The transaction fee has been the staple of the corporate travel industry for years, but it looks like the crisis has exposed a weakness that needs fixing.
Adopting a business model that went out of fashion 30 years ago might not seem like good advice, but this kind of recycling could actually safeguard the corporate travel agency’s future.
Traditionally, an agency charges its corporate client a transaction fee. Up until about a month ago, that worked perfectly. But today the crisis has caught agencies out as bookings dry up and the work switches to processing cancellations — requiring man-hours for which you can’t charge.
It’s not the first time a business model shift been debated as agencies expand their offering with data reporting, duty of care solutions, policy advice, traveler tracking and more. Will these need to be charged for separately to avoid reliance on a single revenue stream should a crisis like this happen again?
“It’s going to have to be a hot topic going forward,” said Dominic Short, president of the Association of Swiss Travel Management.
“During a recent steering committee call, a multinational company said the travel agencies were getting rid of people, but they needed them to be working. But the system doesn’t allow for them to be paid. As a multinational company, with long waits for decisions, how do you suddenly make a payment so your agency can still keep their people working for you?”
TURNING THE PAGE
One solution discussed was a return to “open book” travel management — last practiced in the 1990s. Travel agencies would collect information on the commission fees and other revenue earned and present them to the corporate client. “Everything is put on the table,” Short said. “At the end of the year, whatever remains available is split 60/40, or something like that.”
The method fell out of favor as airlines reduced their commissions and agencies became less transparent about what they were bringing to the table.
However, a revitalized open book approach could work with a third party brought in as an independent auditor, he said. ”If you took someone like EY to develop a cost model, and have someone like them, or PwC, manage the different income streams and cost elements, the agency and corporate could then agree to a different form of working together, rather than the transaction fee.
“Take that thought process… you’ve got a program, you determine the cost of the program, and that’s how you get to a more management fee-focused approach.”
While a small number of agencies do already charge a management fee for some clients, the model should evolve further according to one industry expert.
“I’ve always thought there should be a subscription model,” said Chris Lewis, founder and CEO of data company Travelogix. “For those agencies on a transactional model, it works against them because as soon as people stop traveling, their business is decimated. They have no way of making any money until people start booking again. It’s tough.”
Lewis also suggested a “fee per head of traveler” model, with corporates paying for ancillary services. “Corporate travel agencies have got to be more consultative, not just order takers. Maybe this is the catalyst that’s going to make people sit up and realize that. It’s going to be a brave person that is the first to change it.”
“A travel management-as-a-service model is seen as a more transparent one and a number of TMCs are considering this approach,” agreed Clive Wratten, CEO of the Business Travel Association, adding a departure from a transaction fee-based approach would enable travel management companies to give a “truer demonstration of the value they provide”.
The transaction fee might not be a true reflection of what an agency offers, but it does serve its purpose as a convenient way to wrap around ancillary services, according to one agency boss.
“We like to have a simple, easy to explain fee model. We thought in the past about charging extras for different things… but procurement people don’t like that, because the way travel is paid for is that the budgets are all devolved,” said Click Travel CEO Jill Palmer. “As soon as you put an annual fee in there, that has to be owned somewhere. We found we sell better when the transaction model is very clear. But I do except there’s an element of risk in that, which came to the fore recently.”
Although the link between revenue and work has been broken, Palmer believes agencies and corporates will support each other once the crisis passes. “We are delighted to be supporting our customers through this time,” she said. “There’s an understanding between us that ultimately our customers will continue to do bookings and will transact in the future.
“On the back of this, we have not thought we are going to change our model. What we value more than anything else is our customers staying with us for as long as they can. We’ve never been out to make a quick buck.”
Palmer also thinks the unique nature of the crisis means there’s no need to rush into new operating models: “It’s a one-off event. It’s not happened in the last 100 years, do we need to plan for this to happen again? I don’t know.”
What is certain is that coronavirus has spread uncertainty in the market, leading to many players in the sector rethinking their business relationships across the board.
“A lot of people will be thinking about how they hedge themselves against the next crisis. Corporates are thinking they need to be better protected, but appreciate everyone is thinking this way. It can’t be a one-way discussion,” Short added.
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Photo credit: Business travel has been turned on its head. Now is the time to change business model at corporate travel agencies. Ariel Skelley / Getty