The Hotel Distribution Muddle

Hotel distribution is forging to the forefront of corporate travel management scrutiny as hotel costs now rival or exceed air travel budgets in most big corporations.

 

Yet managing hotel distribution costs is proving quit challenging when compared with air travel cost oversight. The vast majority of corporate travel managers have backgrounds linked solidly to the Global Distribution Systems (GDS) business model. The GDS is the “tool of the trade” around which the industry books, measures, tracks, and audits corporate travel expenditures. Essentially, from a corporate travel manager’s perspective, the hotel booking dilemma is almost directly inverse to the challenges of buying and managing air travel costs.

 

Airline distribution is pretty well understood by most travel managers. The distribution process generally works like this:

1. Airlines host their inventory (airline seats) in a central host

2. The Airlines inventory is made available through four to eight GDS outlets

3. Agents access that inventory through the GDSs or directly into each airline’s central host

4. Inventory (a seat) is removed from inventory when an agent confirms a booking

5. The agent is paid by the traveler/buyer at the time of booking

6. The airlines collect the money from the agent(s) within 7 days

7. The airlines collect proof-of-the-right-to-travel at the time of boarding (i.e. ticket or e-ticket)

8. The airlines reconcile the collected money with the sold inventory electronically in the days following receipt of the proof-of-travel receipt of the airline.

 

Now consider hotel distribution:

 

1. A hotel’s property is stored in a local hotel Property Management System (PMS)

2. Inventory from the local PMS is re-allocated to a centralized site for re-sale

3. The centralized site allocation is made available through the four to eight GDS outlets

4. Agents book inventory through the GDS which is reduced from the central site allocation and relayed to the local PMS to be deducted from the hotel’s potential inventory; or agents book directly in the local PMS and re-enter the hotel data into the GDS travel record (often called the PNR – Personal Name Record).

5. The traveler stays at the property – AND THEN pays for the stay; i.e. after the service has been delivered. In some cases, pre-payment by a third-party or advance deposit is credited against a stay period … but still, after the service has been delivered.

6. The PMS system subsequently decides which agent(s) is entitled to be paid a commission, which rooms are contracted and non-commissionable, and which rooms were booked at the time of arrival or direct with the hotel and thus, non-commissionable.

7. The hotel PMS system then creates an electronic record to authorize commission payments via one of four or five hotel commission reconciliation companies; or authorizes the local hotel’s accounting department to issues a commission check or payment through a direct bank deposit.

 

Question -- from a “distribution perspective”, what is wrong with hotel side of this picture?

 

Answer – Payment structure, information flow, and hotel management incentive criteria.

 

First of all – the payment structure is reversed. In the airline distribution model, the buyer/traveler pre-pays for the right to travel. The airline has the money prior to the travel need and the airline does the financial reconciliation after the service has been delivered. In the hotel distribution model, the traveler only books his intent to stay at a property prior to travel. The traveler/buyer only pay for the service after it has been consumed! Thus, the settlement process is between the traveler/buyer and the hotel; the distribution system plays no role.

 

The fact that the distribution system plays no real role in payment for the service changes the entire data information flow structure. In the airline structure, the prepayment mandates that the financial aspects of the transaction flow with the distribution aspects in order that the airline can reconcile the delivery of service with the payment made. If an air reservation is changed or modified, the distribution and financial information is recorded in the PNR to ensure proper settlement and reconciliation of the pre-paid travel entitlement. Thus, there is a fairly close link and complete data flow between the distribution elements of the transaction and the settlement elements.

 

In the hotel scenario, there is no prepayment. Therefore, the flow of information is only one-way – from the traveler/buyer to the hotel property. The only financial information that flows in this pipeline is the INTENDED nightly rate to be paid by the traveler. The actual rate is generally determined at the time that the traveler arrives at the property and may or may not reflect the INTENDED rate that was transmitted in the booking message. But even more important, if the booking is changed or the rate is modified, that information does NOT flow back through the distribution system. In fact, few PMSs have the technical capability to relay such a change back to through a distribution system even if the buyer desired to get it; in large part because there is no need.

 

Settlement has not yet taken place. Settlement only takes place at the time that the traveler checks out of the hotel. And settlement is not based on money already paid for the service, but rather, on the expenses incurred during the stay (i.e. after-the-fact for services delivered). From the hotel property’s perspective, the traveler/buyer has paid for the service and no further reconciliation need take place. The payment of commissions owed is simply an added expense of doing business; something all hotels would rather avoid if they could.

 

The third aspect that comes into play is the management incentives. Airlines, by the nature of the product they offer, are network dependent. Travelers move in seats from one point to another. Producing those seats necessarily requires centralized control and management. The viability of an airline is linked to its ability to connect people between multiple points; i.e. the network it serves. Strong elements of a network can be used to support weaker segments, and vice versa. For this reason, inventory management is centralized … distribution is centralized … and settlement is centralized. Accordingly, management incentives are focused on the network viability.

 

Hotels, on the other hand, are almost exactly the opposite. Hotels are locally managed. Travelers arrive … but they do not generally connect. Yes, the chains attempt to market the viability of their properties across destinations – but in reality, the geographic needs of travelers play a much greater factor in where a traveler ends up spending the night(s). Therefore, a hotel property manager is not measured primarily by how well his/her chain performs – but rather, how well his/her particular property performs in comparison with other like properties in the geographic or demographic area. In effect, each local property manager must manage his/her property to ensure the maximum yield from the available rooms. The aspect of centralized management or network dependency is virtually absent.

 

Where airlines manage distribution and settlement through centrally managed systems and control, hotel property managers’ use locally controlled independent PMS tools. A given tool, once installed, will often stay with a given property even though that particular property is run by different chains or owners over a period of years. Only the newest of chains have common PMS systems. This is why local PMS systems must reallocate inventory to central site distribution centers for re-distribution; few PMS systems have the ability to communicate bi-directionally with the GDSs. This is also why few hotels can really offer last minute or distress inventory via the GDSs; there’s no ability to quickly relay that information to and from the local PMS system through the multiple distribution tiers.

 

Since each hotel property manager is “on his own” for meeting performance criteria, his goals are set locally and directly by his/her specific owners – and not in concert with networked goals or coordinated markets. Since the local property manager has no economic incentive to incur increased local expenses or lower yields by servicing a one-way (i.e. discount) agreement that cannot or is not measured … or responding to the needs of a bigger business entity like a chain or network agreement … the local property manager with a high-yield event in town (or even at his particular property) has no compulsion “walking” a low-yield or low-revenue guest.

 

Thus, the inability to measure compliance and/or performance electronically and in real-time on the part of any of the possible related business entities results in all sorts of unrealistic expectations and results. Corporate buyers cannot prove that their travelers actually made the committed number of hotel nights … nor can they support a claim that their rate was not available when booked. Hotel property managers are similarly challenged – with both chain agreements and GDSs serving “middleman” roles that also lack any sort of valid auditing function. The best anybody can do in most cases is to make assumptions based largely on intentions and feedback – but not on reliable records of accurate performance.

 

There are a host of other local property management decisions that can be or are necessarily made at the time of check-in which can and do influence the revenue entitlements of corporate buyers – ranging from lost commission entitlements that happen when an arriving guest is “upgraded” to a different room to loss of the booking performance record when the guest is “walked” to another property. And further more, there are not audit trails or other data points by which any of the actions taken in a local PMS can be tracked or audited!

 

In casual studies across a number of large corporate buyers , most corporations only average between 50% and 60% of their stay-nights in contract or preferred hotel properties. For corporations working with a commission-rebated program through a Travel Management Company (TMC), commission entitlement revenue is a critical aspect in off-setting the company’s total travel and/or hotel-spend. Tracking commission (or rebate) revenue entitlement is even more important when the company has its own ARC-approved CTD (Corporate Travel Department).

 

Concurrently, similar studies measuring the use of contract rates booked at preferred hotel show that only about 18% of the hotel-spend is non-commissionable; i.e. booked at properties where corporate travel managers had negotiated non-commissionable contract rates.

 

These data also indicated that close to 15% of the contract bookings were either canceled by the hotel or were “walked’ to some other property. Also, many PMS tools reflect a “cancel” when, in fact, the traveler was upgraded … but since the hotel cannot pass that information back to the corporation via the distribution system; reconciliation must take place through the company’s traveler expense reporting tools if possible.

 

Similarly, these studies indicate that something over 21% of the stay-nights are not booked in advance; i.e. from the corporate travel manager’s perspective, they were uncontrolled and unmanaged “go show” hotel nights. Compare those percentages with the data coming back from the airlines and it becomes quickly apparent that hotel travel spend is a critical opportunity for additional travel manager oversight.

 

Historically and to this day, corporate travel managers have been dependent on the GDS tools and, where applicable, data provided by the company’s TMC. When air travel costs are the controlling factor in travel management, the pre-payment tracking solutions provided by the integrated GDS and settlement tools work pretty well.

 

A number of corporations now report that hotel spend has become a higher spend item than airline travel in recent years. With hotel-spend becoming the critical factor in managing total travel spend, the traditional GDS structures break down totally due to the fact that they are one-way (i.e. distribution only). There is no facility in the PMS tools used by the local property managers … and more importantly, no incentive … to feed the management data needed to oversee travel back through the distribution channel.

 

So when one asks the question, “Are the distributions systems that are evolving now being designed with enough flexibility to justify long-term contracts”, the answer is no! But this is not the fault of the distribution system; rather, it is tied directly to the dichotomy between the business processes that today’s GDSs serve and the business processes and incentives that drive local hotel properties.

 

Corporate travel managers are confronted with the need to come up-to-speed in ways to manage information and capture relevant data from sources other than the GDSs. With respect to hotels, such data collection needs to be incorporated in contract agreements – a challenge to be passed along to those companies that negotiate hotel contracts on the travel manager’s behalf.

 

To the extent possible, non-commissionable corporate travel booking should be made directly with preferred vendors – not through the GDS tools. This will enable corporate travel manager to track and audit their preferred agreements. If it is necessary to track hotel bookings in the GDSs for TMC or other reporting purposes, hotel bookings should be robotically transferred from the hotel booking tool to the PNR.

 

With respect to commissionable hotel bookings, whether in preferred properties or the roughly 50% non-preferred hotels, corporate travel managers need to consider business processes that can reconcile traveler’s actual stay-nights with planned stay-nights; reconciling GDS bookings with hotel settlement data provided through one of the hotel clearing houses and/or direct bank deposits or commission checks issued by the hotels.

 

It is ludicrous to expect the booking reports from the GDSs or TMCs to accurately reflect actual hotel spend. The system/technology prevents any element of accuracy from such tools. Today’s distribution systems should only be thought of as a means for creating a booking; with the full awareness that the booked rate is, at best, hoped for … and that availability itself is somewhat subjective.

 

Corporate travel managers need to evolve internally … or seek from outside vendors … the ability to capture the data feeds from Pegasus, TACS (Travel Agency Commission Settlement), WPS (World Payment Systems), GCP (Global Commission Payments), selected direct bank deposit statements, or whatever digital settlement reconciliation programs that might be appropriate to a given company’s travel purchases. Without this information, attempting to manage hotel-spend becomes a spin-of-the-lottery.

 

The problem in managing hotel-spend is not tied to distribution or the distribution systems – but is the direct result of the business model that drives independent hotel properties. The ability to tame this issue is tied solely to the corporate travel manager’s ability to capture the data necessary to effect meaningful reconciliation of planned travel with actual travel.

(c) 2007 The Eastman Group, Inc    All Rights Reserved