The process by which companies obtain negotiated rates from hotels is broken and has been for years. Consultants are hired, RFPs are sent, discounts are offered, agreements are finalized, everything is loaded and audited. The following year, it's lather, rinse and repeat.
What’s missing from this negotiation process? The actual “deals” themselves.
In most agreements, there is a buyer willing to make purchase commitments and a seller or supplier willing to provide a product or service for a price, plus the appropriate discounts. But with hotel negotiations, neither party makes a hard commitment.
Instead, buyers make soft commitments for room nights and suppliers make soft commitments for price and product, supplementing with loosely defined terms such as last room availability. Room night commitments are rarely met because companies struggle to control hotel spend among travelers or to shift share to preferred suppliers. On the other side of the equation, the negotiated price or product is only realized on average 60 percent of the time.
In other words, six to nine months of effort is wasted each year across the industry for a company to maybe obtain a discount and for a hotel to maybe obtain additional volume.
As a procurement professional, you have three options to consider: First, keep the status quo and achieve a mediocre level of savings. Not a bad choice if you’re close to retirement.
Second, stop the madness and buy rooms on the open market. Trust travelers to spend company money wisely and use rate assurance tools.
Or, third, fix it. Demand discounts that are applied to every booking. In return, live up to your side of the bargain. Deliver greater volume or share to hotel partners that deserve it. This is important; without a share commitment, the deal won’t last and we’re back where we started.
New analytics are key to making sure both sides deliver as promised. On the buyer side, use two key metrics to grade supplier performance:
Negotiated Rate Strength: This is found by comparing the rate booked to the lowest qualified rate available, as well as the availability of a negotiated rate. It’s the discount achieved as compared to the rate a traveler would have paid for the same services without the discount. It doesn’t matter whether it’s dynamic or static. What matters is that the discount is substantial in return for the volume or share commitments made. In most markets, a 20 percent discount is the expectation, but it’s rarely achieved when compared to the lowest market rate. The difference is the true discount obtained and it should meet both parties’ expectations.
As an example, say a traveler books a standard room with king bed at a negotiated rate of $149. The lowest qualified rate available for the same booking is $189. The company obtained $40 in real value, or a 21 percent discount. On the next booking, the traveler books the same negotiated rate of $149 for the same room and bed type, but, the best available rate at the hotel is now $129. In this example, the negotiated discount cost the company money, $20 per night. Add it up across all bookings at this hotel and you get the value of the contract. In the example above, the value is $20 in total ($40-$20), or $10 per night per booking, or only 5 percent.
Negotiated Rate Availability: The second key metric is how often a negotiated discount is available at the point of sale. It’s measured by determining the percentage of time a negotiated rate is booked at each hotel in your program.
The combination of these two are all you need to manage and improve your corporate hotel program. Once you’ve established a set of good hotels in your program, you can then focus on delivering by shifting share at both the point of sale and through hotel rate assurance solutions.
Combining a strong hotel program with an ability to shift share can more than double your cost savings year over year. In addition, better deals are made as you set clear expectations for performance and deliver as promised.
Want to truly optimize your hotel program? Throw out the annual RFP process as its stands today, focus on hotels that deliver true value, and shift share as needed to keep good deals in place.