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Rate Roulette

Interview: Sonja Klasen, Christian Temath

It is not easy to maintain an overview in the fragmented hotel market. Particularly complicated rate offers are a challenge in this respect: At one time, negotiated rates are considered the gold standard in hotel procurement, then suddenly thereís nothing better than the BAR rate. So, which is it? We asked Sonja Klasen, Head of Corporate Sourcing at HRS, and Christian Temath, HRS Director Sourcing Solutions since March.

Large companies no longer want to do it themselves: hold the time-consuming procurement negotiations with the hotel industry. Because sourcing ties up valuable resources for months, and the proliferation of different rate and discount models as well as in many cases simply the lack of analysis and benchmark data make it difficult to make sound decisions. With solutions like "Intelligent Sourcing" for corporate customers, HRS Corporate offers advisory and other services that address these challenges in travel management. Or, as Sonja Klasen formulates it: "We are sourcing consultants." This also includes support in the selection of the most suitable rate strategy for a particular customer.

Ms Klasen, you helped develop "Intelligent Sourcing" at HRS. How high is the level of acceptance on the part of the corporates? Sonja Klasen: Last year alone, our team negotiated for around 80 customers with more than 27,000 hotels in more than 120 countries. The result: 5.5 million room nights in more than 2,100 destinations. That is more than double the number in the previous year. Travel managers are often busy for up to six months with a global bidding process and all the  subsequent negotiations. HRS Corporate supports the responsible people in this respect with advisory expertise and a reduction of their workload.

Sonja Klasen, Christian Temath, HRS: Market transparency for corporates
Sonja Klasen, Christian Temath, HRS: Market transparency for corporates

Thus HRS Corporate primarily saves a company time. Klasen: That's not all! If you compare the topic of corporate rates today with 15 years ago, there have only been marginal changes: A hotel draws up its price list in September, and the customer has difficulty assessing the result because he lacks an overview of the market. Thanks to data on more than 750,000 corporate rates last year alone - and this trend is rising sharply - we have this overview and thus can create market transparency.

After so many rounds of consolidation in all areas, do travel managers still lack the market overview? Hard to believe. Christian Temath: Companies do not work with the same systems in all their countries, many still even do their price negotiations in Excel - that naturally makes it difficult for those responsible to maintain a standardised overview. In addition, for example, changing demand behaviour can lead to a situation where a company rate is higher than the current day's rate. 

But that means that despite my rate negotiations with the hotel industry, I cannot be sure: that I have to permanently look to see if the current day's rate is not possibly cheaper after all? Temath: No. If a corporate customer makes a booking through HRS Corporate, what is known as the "best-buy principle" activates - that means that, for example, a current day's rate is booked that is cheaper at the time of the booking than the negotiated corporate rate, and not the negotiated rate. That works automatically without someone having to monitor the rates the whole time. 

What does that mean for my rate negotiations? Temath: Only a precise analysis of the entire hotel spend and a comparison with the relevant benchmark data can ultimately enable the definition and negotiation of a hotel portfolio that is tailored to individual requirements. That is precisely what HRS Corporate offers. We analyse the booking data thoroughly in order to be able to make recommendations: Where can I save the most as a company? Where I have the greatest need - and vice versa.

Accordingly, however, HRS Corporate does not negotiate the entire overnight stay volume for an entire year either, but specifically for certain markets or destinations. So would it not make more sense for me to negotiate a fixed discount rate with my major hotel partners? Klasen: Those are what is known as floating rates, meaning fixed discount rates on the current day's rate that are negotiated directly between corporate customer and hotel. However, these frequently only appear to be cheaper at first glance. 

Why is that? Klasen: Floating rates do not give any planning security. Let us say, a hotel offers the company a 10 percent discount on the current day's rate. However, if the rate rises sharply in a certain period, for example because of a trade fair, the company still only gets this 10 percent discount - on a much higher price!

What do you recommend instead? Temath: Experience shows that it makes sense to consider a three-pronged approach. At one end you have the rates negotiated by the company itself, at the other end the spot market. We generally recommend contract negotiations if a company can tip the scales in its favour with more than 200 room nights per year in a hotel. If you imagine a pyramid, then these negotiated rates are at the top. For the lower third of the pyramid, we recommend steering towards the BAR rate - the best available rate - or the spot market. For the block in the middle, we recommend looking out for discounts, like for example the Business Tariff from HRS. These prices, that are negotiated exclusively for business travellers in top destinations, are up to 30 percent cheaper than the BAR rate. 

Is the savings potential tapped fully using this model? Klasen: No. Of course, the location of the hotel in question is also decisive for negotiations. This is a factor in the total cost of trip. Let me give you an example: Travel Manager XY wants to lower his hotel costs from Ä110 to Ä100. However, if he can only get hotels at this price that are located far outside the city, the additional costs could even make the overall price of a trip more expensive. And likewise, that is not all, because criteria like the LRA or NLRA also have to be taken into account.

Could you explain these? Klasen: With what is known as last room availability (LRA), you ensure that you get the negotiated rate even when a hotel could actually sell the rooms it still has available at a higher price. In contrast, if a contract is based on non last room availability (NLRA), then the rates may be cheaper, but depending on the hotel's capacity situation, they may not be available. 

What other factors must be taken into consideration? Klasen: A hotel's distribution costs: Today, in order to be able to survive in a global market, a hotel needs access to a global distribution system (GDS) like Amadeus or Sabre. The more mediators there are between hotel and customer, the more expensive the distribution, because each one takes a cut. That can add up to as much as 30 percent of the price - which the hotel in turn has to pass on. That also explains why individual hotels of a similar quality can generally offer cheaper rates than chains: The simply have fewer administration costs. However, in the end of the day, the customer wants transparency. We offer this, because we operate without extra costs.

And then the term "squatter rates" has also been recently doing the rounds in discussions and journals. "Squatter" actually means "unauthorised house occupant." What is behind this term? Klasen: In the same way, a non-contract hotel "occupies" a customer's booking code and provides the traveller with a supposed contract rate in the GDS. Or likewise, a contract hotel exploits a supposed contract rate for a category that was not negotiated. In both cases, without the customer's approval. To prevent this, we regularly carry out GDS audits and check whether the negotiated corporate rates have been loaded correctly. 

Ms Klasen, Mr Temath, thank you very much for this interview. 

 

From McKinsey to HRS.

Christian Temath has been responsible for global HRS Intelligent Sourcing Services since March as Director Sourcing Solutions. Temath, who holds a PhD. in business information systems, had previously been working at HRS since 2013 as Manager Strategy and Business Development and played a key role in developing the HRS Japanese office in Tokyo. In his time before HRS, Temath had worked for more than seven years at international top management consulting firm McKinsey & Company.