Road map to innovation: Hotel portfolio

By April Bridgeman
Managing director

If you’ve ever had to come up with a clever gift idea for a 12 year-old boy, you know it’s a challenge. Well, this year my husband and I decided to take the easy route, the route so many kids dread but so many parents choose anyway. Horror of horrors, we packaged a life lesson as a gift. Let me explain. We believe critical thinking is as important for our kids as reading, writing and math. So, to develop his critical thinking skills, we introduced our sixth grader to personal investing. His birthday gift was a modestly funded trading account.
During his first portfolio management lesson, it occurred to me how much our industry would benefit if we applied the same principles to category management that we encouraged him to apply to his investments. It just so happened that I’d been thinking a lot lately about our 2015 hotel sourcing season results (which by current standards were very strong), and knew that to achieve breakthrough performance for our clients we’d have to approach the category in an entirely different way.

Companies today are competing on a global scale and undergoing rapid rates of change. Procurement’s role is even more challenging and risk prone thanks to eroding margins, higher costs, evolving technology and a more mobile workforce. Hotel programs suffer from negotiating annually, increasing rates, declining savings, plateauing compliance and benchmarking performance to contracts. And, business travelers think more and more like consumers. They’re the first to know when your negotiated rates are higher than what’s available on the open market and try out new lodging options.

With 2015 hotel programs underway, now is the time to think differently about procurement and this spend category. What if we could shape the practices and management of your corporate hotel program like an investment portfolio – holistically, dynamically and in a balanced fashion? How would it look? Here’s what I’m thinking.

Holistic approach

First of all, procurement would play a far more strategic role. Like your own investment portfolio is to your personal goals, procurement would be hardwired into the goals of the business. CFOs and CEOs would expect procurement to go beyond cost control, short-term savings and contract management. Procurement would move from a back-room function to a strategic arm delivering value analysis, linking performance to bottom-line profitability and innovating stakeholder value. Hotel procurement would align with the goals of other departments, like HR, Marketing and Finance, to meet their specific contingent labor, engagement and total cost of ownership objectives. Technology would shape this transformation and provide over-arching insight into when seasonality, market conditions and changes in travel patterns represent real, strategic opportunities versus one-off anomalies. And, with emerging tools you could better capture what I like to refer to as “micro” opportunities – small savings opportunities presented to individual travelers – and engage travelers to make the best purchasing decisions and capitalize on price reductions before those opportunities are lost. While each savings opportunity presented to a traveler would not be significant, in sum they would add up to a lot. I actually believe that those “micro” opportunities should be a if not the focus for every managed travel program. But, that’s not the topic here – we’ll have more on that in another post.

Balanced portfolio

A diversified portfolio balances various assets to accommodate an investor’s goal and tolerance for risk. This ensures no two portfolios are identical. Similarly, hotel procurement would balance preferred suppliers, different types of accommodations and a hybrid of rates (negotiated, fixed, dynamic and spot) to meet savings and other company goals. It would offer a mix of supplier options responsive to travelers’ buying practices rather than just from established relationships. This prevents inefficiencies or expensive contracts. And, procurement would collaborate with suppliers who deliver services that increase employee engagement, productivity and performance.

But for this coordinated approach to meet your company financial targets, hotel spend would have to be viewed as an investment, rather than an expense. The approach would allow for fluctuations in hotel rates based on season and market demand (dynamic pricing). It would also account for the lack of volume commitments in secondary markets and factor in extended-stay options. It would load balance between preferreds when share targets are reached. It would replace underperforming suppliers and test new brands in markets with limited supply. It would account for changing travel patterns and also traveler requirements across business units, reason for travel and frequency of travel. In essence, Procurement would evaluate the return and adjust for the best mix of hotel spend to support the goals and changing needs of their company.

Dynamic management

Like some passive investing, the temptation may be to “set it and forget it” and wait for results. Because many hotel programs have reached the point of diminishing returns in incremental savings, leverage now lies in actively tracking performance after the negotiations. This means our view of sourcing would shift from a single, historical event to an ongoing process of evaluation and realignment. In today’s world of rapid change and innovation, it’s not enough to compare last year with this year. We would proactively evaluate spend real time and match long-term commitments with corporate objectives. We’d focus on dynamically comparing performance to the market and quickly adapting to changes rather than waiting weeks or months before renegotiating contracts. With advanced analytics, predictive tools and new slices of transactional data, we would strategically take advantage of fluctuations in supply and changing demand patterns. Rates would be the last thing we would care about and results would be the priority. Contracts would be less about price and more about fairness, value and shared risk/reward.

We’d view travelers as contributors to procurement’s performance rather than the nemesis of behavior to monitor. We’d go beyond conventional compliance principles and tap into automation to notify travelers when the preferred rate is re-booked, when rates drop below the negotiated price and when creeping market rates warrant temporarily changing a preferred supplier. And we would question how much of our spend is truly managed, if we are not actively and regularly managing it.

So, what if we applied the same investment portfolio approach to a corporate hotel program? We would have the platform for a new horizon of savings opportunities in corporate procurement.

The beauty in all of this is that you can start slow and you can start now to drive incremental results into your 2015 hotel program. In fact, in our next post, our hotel practice leader, Marwan Batrouni, will share what you can do now to dynamically manage your hotel program. You’ll learn about new data sources not previously available to help you drive down rates, capture additional bookings and uncover changing spend patterns in your program.
Curious to learn more? I hope you’ll share your comments with me, forward this to your colleagues and follow this blog to make sure your travel program is Out front. Thank you, April.