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Insighter – May 15, 2005

ONLINE MANAGED TRAVEL: PERSPECTIVES ON WHY COMPANIES RESIST

By Rob Wald

While online managed corporate travel continues to experience both solid and consistent growth, stubborn pockets of resistance remain. Naysayers on the buyer side are a diverse crowd that includes organizations of all sizes and in many industries. Much has been said to explore what facilitates online booking and its ROI but less so about why companies resist. From a marketing perspective, it is instructive to more fully understand the reasons for this resistance. It is also helpful to understand the temporal nature of such resistance and whether vendors can influence the removal of the barriers that constitute the resistance.

Corporate culture – including (a) the proficiency and comfort level with the Internet/self-service among employees and (b) a management team willing to implement at least a partial mandate – is probably the most oft-cited factor that influences online managed booking. For those organizations where components (a) and (b) are both absent, it is easily understood why online booking fails to achieve even industry average adoption rates. For those organizations where only component (a) is present and adoption rates lag, it is less apparent why adoption rates fail to reach expected levels. It is an incomplete explanation to attribute lagging adoption rates to the lack of any mandate.

So, what else is going on?

• Not all booking tools are created equal. Many organizations selected and implemented tools that have failed to keep pace through consistent and ongoing development and enhancement, and adoption levels have stagnated either due to low user interest or limitations of the tool to meet either current traveler or current corporate demands – in some cases both. Surprisingly (given recent difficult industry conditions), the industry has seen very few outright failures among a highly competitive landscape of offerings from online booking vendors, who now include online travel agencies or Internet travel management companies (ITMCs). Among the surviving booking tool owners, there seems to be a widening gap between the haves and have nots, where the laggards lack the resources and/or the agility of the leaders. For companies with laggard booking tools that have not migrated to more successful implementations, either the cost of change is too high (i.e. tied to an overall program offering from a vendor that has been successful addressing traveler/corporate needs) or little pressure exists to force a migration. With overall adoption rates expected to reach approximately 43% by year end according to PhoCusWright research, an adoption rate of anywhere between 20-30% may not seem too bad to many executives responsible for travel budgets. In yet another case of weak management inertia, some early adopters of online booking technology were burned by poor performance of the early tools and suffered a backlash of negative feedback from travelers, causing some corporate travel buyers to be gun

online_managed_travel_naysayers_may05_FINAL.doc

shy about testing the waters once again.

• Relative to the financial return on investment (ROI), it is less clear how much more productive online booking is versus the traditional phone booking channel. While some data exists, the number of variables involved in determining whether productivity goes up or down for any given traveler within any given company using any given online booking tool makes it very difficult to measure productivity gains in a generalized manner. Clearly, there are travelers and companies who champion online booking and perhaps this crowd could be called the “early adopters” or the “early majority” (since adoption overall has not surpassed 50%), if one could use terminology from Geoffrey Moore's classic Crossing the Chasm. Using Moore's model to analyze the “phase” of the online booking market, it becomes illustrative to compare online booking to such technologies as the mobile phone. As of a couple of years ago, it was estimated that there were at least 1 billion mobile phones in use worldwide, which of course gives you a sense of how much further along Moore's technology adoption curve mobile phones are versus online booking. If one were to assume that business people readily adopt productivity enhancing tools, then why haven't they more broadly adopted online booking? A case can be made that those who have not adopted online booking are indeed “late majority” adopters (defined by Moore as extremely cautious when buying into a new technology and who want to see clear proof of results before they will accept a product's usefulness) or “laggards” (defined as skeptics who would prefer to avoid new technologies altogether and who will adopt only if they really must). If this is this case, “late majority” and “laggard” adopters will take more “proof” than “early and early majority adopters” to convince them that online booking is more productive than the traditional phone-based channel.

• Traditional travel management companies (TMCs) have demonstrated remarkable resilience. Although many have predicted a more complete dismantling of the aging economic model of incentives paid to TMCs, much is still in place, including significant GDS incentives. Clearly, soon-to-be expiring supplier/GDS agreements, recent success of the supplier direct model, and the emerging acceptance of the GDS new entrants (GNEs) threaten to accelerate this dismantling. However, the resilience of the TMC channel extends beyond incentives. Much of the TMC channel has embraced online booking technology through reseller agreements with online booking providers, and many companies (particularly mid-market companies) perceive TMCs to be equally as proficient with online booking as the technology providers themselves (including ITMCs). Despite perception, online booking providers make a strong case that their direct involvement with customers drives up adoption, implying TMCs (as opposed to ITMCs) involvement with 3rd party (or even internally developed) booking tools in customer accounts serves as a drag on overall industry adoption rates. While precise data is not at hand, it is likely that the TMC distributor channel is the predominant means by which a majority of companies (large and mid-market segments) engage for online booking services. Many TMCs have also done a decent job retooling themselves for lower revenues through online booking, and smaller regional and local TMCs are seen as offering competitive prices when compared to ITMCs. For many companies, TMCs in general (particularly smaller regional TMCs who can be more nimble) are perceived as offering better service and companies often prefer to go with a more local provider. Sometimes, the smaller, regional TMCs can offer special and unique services that few if any of the larger TMCs or any of the ITMCs can offer. One regional TMC regularly sends


representatives to airport tarmacs to meet and guide customers' executives traveling by corporate jet. Again, the key point here is that while TMCs are proving more resilient than some thought, their “success” with online booking is more likely to serve as a drag on overall industry adoption rates.

• On a related note, difficulty making different pieces (GDS, online booking, TMC front, mid, and back-office components) work together is often cited as a key factor for problem-plagued online booking implementations. While many view it as debatable which party is most responsible for the issues, strong cooperation between all parties of course facilitates resolution.

• Among senior executives, a perceived ambivalence exists towards online booking as a cost management tool. While most executives understand how online booking works and how it can be employed to enhance cost controls, most still use limiting travel as the key method to control or reduce travel costs. A recent survey of senior executives by Sabre Holdings indicated that 68% (down from 78% 2 years ago) of respondents “limit travel among employees” as the top method for controlling travel costs. While the same survey indicates that online booking – at 44% (versus 31% 2 years ago) of all respondents - is gaining as a key means of controlling costs, it remains telling that executives, by a wide margin, continue to rely on “executive order” (versus technology) to manage travel costs.

• Mid-market companies focus fewer resources on travel. Larger travel programs ($20 million or greater annual airfare budgets) tend to have dedicated and full-time resources assigned to travel, and perhaps this helps explain why the larger programs have been more quick to adopt online booking. Mid-market travel programs tend, in most cases, to assign travel responsibility to people who may have little to no travel industry knowledge, and to people who have many responsibilities, only one of which is travel. An “outsiders” (someone who may not have spent much time in the travel industry) perspective in many cases makes mid-market companies more open to newer options such as ITMCs. However, in other cases it makes such companies more cautious, leading to the engagement of more known and tested options, such as traditional TMCs. At the same time, fear plays a role as many travel managers still express at least some concern about how online booking will impact their job or their department (particularly with company-operated on-site configurations). While mid-market travel programs may get less focus/resources than in larger companies, travel itself and the travel services offered to employees are still highly visible, making travel supplier choices sometimes very political, reinforcing any risk aversion for the person who manages travel among their many responsibilities. Using Moore's model once again, one can say that many mid-market companies represent at least a substantial portion of “late-majority” or “laggard” adopters.

• ITMCs over emphasized online booking and poorly articulated additional services and program management offerings. The market entry of ITMCs generated quite a bit of buzz and interest, which in turn caused many travel managers to learn more about the offerings, if for nothing else than to “kick the tires”. While they have had a good amount of early success, ITMCs have underestimated the need for program management flexibility and additional services, perhaps validating many who already had skepticism concerning what a $5 transaction fee would truly get a company. As a result of such technology over-emphasis, ITMCs have lost deals to TMCs and it could take a while to convince skeptics to take another look. One would think that


TMCs are “winners” here, but in fact they have been significantly wounded by competition from the ITMCs and their low transaction fees and consumer-friendly online interfaces which have been adopted to corporate travel with additional functionality, etc.

• Although online booking tools may be just fine for such travel, many companies resist the online channel for international travel. This includes many early adopters who have otherwise achieved very good success with online booking. Similarly, many companies in such industries as mining and energy with substantial business in developing regions/countries resist online booking altogether, stating as a key factor the complexity of itineraries and the inability to book all means of required transportation. One company with substantial travel to India purchases consolidator fares offline because their online booking tool cannot support this requirement.

• Many of the hard-core business travelers rarely use a form factor that is currently well suited to online booking. This crowd stays in touch with Internet-enabled and wireless hand-held devices for checking email and accessing key corporate applications. While many of these road-warriors have administrative support that can book online as “arrangers”, many of them don't have such support and often pick up the phone to book travel.

• Companies are concerned about the future placement of content and many are depending on their TMCs to manage this risk. GDS/supplier content agreements that guarantee full access to airline content are set to expire in the next 1-2 years. High fuel costs and success with direct relationships through supplier Web sites (among other things) have driven many suppliers into the welcoming arms of the GNEs, who have already demonstrated bookings through their platforms. Until such time that the GNEs (or equivalents from either a technical, functional, or economic standpoint) fully support a wide range of booking tools (including ITMCs), online adoption could hit a bump in the road (difficult to tell how challenging this “bump” may be).

WHERE DO WE GO FROM HERE?

Before one gets the wrong idea, let's be clear – it will be difficult to stop the ongoing (and some would say inevitable) march online for managed travel. The cost savings opportunities are well documented and the tools will continue to improve as they have dramatically done so over the past few years. However, later stage growth is always more challenging and it would be wise to reflect on what the challenges might be. The factors for resistance discussed here may or may not be exhaustive but they do reflect both implied and explicit feedback from the marketplace, which many might characterize as being at a crossroads. Indeed, at this point, there is a strong likelihood that overall industry online booking adoption growth will slow and adoption rates will plateau at 50-60% until key industry structural challenges sort themselves out. These challenges include:

• economic relationships between suppliers, TMCs (and some ITMCs), and corporations and the rate of evolution for these relationships. If not for various incentives, it is likely that many TMCs would be either out of business or forced to further consolidate with stronger players. In lieu of a more accelerated dismantling of the incentive economic model, one can envision somewhat of a direct relationship


between a slowly deteriorating TMC value proposition (relative to direct online booking relationships such as ITMCs) and online booking adoption rates. A key factor here will be impact of the GNEs.

• the speed of any shift towards a more integrated type of arrangement between online providers and corporations and the speed of any shift towards direct relationships with online booking providers. This challenge is certainly highly related and linked to the first. The current evolving state of ITMCs is such that many companies with high online booking adoption rates continue to maintain relationships with TMCs for global coverage, and due to demands for program management and additional services. However, as TMCs become more expensive relative to ITMCs, and as ITMCs round out their overall offering and demonstrate further success, both large and mid-market companies will increasingly seek out services from ITMCs – accelerating online adoption. Key factors here include the pace of change regarding industry economics, and the speed of development from ITMCs. A difficult and unresolved question is how will the roles of both the TMC and the independent online booking provider change?

OPPORTUNITIES AND RECOMMENDATIONS FOR ONLINE BOOKING PROVIDERS

While the above structural challenges get sorted out, there are opportunities for online booking providers to enhance their role and success in the industry.

• Get into the minds of corporate travelers to determine the little things that make travel planning (and ultimately the travel experience) a more productive experience. Some of these include things that any traveler – irrespective of company – would find useful. For example, for major cities, compare car rental costs to taxi fares and/or public transportation such as the subway/local rail line. Runzheimer International captures some if not all of this data. Some of these things may be configurable messages that apply to frequented destinations for specific companies' travel. One such configurable message could be “we recommend the following restaurants when traveling to the Burlington office” (and provide directions from the office). This information is probably stored somewhere anyway or easily obtained by just asking a few knowledgeable people. It is also less available publicly for certain areas such as the suburbs.

• Find ways to provide more useful tools to senior management. Enhance business intelligence offerings and deliver online management dashboards that can easily monitor performance against key performance indicators (KPIs). Leverage existing capabilities of enterprise systems that can more closely align travel with the rest of the company. Distinct pre-trip authorization systems offered by online booking providers rarely work very well because they often require duplicitous efforts for set up and maintenance – leverage the existing workflow systems already in place.

• Broaden, deepen, and integrate both program management and additional service offerings (particularly ITMCs). Don't be satisfied with a loose set of 3rd party arrangements and poorly defined and poorly integrated/supported services.

• Stay ahead of the content curve and be prepared to engage with the GNEs. Alternative distribution channels are not a new idea, but for various reasons, they


are more of a reality already than in previous iterations and the dire financial state of many suppliers is forcing them to look hard at bold measures to address costs. Due to the strategic implications, it would not be surprising to see one or more of the GNEs as an acquisition candidate by any of the more deep-pocketed players.
