been more limited in their ability to participate in an RFP. As a result, all the chains are modifying their strategies for how they work with corporate accounts. They all need to optimize their resources and ensure their time is spent on what matters most.
For this reason, as you come back to traveling, you need to focus your RFP efforts only on the hotels where you can bring notable business. On top of that, considerations need to be made regarding rate volatility and vetting hotel cleanliness to ease traveler concerns. Here are the three key steps to setting your strategy.
1. Determine your travel volumes
Central to determining how many properties belong in a preferred hotel program is clarity on the room nights you’ll be bringing to each market. Typically, these values would not change much from year to year, unless your company underwent significant change like an acquisition or a spinoff, but this year they will change significantly.
We recommend using your 2019 annualized volumes as a starting point. From there, rank your markets in terms of the highest room nights. Room nights are key here – not spend – with the value of a room night now more volatile than ever the more reliable data point is the nights brought to a market vs. the spend.
Finally, in conversations with your internal stakeholders, determine the new expected volumes you forecast bringing to each market. This will depend on two main factors – travel readiness and type of travel.
- Travel readiness refers to how ready and eager your company and employees are to get back on the road. If you’ve already aligned with internal stakeholders on a back to travel strategy and engaged your employee base in communications on how to safely get back to traveling, you’re ahead of the game because your internal stakeholders are already considering their future travel volumes. If you have yet to tackle this topic internally, we recommend revisiting our previous blog post “Devise your Health, Safety and Duty of Care Strategy” and work that step into this one.Knowing how you will safely guide your employees back to traveling, and having full internal alignment and support in doing that will mean fewer situations where business trips are canceled due to lack of clarity. Employees will know when business trips are justified and how to travel in a clean and safe manner.
- Type of travel is the factor to which your individual business units will need to contribute. The primary question they need to answer is how their travel to specific locations will change. If travel to a market is primarily for internal reasons and it originates from overseas, that location may drop more than travel to a domestic location largely for sales purposes. Depending on the type of travel, your business units will reset their travel budgets and you, as the travel manager, will need to work with them to adjust your hotel room night volumes down to the market level. Doing this exercise well will be an investment of time, so if taking a detailed approach for every market isn’t possible, focus your efforts where they matter most – on your top markets. From there, applying a standard reduction factor by region to the secondary markets is also acceptable.
2. Determine preferred hotel needs by market
Using these new travel volumes, determine how many hotels you really need in a market. As we work with our clients, we will be encouraging a reduction of preferred properties in all markets. In addition to the expected decline in travel volumes, which warrant fewer properties, hotel programs have traditionally been far too large in the first place.
Then you will also need to consider the rate types you wish to secure. With nearly everyone forecasting more of a “W” shape to this recovery, full of ups and downs, we strongly recommend dynamic rates for 90%+ of your preferred hotel program. Dynamic rates will ensure you are always getting a discount and negate the need to renegotiate every time there is a significant shift in the market. On top of that, they will lay the groundwork for you to stop spending so much of your time sourcing. Dynamic rates can be set to evergreen so rather than re-negotiating them each year, you simply monitor and adjust when needed.
Static rates, or dual-rate loading of static and dynamic, are structures we recommend only for top properties. A top property is one which receives greater than 1000 room nights from your company – or where your company has a symbiotic relationship with a hotel, i.e., the hotel next door to your headquarters.
3. Set your negotiation rate targets
Setting negotiation rate targets is an important and often overlooked step – but this year, it is absolutely critical. COVID-19 has greatly impacted hotel rates. Our hotel practice has been monitoring and tracking the 2019 vs. 2020 change and it is dramatic. Overall, we are seeing an average decline of about 30-40% from June 2019 to June 2020.
For those top properties where you will target a static rate, you want to be sure the value of that rate is appropriate. To determine an appropriate target, we recommend evaluating your existing static rate, both the prior year and current year market-level BAR values and changes, as well as your new projected travel volumes to determine an appropriate value for the rate you deserve to be offered.
Dynamic properties need negotiated rate targets as well, in the form of the discount percentage. Again, using your existing rate – or dynamic discount – consider the new volumes you will be bringing to the market and also factor in the volatility of that market. In markets that have experienced more rate decline, you can expect their recovery to take longer, and hence, your business will be more valuable. In those markets, aim for a higher discount off BAR than in those less affected.
Maintain and prepare to move forward
Once the above steps are complete, you will be ready to undertake the next step in our 5-part series: “When the time is right, release your RFP.” Remember, successful hotel category management leverages far more than the preferred hotel program to drive savings. In order to have time available to engage in activities that drive more savings, it’s important that you lay the groundwork in this step to allow for that. Your preferred program must be sized and sourced appropriately, with many dynamic rates that do not need to be renegotiated each year. Finally, remember to use and update your market-level rate targets monthly – those (not your preferred hotel program) are your biggest lever to managing spend and driving savings.