November 30, 2010
Cutting limo costs isn’t as straight-forward as you think.
For the last few years travel managers have been trying to ring every cost possible out of the corporate travel spend. As is often the case, it has been two steps forward and one step back. Airline negotiations were codified to a balance of travel patterns and volume — then came joint ventures and ancillary fees. Hotel programs were simplified to a matter of room nights and proximity — until someone looked over her shoulder and realized that meetings should be factored in as well.
Now the focus has turned to ground transportation, says Al Rosenbaum, vice president of BostonCoach. “It’s not just the companies with higher budgets such as the financial and consulting industries, but also pharmaceuticals as well as high tech, philanthropy, entertainment and executive recruiting. It’s across the board.”
There’s good reason for the concern. “We are projecting cost increases for chauffeured transportation of between 3 percent and 5 percent,” says David Kilduff, senior director of ground transportation consulting for the CWT Solutions Group, Carlson Wagonlit Travel’s consulting arm. He notes that chauffeured transportation is achieving parity with car rentals in the amount of spending. “Ground transportation takes up about 10-to-20 percent of travel spend. It is significant when you are looking at that level of spending. Actually people are very surprised about how much they can save by finding and using suppliers they can count on and can trust.”
The problem? For one thing, says Rosenbaum, “Car services are highly fragmented and getting your arms around all the pieces is extremely difficult.”
There’s also the problem that travel managers do not have the infrastructure in place to track such spending.
The complexity of ground transportation services include not only the actual cost of the transportation but who is doing it, how it is booked and whether or not a traveler qualifies for different levels of service. It also involves cancellation and wait times. Then there are hidden fees and charges. Companies must also ensure that vendor technology and company technology can talk to one another.
Then, beyond all that complexity, says Larry Moulter, president of BostonCoach, is actually managing the liability risk. That means determining whether the company has all the right insurance, back-office functions, vehicles and maintenance to support a client’s business.
Beyond all that, Gregg Tucillo, CEO of Global Ground Transportation, sees yet another challenge: mindset. “There are some corporate cultures that are more concerned with letting someone else do all the work,” he says. “But other travel managers are under a mandate to reduce expenses which means there is clearly more upfront work to be done to accomplish that. We see two types of travel managers. The progressive ones are looking at these costs, understanding them and finding ways to mitigate them. Then there is the complacent travel manager, who says ‘It’s not broken so let’s not fix it.’”
Which type do you want to be?
Cutting Through Complexity
Technology is the single greatest factor holding back control of black car costs, says Rosebaum. “Most companies have made the investment to manage the larger travel spending — airlines and hotels,” he says. “They don’t want to invest in more technology for something that is relatively small in the overall travel budget.”
But that is exactly what needs to be done. Chauffeured transportation is so much more complex than car rentals, says Kilduff, where companies have been consolidated down to a handful of agencies. “There are hundreds, thousands of limo companies,” he says. “One of our clients has 4,000 preferred vendors.”
Several companies, including Global Ground Transportation, BostonCoach and CWT Solutions Group, have made the technology investment in an effort to help travel managers find out where their money is going and how they can trim expenses.
Investing in technology is only the beginning, says Rosebaum. “You still need the people to analyze information, put an action plan in place and communicate that plan to ensure compliance. Increasing compliance reduces costs.”
Two steps forward, one step back …
But it is not just about cutting costs. “It’s about growing the business,” says Moulter. “While we provide the ability to manage costs and regulate spending, we’ll also give you the data to manage the growth. They know they have to travel more but need to do it more efficiently. Our goal is not just to cut costs but put efficiencies in place on how they can grow their business with clear cost guidelines. We not only deliver the ride but help them deliver cost efficiency. We help them by using the data to make better informed decisions. That is the role of any good service provider.”
The data collection, reporting and auditing services these three companies and others offer provide the answer for travel managers who want to rein in car spending but don’t know where to start.
“First you have to make a decision to control it and unless you take the time to see who is using car services and how many vendors there are you can’t even start,” says Kilduff. “Corporations have decided that this is an area they need to control. They realize they have 100 suppliers and they want to get it down to three: a couple of locals and then a company that is strong throughout the globe.”
The next step is gathering the data on who is using chauffeured transport, where they are spending it, whether it is being spent wisely and whether working through a broker or directly with a local provider is the best strategy. One of the keys is whether or not spending on chauffeured transport can be leveraged to reduce costs, now largely unknown because such spending is difficult to track.
That requires compliance — relying on travelers actually using the contracted services and here, again, data collection and analysis will determine that. Then the task is to develop the traveler education programs that will control the spending on the front end.
Not so much.
“It’s like herding kittens,” says Kilduff. Then what? “Ground transportation is a decent amount of travel spending and there are a host of different strategies,” says Rosenbaum. “What companies are doing is RFPs (requests for proposals) and getting their vendors to sharpen their pencils. Some see consolidation as a way to reduce costs. By consolidating vendors, they hope to make tracking more simple so they can better manage the spend.”
The Cost Of Consolidation
Tucillo also sees a trend toward consolidating corporate ground transportation business through networks. “It’s easier to single source,” he says. “There is a single contact and one place to resolve problems. It is a much easier environment for the travel manager.
“But you pay a premium for that convenience,” he continues. “What progressive managers are doing is identifying the density of use outside of headquarters locations and finding providers in those cities and make reservations directly with those providers in an effort to save the mark-up costs of going through a network. They are also buying ground transportation at local rates. So as travel managers become more aware of the broker fees involved in networks, the more ways they are trying to mitigate it.”
For that reason, Tucillo, who is credited with developing the first global distribution system for ground transportation, also sees a trend toward contracting directly with local providers. “Progressive travel managers are trying to eliminate broker fees,” he says. “They are trying to strip out the middle man where they have volume so they can leverage a lower price. They are looking at where they are spending and then contract directly with providers in their top spending markets. Companies have to weigh that investment to ensure there is an appropriate return. If there is, then it makes sense to go directly to a local provider where you have the volume.”
But single sourcing is still a valid way of doing business, cautions Tucillo, noting that networks are able to make the investment in technology. In addition, they are able to provide high-quality providers because they’ve created the internal distribution system to book and monitor these rides. “It is not a minimal level of effort to set up these networks,” he observes. “They are very profitable.”
It’s convenient to go through a network, explains Tucillo, and travel managers like that. Likewise, networks like farming out to affiliates where they do not have their own service because it is a higher margin — a 20 percent to 30 percent markup. That is a high margin, he says, for what amounts to data transfer — taking the reservation, sending it and monitoring it. In turn, the affiliate gives the network a 5 percent to 10 percent discount, or a commission, despite the fact the hard costs — the driver’s salary, fuel, tolls, parking, the vehicle — are all born by the affiliate who actually provides the ride. Typically, limo companies earn between 4 percent and 10 percent margin, according to Tucillo.
“Our goal is to have the data available,” he says. “We are able to help companies gather the data they need to make decisions. For instance, one client looked at their ground transport usage and found that 80 percent was in nine cities. Now they are buying those cities directly and using a network for the balance of the cities to which they travel. So, if 80 percent of ground spend is controlled, then the bulk of their ground expenditures is controlled and they save the mark up. And for the rest of the cities where they may not have the volume, they are willing to pay that premium because the cost includes vetting, pricing and driver safety.”
Clients of MacNair Travel Management are headed in the same direction, says owner Michael MacNair. “Our customers have discouraged the use of these consolidated networks in an effort to cut costs,” he says. “The biggest change I have seen is the improvement of our online tools to book ground transportation including taxis. That’s a huge change and capturing all this data is big. What is holding it back is the intangibles — the difference between taxi and black-car costs, distances, quality of service in the marketplace and availability.”
But some don’t think direct contracting pays the dividends suggested. “We do see that as a trend,” says Rosenbaum. “That’s a very straightforward procurement approach that doesn’t end up saving money. The RFP generates commodity pricing which ends up with a commodity service. There is always more to that price than what you think.”
That procurement approach always looks good on paper and always looks as if the company will end up saving money up front, Rosenbaum explains. “But companies end up getting so many different bills, added fees and costs so when we actually look at the bills, we find 23 percent or more bloat,” he said. “It’s just much more difficult to manage the spend.” [See chart on page 9.]
An audit done by BostonCoach provides a case in point, says Moulter. “The strategy of booking direct looked as if it would save $9,000,” he says. “But that’s if there were 100 percent compliance on a $180,000 spend. We took on the client and ended up saving that company $33,000. It isn’t about finding cheaper vendors. It’s about managing those hidden fees and charges.”
“There are a bunch of different ways in which fees, incidentals and hidden charges come into play,” agrees Rosenbaum. “The audit matches what is charged with what was agreed upon. An RFP includes fees and rates but you have to be able to audit the bills when they come in to ensure you are receiving those rates. To do it manually is too hard.”
But, what if the company knew all about hidden fees and developed a uniform billing method and baked that into the request for proposal? “That assumes a company has a system for managing all of that,” says Rosenbaum. “In fact, there are only two or three companies out there who have the systems in place to manage the complexity and they spend $10 million a year in car services. There is no other way of getting it unless you use vendor.”
Then there is the economies of scale provided by a network, says Moulter. “The assumption is if you go direct you get a better price,” he explains. “But who do you think is purchasing more car transport — a company who does $10 million a year or BostonCoach who does 10 times that. Even if you could get a better price by a few percentage points, you are going to get killed on the bloat. Our audits show that the average bloat is 23 percent, but for some it is 30-to-40 percent and we are talking about companies with hundreds of thousands and sometimes millions in car spend every year. You are stepping over dollars and picking up pennies and making a lot of work for yourself in the bargain.”
There are many strategies to corral ground transportation costs. But just as important, companies must not only be wary of hidden fees and charges if they contract directly but of the markup of using a network if they make that choice instead.
However confusing this debate may sound, it does reveal what a company needs to do to get started as well as the questions that are important to ask regardless of which strategy is pursued. It also shows the amount of work necessary to tackle this new frontier in controlling travel costs.
The bottom line, however, is starting the process with the data collection necessary to determine where the money is already being spent.